The market is going great so no need to worry, right?

The market is going great so no need to worry, right?

There are weeks when sitting down to write this piece is tough because not much worthy of note has happened in the markets or the economy outside of the usual noise. This week, that was most definitely not the case. Thank God it is Friday – we all need a break.

New Market Highs and the Economy Gets Uglier

Thursday the S&P 500 closed at a new all-time high and is now above its 50-day, 100-day and 200-day moving averages. The post Federal Reserve Open Market Committee meeting debrief gave the market essentially what it wanted, a significantly more dovish stance with plenty of reasons to believe future rate cuts are imminent. Perhaps the Marty Zweig adage, “Don’t fight the Fed,” has been flipped on its head to “Fed, don’t fight the markets.” Unemployment is at multi-decade lows with more job openings than unemployed persons, rising hourly earnings, and improving retail sales while the market hits all-time highs and yet the Fed is preparing to stimulate. Yeah, something’s off here.

Stocks may be partying like it is 1999 (for those who remember that far back) but the yield on the 10-year closed at 2.01% Thursday. To put that in context, on June 9th when the 10-year was down to 2.09%, the Wall Street Journal ran an article asserting that, “Almost nobody saw the nosedive in bond yields coming, but a few players were positioned well enough to profit. Some think there is more room for yields to fall further,” along with this chart. To be clear, despite not one respondent predicting the yield on the 10-year would fall below 2.5% in 2019, none of these economists are idiots, but the thing is they all tend to read from the same playbook.

The stock market is giddy over its expectations for lower rates, yet the spread between the 3-month and the 10-year Treasury has been inverted for four weeks as of this writing, not exactly a ringing endorsement for economic growth prospects. Every time this curve has been inverted for 4 consecutive weeks, it has been followed by a recession (hat tip @Saxena_Puru) for this chart. Note that the chart uses 10-year versus 1-year until the 3-month became available in 1982. Much of the mainstream financial media and fin twit believe this time is different. Time will tell.

The red arrows denote 4 consecutive weeks of inversion and the blue arrows mark bear-market lows (20% declines).

Then there is this, with a hat tip to Sven Henrich whose tweet with a chart from Fed went viral – that in and of itself says a lot.

Both US imports and exports have declined from double-digit growth in 3Q 2018 to essentially flat today. The recent CFO Outlook by Duke’s Fuqua School of Business found that optimism about the US and about their own companies amongst CFO’s had fallen from the prior year.

The shipments of goods being moved around the country have plummeted since the beginning of 2018, as shown by the Cass Freight Index.

The Morgan Stanley Business Conditions Index fell 32 points in June, the largest one-month decline in its history.

If all that doesn’t have your attention, consider that the New York Fed’s recession probability model puts the probability that we are in a recession by May 2020 at 30%. Note that going back to 1961, whenever the probability has risen to this level we have either already been in a recession or shortly entered one with the exception of 1967 – 7 out of 8 times.

But hey, the market is going great so no need to worry right? If that’s what you are thinking, skip this next chart from @OddStats.

Geopolitics – From Bad to Oh No, No No

Brinksmanship with Iran continues as in the early hours of Friday we learned that the US planned a military strike against Iran in response to the shooting down of an American reconnaissance drone. The mission was called off at the last minute after the President learned that an estimated 150 people would likely have been killed. Frankly, the official story sounds a bit off, but what we do know is that we are in dangerous territory and one can only hope that some cooler heads prevail, and the situation gets dialed back a whole heck of a lot.

Given we weren’t enjoying enough nail-biting out of the Middle East news, an independent United Nations human rights expert investigating the killing of Saudi journalist Jamal Khashoggi is in a 101-page report recommending an investigation into the possible role of the Saudi Crown Prince Mohammed bin Salam citing “credible evidence,” and while not specifically assigning blame to bin Salam, did assign responsibility to the Saudi government. This week the US Senate voted to block arms sales to Saudi Arabia, rebuking the President’s decision to use an emergency declaration to move the deal forward. This matters when it comes to investing because there are some seriously high-stakes games being played out that have the potential to suddenly rock markets without any warning.

Over in Europe more and more data points pointing to a slowing economy, which led to European Central Bank President Mario Draghi to announce that more stimulus could be in the works if inflation fails to accelerate. At the ECB’s annual conference in Sintra, Portugal Draghi stated that, “In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.” It isn’t just inflation that is troubling the region. Euro Area Industrial Production (ex Construction) has only seen increases in 2 of the last 11 months.

