The Great Recession Blog

The emphasis has to be on HOG as they squeal for corporate welfare and push their snouts into the trough. One hedge hog says the government needs to bail out all businesses by paying all wages so companies that depleted all cash don’t have to pay to retain all workers:

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As stocks took a morning breather while I enjoyed my coffee and wrote down the first recession stats since the Coronacrisis, I came across a heart-ripping prediction from Goldman Sachs for this week once the data is in. It’s been a long line of facts to this recession, but the last step is a doozy!

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I’ll lead off with a brazen display of SHAMELESS bankster greed. Banks absolutely MUST HAVE all bailouts go to them. When the government said it would send $1,000 checks to every tax payer as a personal bailout, one banker implored the government to give it to the banks instead.

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During its brief and utterly failed attempt to reduce its balance sheet (called quantitative tightening), the Federal Reserve only rolled off securities at a rate of $50 billion a month. It is now purchasing US treasuries at a rate of more than $55 billion a month:

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Having predicted last year that a recession would begin in the summer of 2019 and that it would likely start with a major repo crisis, I am now proven wrong by 2019’s fourth-quarter GDP. If the repo crisis that started in the final week of summer had actually been the start of a recession, we would have seen fourth-quarter GDP go negative. Instead, it came in at 2.1% growth.

I find that an interesting number because third-quarter GDP also came in at 2.1% growth, and second-quarter GDP came in at 2.0% growth. Now fourth-quarter GDP came in exactly at 2.1% growth. Coincidence or goal-seeking? Notice the numbers are “seasonally adjusted,” and think about how many assumptions are made in seasonal adjustments.

All of this year’s quarterly year-on-year readings average out to 2.3% growth over the full year, which is worse than 2018’s average of 2.9%. That means the massive Trump Tax Cuts and spending increases have netted us a worse economy, year-after-year; or you can blame that on the trade wars or the Fed or all of the above (as I would). In the very least, we certainly have not seen any improvement due to the tax cuts.

So, I was wrong in my ambitious 2019 prediction of a recession starting in the summer. I knew I was out on a limb compared to what anyone else was saying, and I was wrong.

Or was I?

O.K. You knew that was coming. If you are one of my detractors, you were waiting for the other shoe to drop. Well, I, at least, gave you a line you can quote out of context later to say I even admitted I was wrong … but here is the “but,” and it’s much bigger than equivocating about whether “seasonal adjustments” allowed room to goal-seek a final number the Trump administration wanted to present as we head into an election year:

…but … let’s consider a few major business/economic factors outside of GDP because GDP is not the only factor used to officially declare recessions (which are always declared retroactively).

A recession is when the economy declines significantly for at least six months. There’s a drop in the following five economic indicators: real gross domestic product, income, employment, manufacturing, and retail sales. People often say a recession is when the GDP growth rate is negative for two consecutive quarters or more. But a recession can quietly begin beforethe quarterly gross domestic product reports are out. That’s why the National Bureau of Economic Research measures the other four factors. That data comes out monthly. When these economic indicators decline, so will GDP. The National Bureau of Economic Research defines a recession as “a period of falling economic activity spread across the economy, lasting more than a few months.” The NBER is the private non-profit that announces when recessions start and stop. It is the national source for measuring the stages of the business cycle.

The Balance

Several major changes that came about in the summer of 2018 scream recession:

• The number-one topic of summer: During the summer, talk of recession started to dominate financial articles and Google searches. If we were not about to enter recession, why did “recession” suddenly become summer’s dominant financial conversation? Possibly even the dominant conversation of any kind. Usually, the masses don’t make something the talk of the town, like Coronavirus now is, unless it has suddenly become a real and major issue.
• The manufacturing recession: It’s now common knowledge that we did enter an actual manufacturing recession in the summer of 2019. I’ve presented the statistics month after month, showing that manufacturing sales, revenue, and earnings have declined every month since the middle of summer.
• Services hovered barely above recession: Business is divided into two sectors — manufacturing and services. While services didn’t quite make it into recession, they hung out during the last quarter of the year on the very brink of recession. That may not have been enough to have pulled the overall business side of the economy out of recession if you average both sectors — services and manufacturing. (And as I’ll show in the next section, there are other major factors in the GDP number that have nothing to do with either services or manufacturing or business at all, which are the factors that did keep GDP from going negative.)
• The earnings recession: It is also now a fact that the US has been in an earnings recession that many peg as beginning in the Summer of 2019. (Some point back to spring, some to fall, depending on what index/stocks you’re looking at.) This actual recession was led by some of the biggest corporations on earth.
• Fed recessionary stimulus measures: The Fed made three “insurance” interest-rate cuts that started in the middle of summer. If we were not, in the very least, perilously close to entering a recession in the summer (or actually in one?), why would the Fed have done something it has never done, except when we are already in recession or when the Fed feared we could be entering a recession if it did not make such cuts? The Fed is loath to waste its ammo.
• The Repo Crisis: The Repo Crisis that I said would be a part of this recession’s dawn actually did hit with such great force at the end of summer that the Fed also leaped back to QE right at the end of summer. The Fed continues in QE mode more than four months later. When has the Fed ever done QE without actually already being in a recession? Usually the size of any emergency response is proportionate to the size of the emergency, so with more than $400 billion new dollars created and pumped into banks to prevent the failure of an institution that would have been equal to the AIG catastrophe of the Great Recession, wouldn’t that reasonably indicate a Great-Recession scale event?

In the very least, with manufacturing solidly in recession and earnings in recession, and the still ongoing repo crisis that I said it would all come with, I was partially right. Is it unreasonable to suggest that, without three interest-rate cuts and without the Fed’s face-losing leap back to QE, the whole economy would have entered recession at the end of summer; or should we just believe that such huge and rare responses by the Fed had no effect whatsoever? After all, we were already at levels of interest that are considered to be economic stimulus, yet these bold measures barely managed to hold the economy at its anemic 2.1% growth level.

