recovery

Instability pervades the entire system, encompassing everything from financial markets to social safety nets. And while it is easy to ignore the seriousness of current events because stock markets remain at record highs and mainstream pundits continue to toe the recovery line, the fact is that an unexpected and seemingly minor event could well send the entire world into a tailspin.

It was 77 years ago this week that Orson Welles struck terror into the hearts of Americans with his live radio broadcast of the HG Wells classic War of the Worlds. What struck me while watching the PBS retrospective were the similarities between then and now. The gullibility of the masses, the power of fear, the overreaction by the media, busy bodies calling for the government to do something, and the effectiveness of propaganda are all commonalities between that Fourth Turning and today’s Fourth Turning.

China as the global Bubble’s focal point – the weak link yet, at the same time, the key marginal source of Bubble finance. China’s policy course appears to focus on two facets: to stabilize the yuan versus the dollar and to resuscitate Credit expansion. For better than two decades, similar policy courses were followed by myriad EM policymakers in hopes of sustaining financial and economic booms. Many cases ended in abject failure – often spectacularly. Why? Because when officials resort to such measures to sustain faltering Bubbles it generally works to only exacerbate systemic fragilities. For one, late-stage reflationary measures compound Credit system vulnerability while compounding structural impairment to the real economy. Secondly, central bank and banking system Credit-bolstering measures create liquidity that invariably feeds destabilizing “capital” and “hot money” outflows.

The talking heads were busy this week powdering the GDP pig. By averaging up the “disappointing” 1.5% gain for Q3 with the previous quarter they were able to pronounce that the economy is moving forward at an “encouraging” 2% clip. And once we get through this quarter’s big negative inventory adjustment, they insisted, we will be off to the ‘escape velocity’ races. Again. No we won’t! The global economy is in an epochal deflationary swoon and the US economy has already hit stall speed. It is only a matter of months before this long-in-the-tooth 75-month old business expansion will rollover into outright liquidation of excess inventories and hoarded labor. That is otherwise known as a recession.

Should the Fed actually hike in December (the statement explicitly mentioned the possibility), we think it’s highly likely to become a “one and done” that will be taken back shortly, similar to the BoJ’s handful of attempts to hike rates after the bursting of the 1980s bubble. We say this simply based on the economy’s actual performance. After all, it took only a minimal tightening of policy (the “tapering” of QE3) to induce a bust in the sector most exposed to capital malinvestment.

Shantytown, Stockton, California, USA

On January 6, 2004, Senator Charles Schumer and I challenged the erroneous idea that jobs offshoring was free trade in a New York Times op-ed. Our article so astounded economists that within a few days Schumer and I were summoned to a Brookings Institution conference in Washington, DC, to explain our heresy. In the nationally televised conference, I declared that the consequence of jobs offshoring would be that the US would be a Third World country in 20 years. That was 11 years ago, and the US is on course to descend to Third World status before the remaining 9 years of my prediction have expired. The evidence is everywhere.

At least parts of the Fed all the way back in 1979 appreciated how Greenspan and Bernanke’s “global savings glut” was a joke. Rather than follow that inquiry to a useful line of policy, monetary officials instead just let it all go into the ether of, from their view, trivial history. But the true disaster lies not just in that intentional ignorance but rather how orthodox economists and policymakers were acutely aware there was “something” amiss about money especially by the 1990’s. Because these dots to connect were so close together the only reasonable conclusion for this discrepancy is ideology alone. Economists were so bent upon creating monetary “rules” by which to control the economy that they refused recognition of something so immense because it would disqualify their very effort.

To believe this isn’t a bubble is to believe that all of the hot momo money from insti’s, high/biotech, flipper, flappers, fraudsters, and foreigners buying houses is fundamental and here to stay, which is exactly what everybody thought in 2006. Or, to believe that interest rates will keep falling 1% per year going forward, which would lend an element of support to prices.

Despite all the promises, all the surveys, all the expectations that wage growth is coming (any minute now), September crushed the hopes (and changes) and dreams of Americans as, for the first time since July 2013, Compensation of Employees fell month-over-month. Recovery?

Back in September we explained why, contrary to both conventional wisdom and the BOJ's endless protests to the contrary, neither the BOJ nor the ECB have any interest in boosting QE at this - or any other point - simply because with every incremental bond they buy, the time when the two central banks run out of monetizable debt comes closer. Since then the ECB has jawboned that it may boost QE (but it has not done so), and overnight as reported previously, the BOJ likewise did not expand QE despite many, including Goldman Sachs, expecting it would do just that.

Welcome to the oligarch recovery. An economic rebound so robust that an ever increasing number of Americans are being forced to borrow money at usurious rates just to pay the bills. Today, we want to introduce you to the latest scheme to profit from poverty: Pension Advance Companies.

Once more in this new normal in which we 'live', the necessary creative destruction of capitalism is eschewed in favor of saving a zombie company that the CEO admitted was "overwhelmed." The good news for American taxpayers is that it is Canadian taxpayers - via a generous $1.3 billion 'investment' by the Quebec government - that are bailing out private-jet-maker Bombardier. Following aircraft projects plagued by overruns, missed deadlines, and scant interest from airlines, Bombardier posted a $4.9billion loss in Q3. Well never mind that, Quebec taxpayers now own 49.5% of the challenged CSeries program.

It appears even Goldman Sachs was surprised by the recent rally in US equities - especially in light of the explicit hawkishness of The Fed yesterday. In a trading note this morning, the bank says that market risks are real and rising (but are not overwhelming) as it explains, we assume with no intent at humor or sarcasm, that they "prefer to think of the recent equity rally as 'macro-free' rather than 'low quality'," reiterating their view of the cycle and of markets as "fundamentally upbeat." They do, however, admit over the last month, the likelihood of a drawdown in the US equity market further increased, and remains at mildly elevated levels.

For generations, single family housing development was a driver of US economic growth. Today, there is no single family housing industry to speak of. These 7 charts derived from this week’s release of new house sales data from the Census Bureau illustrates just how bad things are.