Italy continues to struggle with its budget deficit outside the limits allowed by the European Union, leading to a battle between Rome and Brussels. Friday Deputy Prime Minister Matteo Salvini (head of the euro-skeptic Lega party) threatened to quit his position if he is not able to push through tax cuts for at least €10 billion. While the US has been laser-focused on the Fed (and the president’s tweets) the Italian situation is getting more tense and a time when UK leadership with respect to Brexit is also getting a lot more tense. To put the Italian problem in perspective and understand why this problem is not going away, look at the chart below.

Today, Italy’s per capita GDP is 2.8% BELOW where it was in 2000 while Germany is 24.8% higher. Even the beleaguered Greece has outperformed Italy. Italy’s debt level is material to the rest of the world, its economy is material to the European Union, its citizens are losing their patience and its leadership consists of a tenuous partnership between a far-right, fascist-leaning Lega and a far-left, communist(ish) 5 Star movement lead by folks that very few in the nation respect. So that’s going well.

As if the European Union didn’t have enough to worry about as its new parliament struggles to find any sort of direction or agreement on leadership, the parliamentary process for selecting the next Prime Minister of the UK is down to two finalists. Enthusiam is rampant.

A hard Brexit is looking more likely and that is not going to be smooth sailing for anyone.

The Bottom Line

All this is a lot to take in, but there is a bright light for the week. Anna Wintour, Vogue’s editor-in-chief and eternal trend-setter, has given flip-flops her seal of approval. So, we’ve got that going for us. If that didn’t put a little spring into your step, I suggest you check out this twitter feed from Paul Bronks. Your soon-to-be more swimsuit ready abs will thank me, but your neighbors will wonder what the hell is going on at your place.

The Scoop on June Jobs Report

The Scoop on June Jobs Report

Employers added 222,000 jobs in June versus expectations for 174,000 – so that looks pretty good especially when we see that

The average weekly hours worked for all private sector jobs was flat from April 2017 and up 0.3 percent from June 2016 – so no real change here.

  • Mining and Lodging hours worked dropped from 45.1 in May to 44.8 in June
  • Construction hours dropped from 39.3 in April to 39.2 in June
  • Manufacturing rose from 40.7 in April and May to 40.8 in June
  • Retail trade dropped from 31.2 in April to 31 in June
  • Transportation rose from 38.8 in April (and in June 2016) to 39.1 in June

Hourly earnings rose at 1.8 percent month over month on an annualized basis and 2.5 percent from June 2016.

The prime working age population participation rate, (which removes the skew from retiring Baby Boomers) is below the recent highs of 81.7 percent in February, March, and April, and is still far below the January 1999 peak of 84.6 percent.

Looking at the rate of job growth, it is clear that it has rolled over. We are still seeing job growth, but the rate of growth is slowing. March and April of 2017 saw 1.5 percent growth rates and yes May and June have risen back up to 1.6 percent, but that is just back to where it was November through February and below the 1.7 to 1.8 we saw mid-2016.  This is typical at this stage in the cycle. (The green line marks where we are today.)

The median number of weeks unemployed has continued to drop and is now at a all-time low for this cycle – yet another indicator that we are in the later stages of the business cycle.

Bottom Line: This report, like much else we have seen lately, points to an economy that is in the later stages of the business cycle. The wheels are by no means coming off the cart, but the rate of improvement is slowing and while we are seeing improvement in wages, it is much less than would be typical at this point in the cycle.

The Real Jobs Picture with Lenore Hawkins on Boom Bust

The Real Jobs Picture with Lenore Hawkins on Boom Bust

Earlier this week I spoke with Lindsay France on Boom Bust about the reality of the employment situation in the United States. We keep hearing talk out of DC about how this policy or that is going to ignite the economy, and while we would dearly love to see that happen, we rarely hear anything that addresses the only two factors that truly affect the growth rate of the economy: The growth rate for an economy is the sum of the growth of the labor pool and productivity.

The actual data coming in tells us a lot about the structural headwinds limiting the potential growth rate in the economy. The total available labor pool shrank again in May and has now contracted for four consecutive months by nearly 1 million people: this reduces the potential growth rate for the economy.