You have to either believe the Fed’s multiple rate cuts and $400-billion-plus in QE had absolutely zero effect on the economy (since we stayed frozen at 2.1% growth) OR believe we would have gone a lot lower without those big measures, so their effect was to keep us from falling further.

Looking under the GDP hood

There is still more to consider.

Consumer spending, which had been the economy’s salvation in the summer of 2019 fell off hard in this last GDP print, dropping by more than half from an annualized 4.6% growth in the second quarter of 2019 and 3.2% in the third quarter to 1.8% in the fourth quarter, less than half what it was in the spring.

Business investment and production also cut back, so what drove the overall GDP growth to keep it from falling below the 2.1% level at which it seems to have frozen in time?

The economy got an even bigger boost — though likely a short-lived one — from a sharp decline in the U.S. trade deficit. Exports climbed 1.4% while imports sank 8.7% in the fourth quarter. That’s the biggest decline since the end of the 2007-09 2007-09 recession.

The drop in imports stemmed mostly from an increase in U.S. tariffs on Chinese goods last September. Companies rushed to beat the tariff increases, then cut back on import orders to wait to see if the Trump administration rolled back the punitive measures.

MarketWatch

That is the difference, right there! Almost the entire amount to which GDP growth remained positive was due to a machination of the trade war that has nothing to do with how the economy is doing. You see, imports are normally subtracted out of GDP while exports are added. With imports falling off so much due to the Trump Tariffs, GDP got a fake lift. We did not produce more for export; we simply imported a lot less, leaving a much smaller number to subtract from the GDP total.

By way of past comparisons, the positive/negative impact from imports looked like this over the years, with the drop in imports effectively adding 1.32 points to the 2.1-point total in GDP growth:

That contribution from net trade will not continue, and it is a smoke screen for what was otherwise a very weak quarter. If you exclude trade, you have an economy that grew less than 1% in the fourth quarter. Consumer and business spending is weakening.

Seeking Alpha

Government spending also contributed to the positive side of GDP by rising 2.7%, mostly due to expansionary military spending on planes, ships, missiles, etc. Because war burns up a lot of equipment that has to be replaced, it has always been a reliable economic stimulant … until it breaks the government with debt, as happened to the former Soviet Union. We’re not immune to the same.

“The 2.1% headline GDP print gives the optical illusion of an economy chugging along at a moderate 2% clip at the end of 2019, but the composition of growth reveals a softer picture,” economists at Oxford Economics told clients in a note.

MarketWatch

Where’s are markets going in all of this right now?

Yields keep dropping like a brick, as does the Baltic Dry index, small caps, transports, the banking sector never confirmed new highs, equal weight indicators suggest a major negative divergence inside a market that appears entirely held up by tech, and perhaps by only 5-10 highly valued stocks that are massively technically extended and control more market cap in a few stocks than ever before. At the same time we have a market more extended above underlying GDP than ever and now suddenly a potential trigger nobody saw coming: The coronavirus

Northman Trader

So, you see, it’s not really a healthy picture: GDP frozen for three quarters running, keeping a good face on things but a false face because it is only an optical illusion that is an artifact of the trade war, major sectors of the economy solidly in actual recession for two full quarters now, bond yields still falling in a flight to safety as though investors see recession on the door step, causing the yield curve to invert all over again, more money leaving the stock market all year than entering, in spite of rising share prices, and now the indefatigable stock market is showing signs of trouble even after the Fed’s massive QE repo save. Maybe just a correction, maybe more.

This we’re supposed to believe is a strong economy? Fake news. The US economy may not have hit full recession in all sectors in the summer, but parts of it certainly did, and the rest is reeling … badly.

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I’m not going to predict when and how the US stock market will crash as I did by laying out the stages of its fall for 2018. That was easy, but the times are different now.

Back then, the Fed had laid out a precise schedule for its tightening, and it was apparent to me where the big increases in Fed tightening would be sufficient to bring down the market that the Fed had artificially rigged.

Today, the Fed is back to easing — back to doing what it does to juice markets up. And the correspondence between what central banks do with their balance sheets and what the stock markets do is now almost 100%.

All of 2019 looks like lockstepping to me.

The Fed, of course, is the primary mover for the US market. Therefore, US stocks being overpriced in the extreme may not matter so long as the Fed is willing to keep the money pumps redlining at maximum RPM.

However, the more the market’s metrics move above all rational and historic benchmarks, as I’ll show they now have, the greater its fall will be if the Fed pulls the plug, AND the more sensitive it will become to the Fed even wiggling the plug. So, the situation is, in that sense, more perilous than at anytime past because some of the market’s most fundamental valuation metrics are now printing at levels never seen before.

Let me lay that out for you.

Market madness still being Fed

As I will lay out in my next Patron Post, the Fed has given some indication of a mild return to tightening in the near future, and that could create problems for the market. The Fed has not, however, laid out any clear schedule for tightening, and it won’t get far down that road before it sees market problems, and goes right back to easing because we are now in QE4ever by which I really mean “QE4ever or die!”

That is because, as soon as the Fed backs away from QE, it will see its dependent child go into paroxysms, and like any parent who knows he or she has a sickly child that is highly dependent on continued life support, the Fed will rush back to supporting its baby — the stock market.

Outside of Fed help, the case to be made against the market is huge — as big as it was before the last two major recessions. The market today looks in almost every way like it did just before the dot-com bust, but the difference, then too, was that the Fed started tightening back then. Therefore, as long as the Fed continues its present path of easing, there may not be anything like the dot-com bust, barring a deep recession that busts everything; but the Fed is now the only thing between the market and a bust.

Here are the similarities that scream market melt-up:

The market is overvalued and melting up

How high is it?

The market is a stoner. As a ratio comparing stock prices to either earnings or sales (two historic benchmarks for assessing how pricy stocks are), the price of stocks is higher right now than it has ever been in history. This market is tripping on some pricy hallucinogens.

