Here’s a gut check for bond investors: corporate America is now more leveraged than ever. As this year’s corporate bond sales raced past $1 trillion on Wednesday – marking the fifth consecutive year of trillion-plus issuance – Morgan Stanley published a report Friday highlighting the growing strains on company balance sheets. The report, which estimated US companies’ collective debt at a record 2.4 times their collective earnings as of June, comes at a time of growing angst in global bond markets ‘The investment-grade ‘safe’ part of the market is becoming the most dangerous,’ said Ashish Shah, chief investment officer at AllianceBernstein LP. ‘There are so little returns out there. People are crowding into whatever they can.’ The debt metric, which doesn’t include banks and other financial companies, has climbed for five straight quarters as corporate profits decline at the same time companies load up on the increasingly cheap borrowings, Morgan Stanley analysts led by Adam Richmond wrote in a note to clients. In 2010, when the U. S. economy started recovering from the longest recession since the Great Depression, the ratio fell to 1.7 times.
Why are so many men in their prime working years unemployed? The Obama administration would have us believe that unemployment is low in this country, but that is not true at all. In fact, one author quoted by NPR says that ‘it’s kind of worse than it was in the depression in 1940′. Most Americans don’t realize this, but more men from ages 25 to 54 are ‘inactive’ right now than was the case during the last recession. We have millions upon millions of strong young men just sitting around doing nothing. They aren’t employed and they aren’t considered to be looking for employment either, and so they don’t show up in the official unemployment numbers. But they don’t have jobs, and nothing the Obama administration does can eliminate that fact. According to NPR, ‘nearly 100 percent of men between the ages of 25 and 54 worked’ in the 1960s. In those days, just about any dependable, hard working American man could get hired almost immediately. The economy was growing and the demand for labor was seemingly insatiable. But today, one out of every six men in their prime working years does not have a job… In a recent report, President Obama’s Council of Economic Advisers said 83 percent of men in the prime working ages of 25-54 who were not in the labor force had not worked in the previous year. So, essentially, 10 million men are missing from the workforce. ‘One in six prime-age guys has no job; it’s kind of worse than it was in the depression in 1940,’ says Nicholas Eberstadt, an economic and demographic researcher at American Enterprise Institute who wrote the book Men Without Work: America’s Invisible Crisis. He says these men aren’t even counted among the jobless, because they aren’t seeking work.
The primary symptom of the economic malaise or depression that has developed since the Great Recession (which wasn’t a recession) is an economy that works less and thus earns less. Such a condition would suggest a shrunken system or at least vastly diminished potential. That much is well-established even in the orthodox literature though it isn’t ever talked about publicly. What happens, however, when an economy that is already working and earning less starts to reduce even further?
For October 2014, the ISM estimated that its Chicago Business Barometer was a blistering 66.2. Encompassing much of the Midwest and a good deal of auto and parts production, that level seemed to make sense. As any economist would say then, the US economy was on the verge of a breakout and according to the labor statistics maybe even one of unusually good strength and duration. Two months later, however, the Chicago BB was down almost eight points to 58.3; just two months after that, for February 2015, the PMI was shockingly below 50 and quite far below at 45.8. Since then, the index has been all over the place. It almost counts more as entertainment than actual meaningful interpretation from month to month, but there is, I think, something useful to the overall sawtooth of the past two years. It is emblematic of the unevenness of this economy as it swings from very real recession fears to almost pure elation of seeming to skate by; only to see such jubilation ruined in short order all over again. There is information in the schizophrenia. After falling below 50 again in summer 2015, the PMI was above 54 in July and August, only to drop to 48.7 in September in the aftermath of ‘global turmoil’ – and then rebound to 56.2 by October as the FOMC assured the world there was nothing lasting about it. Of course, the Chicago BB instead fell to a ‘cycle’ low of 42.9 in December before jumping almost 13 points in January alone, to 55.6 – and then dropping back below 50 again in February.