Yet, we continue to hear from those in D.C. and the mainstream financial media that the economy is going strong and starting to accelerate to the upside. Errr what? The jobs data tells a very different story. Earlier this month the Bureau of Labor Statistics nonfarm payrolls report for May showed that only 138,000 jobs were added during May, well below expectations for 182,000 and we saw 66,000 removed from the March and April new jobs. Looking at the trend:

  • Average net new jobs added per month over the past 12 months – 189,000
  • Average net new jobs added per month over the past 6 months –  161,000
  • Net new jobs added in May — 138,000

That is not a story of an improving economy.

The recent JOLTS (Job Openings and Labor Turnover Survey) report from the Bureau of Labor Statistics reveals a continuation of a concerning trend that we’ve been watching for quite a few years. The number of job openings hit yet another record high at over 6 million, while hirings continue to lag.  The spread between openings and new hires has also reached a new record high. Even more concerning, the number of new hires has fallen in two out of the past three months, as companies struggle find the right match for their needs. This reduces productivity because when positions remain empty, everyone needs to work around the void, impacting their ability to take care of their own workload, so here we have a hit to both the labor pool and productivity.

From the post-recession lows, the economy has added about 14 million jobs, yet we’ve seen no real wage pressures. This is partly because we have 23 million Americans, (more than the entire population of NY) in the prime working age that are not engaged in the labor pool, which is 25% above the historical average level – that’s some serious deadweight on the economy.






US Economy Still Wobbly

US Economy Still Wobbly

The US economy is still pretty weak, reminding me of how I feel towards the end of my weekly “long run,” with occasionally short bursts of energy that quickly peter out into awkward limping along – getting older is not for whiners.


Earlier this month new single family home sales missed expectations, coming in at a seasonally adjusted annual rate of 511,000 versus expectations of 520,000, for a year-over-year decline of -1.92%. That miss was slightly offset by an upward revision to the prior month’s data, from 512,000 SAAR to 519,000 SAAR. While total sales for new homes remain in an uptrend, they haven’t made a new high in well over a year.

New single family home prices have also softened, with median price falling 1.8 year-over-year and 6.4% month-over-month.  In addition, both months current supply and median months on the market have risen which indicates weaker new home markets across the country than we have previously seen.

Mid month we also received the NAHB/Wells Fargo Housing Market Index, which came in at 58 in May, unchanged from the three previous months versus expectations for the index to inch up to 59. Much like what we are hearing from the National Federation of Independent Businesses with respect to the biggest concerns for small business, “builders are facing an increasing number of regulations and lot supply constraints,” according to NAHB Chairman Ed Brady. Tuesday the Commerce Department will release a separate report on new residential construction for April.

Bottom Line: Housing is doing pretty well overall, but builders are reporting being constrained by the availability of land due in large part to land-use regulation, particularly in the geographies with the greatest demand. We are also seeing a lot less inventory available than is typical at this point in the cycle, meaning fewer people are putting their homes on the market, which is pushing prices up.

Manufacturing & Services

U.S. durable goods orders rose just 0.8% in March missing expectations for 1.8%, as demand for cars, computers and electrical goods slumped. This after a downwardly revised decline of -3.1% in February, previously reported as a -3.0% decline. Excluding transports, durable goods declined -0.2% versus expectations for an increase of +0.5% with prior month revised downward as well to -1.3% from -1.0%.

All the regional Fed Surveys all came in weaker than expected and are in contraction territory. Empire State was expected to be +6.5, but came in -9.02. Philadelphia was expected to be +3.0, but came in -1.8 and Richmond was -1 versus +8 expected. Finally Kansas City Fed was -5 versus -3 and Dallas was the worst offender at -20.8 versus expectations for -8.0.

Markit’s April US Manufacturing PMI points to weakest performance since September 2009. At 50.8 for the month (down from 51.5 in March), manufacturing activity in the current quarter started off at an even slower pace than the 1Q 2016 average of 51.7. Six of the ten subcomponents declined in April with Customer Inventories and New orders showing the largest declines while Prices Paid increased to its highest level since September 2014, up 7.5 points to 59.0. The Employment component is still below 50, indicating contraction, but did reach its best level since November.

Markit’s April US Services Business Activity Index rose to 52.8 in April, up from 51.3 in March, but we’d caution excitement as it was only the second month above the expansion/contraction line at 50.0. Despite the softening of the US dollar since early February,  new work from abroad decreased at the fastest pace for nearly one-and-a-half years.

Bottom Line: Manufacturing continues to be weak and given the tight correlation between the ISM Purchasing Manager’s Index versus the S&P 500, this is not something to be ignored. 

