Below, we look at the reality behind surging earnings, unemployment and GDP growth.
The Sell-Side Happy Faces
I recently spent a couple days at a HNW investing conference in a warm/wealthy climate with a pair of truly successful old-school business owners.
That is: they made their money the old-fashioned way–earning rather than trading it.
I won’t name the conference or its zip code, but suffice it to say it was nothing surprising.
These high-profile conferences are basically invitation platforms to sell financial products (funds, newsletters, oil wells, cannabis secrets, tax solutions etc.) to wealthy folks.
In short: we were ostensibly lambs among the wolves (yet, thankfully, well-informed lambs…).
It was the typical sell-side bonanza with more market cheerleaders than NFL pom pom squads. And as I’ve written here, here and here, the market (and those who sell it) thrives on good news, never bad news.
Candor, alas, is the one thing missing from the “financial advisory industrial complex”—or FAIC…After all, if you get on stage and announce the risks ahead, no one buys… (and you’re never asked back on stage).
Yet despite the panels, keynote speakers and stock-pickers ignoring debt bubbles, rising yields and a market riddled with macro risks in favor of selling positive memes on record unemployment, rising GDP and surging earnings, I will let you in on a little secret…
When you get these bull-spinners off stage and in a hallway chat, the mood about these markets is anything but positive…
No Agenda, just Blunt Speak
Again, signals matter more than opinions. And so, we stick to the signals…
Toward that end, let’s take a deep breath then and scan the market horizon for facts rather than the smiling salesmen and prompt readers of the FAIC.
And when it comes to the hope-selling topics de jour of “rising GDP,” “surging earnings,” and “record unemployment,” we discover that the facts are anything but positive…
So, let’s dig in and look at reality a bit, shall we?
The Earnings Myth
As also indicated in my recent video, earnings on the S&P are not “up” at all. Companies are not showing greater sales, Capex allocations, productivity or economic rigor. Nor do their “surging” earnings have anything at all to do with healthy economics or natural supply and demand.
Instead, earnings are “surging” for two simple and highly disturbing reasons. That is, companies are using: 1) the one-time Trump tax cut savings and 2) the Fed-manipulated low rate borrowing environment to buy back their own shares at an astronomical rate of $250B per quarter.
Needless to say, when companies can borrow cheap and use those funds to buy their own stocks (i.e. drink their own cool aide) at such astronomical levels, the stock prices will go up at equally astronomical levels.
And equally needless to say, once those tax benefits sunset and once those borrowing costs (i.e. interest rates) rise, all that cannibalistic self-demand for stock-buy-backs sunsets as well—which, in turn, means this stock market bubble will hear a dramatically unpleasant popping sound.
In short, when rates rise, the stock buy-back tailwind will become a market tornado.
And guess what: rates are rising…
When it comes to earnings, therefore, the markets are literally trading on a bogus sense of “good news” and which, if examined more carefully, are nothing more than lemonade stands where the owners are buying their own beverages to appear “profitable” …
Yet profitable they are not…And I mean, not at all.
Remember, earnings and profits are not the same thing. A lemonade stand that makes $3.00 of earnings but spends $2.95 on lemons and cups is not such a profits story, especially if it borrowed the money to buy the lemons…
The Unemployment Myth
The other big spin I heard among the conference salesmen and current MSM is that markets are ripping due to a strong US economy, as largely evidenced by the oft-repeated record-low unemployment figures of which both the BLS and Federal Reserve love to boast.
As of this writing, for example, the BLS is happily reporting a U-3 unemployment rate of an astounding 3.7%.
Go team go! The pom poms are flying!
But as anyone who has read my breakdown of the mathematical inaccuracy of the BLS or the total absurdity of the Fed reporting record will know, trusting the U-3 data from either of these sources would be akin to getting medical advice from Dr. Seuss or legitimate news from Pravda.
But again, let’s just look at the numbers not my rancor.
I’ve said elsewhere that unemployment statistics are some of the most cleverly distorted magic tricks of math ever concocted by the wunderkinder in DC.
What they basically do in DC is remove all the bad news from the data (namely the 96+ million working age folks who have totally given up looking for work) and then report only those working or flipping burgers as “full time” jobs.
This would be like attending a fat-camp and consuming beer and pizza all day long and then having the scale report that you are losing weight.
Why/how? Because that scale just omits the beer and pizza data…
Our current unemployment scale (which ignores the tens of millions who have given up even reporting for unemployment) essentially works the same way.
It’s almost comical, if it wasn’t otherwise so tragic.
What’s equally interesting is that during his Presidential campaign, Trump was adamant in pointing this lie out, declaring the Obama administration’s employment data as totally “fake news” and suggesting that actual unemployment was as high as 30-40% in 2016.
Yet today, Trump is feverishly tweeting the same positive (yet false) data he once criticized. The ironies do abound…
Today’s employment-to-population ratio for men has been steadily declining for decades, and at 66% represents an all-time low. Today, there are currently 125 million men of working age, of which just under 83 million were reported as “employed” at the end of September.
