NEWS: HOT TAKES
- U.S. Labor Market Shows Signs of Slower Growth
The "pent-up demand and stimulus induced spending emerging from lock down" economic growth story is just about over. Since Wednesday with the release of the August ADP Employment Report, onto Thursday with a better but still elevated Initial Unemployment Claims data for the week ending August 28th, and now today with the much worse than expected Non-farm Payroll report, the evidence is clear.
The ADP report showed 374K new jobs created in the month of August (excluding the gov't sector), well below market expectations of 638K. Claims data on Thursday showed 340K Americans lost their job in the prior week and filed for unemployment insurance; this was just about as markets expected. Today, Friday, Non-farm payroll data showed a net gain of 235K jobs, compared to market expectations of 725K. A huge miss. Expectations matter for market players and investors. The weaker data has caused markets to believe this keeps the Fed on hold longer than might have been the case. Weak data means more ZIRP and more QE in market participants minds. Buy stocks, sell dollars, buy bonds, buy commodities.
It is important to note these labor market data are good for pre-COVID recovery data. Claims remain elevated compared to pre-COVID but not by much, perhaps 75K-ish. The Continuing Claims numbers, Americans unable to find a new job, is still high at 2.75 million Americans still collecting unemployment. The ADP number was strong compared to 2019, as is the Non-farm payroll number. So, the economy is returning to growing on its own with no more stimulus from Congress or the Fed. That is OK, and that is what we want. We must wean ourselves off of the supplemental state and federal unemployment checks, the rent and mortgage moratoriums, and we must stop the effort by Democrats in Congress to push another $5 trillion in stimulus spending.
The structural damage to the economy (think labor market, housing market, international trade) caused by our elected officials overreacting to COVID is going to be visible for many months to come; the true damage is still be masked by stimulus. Better to let markets clear, take the pain today, and emerge more efficiently.
- U.S. Economic Data Week of Aug 30 - Market Movers
As always the first week of the month is a big one for data hounds and financial markets looking to gauge, and trade off of, the outlook for the U.S. labor market. It starts on Wednesday with the August ADP Employment Report, Initial Unemployment Claims for the week ending Aug 28th on Thursday, and on Friday the mother of all date reports, the August Employment Situation Report from the BLS. These reports are market movers. Look for 450K for ADP on Wednesday, and 575K for non-farm payrolls on Friday. For the whole week data to pay attention to include:
Monday 10:00AM July Pending Homes Sales
Wednesday 7:00AM MBA Mortgage Applications week ending Aug 27th, 8:15 August ADP Employment Report, July Construction Spending, August ISM Manufacturing Index
Thursday 8:30AM Initial Unemployment Claims, July Int'l Trade Balance (goods & services), July Factory Orders
Friday 8:30AM August Non-farm Payrolls, U3 & U6 Unemployment Rate, Average Hourly Earnings, Average Hours Worked
- The Federal Reserve: Destroyer of Markets, Corporate Competition, Retirees, And Savings; Savior Of The Wealthy And Government Pension Plans
Zero interest rates (ZIRP), printing money to buy bonds and monetize U.S federal deficit spending - known as quantitative easing (QE), stock market bubble, housing bubble, commodity bubble, speculation bubble, IPO & SPAC bubble; the result of 11 years of failed monetary policy. What hasn't been mentioned yet is their dual mandate as imposed by the U.S. Congress in the 1970's. The Fed is supposed to maintain price stability (defined as yearly inflation rates below 2 percent), and maintain full employment (defined as maintaining a full employment unemployment rate between 3.5-5.5 percent. Inflation is running above 5 percent today, and the unemployment rate is around 5 percent. They have achieved their mandate and then some with the spike in the rate of inflation.
The federal funds rate, the overnight lending and borrowing rate the Fed controls should be hiked from 0 - .25 percent range today to 3 percent in the next 4-5 policy meetings. The Fed must stop monetizing U.S. federal debt, and the Fed must reduce their balance sheet. The Fed Chair Jerome Powell indicated the Fed will start "tapering" their bond purchases in the coming months in August while at the annual forum of central bankers in Jackson Hole, WY, though intended to leave the federal funds rate at zero until late 2022. This isn't soon enough.