As was widely expected, the final step of Brazil’s historic impeachment process of former president Dilma Rousseff, concluded moments ago with a decision to formally impeach the former president, with 61 senators voting for her ouster, and 20 voting against. Dilma Rousseff thus becomes the second president to be impeached in Brazil’s 31-year-old democracy, after 13 years of her party’s leftist rule, paving the way for what the market hopes is a fundamental shift in economic policy. Rouseff was previously charged for breaking the country’s budget laws. As a result, the just as unpopular Michel Temer is set to become Brazil’s official president until 2018. Behind the narrow allegations of breaking budget laws, what led a majority of Brazilians to back impeachment was a sense that Rousseff mismanaged the economy and was lenient on rampant corruption. As Bloomberg reports, the decision caps a tumultuous period that began after Rousseff’s narrow re-election victory in 2014 and exacerbated the worst recession in decades. The second impeachment since Fernando Collor was ousted in 1992 has been a traumatic experience for this young democracy, coming on top of a two-year corruption scandal and unemployment at its highest in over a decade. With his mandate as Brazil’s leader confirmed, Temer hopes he can now push more forcefully to put the economy back on track, a challenge that includes unpopular austerity measures.
This post was published at Zero Hedge on Aug 31, 2016.
No one knows how long the current economic expansion will continue. But some seven years after the last recession ended, economists are keeping an eagle eye on the latest data looking for signs that another downturn may be approaching. For now, much of the economic data is pointing to continued, if somewhat weak, growth. Companies are hiring, wages are rising slowly and consumers are spending. But belt-tightening by businesses on investment in new equipment and buildings could be a sign of a deeper slowdown ahead, according to economists at Credit Suisse. ‘Extended periods of falling real business investment are strongly associated with US recessions,’ they wrote in a note to clients. ‘That’s why the recent three consecutive quarters of contraction are concerning.’
The simple fact of the matter is that 2012 wasn’t supposed to happen. By every orthodox prediction and theory about the set of tools deployed after the Great Recession (after it, the first clue) there was no reason to suspect anything but the usual cyclical occurrences. Sure, the recovery would be weak because the recession large, but retrenchment was never even considered. The recovery might be somewhat shallow, but there was no way it could be bent or durably altered. The first rebuke to the mainstream came from Europe. Though the European economy would fall right back into recession so soon after the ‘Great’ one, it was easily dismissed as a product of Greece, debt, and the demographics of Greek debt. So tantalizing was its allure, the European debt crisis of 2012 even made its appearance within excuses for China. China’s fixed-asset investment has already started to pick up and a jump in spending on railway construction would echo the expenditure on rail lines and bridges that was part of stimulus during the global financial crisis. A decline in foreign direct investment reported by the government today underscored the toll that Europe’s debt woes and austerity measures are taking on Asia’s largest economy. I honestly have no idea how Bloomberg News got from European ‘austerity measures’ to the vast Chinese slowdown other than to skim the surface of stories that just happened to be occurring at the same time. In other words, it is the same logical fallacy that pervades mainstream ‘understanding’ of how the world supposedly works; correlation doesn’t suggest causation.
The odds are stacked against Matteo Renzi’s economic ambitions for Italy. The prime minister needs to see a blistering pace in the second half of this year to meet his goal of a 1.2 percent expansion in 2016. Economists say that’s not happening, spelling trouble for Renzi and the wider euro area. With Renzi facing a referendum in the autumn that could decide his political future, a stagnant economy and banks hobbled by bad debt are adding to his challenges. While cheaper oil, a weaker euro and unprecedented European Central Bank stimulus helped the Italian economy emerge last year from its longest recession since World War II, that can only take the recovery so far. ‘Italy’s potential growth rate is, as of today, still zero if not slightly negative,’ said Raffaella Tenconi, a London-based economist at Wood & Co. ‘Companies are still too indebted, profitability in the aggregate is very low and the economy overall is in a particularly challenging position having no fiscal or monetary-policy independence.’ Renzi’s government so far is standing by the 2016 growth projection it made in April, despite an economy that stalled in the three months through June. A constitutional reform referendum expected in November is rapidly turning into a test of the 41-year-old premier’s popularity, with unemployment that unexpectedly rose to 11.6 percent in June and a banking crisis that rattled investors large and small. Renzi has said he would quit if he loses the vote.
