Yield Curve Inversion Occurs - But Is Anyone Paying Attention?

Fed chief Jerome Powell and yield curve for March 25, 2019 (from T. Rowe Price Investor Bulletin, December, 2018)

For some time now, over the past 4 months, I've warned of potential yield curve inversion and how it's often signaled recession or massive downturn  I noted recessions tend to occur once the "flat" yield curve becomes "inverted" - with short term (e.g. 2 -year)  bond rates higher than long term (e.g. 10 year) rates. As a recent T. Rowe Price Investor Bulletin warned (p. 4) this condition has transpired before each of the past nine recessions dating back to 1955.  Hence, while it isn't a 100% absolute predictor, it is a significant historical marker..

The T. Rowe warning - assuming one can take it as such - is (ibid.):

"The yield curve is not flat yet ...but it could be by next March if the Fed maintains its 0.25 percent per quarter pace of rate hikes and the 10-year Treasury continues to meet resistance above the 3.0 percent level.  Starting the historical average 16-month clock from the spring of 2019 would raise the specter of a major downturn by 2020."


Interestingly, last Thursday we learned (WSJ, 'Treasury Yields Tumble After Fed Restraint', p. B12)  that "the yield on the two year Treasury notesettled at 2.402% on the day before compared with 2.471 % Tuesday. This marked the biggest one day slide since the start of the year, according to Dow Jones Market data."

 Given what happened March 21st, it shouldn't have been totally surprising the yield curve might actually have inverted on Friday - March 22nd - which it did.   One of my favorite go-to financial forecast sources, James Mackintosh in the Wall Street Journal wrote:   

"The market’s most reliable recession indicator is finally flashing red. With the Treasury yield curve inverting on Friday—the 10-year yield fell sharply to be lower than the three-month for the first time since 2007—is it finally time to prepare for an economic downturn?”

Good question! I believe so, as I've written before given I suspect the correlations over time (see graphic are almost as reliable as sunspot activity curves in predicting large flares.   It is therefore of interest to inspect the yield curve for March 25th, with Treasury bills designated along the abscissa, e.g. with bond terms from less than five years to 30.  Note also the curve behavior and how it changes with the specific bonds.


Look carefully and you will see the evidence for yield curve inversion, rates, hence the freak out for may. Subsequently economist and NY Times columnist Paul Krugman wrote the following in a tweet:


Mackintosh, for his part, has always been somewhat agnostic on the value of the yield curve as forecaster of recession. He writes, for example:

The yield curve might be less reliable than its recent U.S. history suggests. It has a terrible record internationally, for instance. It flat-out hasn’t worked in Japan, also has a poor record in the U.K. and in Germany provided no advance warning of the 2008 recession, the worst since reunification. At the moment the curve isn’t inverted in any of them thanks to superlow or negative interest rates, even though all are struggling with greater economic troubles than the U.S.


In other words, one needs to bring to bear skepticism as to the historical evidence.

But then in subsequent text  we behold some very crucial points:

“Previous inversions took place at much higher short rates — 5 or 6 percent, versus 2.5 percent now.”

He continued: “So this inversion actually reflects a worse outlook for the economy than the number itself suggests. Again, it’s not a direct read on the economy; it’s a read on what the average bond investor thinks is happening to the economy. But still not encouraging.”

We should also bear in mind what Mackintosh wrote back on July 3, 2017, as regards the assumption that bear markets only come with recessions, i.e.:

"Investors believe that bear markets only come with recessions, and so reassure themselves that there is no sign a recession is imminent, repeating the mantra that 'economic cycles don't die of old age'. Unfortunately, this is both wrong and useless.

First, 20 percent drops happen outside recessions, as in 1987 and 1966. Second, economic cycles can be killed by a financial crash, and as the late Hyman Minsky pointed out, the longer a financial cycle goes on, the more likely it is to turn to excess and end badly. Worse, there is no reliable method of forecasting a recession, so even if it were true that only a recession can end a bull market, that isn't a lot of use to investors."