(EV/EBITDA compares an enterprise’s value to its actual earnings before interest, tax, depreciation, and amortization. Typically a value below 10 is considered healthy.)

The PEG is another measure that looks looks for overvaluation by comparing the Price/earnings ratios of stocks to their long-term expected growth in earnings. It, too, has soared in the past quarter to reach an all-time high:

Prices are more overvalued based on these historic metrics than they were before the financial crisis that caused the Great Recession and even in the stratospheric run-up to the dot-com bust. We have never — ever — been priced this high! That means fundamentals have further to go to catch up to current valuations than at any time in history.

Investors should keep in mind that market valuations stand nearly three times the historically run-of-the-mill valuation levels from which stocks have historically generated run-of-the-mill long-term returns. In fact, the highest level of valuation ever observed at the end of any market cycle in history was in October 2002, and even that level is less than half of present valuation extremes.

So how do you get to historically run-of-the-mill valuation norms? The answer is simple: Wait nearly 30 years, allowing both the U.S. economy and U.S. corporate revenues to grow at the same rate as the past two decades, while stock prices remain unchanged, with no intervening periods of recession or investor risk-aversion, or alternatively (and far more likely), watch the S&P 500 lose two-thirds of its value over the completion of this market cycle.

My view is that the first 30% market loss from recent highs will be the beginning, not the end of the bear market ahead…. To be clear, a two-thirds market decline would not even drive the most historically reliable valuation measures below their historical norms.

John Hussman, president of the Hussman Investment Trust, in his latest note to investors

So, what is going to drive stock values up even further … other than the one thing that has been driving them for the past decade to the present perilously overvalued height — the Fed? If you know what the Fed is going to do, you might be able to make a safe market bet; but just recognize that your hope for making money in stocks hangs entirely upon your being right about what the Fed will do in the months ahead.

As for any hope of those fundamentals catching up, three quarters of CFOs polled in the US say the market is greatly overvalued. That will not, of course, prevent them from overvaluing it more with more stock buybacks … financed in good part by the Fed’s easy money.

Chief financial officers at big U.S. companies entered 2020 on a cautious note, with almost all anticipating an economic slowdown against the backdrop of an overvalued stock market, according to a survey released Thursday…. 82% anticipate taking more defensive actions, like reducing discretionary spending and headcount, as a way to stave off the looming headwinds.

CNBC

CEO confidence doesn’t look any better and disagrees in the extreme with consumer confidence:

So, the biggest insiders (CEOs and CFOs) are united in their belief that the market is priced to perfection with a business future immediately ahead that looks far from perfect. Yet, the market is rising at a rate that can only be matched by previous melt-ups.

“At this level, many things have to go optimally so that the prices are higher at the end of the year,” comments David Rosenberg on the growing complacency among investors. The renowned economist and strategist is one of the most profound experts on the U.S. economy and one of the last remaining skeptics to warn of a correction.

His bearish view is based on exorbitantly high equity valuations and over-optimistic earnings expectations. He also thinks that the US consumer sector is in worse shape than the consensus believes….

This is a liquidity and momentum driven market. It’s been that way for the past four months where the correlation between the S&P 500 and the Fed’s balance sheet has expanded to a 95% relationship. This is a case of a very accommodative Fed policy. The double-digit growth in the money supply is bypassing the real economy and has entered into asset markets broadly, and specifically into equities. So as long as the Fed is in the game priming the monetary pump, shorting stocks is going to be a very dangerous game to play … but this overall market rally is more a house of straw than a house of brick….

People will claim that there is no recession. Statistically speaking that’s true as far as GDP is concerned. But we know for a fact that we actually had a four-quarter earnings recession. I never quite understood why GDP is so important to an equity investor who is buying an earnings stream. There’s no ticker “GDP” on the New York Stock Exchange. So it’s not about the overall level of GDP, it’s really about earnings and about the fact that if you look at the 30% share of the U.S. economy that is outside of the consumer space, we actually have been in a recession in the past two quarters.…

[Does that sound like anything predicted here for 2019?]

On a median basis, the U.S. economy has stopped growing three quarters ago. Also, the U.S. consumer is not as nearly in good shape as people think. We see signs that the labor market is starting to show some fatigue….

The Fed would not be cutting interest rates three times and then re-extending its balance sheet at a rate that even exceeds what they were doing with QE3. The most important correlation to the stock market today is the Fed’s balance sheet. The power of the Fed has become so acute that it has replaced the economy as a principle influence over the stock market to the point where there is only a 7% correlation between GDP and the S&P 500. Historically, in any given cycle that relationship was anywhere between 30% and 70%. The amount of easing that the Fed has done since the beginning of October by expanding the balance sheet is just about as strong in terms of basis points as the three rate cuts they engineered last year. They have cut rates almost a 150 basis points when you look at it on an equivalent basis.

The Market

Rosenberg points out an interesting corollary between the Fed’s recent emergency liquidity explosion and the main event that triggered the dot-com bust in 2000:

We have a template of what happened when the Fed provided a lot of liquidity juice to the marketplace with the Y2K special lending facilities in late 1999. At that time, the market strongly surged, and kept on rallying into the early part of 2000. Then, the Fed started to withdraw that liquidity and it wasn’t a pretty picture.

So, here we are in the early part of 2020 with the market strongly surging due to the Fed having juiced the marketplace with “a lot of liquidity” for the year change in late 2019, exactly as it did in 1999 for the Y2K year change, and again the Fed is, at least, talking about starting to draw down liquidity in April or perhaps before as it did shortly after the Y2K year change.

Will this time also end as “not a pretty picture.”

In 2018 it was easy to know when the market would go into paroxysms because the Fed had published a set schedule for its tightening. This time, as Rosenberg says,…

It’s tough to time when the Fed is finally going to sit back and say: “Ok, you know what: I’m not handing any more candy to the kindergarten class”. My sense is that the response to the Fed no longer priming the pump could be significant.

We’re now “all in”

Don’t let marketeers influence you with their claims that the market is going to rise this year. You can bet that every single one of them, if alive in 2000, was saying the same thing then, too. Though some feared the ridiculous heights the market hit in 2000, almost no one was calling for it to crash.

As Mark Hulbert, who has been in this game for a long time, recalls,

On Jan. 14, 2000, the Dow DJIA … hit its bull-market high prior to the bursting of the internet bubble. And, yet, you’d have never known it by reading what the newsletter editors then were saying. In fact, after reading through my newsletter archives from January 2000, I was struck by the similarities between now and then.

MarketWatch

2008 went the same way. Anyone remember Goldman’s investment advice to its clients just before the 2008 financial crisis implosion? Everything it wrote was printed in vampire squid ink:

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who’s Who of Goldman Sachs graduates.

Rolling Stone

While it sucked everyone dry, it outwardly recommended buying more stocks that would fail, even as it bought up lots of almost everything that would do well when other things crash.

One strong sign of a melt-up and the nearing top of a market is when everyone is in — retail investors like mom and pop and the big money or “smart money” like institutional funds. When there is not a lot of money sitting on the sides, only newly created money can push the market up. When everyone is in, enthusiasm (or euphoria) is at its peak.

Beware those who have stocks to sell. All the big advisors counsel everyone to jump in when MOMO and FOMO hit their peaks. How else will they get rid of all their own holdings so close to the peak? According to Rolling Stone and many other publications, that’s what Goldman did to maintain its Sachs of gold. That’s how it got the name “Vampire Squid.”

We’re now “all in”:

Contrary to several goalseeked indicators which erroneously repeat week after week that whales and other prominent institutional traders remain “on the fence” despite the now daily record highs in the S&P, the truth is that virtually everyone is now all in: from simple human-driven discretionary, to macro funds, all the way to algo and CTAs…. “Equity positioning … has run far ahead of current growth as investors price in a global growth rebound….” The question is, are people starting to feel more upbeat about the global economy or is this just another round of central bank dovishness designed to propel asset prices higher? The answer appears to be, yes. Weakness will be met with overt accommodation. Strength with silence.

Zero Hedge

Or is just another round of Goldman, which populates all levels of the Fed with former GS people and others that it recommends, fleecing the flock? (As a refresher, read the whole Rolling Stone article quoted above, written at the end of those desperate times.)

Money-losing companies are shoving market valuations to the summit

One of the big concerns during the final year or two of the market’s rise before the big dot-com bust of 2000-2002 was that so many companies that never made a dime were leading the market into the stratosphere. We’re pretty well back to that.

Tesla Inc. shares have doubled in three months, while General Electric Co. shares are up 44%. The pair are the two most valuable loss-making companies, part of a shockingly high proportion of listed companies that have been losing money—despite, or perhaps because of, the long bull market.

The Wall Street Journal

The Journal says these two are two very different exemplars of profitless companies in today’s stock market. Tesla has never made a dime, and is now one of the most highly valued companies in the market, and GE is a megalithic dinosaur of great value in the past that has been losing money for years.

The Journal article says that 40% of listed companies in the U.S. are currently losing money quarter after quarter. The biggest area of massive-money-losers in the dot-com gold-rush was the IPO segment of the market. The same is true today:

Maybe it would be good to reflect on what took the market leaders (the “Nifty Fifty”) higher and higher in the prelude to the dot-com bust:

The Nifty Fifty appeared to rise up from the ocean; it was as though all of the U.S. but Nebraska had sunk into the sea. The two-tier market really consisted of one tier and a lot of rubble down below. What held the Nifty Fifty up? The same thing that held up tulip-bulb prices long ago in Holland – popular delusions and the madness of crowds. The delusion was that these companies were so good that it didn’t matter what you paid for them; their inexorable growth would bail you out.

Forbes Magazine, 1977, The Nifty Fifty Revisited

Bonds overflowing

While stocks are overflowing, so is the pouring of money into safe-haven bonds. If the current net flow of money into bonds were to continue all year, it would look like this compared to any other year since the Great Recession began:

Of course, the flow of money into bonds probably will not continue at that rate all year, although several years shown above did continue at the same rate most or all of the year. Still, many others did not and even turned downward partway through the year. Regardless, the steepness of the rise in the first two weeks of January exceeds that seen at the start of any year on the chart, except maybe 2015.

Bonds aren’t the only safe havens rising as a warning sign alongside soaring stocks. Precious metals are, too:

David Rosenberg notes why he believes gold is on the rise and should be:

When you compare the new supply of gold against the supply of money coming into the system from Central Banks, to me it’s a very clear cut case that you want to have very high exposure to bullion….

Gold demand is predicated on the final act which is going to be right-out debt monetization. When we get to the lows of the next recession, we’re going to find that these Central Banks that already have been extremely aggressive are going to engage in what is otherwise known as the “debt jubilee” or a right-out debt monetization which was actually the final chapter of the Bernanke playbook. Remember, Ben Bernanke got his nickname “Helicopter Ben” because in a speech in 2002 he suggested that helicopter money could always be used to prevent deflation. So we’re going to have helicopter money.

The Market

Buyback bonanza is slowing down

It’s no secret that the Fed’s new money and low interest, and the US government’s one-time allowance for low taxes on the repatriation of overseas cash hoards has fueled the market higher.

Over a trillion dollars has been spent on stock buybacks by twenty companies over the past five years to push up the values of the markets leaders. What happens when those companies have used up all the foreign profits they had to repatriate or when interest rises so debt to fund buybacks is not longer cheap or when those “trillion-dollar babies” just reach the maximum amount of debt they feel comfortable taking on … or reach the maximum amount for which ratings agencies feel comfortable selling good ratings?

Currently buybacks are slowing down due to the fourth-quarter reporting period. Repatriation money is also likely running out for many companies, because it has been two years since cheap repatriation of former foreign profits was allowed under the revised tax code as part of the Trump Tax Cuts.