ISM v SP500


Both the ADP and Bureau of Labor April job creation figures were well below expectations. According to the Challenger Grey data on layoffs, the pace of downsizing in April rose by 35% percent to 65,141, from the 48,207 layoff announcements in March. In the first four months of 2016, employers have announced a total of 250,061 planned job cuts, up 24% from the 201,796 job cuts tracked during the same period a year ago. Job creation was a big miss at +160,000 versus an expected +200,000 after +215,000 in March. This is the fourth month without a print over +250,000, the worst such streak since 2013, indicating softening. On the other hand, the share of the labor force that’s been looking for work for at least 27 weeks and those who can only find part-time work have fallen, which is a sign of improvement. The employment-to-population ratio remains far below where it sat during the peak of the last two expansions and fell again 0.3% month-over-month. Overall, not a great picture, but not an alarmingly bad one either.

When we are talking about the employment situation, keep in mind that given the low-to-no-growth environment and low interest rates, companies are likely to utilize M&A activity to bolster revenue and profits. The issue there is layoffs are one of the quickest means to achieve cost savings or “synergies” to use the finance lingo.

Retail Sales

You’ve probably heard about the serious pounding the retail sector took this earnings season, with the headlines mid-month mostly dominated by dour news from the retail sector, with a set of bleh (technical term) earnings reports coming from the likes of Macy’s, Dillards, Kohl’s, Gap, and Nordstrom, all of which are trading down between -45% and -52% over the past year as of today’s close. Meanwhile Dollar General, Dollar Tree and Walmart all exceeded expectations, further emphasizing our Cash-Strapped Consumer theme. But it isn’t just about struggling brick and mortar retail, with Disney reporting its first earnings miss in five years. The next chart hows how retail spending is still in recessionary territory.

3mma retail sales


America has for centuries been a nation on the cutting edge of change, with a highly flexible workforce, both in terms of geography and skills, that led the world in innovating. But that has been changing:

  • Between the 1970s and the 2010, the rate of Americans moving between states dropped by more than 50%, from 3.5% a year to 1.4% a year.
  • The fraction of workers required to hold a government-issued license has sextupled since the 1950s, from less than 5% to just under 30%, making the labor market less flexible because it is now more difficult to switch into an industry or to move from one state to another when licenses are required.
  • The rising costs of health care on top of the tax incentives for employer health-care subsidies versus tax disadvantages for individual plans has made it more costly and risky for individuals to leave their company and start their own entrepreneurial ventures.
  • Traditionally Americans have moved from poorer states to wealthier states, but the rise in federal taxes and federal regulation has muted the benefits from leaving one state for another. This has also reduced the need for states to compete with one another by fostering growth friendly environments.
  • High land-use regulations in wealthier metro areas are making housing more expensive so that now we see more people moving from richer areas to poorer ones due to housing costs.
  • In the past, high rates of migration served to reduce income inequality within the nation, but today the low migration rates have become a drive of such inequality.
  • Entrepreneurship and innovation are contagious. In the past, smaller counties used to lead the nation in the growth of new businesses, even through the early 1990s, but since then, small counties have lost businesses with innovation and entrepreneurship becoming more concentrated in a few areas as regulations concerning angel/venture capital investing has concentrated capital allocation for such into fewer and fewer hands. Today Silicon Valley alone accounts for 40% of all venture investments and the addition of Los Angeles, Boston and New York City brings that to 2/3rd of the total in the nation.

Botton Line: The US is facing strong demographic headwinds as the largest generation, the Baby Boomer, move into retirement, and has a plethora of structural headwinds, a few of which I discussed above. Monetary policy could never address these problems, which is partially why it has been of limited use and of questionable efficacy, leaving us with an economy that is growing at a rate well below historical norms.

Better Retail Data Doesn't Guarantee Fed Rate Hike

On May 13th I spoke with Neil Cavuto on the Fox Business Network about the impact of the recent retail sales report on a potential rate hike by the Federal Reserve.  My concern is that employment isn’t nearly as strong as the headlines would lead one to believe. wrote an article about my discussion as well as some points made by my co-author for Cocktail Investing, Chris Versace, which you can read here.

In the fourth quarter of 2015, productivity declined by 1.7% then fell again in Q1 by 1.0% while labor input rose 2.5% and non-farm business output averaged around 1%. That means from last October through March, the aggregate hours worked outpaced production 2.5 to 1 – obviously that is unsustainable.

