Wall Street

The Fundamentals Are Broken

By David Stockman  |  March 8, 2019

All loans, in the eyes of honest borrowers, must eventually he repaid. All credit is debt. Proposals for an increased volume of credit, therefore, are merely another name for proposals for an increased burden of debt. They would seem considerably less inviting if they were habitually referred to by the second name instead of by the first.

– Henry Hazlitt, Economics in One Lesson: The Shortest & Surest Way to Understand Basic Economics (1946)

Wall Street’s cheerleaders tried to chant into reality some sort of “all clear” signal last week because real fourth-quarter gross domestic product (GDP) growth beat the consensus estimate.

U.S. GDP did expand at an initial estimated annualized rate of 2.6% from October through December. And that did beat a final forecast of 2.2%.

But, as recently as last spring, the consensus was expecting 4% growth for the final quarter of 2018.

Their hopes rode on a strong labor market; the Bureau of Labor Statistics (BLS) had reported 304,000 new jobs added in January.

So, what does today’s BLS report for February mean? The U.S. economy added only 20,000 jobs last month, far short of a consensus forecast of 180,000.

Not much, by itself…

The BLS jobs count is a lagging indicator, and it’s “noisy” on a month-to-month basis. It’s always a day late and dollar short in calling cyclical turns. Big “after the fact revisions” are the historical norm.

For instance, during the six months after Lehman Brothers’ meltdown in September 2008, the originally reported “establishment survey” jobs counts were revised downward by about 556,000 per month.

So, these data can be noisy.

Note, too, that the unemployment rate did come in lower, at 3.8%, and wage growth was substantial, at 3.4%. These are numbers you’d expect to see at “full employment.”

Let’s pull back a little…

The average monthly jobs gain during the Donald’s first 25 months in office, which coincided with month 90 through month 115 of the current cycle, was 205,000 jobs. That’s less than the 213,000 average during Obama’s last 25 months.

During the equivalent 25 months of the 1990s boom, the monthly jobs gain averaged 219,000. That’s annualized growth of 2.1% of total employment. Today, that’s down to 1.7% of a materially larger labor force.

There’s been no acceleration whatsoever in jobs growth.

And what the recent GDP numbers really tell you is that the U.S. economy has been on a Bubble Finance-blown respirator.

That 2.6% fourth-quarter print is down from 3.4% in the third quarter of 2018.

And Goldman Sachs’ GDP tracking estimate for the first quarter of 2019 started at 0.9%, reflecting “an expected drag from inventories, sequentially slower consumption growth, a decline in residential investment, and a four-tenths drag from the government shutdown.”

The New York Fed’s GDP Nowcast slid from 1.22% two weeks ago to 0.88%. That estimate of first-quarter growth was as high as 2.17% in January. It’s pricing in big declines in personal consumption, housing starts, wholesale inventories, and other key inputs.

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Here’s what Bubblevision would have you cheer…

In 2018, the federal government’s debt grew by $1.4 trillion, to end the year at $21.97 trillion. If you exclude the distortive effects of the last debt-ceiling fight, the increase in 2018 comes to around $1.3 trillion.

Most of the additional borrowing of $1.3 trillion was added to GDP and therefore to GDP growth. But GDP growth in current dollars totaled just $1 trillion.

Without that additional federal borrow-and-spend boost, GDP growth would have been negative.

An economy headed for recession benefitted from a wildly irresponsible fiscal stick save that won’t be repeated in 2019. House Dems are militant about thwarting the Donald at every turn.

Uncle Sam’s annual new borrowings exceeded the gain in total GDP – we literally borrowed our way to “prosperity.”

That should signal out-and-out alarm…

Take Cover

Everywhere you look, there are signs of weakness.

The Great Disruptor may indeed succeed in right-sizing the American Empire – but it’s through no intentional effort of his own.

You see, the world is tiring of the “Indispensable Nation.” It’s starting to suffer too much the costs of “Team America: World Police!”

That doesn’t mean, however, that Imperial Washington is on board to end Forever War… far from it. Neocons are ginning up the old martial spirit against Iran, and Very Serious People on both sides of the Duopoly are eyeing Venezuela for intervention.

The Warfare State will metastasize until something bigger stops it. AOC-and-MMT-style socialism plus the Green New Deal promise the same for the Welfare State.

What it does mean – and this is the short version – is “easy money as far as the eye can see.”

The inability of our monetary central planners to do anything but feed Leviathan and appease Wall Street is the focus of the March issue of The Stockman Letter.

Appeasing Wall Street is, of course, critical to maintaining the status quo. The Fed is therefore merely an instrument of Imperial Washington.

So, we’re stuck abroad… And Main Street is stuck in stagflation… The fundamentals are terrible… All we have is debt to sustain us.

But our monetary central planners will test the absolute limits of U.S. hegemony – including the durability of the dollar as the global reserve currency – to nourish the Acela Corridor.

That’s the way it is in the March issue of The Stockman Letter.

As always, I’ve included “tactical” notes based on The Stockman Model throughout the issue.

The Model is built precisely for the type of disruption that comes with the ends of empires…

To common sense,

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David Stockman

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR