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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Central banks QEase on down the road

Most equity markets across the globe moved higher on very low volume as the Bank of England announced its “kitchen sink” response to Brexit.

The theory being that despite a nil growth global economic forecast, central banks will print their way to economic expansion.

The markets don’t have to believe that, but the banks do have to put the added liquidity they receive as a result of the QE into the markets.

That in a nutshell is why we are seeing all-time highs on the Dow and S&P. The trickle down for Main St. is perhaps your 401(k) is a little healthier.

Don’t attempt to get a business loan or a mortgage at these low rates, the banks can’t put that additional liquidity to work and risk defaults.

The large Wall Street banks don’t have the balance sheet to take on more risk, hence the injection of capital through the QE operations.

Don’t think for a second that the Federal Reserve is not continuing its liquidity injections into the banks.

As the paper it bought in 2009-2013 rolls over and matures the Fed is re-injecting the principle bank into the banks to buy more of the toxic paper, that should be trading at $0.05 at par to further bolster the troubles banks.

By some estimates the Fed could be rolling over $15 billion a month into new toxic paper. This is QE by any other name.

Omaha, Omaha: It's the old 5pm audible from Asia market

The helipads around the world are about to get busier.

That’s the central bankers of the world jawboning about “helicopter money coming soon from Japan, Europe and even in the US, while the UK cuts its prime lending rate and perhaps launches a new round of easing.

Does this sound like things are going well and that the equity markets should be making all-time highs? Yup, welcome to the new world.

It all starts at roughly 5PM in NYC. Futures markets are down for the Dow, S&P and Asia while precious metals are rising. In Asia the markets look very soft on a strengthening yen.

The Bank of Japan puts out a — what seems like a daily statement saying that the government will be in the market “to protect” the yen, which really means BOJ wants a weaker, not stronger yen. When it came close to 100 yen  to the dollar on the Fx exchanges due to Brexit, that was too strong.

And we use to laughed at Mexico, when on vacation the peso felt like monopoly money at 25 pesos to the dollar. Whose the third-world country now?

So what does the Bank of Japan suggest during a visit by ex-Fed chief (Helicopter) Ben Bernanke? To give cash to the general population to spur spending, which may spur growth.

Asian stock markets soar, Europe can’t wait to open and US futures rise, bond yields rise, precious metal sink. Got it, ok we’ll do it again tomorrow night.

So now, we still have Deutsche Bank and many Italian banks teetering. We have a Bank of England starting a Quantitative Easing program. And we have a Federal Reserve still divided on want to do this month with rates?

So the short answer is: In a world awash with debt, let’s created more debt — albeit at a very low-interest rates — to get out of this quagmire called stagflation.

Doesn’t sound to me like equities are on a long-term growth cycle to me, but it is election time here in the US, so all bets are off.

 

Corporate welfare program: More easing ahead

On Saturday I wrote how the global equity markets soared on the news of central bank moves or promises of moves to pumped more cash into a slowing economy.

All these moves do not foretell a growing world economy. If fact it’s the complete opposite as predicted by the move announced Monday that America’s biggest retailer is dramatically cutting inventory at all its stores.

WalMart has cut 15% of its skews or products that it carries in the past 6 months and plans to cut an additional 8%-10% over the next year.

The moves are playing havoc with the retailers whole supply chain, most of which begins with Chinese manufacturers.

To prove the point America’s largest manufacturers and consumers band companies have told us what the federal government cannot or will not. We are in a recession.

CEOs from Caterpillar, 3M, Kimberly Clark and Johnson & Johnson have all recently said that times are hard, sales are down and there will be layoffs.

So let’s say this is the new MO for the US economy.

What’s good for corporate America is no longer good for America, because if the Fed eases again due to a slowing economy, then causing corporate stocks go up, but what Americans owe for that corporate welfare program will go up sharply.