This October’s Surprise Will Only Be a Surprise Here If it Doesn’t Happen

Cleaning up after the daily economic news

Thursday morning CPI, again, proved what has become my standing narrative for two years — that hot inflation would force the Fed to tighten faster and harder and would kill the economy, the bond market and stocks — when all of the following headlines hit on a single morning (as collected on The Daily Doom):

  • Inflation hotter than expected!
  • Core US Inflation Rises to 40-Year High, Securing Big Fed Hike
  • Dow futures instantly cliff-dived more than 500 points after a hotter than expected inflation report
  • “Horrible”… “Brutal”…”A Disaster for Democrats”: A Shocked Wall Street Reacts to Today’s CPI Nuclear Bomb
  • US 10Yr Treasury breaks 4%, highest in fifteen years!
  • What we Are Seeing in The UK Is Decades-Long Hyper-Financialization Being Unwound on Fast-Forward at Gunpoint
  • Ugly US 10Yr Treasury Auction Stops at Highest Yield Since 2009 as Foreign Buyers Flee
  • Yellen Flip-Flops Over Adequate Liquidity in Treasuries

That string of headlines was like a grand slam for all that I’ve been saying, suddenly being reported now as facts in a single morning … but

After falling like a stone thrown off a cliff with the Dow plunging more than 500 points due to the severe inflation news, the market rapidly reverted and soared straight back up like the stone had caught an enormous updraft and rose more than 600 points above the top of the cliff!

Zero Hedge explained that “Stocks Erase CPI Losses After ECB Headlines.” According to Reuters, the European Central Bank’s terminal interest rate was projected in a week-old report to be end up being lower than the ECB had formerly anticipated. That supposedly was the thread upon which the US stock market’s major 1200-point rebound from the start of the day hung. However, that’s the ECB’s interest rates, not US interest rates, which impact the US stock market far more directly, in spite of the fact that the morning’s news related to US Federal Reserve interest rates clearly indicated those rates would likely be pushed higher than formerly expected! It didn’t matter, the market lunged for what it wanted to hear and ignored reality all around it like a convulsive creature, gasping for air.

We are seeing the most extremely insane or rigged behavior in the stock market imaginable. In fact, the ECB report that investors chose to instantaneously cling to because it gave them the tiniest dose of hopium ever measured out actually stated the ECB would NOT even use this report for determining its interest rate, making the tiny dose of hallucinogens a diluted dose as well:

Rate-setters agreed this rate would be treated as an input for their internal deliberations but decided they wouldn’t use it as the ECB’s policy guidance.

Zero Hedge

In fact, the news that sent the US stock market through the roof, even contained the following disclaimer:

Policymakers gave the new model a mixed reception and fear it could include errors.

One of the headline stories listed in The Daily Doom carried, among many additional all-out damning observations by numerous top-level market analysts and financial writers, the following quotes (just to summarize) about how bad the morning’s inflation news was for stocks because of what it assuredly meant for the Fed’s interest rates:

“Horrible CPI number… what will the Fed to do on interest rates: Will they go 100 basis?”

It is brutal… I do think that prices will start to moderate — [but] I thought that this would already be happening at this point.”

For Democrats, this is a disaster. Today’s is the final CPI report ahead of the Nov. 8 midterm election. You can bet that Republicans will be hitting this hard — worst inflation in four decades.

“For the Fed, the September CPI report seals the case for a fourth consecutive 75-basis-point hike. It calls into question the modal outlook from three weeks ago—that the Fed might be able to stop raising rates after 50 bps in December and 25 in February.”

“This was clearly a bad number. It’s just broad-based inflation.”

This was clearly a shock for markets. If ever there’s a time for people who do economic forecasting to be humbled, this is it.”

“This report raises the risk that we may see a new cycle high in headline inflation before the end of the year. With energy prices moving back up, a mid-90s oil price in December could see us surpass the 9.1% headline peak from June…

“This print not only poses a challenge for the Fed but also the broader economy. Inflation was supposed to be moderating but instead we got a print that moved in the wrong direction.”

The unfavorable prints expected in coming months — will make it difficult for the Fed to communicate a downshift in the pace of rate hikes in December.

“Once again, hotter than expected US inflation numbers for both the core and headline measures… and, therefore, bad news for the Federal Reserve and markets and, more importantly, the economy and especially the most vulnerable segments of society….”

And now we sit back and wait for something to break.

Zero Hedge

All of that sent markets over a cliff; then the market got the slightest whiff of hope from an error-prone week-old report from the ECB on the other side of the world, and it blasted off on its gigantic rocket ride!

Did the stock market just prove and disprove my long-running thesis in a single morning?