If we look at Challenger’s reported layoffs for the first four months of 2016, we see they were up 24% over the first four months of 2015 and the highest we’ve seen since 2009. In April alone layoffs were up 35%, so the pace looks to be accelerating.

This is the fifth quarter of falling sales and the fourth quarter of an earnings recession, what exactly would drive more hiring when the employees companies currently have are delivering declining productivity?

The three month moving average for retail sales is still at recessionary levels AND today, 47% of Americans don’t have enough savings to cover a $400 emergency! How’s that recovery working for you?

Great jobs number but…

Great jobs number but…

Friday we saw a great jobs number but… were the knock-it-out-of the ballpark numdr+evil+villainbers really indicative of a (finally) robust economy?  Hmmmm, methinks there is more to it all.  You’re shocked right?

I spoke with Matt Ray yesterday on America’s Morning news about the jobs report and how I thought the data could be misleading.  You can listen to our chat by clicking here. Today, after seeing the NFIB report, I decided the topic deserved a thorough analysis, so I’ve added a lot here to what we discussed.

To start with, this number can be quite volatile, so if we look at a three-month rolling average, the current gain is still 26,000 less than the average during the first six months of the year.  We did like to see a 0.4% rise in average hourly earnings last month, bringing the annual rate up to 2.5%, which is the strongest in the past six years. That bodes well for holiday spending, which ought to have companies like Amazon pleased as punch.  If we look at the labor-force participation rate however, that remained unchanged at 62.4%, which is 0.5 lower than in January.  This data point is one that causes yours truly much angst.  Think of this as a measure of what percentage of the population is rowing the economic row boat.  The more that row, the faster we can go.  Today we have roughly the same portion we had in the late 1970s, not exactly a robust growth period for the nation!


The news of the strong jobs report sent the markets into a tizzy as the probability of the Fed kicking off the first interest rate hike in more than nine years at their next meeting in December soared to 68%, which is almost double the odds of such a hike just one month ago.  One of the arguments for such an increase is that it would provide some assistance to savers, who have been struggling to earn much of anything on their savings.  Hmmmm, if the Fed raises rates, and yours truly still considers that unlikely given the bigger picture of the US economy and slowing global growth, it will likely only raise rates initially by 0.25%.  Over perhaps the following year it could theoretically get to 1%, which would in reality still do very little to help savers. The true beneficiaries would be those providers of money market funds that have been forced to eat the cost of overhead to give investors in such funds even the tiniest of yields.  This led to soaring share prices of companies like Charles Schwab, E*Trade Financial and TD Ameritrade Holdings on the jobs news Friday.

In contrast to Friday’s robust report, today’s report from the National Federation of Independent Businesses revealed that job creation came to halt in October, with owners adding a net 0.0 workers per firm in recent months.  55% reported hiring or trying to hire, which was up 2%, but 48% reported few or no qualified applications for the positions they wanted to fill.

If we look at other economic indicators, we see that things really aren’t as rosy as Friday’s job report would lead one to believe.

Last week started with the weakest headline ISM (Institute of Supply Management) Manufacturing report since December 2012 at 50.1, however many economists were expected a reading below 50, (which is a contraction) so this was actually better than expected. Whoop, whoop!  But, a painful portion of the grim report came from ISM Manufacturing employment, which is now at its lowest reading since August 2009 – good times! Thankfully manufacturing is a relatively small share of the total US economy, but we’d prefer to see more upbeat data. Overall manufacturing just looks awful, with everything but customer inventories lower year-over-year, as this next chart illustrates.

ISM manufacutring

If that didn’t drive it home, this next chart on US Industrial Production ought.  The Industrial Production index shown below is an indicator that measures real output for all facilities located in the United States manufacturing, mining, and electric, and gas utilities.  This index is generated using 312 individual data series.  The chart below shows how its longer-term upward trend from the depths of the financial crisis stalled towards the end of last year and is now trending downwards.

IP Trends

In fact, on a global level, manufacturing has been under pressure with the Global Manufacturing Purchasing Manager’s Index, (an indicator of the economic health of the manufacturing sector based on new orders, inventory levels, production, supplier deliveries and the employment environment) down to 51.4 from 52.2 a year ago. Remember that anything below 50 is a contraction. On the bright side, the number is a seven-month high.  In the US, the Manufacturing Purchasing Manager’s Index is down to 54.1 from 55.9 a year ago, but up from 53.1 last month.

