By reading narrative, we escape the anxiety that attacks us when we try to say something true about the world. This is the consoling function of narrative – the reason people tell stories and have told stories from the beginning of time.
– Umberto Eco, Six Walks in the Fictional Woods (1994)
“The whole narrative on the economy is wrong.”
That’s the money quote from my most recent talk with the folks from Doug Casey’s International Man project. That narrative includes just about everything you’ve heard from Bubblevision about the December nonfarm payrolls report from the U.S. Bureau of Labor Statistics (BLS).
Headlines say we added 145,000 new jobs during the last month of 2019 and that the unemployment rate remained 3.5%.
I’d note that under the Tweeter-in-Chief, the average monthly jobs gain has been 190,000 a month. I’d add that during the last 33 months under President Obama, it was 225,000 a month.
No, this is not the “greatest economy ever.” And there’s no one out there to save it – us – from what’s on the horizon.
That includes the Federal Reserve. Indeed, this is the worst policy environment of a lifetime.
It’s time to get ready for the worst of all possible outcomes: a market crash, a Main Street recession, and the election of Elizabeth Warren.
Welcome, folks, to the “Great Disruption”…
Now, here’s the first part of my talk with International Man; I’ll share the second half on Monday.
International Man: Trump is calling for a weaker dollar and negative interest rates. What does this tell you about Trump’s understanding of economics?
David Stockman: It tells you that he has no understanding of economics at all!
I think Trump is not even a primitive when it comes to economic comprehension. His views are just plain stupid when it comes to exchange rates. He seems to think it’s some grand game of global golf, where the strongest player gets the lowest score.
What sense does it make tweeting as he did recently in attacking the Fed?
According to Trump, the US economy is so much better than the rest of the world’s economies, and therefore we should have the lowest interest rate as a result. It has nothing to do with economic logic or with principles related to sound money. I think he’s just thrashing about trying to create a warning that if things go badly, it’s the Fed’s fault.
The whole narrative on the economy is wrong.
The low unemployment rate is something he inherited. It’s the end of the longest business cycle in history – 126 months.
As the economy continues to inch forward, the inventory of excess labor goes down. The unemployment rate, even as badly measured as it is by the U.S. Bureau of Labor Statistics (BLS), inherently goes lower. He didn’t have anything to do with it.
In fact, if you look at the first 33 job reports under President Trump, the average gains have been 190,000 a month. During the last 33 reports under President Obama, it was 225,000 a month.
There has been no acceleration. There has been no improvement. It’s running out of the business cycle, even as the foundation underneath has been made worse and worse by Trump’s trade policies and a really insane fiscal policy of driving the deficit to over a trillion dollars at the top of the business cycle.
Even John Maynard Keynes himself said that you ought to try to balance the budget and even generate a surplus at the top of the cycle.
We’re right in the middle of the worst kind of economic policy in my lifetime, anyway – going back to the 1960s.
Trump is completely clueless about how we got here, how he got here, and where we’re going.
I’ve said many times that if you boast about it, you own it. He’s been boasting about the stock market, which is the greatest bubble in history. He’s been boasting about a business cycle that he inherited that’s got all kinds of rot underneath and that’s nearing its final days.
All of that’s going to come home to roost, and I think it’s very likely to happen before the 2020 election.
So, the 2020 election is not all over except for the shouting, as a lot of people believe. In fact, the prospect that Elizabeth Warren gets the nomination on the Democratic side and becomes a serious contender for the Oval Office is very high.
The irony is that it will ensure the stock market’s collapse and Trump’s defeat. He’s setting himself up for the worst possible outcome.
International Man: The Fed recently said it could increase its tolerance for inflation before it considers raising interest rates. It would be a major policy shift. What’s really going on here?
David Stockman: I think what’s going on is that they’re looking for another excuse to capitulate to Wall Street next time it has a hissy fit because it believes the Fed owes them another shot of stimulus and more liquidity.
Let’s address the underlying issue now. The 2% inflation target is absurd to begin with. There is no historical or theoretical evidence to suggest that inflation at 2% is better for growth and prosperity than inflation at 1.5%, 1%, or even -1%.
This is just made up, just like the money they created that’s been snatched from thin air, adopted as official policy in January 2012.
It becomes a rolling excuse for running the printing press and accommodating both the politicians in Washington, D.C., who want low interest rates so that debts are cheap to finance and the gamblers on Wall Street who want low interest rates because they result in higher asset values and cheaper costs for carry trade speculators.
The idea that we haven’t had enough inflation as it’s measured by one indicator – the Personal Consumption Expenditure (PCE) deflator – is kind of crazy for two reasons.
First, there’s a lot of other inflation measures that say we easily achieved 2% inflation.
The 16% trimmed-mean CPI is a very handy tool. It has the same CPI data at the product code level as that in the regular CPI, but in order to smooth out the monthly figure, it takes out the lowest and highest 16% of individual prices.
It’s probably more accurate than CPI because it removes the outliers but puts them back in as soon as they reach the center of the distribution.
The trimmed-mean CPI has averaged 2% since January 2012. During the last 12 months, it’s reached 2.34%, way over the Fed’s 2% target.
There are lots of issues here.
One of them is that there are many ways to measure inflation. Another issue is that you can’t scientifically measure inflation in a dynamic global economy like the one we’re in today.
It’s just an average in some arbitrarily-weighted product categories that are way too complicated, even for the bureaucrats at the BLS.
And, third, even if you could measure it halfway accurately, which I seriously doubt, the Fed has no tools to achieve its targets anyway.
The big swings of inflation are from commodity cycles and the global trading system, evidenced in oil prices, metal and materials prices, food and grain prices, and so forth. The Fed can’t do much about that.
The point is, inflation targeting is one of the greatest efforts at misdirection that a government agency has ever concocted. This gives them a license to constantly intervene and meddle in the financial markets – pointlessly fiddling with the whole price structure of debt and equity assets. The less inflation there is, the better.
They can’t target it to the second decimal point, and you can’t measure it anyway.
The fact that they’re now saying, “Well, we don’t mean to target inflation on a monthly basis or quarterly or annual basis, it’s a cumulative basis from a day one,” indicates they are maybe starting from the Garden of Eden or something like that.
It just shows you that they’ve backed themselves into a corner of illogic and stupidity, from which I don’t think there’s any exit.
Your Off-Ramp Is Here…
This is the most politicized market in history. And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.
It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.
And it seems as if the whole world has, indeed, gone mad.
Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate.
Well, The Stockman Letter is made for times like these. And we’ve updated our design to help us better navigate to not only the safest harbors but also the most promising opportunities.
The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.
The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.
It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.
To common sense.