Fools from their money will soon be departed

Let me just predict this burst of insane glory won’t last long. But, hey, with insanity having breached the heights of human stupidity, we can only think that the upcoming weeks of deadly earnings reports and outlook revisions will send the Dow to 50,000 by Christmas.

Actually, I’m questioning whether this kind of groundless insanity can even make it through the day before investors get their vacuous heads crushed. While that was a serious hot-air updraft, it’s likely to prove one of those big surges of a massive engine running out of fuel that I recently talked about because the real news is all coming out as forecast, regardless off how stocks surge on the remaining fumes in the tank.

[Note: I wrote the above paragraphs on Thursday and am editing this piece for publication on Friday morning, and look at where the market is now. It didn’t last a day. Just an empty gyration of a surging, dying market that I can’t write and edit fast enough with these in-depth (therefore, long) articles to keep up with.]

Watch out! Gramma Yellen is at it again!

Speaking of absurd surges, let me segue for a moment to our US treasurer for an example of the lame leaders I wrote about in my last regular post (“Celebrating Our Great and Feared Leaders“) because she is a human example of this kind of surging followed by immediate faltering:

Only a day ago Gramma Yellen [two days ago as of this morning’s proofing] glibly reported just like her mentor Ben Burn-the-banky, that she did not see any financial troubles showing up at all. Her assuredness came just after the major Bank of England fiasco that would have ripped pension funds to shreds, even threatening to spill over to this side of the pod, if the BoE had not gone into emergency QE that is not QE.

Suddenly, Janet started yellin’:

Treasury Secretary Janet Yellen cited concerns about the potential for a breakdown in trading of US Treasuries, as her department leads an effort to shore up that crucial market.


Hmm, a day after warmly reporting that the seas are calm and all is well on her watch from the crow’s nest, Yellen started sounding like the Bank of England, as if some monster had suddenly risen from the sea in front of her ship. (Gee, who could have seen that coming?)

“We are worried about a loss of adequate liquidity in the market,” Yellen said Wednesday in answering questions following a speech in Washington. The balance-sheet capacity of broker-dealers to engage in Treasuries market-making hasn’t expanded much, while the overall supply of Treasuries has climbed, she noted.

OK, so she’ not quite screaming, but that is actually pretty loud for someone who normally speaks in soft Fed-speak that she learned during her stint at the Fed, and it is potentially a big deal. It’s a shift away from her normal librarian voice. We saw what happened in the bank repo world when liquidity got tight in 2019. We saw what just happened with pension funds in the UK that became an overnight risk of global contagion due to tight liquidity, even in the US. So, this loss of liquidity can rapidly become serious. It’s one of those things that is fine until the day it isn’t when something breaks and starts a rapid cascade. The less liquid a market is, the more prone to a sudden cascade. Hence, the big brains at the US Treasury are now “worried,” not something they usually like to admit as those words, themselves, sometimes become instantaneous self-fulfilling prophecies because of who is saying them.

Part of the news listed at the top of this article was that the 10yr bond just screamed upward intraday because of the rest of the news to break through 4% for the first time since the Great Recession! Wednesday’s Treasury bond auction was a disaster due to thin liquidity among bidders:

Yields screamed almost straight upward after Janet said “no problems in sight” to nearly touch that 4% that they, then, broke through the next morning. A sixty basis-point rise in one step in US Treasuries is almost unheard of (except recently). And the Fed only just began to double down on the speed at which it lets Treasuries dump onto the market by refusing to refi its balance-sheet holdings (a process called called “quantitative tightening” or “QT”). So, you know it’s going to get plenty uglier with treasury dumping being accelerated now to double time by the Fed. As I’ve been saying, there is no way markets or the government will be able handle this toxic debt dump. That is why I will be surprised if October, when the great treasury dump really gets under way does not deliver an October surprise to markets that are attempting to soar in opiated rallies built on absolutely nothing at all.

So, Yellen is now a little worried right after saying there was no trouble in site anywhere. So glad for the foresight of our much-to-be-feared blind leaders.

This shouldn’t be an issue for the government, though, (always beware that I am often being facetious/sarcastic) because outstanding Treasury debt has only climbed by $7 trillion since the start of the Covidcrisis! So, lockdowns were clearly no big deal, leaving no lasting damage on humanity. Up an extra 7T while interest rates on the debt have more than doubled since the start of the year. What could go wrong?

For some reason, major institutions are no longer as willing to be the market-makers that take on this debt, and for some reason a number of other nations have walked away from financing US debt, too, even as their own sovereign instruments look worse. Hence, the sudden lack of liquidity right at a time when government bonds are being dumped by the Fed at the greatest rate in history.