Put aside yield curve inversion, as yields fell and the curve merely flattened, "investors punished bank stocks ... A flatter yield curve hurts banks stocks because it narrows the gap between what lenders pay on deposits and lend on loans- a spread known as the net interest margin."  (WSJ, Mar. 22,  p. B10 ).  What especially bothered me even earlier (than seeing the yield curve inversion) was reading WSJ columnist Greg Ip's March 21  warning piece:

The Fed's New 'Normal' Looks Worrisome - WSJ

https://www.wsj.com › Economy › U.S. Economy

And how we needed to be wary of the Fed's sudden dovish inclination. Quoting Mr. Ip, which I believe is important to get the context:

"The Federal Reserve now believes its monetary policy is back to normal. That should worry you.  If this is normal then the Fed has precious little ammunition for when economic conditions again turn abnormal."

Ip then goes on to note that since 2005 the Fed had been 'normalizing' monetary policy by raising interest rates and shrinking its bond holdings."  (From the quantitative easing or QE policy.)

But:   "This week it declared the process all but done"  Adding to this,  the Fed big wigs see "no more rate increases this year"  and "they will stop shrinking the balance sheet".   This is nothing short of mind boggling, given almost $4 trillion of toxic bond assets remains on its balance sheets.   Even by September the bond balance will only be down to $3.5 trillion or 17 % of GDP.

Also, ceasing to increase interest rates puts the screws to millions of senior savers - who'd been saddled with pathetic low rates for over a decade. As one of the few segments of the ordinary citizen financial demographic with money to spend, this is not a sound move.   Ip also warns  (ibid., this is all from the original print version, not the digital update):

"Should the economy stumble again, the Fed won't have much ammunition with which to respond."

Well, unless it resorts to the "negative interest rate'"  route which the Swiss also attempted with adverse results, and millions actually stuffing money (cash) under their mattresses. I mean, who the hell wants to keep it in the bank and lose $$?

But perhaps there is method to the Fed's madness. As James Piereson writes ('How Debt Makes The Markets Volatile',  Feb. 28, p. A17):  "Stocks are becoming more sensitive to interest rate hikes because the global economy is over-leveraged."

Something I've also addressed before, in conjunction with IMF warnings and : 

"Vitor Gaspar, the director of fiscal affairs at the  IMF, singled out the U.S. for criticism, saying that it was the only advanced country that was not planning to reduce its debt pile - with the recent tax cuts keeping public borrowing high.  

The fund urged policymakers to stop 'providing unnecessary stimulus when economic activity is already pacing up' and called on the U.S. to 'recalibrate' its fiscal policy and increase taxes to start cutting its debt." 

So no, the GOP-Trump tax cuts - which effects are driving millions crazy now in terms of low or  no tax refunds -  did not help the situation. Assorted experts have estimated $1.5- 2 trillion in added deficits. And as the WSJ's Gerald Seib put it (Feb. 19, p. A4): "As the accumulated debt rises, the bill to pay the interest on the debt rises too."   See e.g.

Brane Space: IMF Debt Warning Ought To Send Chills Through Every ...

brane-space.blogspot.com/2018/04/imf-debt-warning-ought-to-send-chills.html

As 

Why January's "Best Stock Performance in 30 Years" Is A Mirage

The WSJ font page article Friday ('Stocks Post Best January In 30 Years'.)  babbled shamelessly:

"Banks and smaller companies propelled stocks to their best January in 30 years, a sign investors are favoring sectors tied to the U.S. economy....The Fed's statement Wednesday that interest rate increases are on hold helped ease investors' worries that higher rates would lead to higher borrowing costs and curtail corporate profits."

Well, of course the Federal Reserve's statement would do that, given - god forbid - it doesn't want to halt the cheap money bandwagon. Or, for that matter, toss cold water on the manic leverage that now dominates stock purchases as well as corporate expansions.  It seems every  manjack now wants to go into debt to achieve a gain - and of course at the hoi polloi's expense.  Because they are the ones that will have to do the bailing out. (Think of the AIG bailout in 2008, and Long Term Capital Management before that.)

Off the financial media's radar is the other part of the cheap money equation: quantitative easing ("QE") which has undergone several iterations since the credit crisis.  Most ordinary people are not even aware of the amount, the magnitude - of the crutches the Fed has provided to prop up the markets. Most  investors, ignorant though they may be,  have been beneficiaries of the Fed's infusion of "crack" in the form of  QE  cheap money "crack".  Notice especially how the DOW stopped dropping once the buzz began about QE3  (following QE1 and QE2)   - back in 2012- which have together infused $4.3 TRILLION in bond purchases.