The majority of those “employed” include part-time jobs that can’t support a household.
The fact, moreover, that over 50% of average Americans can’t afford a $500 “emergency” or that 45 million Americans are on food stamps (today’s invisible bread lines) is more than enough evidence that “record-breaking unemployment” memes are just missing the bigger picture—and I mean completely.
Other facts worth considering in the backdrop of the unemployment “good news” is the much-overlooked reality (not discussed by the bubble-headed on the MSM or Financial Press…) is that 11 of our 50 states now have populations where those receiving government hand-outs outnumber those who have actual jobs.
Think about that.
Furthermore, across all 50 states, the number of Americans on welfare outnumber those Americans with full-time jobs. According to the US Census Bureau, 1 in 4 Americans (25%) live below the poverty line.
Think about that too.
Folks, do you still feel those heavily-touted U-3 unemployment numbers are all that comforting?
Finally, just one more fun fact…
Although DC likes to flaunt record-low (and perversely distorted) unemployment rates to keep an otherwise bad economy looking good (the proverbial “lipstick on a pig” solution), be warned: For the last time the U-3 rate hit 3.7% was in December of 1969.
And guess what: the next recession started a month later…
The GDP Myth
The last arrow in the cheerleading quiver of the “everything is rosy” meme is the much-reported GDP “good news.”
The 4.1% rate for Q2 2018, for example, and the back-to-back 3% GDP quarters at the end of 2017, were tossed about heavily at my recent conference as yet another reason not to worry—to just keep buying…
Well, not so fast…
As I wrote back in December, these GDP numbers are neither sustainable nor placed in anything resembling context…
“First, 3%+ GDP is not itself a sign of “all clear.” In 2014, we saw a Q2 GDP of 4.6% and a Q3 GDP of 5.2%. It didn’t last…
Nor has there been any kind of underlying GDP trend since the 2009 bottom upon which to base much optimism. We saw 3% numbers in 2010 and 2013 as well. The annualized numbers are much weaker.
And if you look at “core GDP”—i.e. GDP that includes consumer spending, government output and fixed investment, this latest quarter showed the weakest rate in over a year, limping in at 2%.
A better number to be looking at when measuring just how robust the economy really is lies in real final sales—not just inventory numbers which bounce around like a fish on the dock.
In fact, when looking at real final sales, both near-term and long-term, the annual expansion rate hovers at the low end of 2%.”
My views then are the same as they are today: GDP data, though rising and falling here and there, is generally weak when annualized, and by no means as high as it should or needs to be to justify the doubling of our national debt or the quintupling (yes, quintupling) of the Fed’s balance sheet since 2008.
In short, our GDP “return” is pathetic when measured against the debt risk we have taken on as a nation, consumer and market. Pathetic.
Finally, and as for the Q2 GDP “surge” of 2018, let’s put that 4.1% figure into the context of reality rather than spin.
Well, guess what? Our trade imbalance with China immediately improved!
The reason for that sudden (and temporary) “improvement” was that a desperate and sudden export surge took place BEFORE the tariffs kicked in.
That is, farmers were scurrying like mad to boost their sales in a last-ditch, frantic effort to stockpile and sell before they eventually got clobbered by the Chinese tariffs.
Well…It’s the same story with regards to our recent GDP “good news”—that is—Q2 sales was a desperate last act, not a sign of sustainable and continuing growth…
That is, everyone knows that China is about to hit just about anything America produces with a 25% tariff hammer in January.
This means late cycle data with regards to inventory and jobs will reveal a sudden (but alas only temporary) boost as US companies race like rats on the bow of a sinking ship to build up their inventory (and hence GDP) numbers and shuffle products like mad through customs before the January shoe drops…
So, if you are excited about these pre-tariff GDP and inventory reports, be ready for a major disappointment if/when the Chinese tariffs (and US de-stocking) tsunami hits us in January.
Still feel all giddy about US GDP numbers?
Summing It UP as to Earnings, Unemployment and GDP
As the data above suggests, the US “everything is awesome” meme is a stool that sits on three legs: Earnings, Unemployment and GDP.
Yet when looked at more carefully (i.e. beyond what the prompt-readers and salesmen are spinning) we see that each leg of this stool is broken, as is the myth that goes with it.
In short, most of the media spin as to the “surging economy” and “safe markets” is just, well… bunk.
But as I’ve said many times, markets rise on bunk, and will continue to do so until faith in their fantasy is replaced by hard reality.
Adam Smith called this “animal spirits,” and those “spirits” can continue far longer than the facts say otherwise.
We here at Signals Matter are not timing markets based on animal spirits, nor even on reality, as these markets have been trading past common sense and reality for years.
No, we are not market timers or doom and gloomers. We just like truth and facts more than spin. We hope that at least some of you reading this understand the reality markets are gyrating in.
At some point, more and more folks will slowly replace their “animal spirits” with cold reality.
After all, at these levels, markets here and around the world are running on faith; but when that faith dies (either by insight, a black swan or triggered-default), the party is over.
In the interim, and as always…be careful out there.