Yellen noted that the Federal Reserve now has a standing repurchase facility to provide a liquidity backstop to the Treasuries market; that “can be helpful,” 

That’s comforting. I’m glad they have a system, which became extremely overused system during their last liquidity crisis with bank reserves, that CAN be helpful, especially since their counterpart reverse repurchase system is already maxed out compared to any historic norm:

I don’t see any issues there. (It’s that dang sarcasm again.) Of course that is REVERSE repurchase agreements, which suck liquidity out of the system, while Janet is talking about regular repurchase agreements (Repo loans), which add cash from the Fed into bank reserves. Still, if liquidity problems are arising that may require use of the repurchase agreement facility, why is the Fed continuing to roll over such a massive balance of the opposite kinds of agreements that take cash out of bank reserves?

Something is clear wonky. It’s just another thing like Thursday’s stock-market swings that make no sense, except as an indicator that something is breaking or is about to break. I anticipated months ago that the Fed built up these reverse repos to roll off them off fairly quickly to buffer its QT in the present months, but so far that is not happening. To me, that raises a question as to why rolling them over, rather than off, still remains essential? In a reverse agreement, the Fed gives its US bonds to banks as cash-worthy collateral and takes a loan out of those banks’ reserves to diminish their reserves because they have too much cash slopping in reserves. So, why is Yellen talking about Repos (of which the Fed has virtually none out) with all of those reverse repos to unwind?

You can see how in the 2019 Repo crisis (the Repocalypse), Repos hit an all-time and highly unusual high, which then soared to double that height as soon as the 2020 Coronacris hit util the Repos were replaced, as I said they would ultimately be, by a return to all-out QE:

So, now we are in a “reverse” wonky situation that is even higher, and Yellen is talking about the need for Repos, instead of unwinding the Reverse Repos. They’re tying my head in a knot trying to figure out what they are even thinking. I’m guessing the Federal Reserve doesn’t want to suck back those bonds that it gave to banks to hold in their reserves in exchange for draining cash out of their reserves because, as I note early on, this would buffer (as in negate) the tightening effect of their QT against inflation in that it would put more bonds back on the Fed’s balance sheet from bank reserve collateral being reclaimed by the Fed just as it is trying to reduce its balance sheet by letting the bonds it already has roll of without refinancing,.

So, it seems to me, they are stuck, unable to use the buffer they had put in play because they must fight inflation far more intensely than they had thought when they first “banked” that buffer. If they didn’t have to kill screeching inflation, they could reduce their balance sheet by letting bonds roll off (not refinancing them) and buffer any negative effect, if one showed up as it did in 2019, by taking bonds back onto their balance sheet from the bank reserves and replacing cash in the reserves that they had removed with the RRPs.

At the time when they did all those RRPs, I said it was highly odd that they were doing QE on one side of their balance sheet and simultaneous QT in bank reserves, which indicated their QE was out of control and causing a lot of sloshy, unnecessary liquidity. So, they were adding massive liquidity through the front door and hosing it out the backdoor by pumping it out of bank reserves. Very odd. Very, very odd. Now it is reverse oddity. (I suspect largely as a way of juggling the burgeoning government debt.)

As the Federal Reserve’s gyrations and reverse gyrations with Treasuries become endlessly more peculiar, it seems clear to me something is broken. Some markets are starved for liquidity, according to Yellen, while others are clearly bloated, or those banks, by their own choice, would not continue their RRPs and would be wanting their cash back.

I haven’t figured out what this absurdity is all about for sure, but it looks as bad as the Repocalypse did in 2019, just in a reverse sort of way with the added peculiarity of Yellen now talking about the need to reverse the reversals in what sounds in normally muted Treasury talk like a burgeoning crisis at a time when there is no crisis on the horizon, according to this same government mouthpiece. A lot of doublespeak; I’ll keep my eye on it.

Ever had a Diesel engine backfire and start running in reverse so that forward on the vehicle works as reverse? I have. This looks something like that, and now it is backfiring again and going to surge the other way. Maybe it is just that NO ONE wants old Treasuries when new issues are rapidly offering better yields, while no one on the selling end wants to absorb the loss of repricing the old ones to market to equal yields available on the new ones.

I don’t know, but it’s a mess, and the Fed and Feds are pretending everything is smooth “saleing.” (See “Epocalypse Revisted: The Entire Global Economy is Breaking Up on the Rocks.”) I hesitate to write about these things when I don’t yet fully understand what is happening and have to venture speculations, but I decided its best to, at least, point out as I did half a year before the Repo crisis that something bizarre is going on.

Segue over, back to fools and their money

As JPMorgan Chase’s CEO, Jamie Dimon, just warned,

a “very, very serious” mix of headwinds was likely to tip both the U.S. and global economy into recession by the middle of next year…. Among the indicators ringing alarm bells, Dimon cited the impact of runaway inflation, interest rates going up more than expected, the unknown effects of quantitative tightening and Russia’s war in Ukraine.