Speaking of inventories… this next chart almost speaks for itself.  The wholesale inventory-to-sales ratio is at a level not seen out of a recession in decades, but  I’m sure that’s nothing to be concerned over!  Looking back at history, keep in mind the strides made in inventory management in order to keep inventories as low as possible to maximize returns. In a perfect world, the second a business gets an item into inventory, a customer grabs it right off the shelf.  The longer items sit on the shelf, the more money the business has sitting idle.  It is best to look at inventories relative to sales, as if sales double, it would be reasonable for a business to need to keep more inventory on hand. When we see inventories relative to sales rise dramatically though, that means that businesses are having more items sit on the shelves for longer, which is never a good sign.

Inventories to Sales

On a more upbeat note, the ISM non-manufacturing beat expectations mightily, coming in at 59.1 versus expectations for 56.5, down from last month’s 56.9. So the manufacturing sector is continuing to weaken while the services sector strengthens.  The good news is the service sector counts for a larger portion of the economy, however the fly in the ointment is that these two tend to move along much closer together and are now diverging to a point not seen since late 2000/early 2001.  This is cause for concern as we have every reason to believe the two will return to their historical relationship.  Given the global picture, at the moment it looks more like services will move towards manufacturing than the reverse.

If we look at construction, it is also struggling. Residential construction spending rose 61 basis points in September, driven primarily by gains in private residential spending, without which, the spending number would have actually declined month-over-month.

Recently the Federal Reserve released its Senior Loan Officer Survey reported that for the first time since early 2012, a net 7.3% of bankers reported tightening standards for large and mid-size firms based on a less certain economic outlook.  Most banks also reported weakening demand for most categories of mortgages since the second quarter while seeing credit card credit demand increase.  In response, banks reported having eased lending standards on loans eligible for purchase by Fannie Mae and Freddie Mac.  Tightening credit conditions are a headwind to economic growth, of which Chairperson Yellen and her team are highly aware.  We’re quite sure they are watching this data very closely.

Looking at the Global Economy…

Monday morning the OECD, (Organization for Economic Cooperation and Development) lowered its global growth forecasts for 2015 and 2016 to 2.9% and 3.3% versus 3.0% and 3.6% previously.  This comes just a few weeks after the International Monetary Fund predicted that the world economy would, in 2015, grow at its slowest pace since the financial crisis. We are particularly concerned with global exports as world trade has long been a strong indicator of global growth and so far in 2015, trade levels have been at levels typically associated with a global recession.  To further drive home our concerns on global trade, we looked at the reports coming from the largest shipping company in the world, A.P. Moeller-Maersk, which handles about 15% of all consumer goods transported by sea.  The CEO of A.P. Moeller-Maersk recently stated that, “The world economy is growing at a slower pace than the International Monetary Fund and other large forecasters are predicting.”  Err, wait, what?!  They just reported trade levels that are typically seen during a global recession and this guy thinks it is even worse? Argh!  The company reported recently a 61% drop in third quarter profit as demand for ships to transport goods across the world hardly grew from a year earlier.

China, the world’s second largest economy, reported that its exports declined 6.9% year-over-year versus expectations for 3.8% and marked the fourth consecutive month of declines.  In India, exports of the top five sectors including engineering and petroleum fell by about 31% in September on a year-over-year basis. Keeping a wary eye out here!

To put the chart below in perspective, world trade grew by 13% in 2010, but has been slowing considerably since then.  The WTO (World Trade Organization) lowered its forecast in volumes to 2.8% from 3.5%, which is well below the 7% average for the 20 years leading up to 2007.

World Imports

Bottom LineWe are seeing diverging data coming out on the domestic economy and continue to be concerned with the weakness we see in global commodities, transports and particularly in global exports as they typically lead global GDP trends. The combination of new trade barriers being introduced faster than existing ones are being removed coupled with cyclical problems that include falling commodity prices and debt overhang are acting as headwinds to global trade, which harms economies all over the world.  While the US is the largest economy and is driven to a large degree by internal demand, it is not immune to the fates of the global economy.  As is such, the US manufacturing sector is teetering on the brink of a recession. Whether the service sector, which is typically correlated with the manufacturing sector, can remain strong is yet to be seen.

P.S.: It isn’t only global trade that is suffering from too much government intervention.  Today The National Federation of Independent Businesses released its Small Business Economic Trends Report which revealed that the single most important problem facing small businesses is (1) Government Regulation and Red Tape followed by (2) Taxes. The government could do a lot to stimulate the economy, by getting the hell of out it!

Where are the Jobs?

Where are the Jobs?

