A US economic snapshot in the middle of 2018 — not all is well

Let’s take a quick look at the US economy and where it may be headed in the near term.

While unemployment is said to be very low, the rate is still artificially low due to the uncounted Americans no longer in the workforce because of chronic joblessness.

Producer and consumer pricing are rising — not because of tariffs as the left will cite — due to the excessive capital washing out of the stock and bond market. The stock price run up over the last three years was engineered by the Federal Reserve’s quantitative easing capital finding safe haven in stocks and bonds.

Now that capital is exiting the security markets and finding better treatment with private equity firms that are buying out manufacturing and consumer brand companies, which drives up prices in order for the new owner — the PE firm — to make money from the investment through putting the brands deeper into debt to make special payments to them.

So this capital is not from the average American, but the repercussions are being felt by these average Americans through higher prices. Look at the biggest PE firms raising record amounts for new funds.

Taking a quick look at the US bond market to see where the real problems are. The difference in return rates between lending Uncle Sam money over 2 years versus 30 years.

The 2-year return is 2.61%, the 30-year interest rate is 2.96%. The delta between these two 0.35 percentage points return over 28 years. This is what is called a flat yield curve, since the interest curve is very shallow.

In the environment of the bond market capital is not treated well at all with artificially low returns, so this is pushing additional big money out of the public capital markets and into the private funding markets.

What is the down side of this move? Look at the number of bankruptcies in the retailing sector over the last year. These stores: Toys R US and a dozen or so women’s apparel stores are all closed or limping along because these companies were so leveraged up on debt that they could not pay off their huge debt levels imposed on them by their private equity owners.

But don’t worry about these PE firms because they took their money upfront and more than likely owed some of the companies bonds, which were paid off in the bankruptcy.

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Bernanke’s policies were certainly not a Roadrunner

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Former Fed chief Ben Bernanke was taking jabs at President Donald Trump’s economic stimulus and tax cuts on Thursday in DC to a like-minded leftist crowd.

Bernanke, whose monetary policies helped every institution in the US except the US consumer, says the stimulus will only have a short-term effect and that by 2020 it will peter out.

The former Fed chair sounding quite jealous  since he begged the White House and Congress for this type of economic plan for most of his term as Fed chief to help pull the US out of the Great Recession.

Bernanke using the cartoon character Wiley E Coyote to say the US economy will go off a cliff in 2020. This happens to coincide with Trump’s re-election campaign.

Bernanke — citing the amount of stimulus coming from the White House of  $1.5 trillion in personal and corporate tax cuts and a $300 billion increase in federal spending — saying these policies  “make the Fed’s job more difficult all around” because it’s coming at a time of very low U.S. unemployment.”

While the unemployment rate is 3.8%, the number really does not take into account people working part-time and wish to have a full-time job. It also does not count the people who longer collect benefits.

So to say the US is at full employment is disingenuous at best, since Bernanke knows he is citing flawed data to take a shot at the Trump White House.

I find it ironic Bernanke would use the Wiley E Coyote imagery since no matter what he did as Fed chief both he and President Obama resided over the first modern 8-year term that did not achieve a 3% annual GDP growth. So to suggest that Trump’s economic policies are basically futile and will fall off the cliff is very rich.

 

April’s a cruel month for job market

Where have all the workers gone?

On Friday the Labor Department said that the unemployment rate fell to 3.9% in April, which is the lowest rate since Bill Clinton was in the white House.

Now if this number had any relevance to the workforce, I would have written about it when it was released. But it doesn’t mean anything really.

To say there were only 3.9% of the potential workers still looking for a job is preposterous.

The people who are not counted in that number are in the millions.

  • College graduates
  • Those who are jobless, but no longer collecting unemployment benefits
  • Part-time workers
  • Retirees looking for part-time work

The U6 jobless rate, which includes people who can only find part-time work and those who’ve gotten so discouraged they recently stopped looking, fell to 7.8.% in April — the first time it has been below 8% since 2006.

A better barometer of the workforce is wages. If you can’t find workers, then you need to raise the wage to entice job seekers to apply. Or if you wish to keep good employees you give them a raise or bonus, or so goes the narrative.

Now we saw companies as a result of Trumps new tax law give one-time bonuses to employees, but that is not reflected in this data also released Friday by the Bureau of Labor Statistics.

The average wage growth for April was a startling 4 cents to $26.84 an hour with average work week at 34.5 hours.

So what do these two numbers say about the job market?

There is little premium being offered by employers broadly to find or retain workers and two, there are many, many jobs not offering any additional benefits since they are not working full-time.

This is not a new phenomenon, the hourly pay rate has increased 67 cents over the last year. So in simplest of economic theory there is plenty of supply and little demand in the job market.

Now, the Street takes all this information into account, and we see why The Fed did not raise rates recently.  As I wrote in January, we will get one rate increase in 2018.

You cannot have inflation, without wage increases and a 67 cent rise over the last year is far more important than 3.9% jobless rate.

Big news from small businesses

This is the effect of a pro-business White House means to the US economy.

Main Street’s businesses are looking at a far brighter future, according to the latest survey taken by the National Federation of Independent Businesses.

Small business posted its second highest optimistic score in the history of the survey in February with a reading of 107.6. Continue reading

Mr. Powell, did the Fed bail out failing hedge funds last month?

New Fed chief Jerry Powell is set to testify Thursday in front of the Senate Finance Committee. In his Tuesday session in the House, Powell hinted that four rate hikes may be needed this year.

I believe today’s discussion will sound more like what I predicted the House testimony should have sounded like.

My big question to Powell would be can he explain what happen early last month where the Fed’s weekly balance sheet reports exploded by $14 billion during the market turmoil surrounding the VIX volatility spike.

From all indications I see, it looks as if the Fed did a three-day QE4 operation in conjunction with the Plunge Protection Team, to buy up toxic VIX short instruments that were way out of the money before some hedge funds would have been forced to liquidate and shutter.


Gun maker shares are falling sharply this morning after President Trump said he was in favor of restricting sales to minors and the mentally ill following the Florida school shooting last week.

In an abrupt reversal from the previous decade where firearm shares would soar on news of a mass shooting for fear of legislation, share prices fell after the Florida shooting.

Now with a Republican leader saying he is open to curtailing some gun sales, shares are nearing 52-week lows on the news.