But at some point, the cheap money flow has to stop and we know even if it's done slowly Maul Street will respond hysterically. This  is what has prompted discussion of how large a future correction will be   But let's get back to the Journal's blabber - woky of the greatest January in 30 tears. We agree the Fed deciding not to raise interest rates is part of it - but the other part ("that which must not be mentioned") is the quantitative easing - and rolling it back to get the Street off its addiction.

Flash now to an article on the same day (p. B12,  Heard on the Street, 'The Fed's Balance Sheet Needs Taming')  whereupon we learned:

"The famously plain-spoken Mr. Powell  left the market with little doubt that the probability of tightening has shifted, noting on Wednesday that the 'case for raising rates has weakened'.  But policy rates are only part of the story.

Since the financial crisis the Fed has used its balance sheet as a powerful tool, buying bonds to affect the yield curve. Since late 2016, it had begun to slowly unwind those purchases, most recently at a pace of $50 billion a month.  The Fed's balance sheet has shrunk by only 10 percent."

Okay, let's do the math: if the original balance was $4.3 trillion and the QE balance sheet has shrunk by only ten percent - according to the WSJ - then than means only about $430b  has been removed.  That leaves $3.87 trillion still to be unwound.  Now, at the rate of $50 b a month how long will it take to remove all that excess crack?

Again, we can do the math:   

Y   =   $387 trillion/  ($50 b x 12) = 6.45 years

And that only holds up if we don't get yet another recession.

And this may well be lowballed because "the actual amounts have been closer to $40 billion in recent months" (WSJ, January 29, ibid.).

How is this unwinding happening?  Well, by allowing the purchased Treasury and mortgage securities to mature without replacing them.  But even this tortoise -paced process has some prominent investors rattled, such as Stanley Druckenmiller who claims it's "a big factor behind the return of market volatility".  ('Fed: Stock Swings Not Tied To Bond Moves', p. A2, WSJ, January 29).

Now, let's back up and process what the yield curve means and how the Fed's QE policy is affecting it and how it could lead to a new recession. As noted in my post of December 5th: the U.S. Treasury yield curve is the spread between the 2- and 10-year Treasury bond yields.  It is taken to be a predictor for recession especially if it becomes "inverted".  (See e.g. 'Fear Of Inverted Yield Curve Stalks Markets', Jan. 10, p. A2)

Prior to that inversion, it becomes "flattened" in other words, the difference between the 2 and 10 year bond yields is minimized.  Specifically, recessions tend to occur once the "flat" yield curve becomes "inverted" - with short term (e.g. 2 -year)  bond rates now higher than long term (e.g. 10 year) rates. As a recent (December, 2018) T. Rowe Price Investor Bulletin noted (p. 4)

"The yield curve is not flat yet ...but it could be by next March if the Fed maintains its 0.25 percent per quarter pace of rate hikes and the 10-year Treasury continues to meet resistance above the 3.0 percent level.  Starting the historical average 16-month clock from the spring of 2019 would raise the specter of a major downturn by 2020."

But ok, you say, the Fed is no longer going to increase interest  rates, so we dodged a bullet. Not so fast.  There's still that huge balance sheet. To make this clearer let's understand that the QE balances are really an alternative to printing more money. (Which we understood used to be done in the old days, or more recently by the last government of Barbados to try to pay all its obligations.) 

According to one technical financial paper

Monetary easing is the Fed’s way of putting in more money into circulation in the economy....and it does not involve the printing of new banknotes

True, but still it effects the yield curve. How?   According to the same Market Research paper:

The Fed’s QE initiatives have successfully shifted the yield curve downward, that is, lowered the Treasury yields across maturities.

In other words, shifted down as in flattened the yield curve.  More worrisome - from the earlier cited WSJ article on the Fed's balance sheet needing taming:

"Moreover, he (Powell) raised the possibility that the balance sheet  could be an 'active tool' if warranted. In other words more bond purchases if markets or the economy cry out for more help."

In other words, merely postponing the 'big one' while other recessionary signs build - and the "insurance" of QE itself becomes a ticking time bomb.

What are those other recessionary pressures?  From a separate WSJ article ('Chances of Recession are Rising') they include:

-  Another shutdown following the one for over 4 weeks which sapped GDP at the rate of 0.1 % per week.    That initial "partial" shutdown already hurt "sentiment measures:  - but these ought to rebound provided there are no further shutdowns.  But given the bombastic fool holding office, who can say? We know he will likely try to make another specious case for his ignorant 'wall' tomorrow night. Another reason not to waste one's gray matter or time tuning in to Dotard's lies, bragging and  babble.