Savers and retirees have been devastated since the Fed began their unusual monetary policy after the great recession. In 2008 savers and retirees could earn 6 percent on their saving, since 2009 that rate fell to basically zero. Only by taking more risk (think stock market) would they have possibly been able to fund their retirement. For banks the traditional way of making money, net interest earnings (the rate at which they lend minus the rate at which they borrow), narrowed sharply forcing banks to take more risk putting the whole system in a liquidity trap.
When it comes to accelerating the problems of wealth transfer and the growing income gap in America the Fed takes the 1st Place prize. They have to admit their mistake and reverse policy returning to normalcy that was achieved between 1981 and 2008.
In 2007 the Fed's balance sheet, already inflated by managing the impacts of the terror attacks on 9/11, was $850 billion, today it is $6.75 TRILLION. Monetary policy is way off base and represents a severe risk element for the U.S. economy in the near term.
- Democrats Pushing To Pass $5 Trillion In Stimulus Spending That Is Not Needed and Is Unaffordable
As of the end of August 2021 the U.S. economy is not in recession (though certainly severely structurally damaged). GDP has recovered to the output levels of February 2020. Q2 Real GDP was up 6.5 percent, with output reaching $22.7 trillion vs $19.5 trillion in 2020. The U3 unemployment is back down to 5.4 percent, still above the March 2020 reading of 3.5 percent, though well within range of what economists call full employment levels. Good news. Clearly, the U.S. economy does not require any additional stimulus spending at this time.
However, with that has come rapid increases in the rate of inflation with both the Consumer Price Index (CPI) and the Producer Price Index (PPI) rising to levels not seen since 2008 and 1974 respectfully. July CPI increased by 5.4 percent and the PPI jumped 19.8 percent. This is not good; you can be certain real incomes haven't risen to match. This represents a tax on all Americans, and a sharp drop in real incomes. It results from too much money chasing too few goods. Or, prices are rising faster than output. Or, bad public policy by both fiscal and monetary policy makers.
The $5 trillion in two new stimulus "infrastructure" spending packages proposed by Democrats is unaffordable, highly inflationary and politically driven (only some $550 billion of the $5 trillion is targeted towards real, proper infrastructure spending). Total outstanding U.S. Federal debt was a staggering $23 trillion in February 2020. Today, it is $28.5 trillion boosted by the COVID stimulus spending packages the Congress passed in Q2 2020. Passage of these stimulus packages will push America's total outstanding debt to $33 trillion; unfathomable, unconscionable, and unsustainable. The U.S. economy does not require stimulus today. Passage of one or both bills will require legislation to once again increase in the debt ceiling.
Proper infrastructure spending, which is very much needed, should be managed through the Constitutionally required annual budget process.
The first bill, H.R. 2 totaling $1.5 trillion, has passed both the House and the Senate and awaits compromise. The Second bill, H.R. 227 totaling $3.5 trillion, has already passed the Democrat controlled House on a party line vote, and seemingly has no chance of success in the Senate. This bill represents a wish list of progressive programs that includes the components of the so called Green New Deal. Watch the bond market for reaction to events in Congress related to Democrat political machinations (think reconciliation) to try and force passage of these two spending bills.
Note: the 2022 budget is Constitutionally required to be completed by the end of October. Sadly, once again, for the 13th year in a row, that is not likely to happen. Once again continuing resolutions, forced by Christmas break for members of Congress will be patched together in a rush. Deficit spending will continue, and those we elect to represent us in Washington D.C. will have once again failed in their Constitutional duty and let their constituents down.
