Wall Street

Needs, Wants, “Data,” and Easy Money

By David Stockman  |  July 26, 2019

I can’t say it better myself, so I’m going to cut right to Sven Henrich:

Based on recent data the only reason the Fed would cut rates at this precise moment in time is because they are afraid to disappoint markets. That is the true data dependency

It is, as it’s been since October 1987, all about Wall Street.

Sven’s tweeting about this morning’s release of the initial read on second-quarter gross domestic product (GDP) growth from the Commerce Department. Here’s Bubblevision’s take:

Growth decelerated in the second quarter, but not by as much as Wall Street thought, as tariffs and a global slowdown weighed on the U.S. economy…

 GDP increased 2.1%, down from the first quarter’s 3.1% and the weakest increase since Q1 of 2017 when President Donald Trump took office. Dow Jones Q2 estimates were for 2% growth.

However, the underlying numbers in the report seemed to take steam out of the recession fears that have been much of the talk among economists and policymakers at the Federal Reserve.

That’s what they’re running with, and the S&P 500 Index and the Nasdaq Composite have both touched new peaks on this “news.” It’s absurd.

There is, of course, the fact that after more than a decade of the easiest money in history GDP growth is, still, 2%. Sven gets it:

As increased government spending and consumers adding 8% to credit card debt in Q2 are the positive drivers of the GDP headline figure one could argue that this print was debt expansion driven. And still it shows slowing.

Here it is in picture form:

And It Gets Even Worse…

Business investment was actually negative – minus 0.6%. That’s the worst reading since early 2016. Residential investment was also down.

But consumers loading up on credit card debt!

Well, turns out there are some data underlying that development too…

From its Great Recession bottom in 2010, the unemployment rate has plunged from just under 10% to a 50-year low of 3.7%.

Yet, despite the apparent massive evacuation of employment-market “slack” from the U.S. economic bathtub, real weekly earnings for prime-age males have essentially flatlined.

So, you could put a stake in what the eggheads call the Phillips Curve and be done with it.

But the story is far bigger than that. Jerome Powell’s recent confessions implicate much more than merely the employment-and-wages equation.

Nobody has said so, and nobody plugged into Acela Corridor power ever will.

But what the current Chair of the Federal Reserve has done is crush the core tenant of Keynesian-style monetary central planning.

The entire postwar financial system rests on the assumption that the Federal Reserve is operating in a closed bathtub. That’s how it conceives of gross domestic product (GDP).

Our monetary central planners believe that by raising or lowering the water level – “demand,” in our analogy –they can bend inflation, employment, and, consequentially, economic growth to their will.

As is quite evident by now, that’s a bunch of bullshit. And it starts with Powell’s claim that the relationship between wages and employment “has gone away.”

What’s at issue here is the fundamental law of supply and demand. That law hasn’t disappeared into some sort of “Stranger Things” upside-down. Nope, it’s simply expanded jurisdiction, from the Lower 48 all over the planet.

These days, resource allocation happens on the margin in an open, global economy.

What it means is the U-3 “headline” unemployment metric is about as useful as tits on a boar. The relevant “slack” is unutilized workers in the global labor-market pool. And there remains plenty of them.

During the last 10 years of “recovery,” rising domestic demand for production and labor has leaked out of the Fed’s bathtub.

Alas, were domestic wages to have risen rapidly – per that old Phillips Curve equation – even more production and more wages would have shifted offshore.

That’s because the cost and wage gap between domestic production and venues driven by the China Price and the India Price has been steadily widening. In nominal terms, the average U.S. wage gap with China was $10 per hour fully loaded in the late 1980s. Today, it’s about $25 per hour.

This widening gap is what’s holding down real U.S. wages. Yet even relatively flat real wages haven’t been enough to halt the migration of U.S. demand to lower-wage/lower-cost foreign venues.

Imports have grown nearly 300% over the past 25 years. That’s 5.8% per year. Meanwhile, the total pool of domestic “demand,” as measured by nominal sales to domestic purchasers, has risen by 195%. That’s just 4.5% per year.

So, a materially growing share of the domestic demand pie has gone to foreigners. The widening gap between the purple line and the black line measures that demand leakage.

It’s the outcome of a powerful engine of wage suppression that remains so mysterious to our monetary central planners.

In fact, there is nothing new about this demand leakage factor. It’s growing now because the Fed refuses to allow financial markets to clear in the indicated deflationary direction.

Now, it’s part of the design.

On to next week’s rate cut…

Trust Yourself

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…

Revealed: What Really Goes on Behind Closed Doors in D.C.

Former White House Budget Director, David Stockman is stepping forward in his new project, The Stockman Letter to warn everyone about the serious danger facing our country! Click here to find out the… 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