Economy

It’s “Easy Money” That Makes the World Go ’Round

By David Stockman  |  August 1, 2019

The Federal Reserve cut interest rates for the first time since 2008.

Some variation of that sentence forms the basis of just about every “top of the fold”/“top of the hour” Bubblevision story about what our monetary central planners did yesterday.

And for what?

Well…

What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world….

….As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place – no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!

The desire for easy money is insatiable; this is the world the Duopoly’s made.

But, soon, easy money will be unmade.

Unworkable

Many thoughts come to mind when I look at this chart showing housing starts and permits data for June. “Greatest economy ever” is not among them…

As we discussed yesterday, starts were down 1% from May and 6% compared to June 2018.

June housing starts were 1.253 million on an annualized basis – equal to the number for June 1989. And, since 1989, the number of U.S. households has grown from 93 million to 127.6 million…

Equally astounding is the rate of growth in the total number of labor hours employed on nonfarm payrolls by the U.S. economy.

From 1964 through December 2000, total labor hours grew consistently at about 2% per year. That’s including temporary dips amid five recessions during that 37-year span. From January 2001 forward, total labor hours have grown by 0.63% per year. That’s a third of the historic rate.

Look, this slowdown is not about lack of available hours. There’s still about 169 billion out there. That’s based on a 2,000-hour potential work year for members of the population aged 20 to 69.

Another way of looking at the problem is this: The comprehensive, hours-based unemployment rate in the U.S. is 40%.

The abrupt slowdown in labor utilization is not due to some Keynesian faltering of aggregate demand.  Real final sales, for example, have grown by 2% per year during the 21st century.

The (many) problems are on the supply side of the domestic economy.

There’s too much debt. There’s costs, wages, and prices that are too high to compete in globalized markets. And there’s excessive diversion of resources to non-productive speculation and rent-seeking. There’s the Welfare State. There’s the Warfare State.

All those things are “growing.”

But, at the end of the day, prosperity depends on productivity. And growth in productivity is a function of one of two things.

It’s about more bodies working more hours. Or it’s about more capex, better technology, and entrepreneurial innovation.

Totally Unproductive

Alas, labor productivity growth has skidded into the ditch along with most other Main Street fundamentals.

Between 1998 and 2010, labor productivity growth averaged 2.84% per year. That’s slightly above the long-term average of 2% per year from 1954 through 1997.

Like industrial production, in the aftermath of the Global Financial Crisis/Great Recession, productivity has been punk.

Productivity growth averaged just 0.74% per year from 2011 through 2018, marking an extended drought with no parallel in the last half century.

The Fed never says much about these kinds of things – not with the Tweeter-in-Chief on the case. But not ever, really, because it doesn’t fit their narrative.

Of course, Wall Street only reacts to Bubblevision’s inevitably upbeat interpretations of the inevitable positive month-to-month noise that comes from data series such as these. In other words, their interest is only so far as it means “buy the f***ing dip.”

This Boom’s Bust

All this macro-stagnation makes you wonder…

How have corporate profits been able to “boom,” to borrow Bubblevision’s favorite word?

In fact, they haven’t. That’s the dirtiest open secret out there.

During the first quarter of 2012, “national income” posted at $2.20 trillion on an annualized basis. During the first quarter of 2019, it was $2.18 trillion.

That’s right… seven years of nowhere. But this flatlining was felt only on Main Street, certainly not on Wall Street.

“National income” is the aggregate profits of all corporations, whether publicly traded or private. It accounts for profits whether CEOs and CFOs have been increasing or decreasing their share counts through financial engineering.

It also represents pre-tax economic profits generated without regard to accounting adjustments for accelerated depreciation, tax accruals, inventory valuation adjustments, or the Donald’s big Christmas Eve tax rate reduction of December 2017.

Now, aggregate profits for companies in the S&P 500 Index for the 12 months ended March 31, 2012, were $98.12 per share. The figure for the 12 months ended January 31, 2019, was $152.24 per share. That’s based on Wall Street’s ex-items accounting flimflammery.

When it comes to plus or minus $2 trillion of corporate profits, it does make a difference whether the seven-year gain was 0.0%, per the national income accounts, or 55%, per Wall Street accounting.

Suffice to note that there was total mergers-and-acquisitions deal-value of $11.5 trillion in the U.S. between from 2012 through 2018. And, overwhelmingly, these did not involve the minnows swallowing the whales.

That massive merger was stimulated by Fed-enabled cheap debt and overvalued stocks. And it’s caused the girth of the S&P 500 to “grow” far faster than Corporate America as a whole. It’s an illusion.

That they’ve been buying back a lot of their own shitty stock does not make this “The Greatest Economy Ever.”

More Truth

Desperate times call for… “common sense” measures.

And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

If You Need Your Money in the Next 5 Years…

America is at a crossroads. The middle class is disappearing… government spending is out of control… and the implosion of Bubble Finance will cause the greatest market crash in history. So, if… Read More
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