- COVID, What Do We Know18 Months Later
As of August 26, 2021 with over 34 million cases recorded, and tragically over 630,000 deaths, the impacts of COVID haven't changed to any significant degree in terms of percent of the population since the 3rd quarter of 2020 (CDC.org Data Tracker page for more details):
90.1 percent of the U.S. population has not been infected
96.8 percent of those infected did not require hospitalization
98.3 percent of those infected survived
Additionally, since March of 2020, according to the CDC and the NY Times, we have learned:
Transmission from surfaces is low risk
Little to no transmission from asymptomatic cases
Outdoor transmission rates are near zero
PCR test cycle threshold rates over 25 result in false positives (viral load to start is too small to be symptomatic or able to transmit the virus, confirmed by Dr. Fauci publicly in November 2020)
It is 6' or a mask, not 6' and a mask
Plastic barriers in stores, restaurants, and schools don't work as they disrupt air flow
For those who have suffered the virus or lost loved ones there is no consolation, and like them, all Americans wish they could have stopped COVID in its tracks. Though, compared with the thinking in March 2020 the bulleted lists above represent good news. The numbers as stated above are national averages, for those under 60 the numbers are a lot better, and a bit worse for those over 60. It remains the case the overwhelming majority of cases, hospitalizations, and deaths have impacted Americans over the age of 60 with one or more comorbidties. It also remains the case those under the age of 25 have a low risk of being infected, and for those that are there is little risk of illness or hospitalization (even with the apparently more infectious Indian Delta variant).
Follow the science seems to have taken a backseat to media panic and political considerations. It is not unreasonable to consider masks mandates have become a social and political palliative rather than a legitimate way to protect those at risk. The mask debate rages on though there is still no clear evidence masking prevents the spread of COVID as we know for certain that the particles are small enough to travel right through the paper and cloth masks most people are wearing.
Policy makers should not react to case numbers, especially those cases where the PCR test cycle threshold rate is above 25. Cases do not matter. What matters is the hospitalization rate, and that is something local and state officials should keep a careful eye on. Even in this realm the media panic overstates the true problems and triggers some policy makers, particularly when it comes to intensive care units. As of August 20, 2021 approximately 83 percent of ICU beds were occupied nationally, with some local hospitals in a few states showing occupancy rates of 95 percent or higher related to the Indian Delta variant. Any occupancy rate around 80 percent is normal pre-COVID, and for that matter desired by hospitals (the financial need to keep the lights on). The average number of ICU beds per hospital in the U.S., including pediatrics and neonatal, is only 35 beds, excluding those two segments the average number drops to 12-15. Obviously, the number is higher in big city hospitals, and lower in rural hospitals. Understandably, it doesn't take much to overwhelm the average ICU unit in America and engender media panic.
For a positive near term economic outlook to develop what we need from policy makers in the next months is rational cost benefit analysis. Such an effort will likely show the costs of lock downs, masks, social distancing, closing schools and businesses far outweigh the benefits of stopping one COVID case. COVID is not going away and a zero COVID case count should not be a goal. We will have to learn to live with the risk of COVID as we do with the flu and other infectious diseases. Policy makers should focus on protecting those who are most at risk (seniors and people of all ages with pre existing conditions or multiple comorbidities), and free the rest of America.
- Positive Externality And The COVID Vaccines
An externality is an economics concept and occurs when some of the costs or benefits of a good or service are passed onto or spill over to someone other than the buyer or seller of that good or service. This is what economists call a market failure either on the supply side (negative), or the demand side (positive). Positive externalities (PE) represent a benefit of a good or service to those who did not purchase the good or service. A PE results in lower demand for that good or service. One of the best examples is a vaccination. The COVID vaccination debate that is raging today is a debate over a PE and reduced demand for the good.
When a subset of a group of people get vaccinated it not only benefits themselves, but also those others around them who did not get vaccinated. Those who are vaccinated know they likely won't get sick from the virus, and the others around them know that they are now safer and at reduced risk of infection. Assuming the others are rational economic actors they will be less likely to get the vaccine resulting in reduced demand, or compliance.
The vaccination is a public good (characterized by nonrivalry and nonexcludability), as such there is no way to keep others from benefiting from the protection it provides to one person, or make others get the vaccine once a significant number of people around them are vaccinated. That is why we are witnessing all kinds of incentives to encourage/force the others to get the vaccination. Policy makers can incentivize the producer with subsidies to produce more of the vaccine, and/or subsidize the consumer to incentivize them to get the vaccine. Producers are already well incentivized to produce as much as they can. Since the vaccine is free to all Americans, rather than price consumer incentives have been focused on cash payments and rewards, and increasingly harsh social, travel, and work related punishments. Policy makers to some extent will be pushing on a string as the greater the number of people getting the vaccine, the greater will be the resistance to getting the vaccine by the remaining others. A one hundred percent vaccination rate need not be and probably should not be a goal.
