Absolutely Unabsolute

We’ve had a fair bit of negative macro economic data lately.  To name a few examples, poor real manufacturing ISM numbers.  Once we saw the raw unadjusted figures we saw that the adjusted acceleration translated into real deceleration.  It reminds us that we must be very careful when accepting the headline figures.  Adjusting ISM seems a bit odd given it is a survey with 3 response options; same, worse, better.  How do you adjust that with any sense of improvement vs the actual responses??  I want to know how many answered which, period.  I can put the responses into context on my own please.  We had poor retail sales figures especially given we were expecting a big pop after the ‘winter drag’.  Well the pop never came.  Now we just had the World Bank revise its GDP expectations for the year downward by 25% for the US economy.   We are still coming off of a negative Q1 GDP.  We got the big spin on jobs suggesting that we have now recovered all lost jobs since ’08.  Well that is true if you believe an engineer that lost his job and is now working 2 days a week at Hardee’s has recovered his job.  However, if you believe there is a significant difference between a lost engineering job and a gained part time fast food job then you understand the headline spin on jobs is a total farce.  U6 unemployment which essentially computes those types of conflicts is still sitting at 12.5%.  Meaning we still have about 6% more unemployment than we did in 2006 and 8% more than we did in 2000.  Housing market is again in the dumps and home ownership is at its lowest point since tracking.  Add that with the debt levels for both the country and households at all time highs and you get the feeling that the big everyday story of a new market all time high is confusing at the very least.

Today we have the world in turmoil with China pushing its way around the Asian seas, Russia taking hold of important oil assets in Crimea, Sunni’s taking oil assets in Iraq, full civil war in Ukraine and still Syria, Egypt and Libya a mess.  We have the BRIC nations committed to a de-dollarized world and implementing a plan to make that happen.  The world is not a happy place.  Europe just moved to negative interest rates because they cannot seem to generate any consumer demand and so they will punish consumers for holding cash driving them to spend rather than save.  US consumers are willing to spend on things like autos which have had strong sales, however, 75% of those sales are being done on credit with monthly payments at all time highs.  This is not real consumption as it simply replaces other consumption that now won’t happen because they must pay for the car.  Further it adds debt and so less overall spending will occur to protect against the increased debt levels.

We have lost a significant amount of jobs over the past 14 years and most of those over the past 6 years.  We have gained some back but very poor jobs have now replaced what were very good jobs.  We have also added enormous amounts of debt at the same time.  The end result of bad jobs and high debt is significantly reduced disposable income leading to significantly less consumption per capita.  This is evidenced by revenue figures of the S&P.  Since ’08 although earnings have increased by 230% revenues have only increased by 26%.  How do earnings increase by almost 1000% above revenues?? Well it’s called financial engineering and its what folks like me learned in top tier business schools.  It is actually quite simple to turn 26% increase over 7 years in sales into 230% increase in earnings.  Bottom line is that the economy is not accelerating when you consider the amount of leverage that has been pumped into the system in hopes of driving acceleration.  If there was no downside to pumping leverage into the economy we would do it infinitely, yet we don’t.  We don’t because we know that there is a definite risk to adding excess leverage into an economy.  It can work if the excess leverage creates excess income, however, what’s happened is that we’ve no gotten the upside to the leverage.  So now we are stuck with double the debt and less real income than we had in ’08.

What does all this matter?  Well it matters in many ways.  It matters because we are pushing households to take on debt to drive consumption believing it will make everything ok.  When the reality is that it is just putting households even further behind the eight ball.  We have driven interest rates to zero at a time when more people than ever are retiring.  These folks were told to save a nest egg and live on the interest.  Well they saved and now they are not receiving any interest forcing them to push their savings into a VERY risky asset, the stock market.  This has driven stock prices to all time highs.  This has created another period of euphoria just seven years after the last period of euphoria.  We all know how that ended only this time households have less jobs, less income and more debt.  The government is less able to bail out the country due to the enormous amount of debt it has taken on trying to bail out the country after the last collapse.  Most market investments saw a 50% decline in the last collapse which is why we’ve always suggested that retirees not be heavily, if at all, invested in the stock market, until now because obviously now it’s safe.  What is coming is a devastating realization of absolute truths over spin.  I remind you to always place someone’s comments in the context of their objectives (mine and the talking heads on TV alike).  It’s called critical thinking and it is essential in one’s understanding of history, the present and the future.  The interesting thing about absolute truths is they are rigidly absolute, unlike human perception.