Dimon claims at the same time the economy is “actually still doing well,” and that the possible recession (still 6-9 months down the road, according to Dimon, where he said it was at the start of the year, so always down the road) will not be as bad as 2008. It’s the same baloney we hear from all financial media and the Fed and the Treasury. However, an economy that is doing well doesn’t have two full quarters of declining GDP, screaming inflation, and all the many other problems we are seeing. So, these people are either unbelievably delusional, beyond pathetically blind to their own area of expertise, or outright lying through their smiling, polished teeth.

“These are very, very serious things which I think are likely to push the U.S. and the world — I mean, Europe is already in recession — and they’re likely to put the U.S. in some kind of recession six to nine months from now,” Dimon said.

Yeah, sure, six to nine months from now. If the third quarter comes out with positive GDP growth, I think it will be the biggest election-year lie ever printed by the Bureau of Economic Analysis. If they can’t “seasonally adjust” the numbers enough to get them positive, I expect them to have a massive internet collapse or some other thing of the kind that makes them unable to report until after the elections.

I mean, the twists in all of this are just getting that convoluted.

It’s not as if the data are not always being manipulated. I’ve reported in the past on how extremely manipulated or, at least, grossly in error the jobs data is, and Zero Hedge just reminded us that it has made similar reports:

Last month was a big surprise: as readers will recall, for the month of July, the BLS did not yet get the memo, and instead “Job Openings Unexpectedly Surged To Two For Every Unemployed Worker, Crashing Fed’s Plans To Nuke The Job Market.” Needless to say that made no sense, and as we warned at the time “this is not the first time the DOL was forced to manipulate data – we caught them almost a decade ago in a gaping disconnected between data series one which they were forced to subsequently admit was a mistake – and we expect that the BLS will do the same and completely revise both its JOLTS and labor market data.”

I’ve reported two different years now where annual revisions to jobs reports adjusted the previous year’s aggregate of jobs reports by HALF A MILLION! In each case the aggregate adjustment was lower than what the government reported originally. Some months got adjusted higher, but others got adjusted way down with the aggregate getting reduced by half a million. But here’s the thing. If you reduce the totals a year later by half a million, no one cares! That’s all water under the bridge, so it has no impact on markets today. That’s what makes it work nicely.

Fast forward to today, when the BLS did just as we expected, and in a release that was not merely a surprise, but sheer JOLTing shock, reported that not only was the July surge revised sharply lower, but that in August the labor market cratered as job openings tumbled to just above 10 million from a downward revised July print of 11.1 million, a collapse of 1.1 million in job openings, the biggest one-month crash outside of the covid global lockdown crash in April which was clearly an outlier.

“Makes no sense,” indeed, for a labor market that is “strong” and “resilient,” indicating a “strong economy.”

There is also a sly double advantage in reporting numbers high one month or quarter and then revising them sharply down after no one cares. Obviously, it serves well when they are first reported high, but saving the true number for a downward revision later, also plays really well when the next month or quarter gets reported:

It wasn’t just job openings which plunged: hiring did too, and in August, the BLS reported that total hires dipped to 6.277 million which would have been the lowest print since May 2021 if only the BLS had not strategically revised the July print sharply lower to 6.238MM from above 6.3MM.

In other words, by stretching the “adjustments” to make the immediate month or quarter look great, the next month-on-month or quarter-on-quarter report would look comparably worse because it would be comparing back to that higher number. However, when the next month or quarter arrives, you adjust the numbers you reported the month before much lower before calculating the monthly or quarterly change, which eases the comparison considerably. I’ve even seen the revisions of the previous month turn what would have been a negative report in the following month into a positive month-on-month change. So, it makes both reports smell better. It’s a win-win!

I’ve also noted in the past how I’ve seen them seasonally adjust a single December up by half a million for the month due to unusually cold weather and then adjust the next December up again by half a million due to unusually warm weather!

Certainly things smelled ripe in the manufacturing sector most recently:

The only time where employment blasted lower than that was in the big Coronacrash due to the nationwide lockdowns! Not to worry, though, the labor market is strong and needs to Fed to suppress it in order to quell raging inflations. Looking at the above chart, I’d say, “Mission accomplished,” not with inflation but with labor’s turnaround for the worse.

Investors who believe the job’s narrative counters the GDP numbers and proves we are not in recession are in for a major wake-up call.

Belaboring the labor lie

So, let’s take a deeper look at the jackboot excuse that I’ve said all along is the one major twist being used to make the claim that the economy is strong:

Recently we saw the president of the Chicago Fed say rate hikes would continue even if they caused some job losses. This, they believe (delusionally as explained in other posts) is no problem because the labor market is supposedly tight like the muscles of a strong athlete.