It feels like 2018 all over again

I still think, as I wrote in December, that the following is a strong contender to become the market’s peak before it hits a wall:

The market has a highly attractive 30,000-foot altitude marker in the sky to hit on the Dow. That attractive goal will tend to suck the market quickly up another 5% until it nears that target.

Once the market gets to that target, however, that number tends to become resistance as everyone starts to wonder if it can break it and if it will hold or crash in fear of such great heights. 30,000 is a much stronger number psychologically than 29,000 was because it breaks into a new 10,000-foot level. The human psyche likes big, fat, round numbers like that.

Once it gets to that level, however, it can generate a lot of fear because of how perilously high the market suddenly feels, which makes it an ideal number for an ultimate blow-off top

“Santa, No Longer Tariffied, May Rally for Christmas“

I’m not predicting 30,000 is the major breaking point. I’m just noting that I think it is a strong psychological milestone that is quite near in the present melt-up stage as both the brass ring for investors to reach for and then perhaps to fade … or even flee if people see a lot of fading happening. It will deepened onhow many other things are going bad at the same time or on one thing going bad — Fed support. (Don’t say it can’t happen. It did in 2018 when the Fed should have known better then, too.)

First, let me point the last time we neared a milestone of this kind (Dow 20,000). You can see in the graph below that it was both a magnet, sucking stocks upward and then a two-month bench to rest on. However, the steep final rise to that level was not a melt-up because a “melt-up” is meant to imply things are about to melt down:

30,000 will be a natural place to catch one’s breath, but what happens at that point will depend a lot on what kinds of events happen when the market takes a pause bringing momentum to a halt — say if buybacks fade for the reasons above or if earnings estimates sink more than expected or a very low GDP print; BUT it relies far more than anything on whether the Fed fades its current easing.

After December, I got out of stocks to sit this mile-marker and possible Fed transition point out. (I don’t even like being in stocks now, given how insane the market is; but my predictions of the market’s fall were based on Fed tightening, so a return to easing changed things for the last few month.)

As for what happens in a Fed tightening regime, the graph above also bears testimony to just how much the market changed in January of 2018 for the remainder of that year and how it remained below its January blow-off top with some hard bouncing even through the first three quarters of 2019 as the Fed’s quantitative tightening continued … even though the Fed stopped raising interest rates. Only when the Fed moved deep into QE4ever did the market finally sustain a rise above its two 2018 high mark.

As for what happened back then when the Fed tightened and how it compares to now,

Stock market investors could be setting themselves up for a nasty fall … according to Mark Newton, a popular independent market technician, in a Friday note to clients.

“US stocks have moved up at a clip that’s eerily reminiscent of January 2018,” he wrote. “No news really matters to shake markets, and bad economic news or earnings, not to mention geopolitical threats matter for a few hours only before the relentless rally continues unabated,” he wrote.”

The S&P 500 index … fell more than 10% between Jan. 26 of 2018 and Feb. 9 of that year, after rallying more than 27% between the start of 2017 and the Jan. 2018 top.

“Make no mistake, this market move is NOT normal, and is NOT something which should be able to continue technically into and through February without a major hiccup,” he added.

“Markets truly seem to be near exhaustion using traditional methods, but it’s proper to wait on the sidelines until the break gets underway, which should prove swift and severe….”

That said, it’s incredibly difficult to predict exactly when euphoric sentiment will take a turn for the worse. “Indicators don’t flash red when the market is at a top,” Newton warned. “It’s hard to go out there and really trumpet a big bearish call, which makes you wonder if its probably the right thing to be doing.”

MarketWatch

BEAR in mind,

Most initial bear market declines are accompanied with versions of Herbert Hoover’s 1929 statement that “the fundamental business of the country is on a sound and prosperous basis.”

John Hussman

The only failsafe red indicator now that the market is ignoring all economic the metrics of all economic/business fundamentals is the light on the power cord to the Fed. Everything depends on the Fed and what it does, and right now the Fed is not all that clear about what it will do. It is certainly not clear that QE4ever will continue without a failed attempt at reversing it.

The big thing to use as your red light is any attempt or mention of an upcoming attempt by the Fed to prove it is not financializing the US debt by moving back toward tightening … or even just stopping the money pumps. (It, of course, won’t mention the “financializing” part, as it doesn’t want you to even think about that, but look for hints of tightening that it can use to support its argument that it is not monetizing the debt with anyone who calls it to task.)

Bear in mind the only way the Fed can maintain its lie that it is not illegally financing the national debt with QE4ever is if it can prove that its recent massive asset purchases were just temporary emergency monetary responses. Lack of “temporary” = QE4ever = the Fed monetizing the US debt by soaking up US treasuries forever … or until the Fed decides to crash the entire economy by tightening again. (It is only 4ever if the Fed wants the economy to keep going.)

So long as the Fed even shows it is going to do nothing more than hold its existing treasuries for years to come, it is, at least, guilty of monetizing that much of the US debt. Throughout QE, the Fed’s sole argument that it was not monetizing the debt rested on its QE being temporary.

The Fed has a great need to quit its repo recovery actions so that the Fed can prove it is not financing the US government by sopping up its debt to roll over in perpetuity. It doesn’t make any difference that the Fed is only buying short-term treasuries, as it now claims for its excuse, if it rolls those short-term treasuries over forever. That is just short-term dressing in name only on permanent monetization of the debt. So economists, analysts and politicians will be questioning the Fed’s “not QE” if they see that the Fed simply cannot stop. The Fed is fully aware of that. As I noted in last year’s early Patron Posts, the Fed expressed great concern about losing trust in 2018.

At the same time, this market has nothing left to keep it up but Fed fumes.

(If you want to read as much as I can lay out about the Fed’s projected moves for the first half of this year, I’m going to give access to January’s Patron Post as soon as it is finished to those who sign up to support my continued writing of free articles like this now at the $5 level or above, even though their first support payment won’t process until February. The Fed has not laid out any clear path, but there are some broad hints, and I don’t want anyone to miss the information in case it is helpful, so I’ll make it available before pledges are processed.)