Note: vaccinations DO NOT guard against infection from a virus. They guard against getting sick or having to be hospitalized as a result of being infected, and sharply reduce contagion from the vaccinated person.
- July Durable Goods Orders Disappoint
Weakness emerges in the manufacturing sector. This is not surprising, it is a volatile sector often with strong months followed by weak months. Since 2000 and Bill Clinton's surrender to China on trade, this number has become less market impactful. The year-over-year comparison for July is a tough one because July 2020 saw a record surge on the re-opening of the economy from the initial national lock downs. The U.S. economy is still struggling with serious manufacturing supply constraints related to domestic and international lock downs (think China). Our dependence on China for most of our manufactured and consumer goods, and the long held strategy of utilizing "just-in-time" inventory control methods (think Japan) have exposed the weakness in U.S. manufacturing and the sectors ability to supply the U.S. economy.
According to the U.S. Dept. of Commerce New orders for manufactured durable goods in July decreased $0.4 billion or 0.1 percent to $257.2 billion. This decrease, down following two consecutive monthly increases, followed a 0.8 percent June increase. Excluding transportation, new orders increased 0.7 percent. Excluding defense, new orders decreased 1.2 percent. Transportation equipment, also down following two consecutive monthly increases, drove the decrease, $1.7 billion or 2.2 percent to $75.3 billion.
Shipments of manufactured durable goods in July, up four of the last five months, increased $5.6 billion or 2.2 percent to $257.8 billion. This followed a 1.6 percent June increase. Transportation equipment, up two consecutive months, led the increase, $3.4 billion or 4.6 percent to $75.9 billion.
Inventories of manufactured durable goods in July, up six consecutive months, increased $2.7 billion or 0.6 percent to $453.6 billion. This followed a 0.9 percent June increase. Primary metals, up twelve consecutive months, led the increase, $0.8 billion or 1.9 percent to $40.0 billion.
Non-defense new orders for capital goods in July decreased $7.0 billion or 8.0 percent to $80.6 billion. Shipments increased $0.3 billion or 0.4 percent to $79.4 billion. Unfilled orders increased $1.2 billion or 0.2 percent to $742.2 billion. Inventories increased $0.5 billion or 0.2 percent to $200.1 billion. Defense new orders for capital goods in July increased $2.1 billion or 20.5 percent to $12.5 billion. Shipments increased $0.7 billion or 5.8 percent to $12.6 billion. Unfilled orders decreased $0.2 billion or 0.1 percent to $188.7 billion. Inventories increased $0.2 billion or 1.2 percent to $20.9 billion.
- July Retail Sales Fall As Stimulus Money Fades
July Retail Sales fell 1.1 percent from June, though were up 15.8 percent year-over-year (YOY). YOY comparisons will continue to look good for another month or two, the monthly numbers will continue to be challenged. Absent more expansion of the Fed balance sheet or more helicopter money (stimulus checks) from Congress, the U.S. consumer is on their own based on their income, savings, and assets. This will be further complicated by the ending of supplemental unemployment benefits due to expire, even in blue states, in the next couple of months. Household consumption accounts for more than 60 percent of annual real GDP. While unlikely based on the horrible results of 2020, there is still prospect for renewed COVID lock downs as the media panic over new Delta variant case increases. This would tank retail sales again as in the March - July period of 2020 and send the economy back into recession. Either way, the quarantined consumer has already satisfied their pent up demand (spending), improvements in future retail sales will come from increases in wealth (think stock market), better employment opportunities and/or higher incomes, or more consumer debt (currently $14.2T). There is the uncertainty. Watch the Fed and Congress (infrastructure bills) for signs of supporting more consumption.
- The Graveyard of Empires Takes Down The U.S., Taliban Claim Victory
In the aftermath of the 9/11 terror attacks is was altogether appropriate for the U.S. to strike at the perpetrators led by Osama bin Laden and the country that gave them safe harbor; Afghanistan. The U.S. military did their job, then the bureaucrats and politicians got involved and we were once again nation building. The evidence is clear, the U.S. is not good at nation building.