Reiterating a message sent by numerous central bankers in the past couple of weeks, Chicago Fed President Charles Evans took a hawkish tone during an interview with CNBC and argued in favor of aggressive rate hikes by the central bank.

Only three weeks before the Fed’s next meeting where they are expected to raise interest rates again by 0.75 percentage points, Evans suggested that job losses were an acceptable circumstance.

“If unemployment goes up, that’s unfortunate. If it goes up a lot, that’s really very difficult,” Evans said. “But price stability makes the future better.”

Zero Hedge

In other words, as investors continue to refuse to believe, the Fed is not going to turn its back on the inflation fight, EVEN IF UNEMPLOYMENT GOES UP “A LOT!” Price stability comes first, as I’ve said all along. One wonders how many times the Fed heads have to pound this into investor’s dead heads. However, one of the reasons they have to is because they lost a great deal of credibility when Janet Yellen told us in 2017 the Fed’s QT would continue on autopilot until it got its balance sheet down to its target level, and then Powell flipped on that well ahead of getting there.

I noted at the time just how much face-saving the Fed was having to do as it made that pivot and said it had sustained seem serious credibility damage. Now we see how bad the credibility damage really was and how that plays out in real terms as investors keep believing the Fed is going to pivot again, regardless of how often the Fed says otherwise. (Of course, the market is also readily believing what it wants to believe in order to keep jacking its own adrenaline up, but it wouldn’t be finding a path that worked for that if the Fed hadn’t lost a lot of credibility on the issue of tightening.)

ZH then points out the catch-22 that I’ve been saying will force the Fed to stay with tightening until things break badly enough that a move back to QE is irrelevant:

The tone of central banks has changed in recent months from one of “soft landings” and protecting stock markets to one of sacrifice in the name of bringing inflation down to 2%. Of course, it will be the general public making the sacrifices regardless. If the Fed does not raise rates or continues on with QE measures then price inflation will skyrocket further and crush consumer buying power and savings. If they continue to raise interest rates then stocks will continue to fall and credit markets will tighten, leading to mass layoffs and rising unemployment.

It’s a Catch-22 that the central bankers created through years of stimulus measures and artificially propping up “too big to fail” corporations….

It would appear that central banks and western governments are intent on crashing the system, and they are offering no practical solutions to the consequences that will result.

That is exactly the trap I’ve been decrying for years by saying, “the Fed has no end game” for its Great Recovery program. It cannot contract its balance sheet without crashing all the bubbles that were built on all that money made out of hot air via expansion of its balance sheet. If the incoming tide floats all boats, the outgoing tide lowers them. But basic logic means nothing to high-minded Fed economists and their junk theories. They disregard it as beneath their fancier theories about what they can magically do.

Fed Chair Powell’s repeated claim has been that the labor market can absorb all of this because it is so strong. You already know why that isn’t true and why this massive blind spot will cause the Fed to grossly over-tighten, making the economic wreckage of this recession the worst most of us have ever seen, and now we start to read about how the supposedly robust job market is starting to cracks:

Labor is now visibly cracking up, but it isn’t funny

Supposedly, the Fed wants some cracking in the belief that the only way to tame inflation is by weakening labor so it cannot keep demanding higher wages, even though it long stated as justification for its almost interminable quantitative easing period, that it needed to keep easing until it saw improvements in wages. Of course, a tight labor market is exactly what creates wage gains by giving labor leverage to strike when it hurts and by forcing employers to compete for employees, which always pushes up costs.

Apparently, now that the long-awaited gains just started to materialize, they must be crushed as the only solution for curtailing inflation. Regardless, if the labor market has so many more jobs than laborers as mistakenly claimed over and over, why is it already laying off laborers in signs of stress, versus just no longer needing to try so hard to find ADDITIONAL laborers? Somehow we skipped right past the point where labor matches with jobs and the stress to find employees ends … straight to actually laying off employees to downsize. I think that proves the point I’ve been making that there is no actual tightness as in too many jobs, but simply a labor shortage due to too many sick or dead laborers.

Anyway, BofA now predicts that payrolls will turn negative in the present fourth quarter and then will remain in decline throughout 2023; but how they describe it is really strange because they are sucked into the same delusion so they don’t even see the self-contradicting nature of their own report:

While the unemployment rate unexpectedly slumped near all time lows as the number of unemployed workers dropped sharply in September, sparking a swoon in the S&P on 6 of the past 7 payroll Fridays, Bank of America’s economists summarized the payrolls data noting that there was little in our BofA Indicator of US Labor Market Conditions … that suggests current and expected Fed tightening have significantly dented the strength of labor markets.

Zero Hedge

So, they start by saying nothing indicates the Fed has even dented the “strength of labor markets.” Then they go on to say,

while [labor] conditions have moderated somewhat, they remain near all-time highs, and “those that were expecting the Fed to pivot to a slower pace of rate hikes in November may very well be disappointed on the heels of today’s report.


Notwithstanding this signal extraction problem, we are inclined to take the framework at face value; though recent employment reports would be viewed as robust by any historical standard, they are still less robust than some employment reports received in 2020 and 2021.

Oh, OK. So, while they would be viewed as robust by historic standards, they are less robust than perceived over the previous two years, which means the earlier reports were a little more vacuous perhaps in what was perceived than reality. Hmm. The labor data is starting to crack and BofA is admitting a little of what we knew here on The Great Recession Blog was coming. But it gets worse:

A far more ominous take on the NFP report was provided courtesy of BofA credit strategist Yuri Seliger who wrote that while the September Payrolls report was strong, “we should start seeing a slowdown in jobs soon.

And unlike other banks who still pretend the US can magically avoid a recession with 7% mortgages, record credit card rates and near record low savings rates, the BofA strategist (whose employer recently forecast a recession as a base case) actually put his money where his mouth is and wrote that the bank’s economists are calling for Payrolls to drop to about half the pace in 4Q vs 3Q and then go negative in 1Q-2023, where they will stay until the end of the year.

OK. Only a full year of quarterly employment declines following present lackluster quarter right now. Why was there no time where the labor market was balanced between “labor is tight” and “labor is breaking down?” If labor was truly tight because there were way too many jobs in a strong economy and the Fed is trying to impact labor by tightening the economy, wouldn’t the economy decline to a neutral point where labor and jobs balance perfectly before it slides into layoffs?

What they don’t say, or are blind to for all the reasons given in past articles about their blind spot, is that the cracks are giving way because the original labor numbers were vacuous, actually representing only a very weak labor market that could not supply laborers, not a strong jobs market; so the sudden OVERABUNDANCE OF JOBS THAT CANNOT BE FILLED BECAUSE “THE ECONOMY IS STRONG” gives way into immediate reductions in actual employment. IF THERE HAD EVER BEEN A TRUE SURPLUS IN ACTUAL JOBS V. A SHORTAGE IN AVAILABLE WORKERS DUE TO A SICK AND DYING LABOR FORCE, ONE WOULD EXPECT SOME MONTHS OF SURPLUS JOB SHRINKAGE BEFORE WE ACTUALLY GET INTO PAYROLL REDUCTIONS.

How did the surplus jobs all evaporate so quickly to where to where we are going straight into layoffs? Answer: there were never a lot of jobs in the first place, which means there was never the strong economy — a belief predicated on an enormous number of jobs that could not be filled, which means all the claims that negative GDP CANNOT mean a recession are based on nothing but delusions about the labor market. There are two paths to a surplus of anything. You suddenly have a overabundance of it, or you suddenly have a lack of demand for it … in this case a lack of people in the labor force either willing or ABLE to work.

It all confirms that what we really had was just a lack of living or healthy people to fill the jobs that did exist! So, the phantom surplus from abundance is instantly gone, and we’ll see fewer and fewer existing payrolls for an entire year … and that is just the first report! How much do you want to bet that what really comes is worse than the first guess that is still convoluted because of the continuing belief that the economy is strong (by nearly everyone)?

The misunderstanding abounds

The Associated Press reported at the close of September,

The number of Americans filing for jobless benefits dropped last week, a sign that few companies are cutting jobs despite high inflation and a weak economy.

They, at least, got the last bit right. But then you can see the confusion setting back in:

Applications for unemployment benefits for the week ending Sept. 24 fell by 16,000 to 193,000, the Labor Department reported Thursday. That is the lowest level of unemployment claims since April…. 

Jobless aid applications generally reflect layoffs. The current figures are very low historically and suggest Americans are benefiting from an unusually high level of job security.

They are actually benefiting from an unusually low level of labor competition. Yes, it generally means fewer companies are cutting jobs. It can also mean that there are so fewer workers that no one being laid off has to go on unemployment because they still have a second job or there are still more jobs than available workers due to the sick or dead labor pool. If you are laid off from one job, you can readily find another position even in a slack economy due to lack of competition in labor. So the article acknowledges the weakening economy but says it must be strong enough that jobs are not fading away, even though we are suddenly in a quarter which BofA says will be down for payrolls. It all sounds like nonsense.

For example, when the article above says,

Employers, who have struggled to rehire after laying off 22 million workers at the height of the pandemic, are still looking to fill millions of open jobs. There are currently roughly two open positions for every unemployed worker, near a record high.