National Economic Council Director Larry Kudlow, a top economic adviser to President Donald Trump, said Wednesday that the White House plans to unveil a plan for additional tax cuts later in 2020. “I am still running a process of Tax Cuts 2.0. We’re many months away – it’ll come out sometime later during the campaign,” Kudlow told CNBC. “Tax Cuts 2.0 to help middle-class economic growth: That’s still our goal…. We will unveil this perhaps sometimes later in the summer.”

CNBC

There is nothing like a tax cut to buy votes

It is important for Trump to announce middle-class tax cuts just before the election because everyone in the middle class now knows (or should) that the massive Trump Tax Cuts that were first on his agenda went to the rich. Even major pro-capitalist, Republican-leaning, Republican-owned magazines like Forbes acknowledge this:

For the first time in American history, the 400 wealthiest people paid a lower tax rate than any other group…. It’s never been more clear that our country’s tax code is built to serve only those who have the most money. While hedge fund managers, private equity executives and venture capitalists benefit from the carried interest tax loophole, everyday Americans barely get a deduction for their student loan interest payments…. Income inequality is widening to record levels and there’s no reason to believe the trend will slow down…. The Tax Cuts and Jobs Act of 2017 was the largest tax overhaul in over three decades. It was rushed through congress and it’s working exactly as it was intended to do so: to line the pockets of the wealthy at the expense of the working class. Optically, it was championed as a way to boost the economy, but the fact is that unemployment was already low and the cuts came amidst a long bull market…. The tax cuts are deficit-financed which … means that “resources will be taken away from future generations as well as today’s working class.”

Forbes

The fact that the Trump Tax Cuts inured almost entirely to the rich is a fact Trump now has to massage in this election year. As an earlier Forbes article stated,

Whether the Tax Cuts and Jobs Act (TCJA) disproportionately helped the rich may be 2020’s biggest political issue…. The richest 1 percent received 9.3 percent of the total tax cuts, the top 5 percent got 26.5 percent, the top quintile received 52.2 percent and the bottom quintile got 3.3 percent.

Forbes

The article argues that these numbers are actually progressive on the basis that the top quintile pays eighty percent of the taxes so 52% was less than they should have received. However, the article (as all Republican articles of this kind do) fails to mention that the top 10% also have 80% of the nation’s wealth — a portion so obscenely sickeningly and unmerited that it never occurs to anyone that the rich should be paying 80% of the taxes just to pay an equal percentage of what they have to what others are paying.

You can be sure Krazy Kudlow’s promise will be rolled out in the summer just as he has said because that will time out perfectly for countering the outcries against Trump as we transition from intra-party primary debates into inter-party main-election debates. Trump will be able to say when challenged as the protector of the establishment, “I’ve got this covered. I’m working on it. Elect me along with a Republican congress, and I’ll give you the best middle-class tax cuts ever!”

Are the Trump Tax Cuts and spending increases MAGA?

The problem with Trump promising a new round of tax cuts — this time for all the rest of us — is we’re not paying for the tax cuts Trump already gave. The Trump administration (with the blessing of the majority of voters) chose to save the rich by tapping the economic strength of future generations in order to pull money forward for our benefit now.

The 2020 deficit is projected to come in somewhere between a trillion and 1.2 trillion dollars. And future deficits are projected to grow parabolically like this:

That steep deficit growth is without Kooky Kudlow’s newly promised additional tax cuts that also will not pay for themselves because they never do! Of course Kudlow & Co. will promise, as they did last time, that the tax cuts will pay for themselves. Fool me once, shame on you. Fool me twice, shame on me. (However, US voters have already been fooled three times by promises that “supply-side” tax cuts (or “trickle-down” tax cuts) will pay for themselves. so triple shame on them! The Kudlow Kraze will be the fourth time if the nation falls for it, and people most likely will fall for it because people want to fall for it because people want to believe we can have the strong military we have, fight innumerable endless wars in countries around the world, and have all the welfare we want and still pay less in taxes. People routinely deny reality in order to have all they want, and politicians certainly know how to squeeze votes out of that. We’re being juiced.

So, let me point out that didn’t come in quite as great as promised under the latest round of sugary tax cuts:

The nonpartisan Congressional Budget Office projected that fiscal 2019 revenues, without the tax cuts, would be $3.69 trillion. Instead, revenues with the tax cuts were only $3.46 trillion…. Treasury Secretary Steven Mnuchin said during the push for the tax cuts and as recently as last month that they would pay for themselves by generating economic growth. Payroll taxes are higher than projected, as are tariffs, but corporate and individual income taxes are lower.

Washington Examiner

Revenue in the first year of the tax cuts dropped by a minor 0.4%. Since population keeps growing, it’s rare for government revenue to drop unless the nation is going into a recession, which was not the case in 2018. Moreover, revenue needed to rise by about 2% just to keep up with inflation in 2018. On the other hand, as you can see in the image below, government revenue did nudge up slightly in 2019:

This uptick in revenue, however, is not adjusted for inflation. Corporate taxes, which were cut the most, are far from paying for themselves, and individual tax revenues have remained about the same, but should have grown due to population growth, while revenues from payroll taxes, which were not cut, have increased because of population and job growth. The losses from corporate tax cuts have been covered by the record-breaking Trump Tariffs (mostly paid for by American companies and handed down to consumers). If those eventually go away, there will be a larger revenue shortfall. Even the Trump administration’s Phase One China charade may reduce tariffs enough to leave the nation with less revenue than it had in prior years.

More significantly, tax revenues benefited hugely in 2018 and 2019 from foreign profit repatriation (yet corporate tax revenue still declined) because that was front loaded into the tax cuts. Money that had been kept outside of the country suddenly came in as profits, benefiting the government with taxes that likely would not have been collected at all if not for the repatriation program. Repatriation of past profits, however, was a one-time opportunity that is now fading away because most corporations have likely brought back home about as much of those past profits as they intend to.