- "The tight labor market is another reason the recession chances have risen" i.e. in models including from JP Morgan.    Most economists in addition believe the current rate is unsustainable.

A further cautionary take has been offered by James Mackintosh (WSJ, Jan. 30, p. B1) who notes there is clear evidence the Phillips curve (the statistical link between inflation and unemployment has "broken down".  Mackintosh adds:

"If the relationship is finished economists will need to build new models of how the economy works.  Investors should applaud such a change if it shows that higher wages tempt people back into the workforce.  That would demonstrate more spare capacity than thought, so the economy could grow without sparking inflation"  -  and presumably inciting a Fed reaction like more QE!

Where the biggest risk lies is perhaps in a confluence of factors. That is, the Fed is reducing its bond portfolio at the same time the Treasury is issuing more bonds to fund large federal budget deficits - crowding out capital for other types of investment. This is the same type of risk I forecast after the Trump - GOP tax cuts were implemented.  Basically, a systemic instability triggered by unnecessary deficits from a stimulus not needed when the economy was already humming - thanks to Obama's wise moves in holding deficit spending down. (As finance specialist Steve Rattner  aptly pointed out this a.m. on 'Morning Joe')

Watch for what transpires in the next two weeks and whether Dotard calls for another shutdown. If he does, and renews his temper tantrum, the probability  of a recession increase to more than 90 percent. Especially as over 4 million federal  contractors are still trying to financially recover from the last debacle!

Don't Like Thinking About Deficits? Then Better Be Sure You Win The PowerBall Or Mega Millions.

Let's concede that deficits are not a choice subject of conversation or discussion for too many Americans. They'd almost rather reach for their Instagram and look at the latest flicks of kitties punching each other than delve into any economic topic, especially deficits.   But with the latest planned shitstorm by the GOP - passing a new round of tax cuts they ought to be paying more attention.

In a WSJ report on Friday we learned just how reckless the GOP and Trump bunch has been in pumping up spending (via tax cuts) to record levels, even as the likes of 'Bitch' McConnell talk about "having to cut entitlements" - namely Social Security, Medicare and Medicaid. Why pray tell?  Well, because the tax cuts passed last year didn't "pay for themselves" as the Repuke hucksters had promised. Indeed, the Treasury Department reported that the federal government's budget deficit grew to $779 billion for the year ending Sept. 30th.  This was up 17 percent from the year before and came as a result of last year's sweeping tax cut.

That tax cut drastically reduced tax revenues as a share of gross domestic product .  At the same time, according to the WSJ report '(Federal Deficit Has Widened') government spending rose 3 percent to $4.1 trillion.  Meanwhile rising interest rates and the amount of total debt outstanding drove up federal interest costs 14 percent last year, by $65 billion".  (Imagine paying $65 b  just in interest on your credit card)  Trump complained that this was because of the Fed raising interest rates, but of course he was talking out of his fat ass.

The interest rates being leveraged by the Fed are most directly concerned with too rapidly rising wages and prices. However, it is true that the national debt does increase if  the federal interest rates increase.  Higher short and long term Treasury rates mean the federal government's borrowing costs also rise, so generating significant consequences for the budget and national debt.   This is why generating revenue - especially in an environment already replete with aggregate demand (because of the exceptionally low unemployment rate) - is more important than reducing revenue via tax cuts for an unnecessary stimulus.

But that is why we need circumspect leaders and political parties who are courageous enough to add revenue - via higher taxes - when needed, instead of tying to score political points.  Every manjack in the country - especially students with massive loan debt and ordinary folks tapped out on their credit cards- knows that interest on their debt can eat them alive if they're not careful. That is why credit card companies insist you pay back only a minimum amount each month - hoping to keep the interest $$$ flowing into their bank coffers.

But this is now the situation with the U.S. government which is spending way more than it takes in.  And instead of increasing our income to accommodate our spending - like you or I would -it insists on spending even more while reducing revenue!  Can anyone say madness?

But lo and behold there's a method to the madness.   Thus, earlier last week Sen. Mitch McConnell responded to the growing deficit by blaming "entitlement" programs like Medicare, Social Security and Medicaid.  Indeed, he and the putative next House GOP chair (if the Reeps win everything again) have promised the 'big three' will be the first things they will go after for cutting.