Friday the Dow Jones opened down, falling as much as 258 points, to only then completely reverse direction and ended the day up 200 points for a more than 450-point swing!  This was the biggest one-day percentage reversal in about four years. What drove the crazy move? This wild move was based on the very disappointing jobs report released Friday morning. Yes, you read that right.  A market rally on a weak jobs report as we return to bad news is good news and wonder, where are the jobs?  Whoop whoop!

2015-10-05 Job Growth Slowing


  • Consensus estimate for new jobs was 201,000 but the actual was 142,000 – 30% below expectations.
  • On top of that grim number, about 60,000 jobs were removed from the prior two month’s estimates, making August’s not-so-bad 173,00 look pretty sad at a revised 136,000 new jobs.
  • This is also the sixth of the past eight reports to have had a downward revision – not a good trend.
  • To rub salt into that wound, the workweek also dropped from 34.6 to 34.5, which doesn’t at first glance look like that big of a deal, but when you put that number across the nation in aggregate… it means effectively an additional 348,000 in job losses!
  • No improvement in wages either, so don’t be waiting to see consumer spending to help out the economy here.
  • The steady unemployment rate is only because more and more people are leaving the workforce, such that the labor force participation rate has fallen to its lowest level since the grim days of 1977 at 62.4% from 62.7%.

2015-10-05 Labor Participation


I’ve been saying for most of this year that I think a rate hike is highly unlikely in 2015 and this market rally shows the market is coming around to my way of thinking.  After Friday’s report, I’d say not only is a rate hike unlikely, but another round of quantitative easing is becoming a real possibility if things continue on this trajectory.  That isn’t to say I think QE is useful, as a matter of fact I think it is quite harmful, but it is the only tune that central bankers seem to know how to sing when times get tough and the rest of the government has basically shrugged off any responsibility for providing a fertile environment for economic growth. Most seem to be more interested in tossing snappy sound bites at each other.  Good times.



I will also be watching very closely how the dollar is going to react as the strengthening we’ve seen could very well be affected by a belief that yet another round of QE is on the way, with the Fed once again joining the ranks of central bankers around the world trying to print their way into prosperity.

Looks like the refrain we’ve been singing for years of “Where are the jobs…. there ought to be jobs,” isn’t going to wrap up anytime soon. This cover is from over 4 1/2 years ago!   Oh and that Afghanistan thing… it’s sorted out right?

2015-10-05 Where are jobs


Neil Cavuto: Fed Policy is the Problem

Neil Cavuto: Fed Policy is the Problem

This morning I spoke with Neil Cavuto on Fox Business about the Fed’s decision to not raise rates earlier this week; my view, Fed policy is the problem!

An economy grows when good ideas are able to get funding, find talented people to work on them and are able to operate in an environment that is conducive to their success; that means limited laws, regulations, and a tax code that are all easy to understand and not costly to follow. 

All the QE (Quantitative Easing) and ZIRP (Zero Interest Rate Policy) have kept interest rates super low. That forces people to put their money into riskier investments than they’d like. Riskier investments by definition have to generate higher rates of return to compensate for their higher level of risk. High levels of risk are also associated with ideas, that normally wouldn’t get funding, but manage to get it by promising really high rates of return. If investors are pushed into more higher risk/higher potential return investments than they’d normally like, that means more of these potentially bad ideas get funding.

This means the economy experiences a higher failure rate than would normally be the case. That means more investors lose their money and more resources get wasted, draining the economy. Add in that the U.S. economy is getting more and more complicated with respect to legislation, regulation and a tax code that even the IRS doesn’t understand and ever great ideas struggle under the burden of trying to jump through all those extra government hoops that just make it that much harder to be successful.

In my discussion with Neil I refer to how we have a record high level of job openings. The chart below is from the Federal Reserve, but can be researched in depth by looking up the JOLTS report from the Bureau of Labor Statistics.

2015-09-18 Cavuto - Job Openings

I also mentioned how the percent of the population actually employed is where it was nearly 40 years ago.  This data is also from the Federal Reserve.

2015-09-18 Cavuto Employment Population

Obama Claims Country Better Off Today?

Obama Claims Country Better Off Today?

Obama claims the country is better off?  Uh, what? Last week President Obama told a small group of wealthy donors that by almost every metric, the U.S. is significantly better off under his leadership than under Bush’s. Oh dear God this is just getting embarrassing! Can we please have a little reality check here?