The list is being compiled by thousands of analysts around the world delineating the failures of the U.S.' 20 year military intervention in the 'graveyard of empires' that is Afghanistan. The top will include:
The shocking manner in which the Biden administration decided to exit
Bugging out of the Bagram air base without notice in the middle of the night leaving equipment and material behind for those who wanted it
The unexpected though apparent unwillingness to fight the Taliban on the part of much of the well armed Afghan Armed Forces and provincial governments.
Leaving behind tens of billions of dollars of critical advanced military equipment and ammunition
Nation building and all the related sub-components
Poor leadership along the military chain of command
Greedy military contractors and NGO's resulting in the waste of hundred of billions of dollars in supporting U.S. troops for 20 years, outfitting and weaponizing Afghanistan's military, and providing new infrastructure and internal civic support
U.S. military's failures in training domestic forces including police
No apparent advanced planning to coordinate the withdrawal of U.S. citizens and Afghan allies prior to military exit
The U.S. invaded Afghanistan under the cover of darkness on October 7, 2001 and did so for one obvious mission; get bin Laden and those who executed the 9/11 terror attacks and their in-country protectors. Upon completion of that mission U.S. forces should have been removed. However, there was no exit strategy. If only it were the first time. Who gets the blame? Start with George Bush, Donald Rumsfeld, Robert Gates, Barack Obama, Leon Panetta, Chuck Hagel, Donald Trump, Ashton Carter, James Mattis, Mark Esper, Joe Biden, Lloyd Austin, members of congress who voted to remain in Afghanistan year-after-year, many in military command, the CIA and NSA, and others to include American voters.
Today, billions of dollars of U.S. military equipment, buildings, bases, infrastructure, documents, organizational systems are in the hands of the Taliban, and soon to be in the hands of Chinese, Russian, Pakistani, and Iranian intelligence agencies. Of course, we have betrayed millions of Afghans who are left to deal with the dictates of a brutal caliphate. There will be expensive lessons learned that have been paid for by the lives of American soldiers, contractors, Afghan civilians and soldiers, the enemy, and by American taxpayers.
Russia and China are ready to recognize the Taliban as the legitimate government in Afghanistan. The Geo-political scenario in the region has changed and has opened up an opportunity for both Russia and China to extend their influence; China with their belt-road initiative and money for the Taliban, and Russia with their energy resources. A gap has been opened up in the U.S. strategic plan to surround China in central Asia. Mineral resource access and control (think EV's and tech), and containment of China has been made much more difficult.
Just shy of 20 years, $2.2 trillion, 2,400 Americans killed, over 20,000 Americans wounded. This is an historic policy fail for the U.S. government.
While the U.S. media will try to protect Biden and blame Trump or Bush the world will know the truth; the Biden team managed the exit horribly and President Biden's response and visual absence since the Taliban reached the outskirts of Kabul on Friday has been weak. Expect talk of the 25th amendment to the Constitution to be revived.
- Elected Officials And Appointed Bureaucrats Don't Like To Retire
The average age of the leading policy makers in the U.S. is 71.5 years:
President Joe Biden - 78, first elected 1970
Vice President Kamala Harris - 56, first elected 2002
Speaker of the House Nancy Pelosi - 81, first elected 1987
House Minority Leader Kevin McCarthy - 56, first elected 2000
Senate Majority Leader Chuck Schumer - 70, 1974
Senate Minority Leader Mitch McConnell - 79, first elected 1977
Federal Reserve Bank Chairman Jerome Powell - 68, first government job 1990
Secretary of the Treasury Janet Yellen - 75, first government job 1977
Director National Institute of Health Francis Collins - 71, first government job 1993
Director National Institute of Allergy and Infectious Diseases Anthony Fauci - 80, first government job 1968
Power, status, fame, luxury, and fortune are powerful incentives to keep working into your 70's and 80's. Take out Harris and McCarthy and the average age jumps to 75.2 years. Seniority, network, and name recognition rule in DC, though it is reasonable to ask does the system bring forth the best leaders?