Trump himself has called for massive cuts - trillions of dollars worth - to food stamps, disability benefits, welfare and student loans.  (Not cutting interest on them, but cutting the loans altogether).

Nancy Pelosi, say what you will about her, was at least honest in her assessment of the situation, quoted in the WSJ report:

"Republicans have exposed their true agenda in budget after budget: add trillions to the deficits to justify slashing the Medicare, Medicaid, and Social Security that seniors and families rely on."

But, of course, we knew this from the time the odious "stimulus" tax bill was passed, when no stimulus was needed, see e.g.
http://brane-space.blogspot.com/2017/12/paul-munster-ryan-admits-he-wants-to.html

The shortfall in government expenditures will rise above $1 trillion next year. Deficit spending makes sense during a recession. But what Trump is doing now is essentially allowing the rich to siphon the cream off the top, providing the middle class with some skim milk, and leaving the sour dregs for everyone else.  The stimulus where none is needed also makes it much more probable the Fed will have to continue raising interest rates to cool off an overheated economy. Fed chief Jerome Powell has already indicated that if things keep going as they are several more interest rate hikes may be coming next year - not good news for those who have mortgages, or plan on buying a home. (Already as reported in the weekend  WSJ and FT, home sales are receding - as interest rates now approach 5 %.)

Then there’s corporate debt which is now set to be on rocket power given the corporate tax cuts.  Companies have taken advantage of low interest rates to borrow like crazy. This summer, corporate debt hit a new high of $6.3 trillion. Worse, the cash-to-debt ratio, which was 14 percent in 2008, has dropped to 12 percent: that’s $1 in cash for every $8 of debt.  Nor are companies doing much with that tax cut money other than share buybacks, further fueling excess valuations, higher P/E ratios in the asset bubble, overheated stock market.  It's no wonder now the volatility is spiking again.

Here's another alarm bell for those (mainly investors) who might need one. For several years the term premium (the additional yield investors demand for the risk of lending over long periods) on the 10-year Treasury has been negative.  This is a rarity that is tied - in part- to supply constraints and bond buying by the Fed and other central banks.  But this month the term premium became less negative, rising to -0.32 from -0.45 percentage point (at the end of last month)

In the months ahead the term premium could get even less negative and possibly even turn positive. Also, supply constraints on the bond market are likely to shift as the Fed continues to reduce its balance sheet, i.e. the trillions of bonds purchased via quantitative easing after the financial crisis.  The more imminent danger point then will arrive as other central banks also rein in their bond-buying programs and the U.S. government issues more debt in order to cover its growing budget deficit.

Buckle your seat belts and pay attention, because ultimately - unless you're independently wealthy - what happens with the deficits and tax cuts will affect you!

Trump's Asset Bubble Economy - Based On Irrational Exuberance- Contains Seeds Of Destruction Within It

The Trump buffoons, and Preznit "Gaslight" himself,  are busy bragging on the 4.1 percent growth over the last quarter -  the largest since a 5 percent spurt after Obama took office. As we know from previous Bull Market terminations, market crashes, irrational exuberance reigns before the fall - as it does now. Scanning over the financial headlines in both the WSJ and Financial Times the past six months all I've seen are warnings and insinuations the alarms are "blinking red" - as they did before 9/11. But too few are paying attention, they're too drunk on Gaslight's Kool aid.

Too many citizens are drunk with their seemingly flush investments, including 401(k)s and IRAs, and they are failing to see the warning lights, far less pay any attention to them. It's much too easy to just coast and enjoy the economic bounty while it lasts  - besides it's believed it's about the only positive aspect to the Trump Imperium's reign.  Most economists, even those who are citing the warning signs, grudgingly concede the dousing of regulations (i.e. citizen protections) as well as the tax cuts of last year- have ginned up the economy.  Others have rightly warned that basic economics says you do not gin up or stimulate an already humming economy because it risks inflation - and that means the Federal Reserve raising interest rates. That scenario carries the same horrific specter for the markets as crucifixes do for vampires.

The other aspect missed by too many in their stock and bond hubris, is the fact the stock market was revved up after GE was replaced in the Dow Jones Industrial Average lineup by Walgreens, after being a member company for more than a century.. 