Given this ugly picture, it is no surprise, then, that Republicans are now bending over backward to find excuses for the poor performance of their tax cuts:

Rep. Kevin Brady (R-Tex.), a lead architect of the GOP tax bill, suggested Tuesday the tax cuts may not fully pay for themselves, contradicting a promise Republicans made repeatedly while pushing the law in late 2017.

Pressed about what portion of the tax cuts were fully paid for, Brady said it was “hard to know.”

“We will know in year 8, 9 or 10 what revenues it brought in to the government over time. So it’s way too early to tell,” said Brady at the Peterson Foundation’s annual Fiscal Summit in Washington D.C.

The Washington Post

The problem with begging for a lot more time for the tax cuts to prove themselves is that nothing was said about the need for eight to ten years to lapse before the cuts started paying for themselves back when Republicans like Brady were pitching the plan to the public. In fact, back then, we were all promised they would pay for themselves with GDP growth in the very first year. Remember all those big promises about how much GDP in 2018 would rise to 3% or 4% or 5%, depending on what snake-oil salesman was talking?

Moreover, the tax cuts were front loaded with the greatest stimulus effects in the first year. Because repatriation is fading away after being almost entirely spent on stock buybacks and shareholder dividends, we have created very few business improvements to propel future economic growth. That makes it hard to see how future years are going to bring more growth and more tax revenues so the cuts will finally start to pay for themselves. It’s an even more ridiculous argument when you consider that economic growth in the second year of the tax cuts was slower than growth in the first year! It hardly appears to be gaining momentum.

Spending stimulus is spent

The failure of taxes to pay for themselves might not be so bad if we didn’t also accompany it with spending increases (just as much under Republicans now as in the past under Democrats, proving neither group is more fiscally responsible). Here is what has happened with spending (not deficits, just spending) in the Trump years compared to those years that came before:

As you can see, the rise is steeper now than in almost anytime past with the exception of the large emergency leap at the start of the Great Recession, which then actually got reversed for awhile. Yet, government spending in the past two years has even exceeded those years during the Great Recession when the US government leaped into overdrive, trying desperately to save a dying economy while supporting millions of people who lost their jobs. We’ve now moved to setting new records in spending, which doesn’t even include the acceleration in spending that is now building for 2020 … even if we don’t have a war with Iran.

The Trump administration promised everyone that spending increases would also pay for themselves by stimulating the economy through infrastructure construction. So, we need to look at how much economic benefit all of this attempted tax-cut/spending-increase stimulus has bought us.

It has bought us precisely nothing. While Trump’s treasury projected the tax cuts and spending increases would create 2.9% GDP growth, and Krackhead Kudlow and Trump promised even more than that, we actually averaged about 2.6% during all of Trump’s presidency. Worse still, the numbers are getting consistently worse, not better. The average GDP growth rate last year through the third quarter is a fraction lower than Obama’s average, and it appears the fourth quarter will bring that down even more. That is a poor return for all the debt being piled on.

GDP growth dropped to 2.1 over the second and third quarters of last year while the fourth quarter is projected to come in below 2%. The Atlanta Fed’s GDP Now forecast for the fourth quarter of 2019 has just fallen off a ledge (and tends to become more accurate as we get closer to the first release date of GDP information):

Before the deregulation of the financial industry under President Reagan, which led to an explosion in consumer credit issuance, it required just $1.00 of total system-wide debt to create $1.00 of economic growth. Today, it requires $3.97 to create the same $1 of economic growth. This shouldn’t be surprising, given that “debt” detracts from economic growth as the “debt service” diverts income from productive investments and leads to a “diminishing rate of return” for each new dollar of debt. The irony is that while it appears the economy is growing, akin to the analogy of “boiling a frog,” we accept 2% economic growth as “strong,” whereas such growth rates were previously considered near recessionary.

Real Investment Advice

Average economic growth over the course of all of Obama’s eight years was a “near recessionary” 2.0%. Bear in mind, however, Obama’s term began during years when the nation was still crashing into its worst recession in most people’s lifetimes, a deplorable situation Obama inherited from the Bush Tax Cuts, which took us from a surplus budget to a deep deficit budget and into the worst recession in nearly a century. (Just the facts: that’s where we ended up after the Bush Tax Cuts that promised us accelerated economic growth!) Obama had some quarters after the Great Recession where GDP growth hit over 5%. Trump has never come close to that. (It’s just math, Folks, not arguable as an opinion, and out would be truly deplorable to make excuses for it.)

Economic growth, measured as the change in real GDP (inflation-adjusted), averaged 2.0% from Q2 2009 to Q4 2016. This was slower than the 2.6% average [under Bush] from Q1 1989 to Q4 2008. Real GDP grew nearly 3% during President Bush’s first term but only 0.5% during his second. During the Clinton administration, the GDP growth was close to 4%, slightly faster than the Reagan administration.

Wikipedia

Real GDP per capita rose an average of 2.5% a year under Obama. (That is adjusted for inflation.) Real GDP per capita after the Trump Tax cuts grew 2.9 percent in 2018. However, 2019 isn’t in yet, and it now appears all but certain it will be lower than 2.9%. In short, there is nothing worth seeing here, Folks. No matter what you may want to believe, the hard, cold truth is that the economy is slowly ebbing away under Trump.

No jazz for jobs

Job growth is as important as GDP growth, but that has also dropped to a slower rate of growth than under Obama. In fairness, that is inevitable as a nation moves to full employment. (The term “full employment,” however is deceitful since a larger percentage of people after the Great Recession are part-timers who have replaced one job with two jobs at lower pay and lower benefits — true under both Obama and Trump. These part-timers are counted as two employed people because the nation refuses to use full-time equivalence as the basis for measuring job growth, which it would do if it wanted honest measures.)