…….. As the stock market reached its lunatic peak near 2200 in August, the certainty that the Fed is out of dry powder and that the so-called economic recovery is out of runway gave rise to one more desperate pulse of hopium. Namely, that the central banks of the world were about to embark on outright ‘helicopter money’, thereby jolting back to life domestic economies that are sliding into deflation and recession virtually everywhere – – from Japan to South Korea, China, Italy, France, England, Brazil, Canada and most places in-between. That latter area especially includes the United States. Despite Wall Street’s hoary tale that the domestic economy has ‘decoupled’ from the rest of the world, the evidence that the so-called recovery is grinding to a halt is overwhelming. After all, the real GDP growth rate during the year ending in June was a miniscule 1.2%. It reflected the weakest 4-quarter rate since the Great Recession. And even that was made possible only by an unsustainable build-up in business inventories and the shortchanging of inflation by the Washington statistical mills. Had even a semi-honest GDP deflator been used, the US economy would have posted real GDP on the zero-line, at best.
The NBER does not define a recession as two consecutive quarters of contracting GDP. That is the mainstream definition that largely survives as a coping mechanism to deny what might otherwise be quite apparent. That was certainly true in 2008, as only Q1 GDP declined and it wasn’t until Q4 2008 that this mythical ‘technical’ definition was met. The NBER only made it worse by waiting until December that year to declare what was by then obvious to everyone, already one year in length. The organization actually employs a Business Cycle Dating Committee whose job it is to decide both cycle peaks and troughs. The Committee, according to the NBER, considers a broad range of data that includes GDP, but relies primarily on four sources or accounts. The first two are broad monthly figures, real personal income less transfer payments and employment, while the second two are basically manufacturing, industrial production and inflation-adjusted total sales aggregated for the whole supply chain. Updated figures for Industrial Production continue to show contraction, even if only slightly. The decline now stretches about a year, which suggests something more significant than simple and expected variation. And we already know that total sales across the whole of the ‘goods economy’, from manufacturing to wholesale to retail, are declining, with particularly acute weakness again in retail sales and the lingering, heightened inventory imbalance. The NBER committee takes into account ‘inflation’ here, but with total business sales already a negative number just in nominal terms the specific level of ‘real’ decline isn’t really the issue.
Industrial production declined for the eleventh consecutive month in July, down 0.5% from July 2015. Though the slope of the contraction continues to be unusually shallow, the fact that it has lasted for nearly a year now is significant particularly in the context of the ‘rising dollar’ period. On a monthly basis, IP is up from its low in March, particularly in the past two months (though the rise in July is susceptible to revision next month, as June’s increase was revised significantly lower with this month’s release). As with other economic accounts, the more recent gains during spring are being considered as meaningful changes. As noted before, the drastic declines in not just markets but economy at the end of last year and the beginning of this year had the obvious effect of converting even stalwart optimists into less biased observers. What once seemed unthinkable, recession, suddenly seemed not only realistic but perhaps even imminent. Since February, the fact that the economy does not appear to be getting worse, very much related to the ‘dollar’ after February 11 in its reverberations in sentiment and even relative economic performance (less bad), initiated a tremendous sigh of relief as if the whole matter has concluded. Every monthly gain, no matter if still in contraction year-over-year, is greeted enthusiastically as if that were the case.
In yet another data point that identifies depression rather than a Great Recession, the Wall Street Journal reported last week what most people outside the economics profession had realized a long time ago. Janet Yellen likes to say that the housing market is recovering, highlighting the economic sector as one of the few bright spots left. The FOMC regularly and officially makes mention of it, largely for the same reason. As with everything else in this economy, however, that something is not getting worse does not immediately indicate that it is getting better. The housing market has been out of its crash for five years, but that is not at all the same as a housing recovery. Monetary policy interference is still interference, even if it is done with the best of intentions. The housing recovery that began in 2012 has lifted the overall market but left behind a broad swath of the middle class, threatening to create a generation of permanent renters and sowing economic anxiety and frustration for millions of Americans…
It was supposed to be different this time. Ahead of looming fiscal stimulus from China, analysts were quick to emphasize that this would be a leaner, smarter government spending program. There would be a new method of financing to try to keep the debt burdens for local governments from becoming too onerous. And, above all, it would be targeted to avoid exacerbating the excess capacity that’s abundant in many industries. While the scale of the expenditures certainly pales in comparison to those that followed the Great Recession, the story remains the same. A Morgan Stanley team, led by Chief China Economist Robin Xing, noted that fixed-asset investment growth among state-owned enterprises (or SOEs) has accelerated across the board in 2016, with the exception of mining. This same trend also holds for investment in services sectors, Xing observed. These data suggest that stimulus efforts have not been as targeted as proponents hoped, belie the narrative of rotation of growth from credit-driven infrastructure projects to activity linked to domestic demand, and raise the specter of further malinvestment in the world’s second largest economy.