The most basic metric for how well the country is doing is median household income – are families making more today than in years past?  Errrr, not so fast there Mr. President. As the chart below shows (the red line) we are still well below we were when you took office… and that is despite the massive amount of government spending and monetary policy stimulus! Or perhaps, this is in fact because of all that insanity? In fact, median household income, after taking inflation into account, is where it was back in 1989, twenty-six years ago!

2015-07 Median Household Income


One of the reason household income is so low is that despite the often touted “unemployment rate” the more important number, the percentage of people in the country actually working is down to levels not seen since the early 80s and well below the ratio during George W Bush’s Presidency.

2015-07 Employment Population Ratio

On top of that, 2.2 million Americans are in part-time jobs who want to work full time, still far above the level at the start of the recession and during George W’s entire Presidency.

2015-07 Part-time for economic reasons


So people are making less and fewer people are working… what about the debt burden on those who do have jobs?  When Obama took office, the total Federal Debt was 10.7 trillion. Today it is over 18 trillion and expected to be well over 19 trillion by the time he leaves office.  That’s more than an 80% increase in the debt burden shouldered by the American people in just 8 years, nearly doubling!

2015-07 US Total Public Debt

This has also been the weakest economic recovery in the nation’s history. For the first time ever, U.S. GDP has contracted twice since the recovery and on an annual basis remains well below historical norms. Normally after a recession, we experience a period of above average growth which helps repair the damage experienced during the recession.  Not only did we never get that above average growth, but the economy continues to stumble along at very weak levels.

Just exactly what is it that you are looking at Mr. President?  As the “most transparent Administration in history,” (snort, chuckle, eye roll) how about if you show us?


Unintended Consequence of Raising the Minimum Wage

Unintended Consequence of Raising the Minimum Wage

This morning I had the great pleasure of being on The Sam Sorbo radio show.  One of the things we discussed is the push to increase the minimum wage. A while back I first introduced the concept of BUC (see below) which is proven true again with the unintended consequences of raising the minimum wage.

Lenores Law BUC

Politicians, particularly nearing election season, love to trot out the minimum wage debate, claiming that by raising the minimum wage they will help lower skilled and lower paid workers.  That just sounds dandy as who wouldn’t want those living at or below the poverty line to have a better life?  Let’s all just hug over the brilliance.  Err, but wait, the are likely some sort of consequences to forcing a business to pay someone more than they otherwise would.

1) Raising the minimum wage costs businesses more (shock!) which means that many will not be able to afford to employ as many workers.


Shocked Dog_001
Oops. In fact a report by the Congressional Budget Office in 2014 estimated that raising the federal minimum wage from its current $7.25 to $10.10 would actually reduce total employment by around 500,000.  Keep in mind too that the CBO is notorious for its overly optimistic projections, so my bet is that it would likely be much worse. Obviously any plan that results in half a million people losing their jobs is tough to stomach, but there’s more.

2)  When politicians talk about minimum wage earners, the assumption is that those earning minimum wage belong to households in poverty, but the actual data, (yes, there I go again with that pesky information over emotion) reveals this isn’t the case. Many low-wage workers are in fact not members of low-income families; remember those summer jobs in our teens?  The CBO estimated there would be about $31 billion in increased earnings from raising the minimum wage from $7.25 to $10.10.  Fantastic!  But wait, just 19% of that would go to families in poverty! Wait, what!?  Yup, the rest would go to families earning more than 3x the poverty threshold! So a bunch of folks lose their jobs and only 19% of the increase goes to those in poverty!?

An increase in the minimum wage would actually result in a transfer of income from people in poverty to people in middle and upper income households.


3) When the employer decides that he/she needs to lay off some workers because the business cannot afford the increase for all its minimum wage workers, those most likely to get laid off are likely to be those with the weakest skills.  Reasonable, right? You’d keep those who give you the most bang for your buck. But this means that that those who most need the job to help them develop their skills are the ones most likely to lose theirs! Now they are thrown back into the mailbox economy, where they simply wait for government aid to support them and their families.


As the lovely Sam Sorbo suggested, if we really want to help those are the lowest end of the income spectrum, then we need MORE jobs for the lowest skilled, not fewer. We need more jobs that help these people develop the skills they need to get out of the cycle of poverty and slowly but surely, move into higher paying jobs. How about focusing more on helping this group develop the skills, rather than giving them no options to earn, but rather to be endlessly dependent on government intervention.

Don’t give the man a fish, teach him to fish!  Now that, is truly supporting individual liberty.