All the same is true for the nation’s unemployment rate because people are no longer considered unemployed if they get a part-time job or if they just fall off the unemployment rolls because their benefits run out. You can see the glide path down was starting to flatten out even during Obama’s final year and has become completely flat now:

It’s only natural that the unemployment rate would flatten out at this point, since this is as low as it ever has been, but clearly Trump has nothing to brag about on jobs or unemployment over Obama either. (Just keep in mind that the actual unemployment rate during Obama’s years and Trump’s would be far worse if unemployment were measured honestly or even just measured as it was back in the seventies and eighties. See Shadowstats.)

Next in importance for assessing economic improvements would be wage growth because that is where the rubber meets the road for the average employed person. For about a year, wages grew more quickly under the Trump Tax Cuts and spending increases than under Obama, but that growth rate is now slowing back down. Even in the Obama years everyone anticipated wages would only start to grow as we got nearer to “full employment,” so it’s a little disappointing that wage growth is slowing down almost as soon as we got to where it was picking up. Let’s hope it, at least, maintains a flat line at the current levels is only one percentage point higher than the Obama years rose to.

Draw a line to show the trend through the middle of Obama’s last two years, and you’ll see it ends right where we are now. (Aside from using this number to show whether there is any improvement over the past administration, note that REAL wage growth is still almost zero because the past year of inflation at CPI 2.3% ate almost all of it.)

Apparently, Trump’s projections for the tax cuts and spending stimulus were all based on best-case scenarios, and that is aways a poor way to create a budget or a funding plan for anything.

All Trumped up and nowhere to go

Regardless, here in Candyland, Trump knows voters love their tax candy. So, he’ll be throwing out promises of handfuls of candy to the children as soon as the Dems choose their anointed one for Trump to campaign against. He knows also that arguing against middle-class tax cuts during an election year is likely a losing proposition for Democrats. So, it’s all politics intended to woo the nation’s middle class where the voting majority resides, but at the cost of driving the nation deeper into the hole at a steeper rate of decline every year.

Of course, if Trump really wanted to help the nation and not just get himself re-elected by throwing out fist-fulls of candy, he’d eliminated the special capital-gains tax rate that goes almost entirely to the rich and effectively puts them in a lower tax bracket than much of the middle class and that only gets recycled into endless asset purchases (an argument I’ve detailed many times in the past).

He’d set up tax structures that force the rich to earn their money the old-fashioned rich way by building factories that hire people and produce useful things and that pay people good wages and good benefits so they can buy those useful things, instead of giving the rich a tax break when all they do with it is take profits from asset sales and then recycle the savings into more stocks, more bonds, more real estate, more collector items and pricier football teams that play in stadiums the middle class people pay for!

Unless the middle-class finally gets its brains back and stands up and fights this, the same rinse-and-repeat national national debt cycle that subsidizes the rich is going to keep on happening. So, if you want a middle-class tax cut, make sure it gets paid for by the rich who have long been effectively in a lower tax bracket than the middle class, even more so under Trump who has served his Mar-a-Lago buddies well!

Just like capital-gains tax cuts, corporate tax cuts also have not gone into building new factories or into entrepreneurial new service businesses but — as I argued here before they even became law — have gone almost entirely into stock buybacks and dividends that just help the rich get richer without helping anyone else. Sure, they may finally help the middle class in their retirement years because 401Ks are about the one place where the middle class have enough money to buy stocks, but that is only IF those retirement funds don’t get crushed again as they did in the dot-com bust and in the Great Recession. That money all exists only on paper until the days in which you actually get to spend it. It doesn’t help the middle class any now; but the rich are helped fabulously right now. Fabulously! Better times than they’ve ever know!

Replacing those help-the-rich tax plans with ones that help the rest will never happen. The saddest apparent truth is that middle-class voters won’t even vote to make it happen. They’ll vote for more of the same shiny, cellophane-wrapped, candied, trickle-down promises, happy for any sweet morsel thrown their way and willing to get it by letting someone in the future pay for it. They’ll continue to rally to the argument that helping the rich is the only way to help the rest. That’s what the last thirty years of history shows us.

That’s because they’d rather be right (in their own heads) about the beliefs they’ve been suckered into all those year than be wealthier. No one wants to admit they’ve been suckered. So, they’ll stay with their party-line votes and stand by their man and argue that the good times have never been better even though the only thing greater about America right now is its growing debt.

They will continue to syphon all economic power away from their grandkids to help themselves have all they want to have right now by leaving their children and grandchildren with the forever unplayable bill — a bill where the interest alone will cost every penny in taxes they can possibly scrape together. They’ll do that on the false premise that it will make the nation stronger for the future, as if a nation far deeper in debt can ever be considered stronger, especially when we are seeing no lasting benefits in improved infrastructure and a more vibrant economy. Mark my word. That’s what they will do!

That is, for a fact, what the nation is doing — pulling all economic power into the present just to keep the economic engines barely running by making future generations fuel all of it. In decades past, parents did all they could to make sure their children had a future that was brighter than their own times had been. We’re doing everything conceivable to undermine that environmentally and economically just to keep things on a more gradual downward glide path for now.

But we do have more rich people. That’s for sure.

And more poor.

And fewer middle class.

We have, indeed, trickled down.

Did you know Dr. Frankenstein created a monster that stays alive to this day by eating zombies? Neither did the zombies. Neither, apparently, did Dr. Frankenstein. In fact, the zombies, being braindead as zombies are, do not realize that they are also keeping alive the diabolical doctor who made the monster that is eating them.

Read the remainder of this entry »

Consider this a travelogue in pictures (graphs and charts really) that presents a rather striking and comprehensive image of a nation journeying into recession. Our decline is steeper now than it was even in my retelling of economic turns during the summer and early fall.

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“Show me the data,” demand those who cannot see a recession forming all around them and who keep parroting what they are told about the economy being strong because it is what they want to believe; yet, the data look like an endless march through a long summer down the road to recession.

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The Great Recession never ended. I say that because the deep economic flaws that caused it were never corrected. All recovery efforts since merely clouded our eyes to the problems growing larger around us, even making them worse, and now we are going back into the belly of the Great Recession.

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