How Flyover America Was Duped By MEW For a time this artificial goosing of living standards by the central bank money printers did help insulate Flyover America from feeling the full brunt of its shrinking job opportunities and the deflating purchasing power of its pay checks. What it couldn’t afford, it borrowed. No more. As is evident in the chart below, the household LBO is over and done. After peaking at 225% of wage and salary income in 2007, the household leverage ratio has retracted to about 180%. Yet that modest decline does not mean American households are out of the woods; the household leverage ratio is still more than double the 75%-85% level that pre-dated the Greenspan era and remains far above pre-1980 levels that had been consistent with healthy and sustainable household finances. At the same time, the modest deleveraging so far is a leading indicator of the distress that has been felt in Flyover America since the Great Recession. Self-evidently, the preponderant majority of households have been forced to cut their consumption expenditures back to the levels of current earnings, which, in turn, are not rising nearly as fast as the 3.1% inflation rate afflicting Flyover America.
Basic economics has proven that when the supply of something dwindles, absent an offsetting drop in demand the price should rise. When translating these fundamental terms to the labor market especially of the past few years, the supply means ‘slack’ or the available pool of workers not yet working; demand has been, we are told repeatedly, very robust; therefore the price of labor, the hourly wage rate, should be rising and rapidly so if only to match the rhetoric (‘best jobs market in decades’). Monetary policy is already at a great disadvantage because its core philosophy seeks to discourage rapid growth in wages. Figuring that wage inflation leads to actual inflation, central banks believe they must act to control it even though, as noted above, it’s basic economics that shows and truly delivers the best basic economy. This policy handicap isn’t one-sided, however, as this ‘recovery’ has proven beyond any doubt. In other words, central banks have also philosophical problems about getting wages to rise in the first place. In the past nearly decade, it all works around and toward ‘slack.’ Economists claim that the unemployment rate is the best indicator of it largely because of what we find of the past. Despite positive growth since the Great Recession, it was never at any point enough to erase the deep hole with which this post-crisis period started. But because the BLS surveys the labor force and that survey is taken as scientific verification of it, this initial deficit is just ignored as if covered by demographics or other non-economic factors. The unemployment rate says those who want to work are doing so and rapidly enough since the middle of 2014 that the recovery is full and the economy will only getter better from here (so that monetary policy must shift before it gets ‘too’ good).
The mainstream, dominant view of monetary policy remains as if it were ‘accommodative’ or ‘stimulus.’ Low rates and/or balance sheet expansion are treated as one and the same in terms of economic effects. The mountain of economic evidence since the end of the Great Recession, however, argues that that view is backward; starting with the observation that the Great Recession itself was no recession. This is a universal problem and not just one for which the Federal Reserve and the United States economy will suffer. As I wrote earlier today with regard to China’s recalcitrant imports and PBOC policy: Instead, by view of the ‘dollar’, it becomes clear that China’s central bank policies rather than being ‘stimulus’ were not proactive but merely reactive efforts to counteract the ‘rising dollar.’ Thus, as in the US, Europe, and Japan, monetary policy doesn’t tell us anything about what will happen, it is rendered an indication of what already did. This is the determined view of bond and funding markets all over the world. Low and even negative rates don’t indicate an economic friendly financial environment, they prove the exact opposite as financial agents are betting directly against it. Therefore, when policymakers tell us, as they constantly do, that interest rates and other monetary policies must remain ‘accommodative’ for an extended period even after nearly ten years already so, what they really mean is that they are merely following the economy down. There is an increasing risk that the US economy has become trapped in a prolonged period of subdued growth that requires lower official rates than was previously expected, a leading Federal Reserve policymaker has warned.