… you have to realize the near-record high is the number of open positions per unemployed worker and that can be because there are so many jobs that opened back up or equally, but normally just about unheard of (so staying below the radar of observation), because so few people came back to work that companies that tried to reopen at the levels they were running at simply haven’t been able to, so the jobs remain open or get resisted when not filled (if they were listed as openings with closing deadlines).

Likewise, when you read,

Laid-Off Workers Hired Quickly by Other Companies: This Labor Market Is Astonishingly Strong

…. that headline could have it right, or it could be the job is market already laying off workers in some companies due to a weak (therefore already underproductive) economy getting worse, but so many other companies still have those unfilled positions that have been dangling since the lockdowns to where laid-off workers who are in short supply immediately stream over to those long-dangling jobs and never have to go on unemployment. In that situation, the unfilled positions represent an underproductive economy that was never able to fully come back online after the lockdowns. (GDP soared, but only because it had declined to such an abysmal level in the lockdowns. Rising is relative.)

Most people are going to immediately assume it is the normal dynamic, but I say the unique situation described by the Brookings Institute in my earlier article exactly accounts for the number of jobs that never got filled and makes far better sense of why GDP has been declining all year even when there are not enough people to fill existing jobs.

As Wolf Richter points out in the article by that title, this apparent tightness is being mentioned in every one of Jay Powell’s press conferences as proof that the economy is strong and needs to be cooled down by the Fed.

The truth of the situation is not easy to sort out, as Wolf, describes,

Just about every day, there are stories of layoffs, but mostly small-scale layoffs, in the hundreds, 300 people here, 500 people there – of the 153 million employed people. Occasionally, there were layoffs of 1,000 or 2,000 people, and sometimes those are in global operations, with an unknown number in the US. Then there are large companies that are laying off staff in the divisions they’re trimming back, but they’re hiring in their other divisions, and often employees can get hired by another division.

That is exactly the scenario I suggested last time I mentioned this topic. There is no way to sort out how many of the new jobs we hear reported in the data are taken by the same person, holding two or three jobs due to inflation or a sick or dead spouse (due to Covid or the vaccines or both) because new jobs reports don’t say who was hired, and most employers wouldn’t know if someone they were hiring was moonlighting elsewhere or if his job was the moonlighting job. We do know that the number of peopling holding multiple jobs has gone up quite a bit.

Wolf notes that all these layoffs just don’t add up to anything like the mass layoffs seen in other recession; but then they wouldn’t IF there are so few workers that most larger employers are just moving people, as I suggested earlier and Wolf now describes, laterally to other positions they haven’t been able to fill since the lockdowns. No company, during a short labor supply, wants to give up any more human resources than they have to when they have some departments or plants that are still running short-staffed.

Wolf notes as a sign of a still strong jobs market,

there are massive well-documented staff shortages in some sectors, such as schools (the “teacher shortage”), in healthcare, and others.

But shortages don’t have to mean an abundance of jobs. They may mean a dearth of workers due to a death of workers … or sickness of workers.

We’re seeing that in the initial claims for unemployment insurance. For the week ended September 24, released today by the US Department of Labor, the initial claims for unemployment insurance fell by 16,000 from the prior week to 193,000 (seasonally adjusted) – near historic lows.

Sick and dead workers down’t file unemployment claims.

This shows that most of the people who are being laid off either already had a new job lined up when they walked out the door, or they’re finding a new job very quickly, before even filing for unemployment insurance: another sign of how strong the labor market still is:

Or they got Covid and joined the ranks of those who have long Covid (or had been vaccinated and joined the growing ranks of people with health conditions due to the vaccines), and those don’t qualify for unemployment because they are no longer actively looking for work (a condition for qualifying being that your “able” to work and “actively looking for work“).

Initial unemployment claims are the most immediate measure of the labor market, and they just refuse to show any weakness.

Except, not if the reason is the anomaly the Brookings Institute posted where 5,000,000 people who were part of the labor force have dropped out and stayed out due to long Covid (or the side effects from the vaccines attributed as long covid or both).

This normally very astute writer goes on to compare the unemployment data via graphs to previous recessions and notes how today’s unemployment doesn’t match up; therefore, there is

…still huge demand for labor and tight supply [and] the number of job openings, at over 11 million, has remained in the astronomical zone, up by 61% from the same period in 2019.

But that is job openings that have remained in the astronomical zone, not total jobs (because the SAME jobs that existed back in 2019 were never refilled and remained open). We had a ton of openings after the lockdowns that came after 2019, and many of them simply remained open all this time, often recycling as new listings … or as new positions on payroll if they did fill.

employees are still quitting jobs in historically large numbers, a sign of massive churn and job hopping as they take advantage of still strong demand for labor to obtain a better job, more pay, or better working conditions.

