Welcome to Financialization

By David Stockman  |  November 15, 2019

At the end of the day, Bubblevision’s narrative doesn’t match the facts. And, eventually, the facts will come out – as they did in the dot-com crash of 2000-02 and the Global Financial Crisis/Great Recession of 2007-09.

Reality Will Sink In

Michael Coolbaugh shone a light on the impact of the financialization of the U.S. economy in his Thursday market commentary. Behind the charts he shared and the ones we discuss below are real people.

Still, the Federal Reserve’s endless stimulating and coddling of Wall Street has virtually destroyed any capacity to dissect and interpret the “incoming data.”

Indeed, does the “incoming data” even matter anymore to the chart monkeys? They already assume the Fed will be there for the stick save if the market falters even modestly, as it did last December.

Of course, when Bubblevision’s narrative finally gets mugged by reality, all the talking heads will be “shocked… shocked!” to learn that there was so much rot down below. That’s true in spades at month No. 125 of a business expansion defined by record debt accumulation, malinvestment, and financial asset inflation.

Consider the fact that, after the longest continuous expansion in history, the U.S. economy has only recovered 68% of the 4.6 million goods-producing jobs it lost during the Great Recession. And, by every indication, that’s all she wrote – until, of course, the next recession takes the number south again.

You can talk about the rise of services all you want—or the beauty of having Americans sell each other insurance. But you do have to mine, make, and build stuff to sustain prosperity.

Even the Donald, in his crude way, understands that you can’t continue to run massive trade deficits with the rest of the world and borrow to cover the shortfall forever, world without end.

Where Does the Economy Stand?

It is no sign of strength that the 21.085 million goods-producing jobs reported for October 2019 is the same number as first posted in November 1965. No amount of productivity gain or technological progress explains it.

The U.S. economy today is 4.5 times bigger, as measured by real gross domestic product (GDP). But employment in mining and energy, construction, and manufacturing is where it was 54 years ago.

The loss of 26,000 goods-producing jobs in October was coupled with the addition of 61,000 leisure and hospitality jobs. That’s fitting. It captures in a single-month snapshot the egregious imbalance that defines the U.S. economy since 2009.

Average weekly earnings in the goods-producing sector last month were $1,177. That’s an annualized wage of $61,200. By contrast, average weekly earnings in the leisure and hospitality sector were just $431. That’s $22,412 a year.

From an aggregate income point of view, these are 37% jobs.

On an annualized-run-rate basis, the October job counts in these two categories compute to a $1.59 billion loss of earnings in the goods-producing sector and a $1.37 billion gain in the leisure and hospitality sector.

That’s the essential story of the current so-called recovery. Since the pre-recession peak in December 2007, the count of “37% jobs” has risen by 24%. Goods-producing jobs are still 5% below their pre-recession peak.

In terms of income, the implications are startling. At October weekly earnings rates and employment levels, the goods-producing sector generates $1.294 trillion of wages on an annual basis. The leisure and hospitality sector generates $378 billion. The total payroll of the combined sectors is $1.672 trillion.

When it comes to the impact of job gains or losses since the December 2007 pre-crisis peak, the goods-producing sector’s 891,000 job loss equates to a $54.5 billion lower payroll for the sector. At the same time, the 3.29 million job gain in leisure and hospitality equates to a $73.8 billion payroll gain.

But the $19.3 billion net gain in payrolls among the two sectors is bupkis in the scheme of things; it implies a mere 1.2% gain in nominal dollars over 12 years.

Jobs are migrating from goods to services, from high pay to low pay. During October 2019, on an annual basis, goods-producing jobs were worth $61,200 a year in annual salary. Health and education jobs were worth $47,500. Hospitality and leisure jobs were worth $22,412.

Yet, since January 2000, the total number of goods-producing jobs has shrunk by 14.5%. Leisure and hospitality jobs are up by 43.8%. Health and education jobs are up 61.9%.

Consider as well that households with incomes greater than $100,000 account for nearly 50% of restaurant spending and own nearly 90% of the stock. When the bubble bursts, so will their spending.

Also, upward of 90% of the $5 trillion spent on health and education services in the U.S. is provided directly and indirectly by the public. The latter is going broke fast and so is its ability to fund the growth of services and jobs in the health, education, and services complex.

At some point, soon, the U.S. economy is going to run out of tax dollars and borrowed money to fund the growth of households doing each other’s laundry.

Honest Labors

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.

You’ve got to be nimble to win in this market…

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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