…… Unfortunately, it is too late to reverse the tidal wave of system failure that has been brewing for three decades now. It will soon end in a speculator implosion. Whether that crisis commences before November 8th or soon thereafter is largely immaterial. If the Trump campaign has the good sense to focus on the gathering economic storm clouds, it’s the one thing that could catalyze an out-with-the-bums uprising across Flyover America on Election Day. So let us reiterate our thesis even more vehemently. The idea that the American economy has recovered and is returning to an era of healthy prosperity is risible establishment propaganda. It’s the present day equivalent of the Big Lie. It’s the reason why Hillary Clinton’s campaign to validate and extend the current malefic Wall Street/Washington regime is so reprehensible. In fact, the natural post-recession rebound of the nation’s capitalist economy has already exhausted itself after 84 months of tepid advance. Now, the massive headwinds of towering public and private debts, faltering corporate investment and productivity, Washington-based regulatory and tax-barriers and the end of an unsustainable central bank fueled global credit, trade and investment boom are ushering in a prolonged era of global deflation and domestic recession.
Given it is payroll Friday, it has to be a chart related to the futility of focusing on the headline number. There is any number of ways with which to accomplish this, but it serves well to highlight the relationship already presented in my view of this specific view of the payroll report. Economists often claim that the participation problem isn’t really a problem because of demographics, and when they don’t make the claim they just ignore it altogether. In August 2014, Janet Yellen spoke about the challenges this unique labor environment would present as the FOMC contemplated ‘full employment’ as a real possibility. Estimates of slack necessitate difficult judgments about the magnitudes of the cyclical and structural influences affecting labor market variables, including labor force participation, the extent of part-time employment for economic reasons, and labor market flows, such as the pace of hires and quits. A considerable body of research suggests that the behavior of these and other labor market variables has changed since the Great Recession. Along with cyclical influences, significant structural factors have affected the labor market, including the aging of the workforce and other demographic trends, possible changes in the underlying degree of dynamism in the labor market, and the phenomenon of ‘polarization’ – that is, the reduction in the relative number of middle-skill jobs. She adds nothing about the huge, yawning overall lack of recovery, just hints at why it isn’t the Fed’s fault that the recovery when it does get to full might not be as full as in the past.
When the US gross-domestic-product growth was released last Friday, the numbers were disappointing. The US economy grew at an annualized rate of just 1.2% in the second quarter, much weaker than expected. When combined with the results of the first quarter, the economy is growing at about a 1% annual rate, according to The Wall Street Journal – the worst first-half performance since 2011. Many economists think one of the big reasons for this weak expansion is a slowdown in total-factor productivity, a phenomenon that has been occurring in the US – and, to some extent, other developed countries – since 2004. A Deutsche Bank research note, which was sent out before the release of the GDP numbers, lamented productivity as ‘abysmal’ and a ‘substantial risk to the growth outlook.’ ‘Annualized productivity growth has been just 0.9% during the current expansion, and even this low reading has been buoyed by large productivity gains early in the cycle due to massive economy-wide layoffs in the aftermath of the recession,’ the report said. And the recent trend has been even weaker, the note said: ‘Productivity has grown at just 0.7% over the last four quarters and at an annualized pace of only 0.6% since the start of 2010.’ This ‘productivity puzzle’ was the subject of a recent episode of ‘Alphachatterbox,’ the Financial Times’ podcast about economics and business. ‘Puzzle’ refers to the seemingly paradoxical idea that our productivity isn’t going up, despite all the innovation around us, said Isabella Kaminska, the host of the podcast.
Trump Isn’t All Wrong About Trade Deficits – – How Washington’s Money-Printers Betrayed American Workers ……. Needless to say, the lack of good jobs lies at the bottom of the wealth and income drought on main street, and the recent BLS jobs reports provide still another reminder. During the last seven months goods-producing jobs have been shrinking again, even as the next recession knocks on the door. These manufacturing, construction and energy/mining jobs are the highest paying in the US economy and average about $56,000 per year in cash wages. Yet it appears that the 30-year pattern shown in the graph below – – lower lows and lower highs with each business cycle – -is playing out once again. So even as the broadest measure of the stock market – -the Wilshire 5000 – – stands at 11X its 1989 level, there are actually 20% fewer goods producing jobs in the US than there were way back then.