Nay, not strong demand; week competition from week supply. It’s assumed they are quitting to get a better job, but they may just as well be quitting due to health reasons from long Covid (many people getting long Covid after they are re-infected) or latent vaccine side effects and have become the 5,000,000 people who exited the labor force that the Brookings Institute was talking about. Wolf even admits,

The labor force is still not back where it had been before the recession – and that is part of the problem with the labor market. Very strong demand for labor meets very tight supply. The result is rising wages – and in terms of just wage increases, this has been the best labor market for workers in decades.

Actually, I think it is MOST of the problem: reduced labor supply. Data shows the labor force has not recovered back to where it was before the Covid recession and neither have total jobs. The Brookings Institute data say all of that missing labor supply either died or remains sick.

If I’m write in how I’m interpreting the tight market, this is one very serious problem that the Fed cannot solve, ad its tightening is making it worse. Either way, nothing lets up for inflation:

The problem is that inflation is red hot, and is outrunning even those wage increases, and those wage increases provide further fuel for inflation – and here we go: the wage-price spiral.

The Fed will have to crush a LOT of companies before it gets open jobs down enough to match our greatly diminished labor force and is why …

the labor market has been playing a key role in every one of Powell’s more and more hawkish press conferences.

Fed tightening won’t heal 5,000,000 people who left the labor force because they died, have long covid or have longterm problems due to vaccines that are being diagnosed as “long Covid.” Our labor force is sick and tired. It will take more crushing of our already underproductive economy (as measure in months of declining GDP) down enough to where jobs close up enough to match down to the depleted labor force. The Fed’s labor misbeliefs are causing it to crush a wounded economy just to get the shortage caused by a diminished labor force resolved. That is not the kind of resolution you want. In the past, when the Fed crushed inflation under Volker, it was due to a hot economy. That is far from being the present situation.

There are, of course, also those workers from two-income households who found out during the lockdowns they could get by on just one income if they cut discretionary spending. Some of those are not coming back because they found time with their children more valuable or are sick of the rat-race and feel happier with “less is more.” They might be force back if economic time become hard enough … as they will under the Fed’s plan.

Now, back to that market insanity

If all I have said above is true, then you can see that it is truly insane for the stock market to be rising as the Fed tells the market it will continue to crush the economy until it squeezes the life out of inflation. The market buys the narrative that jobs are strong and that strong jobs prove a resilient economy. They are taking the unemployment figures as gospel over the GDP figures. They are wrong.

Here is what Thursdays absurd gyration into the stratosphere looks like to me. Look at the bump right after the black line of today’s market ends:

That “Phase 2” bump is the one we had at the end of summer. It looks like the short-lived bounce that happens during the market’s biggest bear crashes just before the market plunges into oblivion. It’s built on the amphetamines of greed and testosterone with no nutritional support under the energy boost at all. So, you get a big collapse after the boost. I will be surprised if we don’t see that collapse begin today (Friday) or on Monday. Thursday will prove to have been nothing but a head fake — an empty threat against the developing crash:

Only a few market events in an investor’s career matter; among the most important of all are superbubbles. These superbubbles are events unlike any others: while there are only a few in history for investors to study, they have clear features in common.

One of those features is the bear market rally after the initial derating stage of the decline, but before the economy has begun to deteriorate, as it always has when superbubbles burst. In all three previous cases, the market recovered over half the initial losses, luring unwary investors back just in time for the market to turn down again, only more viciously, and the economy to weaken. This summer’s rally has so far perfectly fit the pattern….

The current superbubble features an unprecedentedly dangerous mix of cross-asset overvaluation (with bonds, housing, and stocks all critically overpriced and now rapidly losing momentum), commodity shock, and Fed hawkishness. Each cycle is different and unique – but every historical parallel suggests that the worst is yet to come.

Jeremy Grantham, GMO

Bear markets have three stages – sharp down, reflexive rebound, and a drawn-out fundamental downtrend.

Bob Farrell’s 10-Investment Rules, quoted on Real Investment Advice

When the market tries insanely to rebound as it did on Thursday, running directly contrary to the clear inflation data that showed the Fed will continue to tighten hard, the market is no longer following its old mantra of “never fight the Fed.” It is fighting it because the old greed and bullheaded testosterone die hard, but they are waning sentiments now as reality has the upper hand … and relentlessly so as we are entering that long downtrend.

I expect today will punish the market for yesterday [and I wrote that at the start of the day before I began revising the article, a process that takes about three hours as I add and delete info and try not to make more typos in the process than I correct], and I would be surprised if the October surprise doesn’t materialize next week as a relentless tumble into market hell because the thing about rising out of the canyon on an updraft is, if you don’t have wings to fly beyond the gust of hot air, gravity always wins. Ask Wile E. Coyote what happens when you look down.

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