How many are aware, for example, that that Dow was also 'adjusted' ('juiced' by might be a better term) on March 17, 1997? And by the people that invented it (Dow Jones, Inc.)? As Jay Hancock notes ('Dow Index Detaches from Reality', The Baltimore Sun, April 4, 1999, p. 1E):

Quote:

A committee of green eyeshade types juiced the lineup, blackballing four down-at-heel Dow members and picking ringers as replacements. Out went Bethlehem Steel, Woolworth, Texaco and Westinghouse. In came Johnson & Johnson, Wal-Mart, Hewlett-Packard and Travelers. One -eighth of the Dow membership changed that day, but you'd never know it from looking at those mountainous Dow graphs....Without the switch, by my calculation, the Dow would have been near 9,000 last week. Not 10,000.

What Hancock is basically saying, is that the alleged stock market upon which folks are basing their retirements and long term investments is a myth. It doesn't really exist because it lacks any fixed identity, e.g of component companies, over time..  It's like a human who changes personas every so often so no one can remotely know who he is.. That may sound like no problem, but it means the human's short and long term behaviors are unpredictable and it means the same for a stock market predicated on a DJIA subject to expedient reshuffling.  It also renders the frequent citations of rate gains over long periods of time, e.g. "7 % per year"  gains or whatever, totally fictitious. Since the identity of the DJIA alters with each replacement, or substitution it can't be the same over long duration. So you can't cite a fixed average gain - which implies component stability - over decades,. say from 1987 until now.  

Indeed as a WSJ piece notes ("In GE Ouster, Dow's limits Stand Out', June 21, p. B12):

"The Dow Jones Industrial Average has ejected numerous Blue Chip companies over the past decade including miner Alcoa Inc., Westinghouse Electric Corp. and this week General Electric Co."

Nor are serious market watchers particularly happy with this state of affairs.  Robert Pavlik, senior portfolio manager and chief investment strategist at SlateStone Wealth said of the decision to drop GE (ibid.):

"Honestly, I didn't like the move. It's supposed to be an industrial average that is reflective of the overall economy of the United States, and if that's the case then why replace it with Walgreen's?"

Well, the only reason would be to juice the index, by changing its identity - again reinforcing my point that what people are investing in lacks any persistent identity. Basically, people are pouring their money into an extravagant "pig in a poke". Most ominously (ibid.):

"The removal of troubled businesses appears to have helped keep the index moving higher."

Or, three card Monte on steroids.

Having dealt with the artificial identity of the DIJA - and hence the DOW overall   and how the several replacements of member companies  renders the "market" a fiction,  we now come to the more immediate factors destabilizing this fiction. Three article alerts that appeared in March and April and remain relevant today include:

1) 'Investors Fear Goldilocks Market Is Ending', noting "Nine years into a roaring stock bull market, fund managers are paying their last respects to Goldilocks".

2) 'Bear Markets Can Fly In On Their Own'  warning "stock market bulls shouldn't be basing their bullishness on recent bullish activity."

3) From The Financial  Times , April 17, ('IMF Sounds Alarm On Excessive Global Borrowing') :

"The world's $164 trillion debt pile is bigger than at the height of the financial crisis a decade ago, the IMF has warned, sounding the alarm on excessive global borrowing.  The fund said the private and public sectors urgently need to cut debt levels to improve the resilience of the global economy, and provide greater firefighting ability it things go wrong.

Fiscal stimulus to support demand  is no longer the priority the IMF said Wednesday in a report published at its spring meetings in Washington. "

Let's note here that "support demand"  referenced in the FT account means support of  "aggregate demand", i.e. getting citizens to spend more - which was the basis for the Trump-GOP tax cuts. This was an incredibly bad play given how much these cuts will add to the deficit, going forward, and how little they would contribute in terms of a job picture then already near full employment. And as the WSJ's Greg Ip showed, they will now increase the trade deficit as well, approximately $35 for each $100 increment in the budget deficit.  Since the tax cuts are now conservatively estimated to add $1. 5 trillion to the deficit, you can do the math for the trade deficit using Ip's ratio. 

Why does the U.S. run a trade deficit? Well, because "it consumes more than it produces while its trading partners collectively do the opposite."  Ip notes "another way of saying this is that the U.S. invests more than it saves while other countries save more than they invest."

The FT piece on the IMF warning goes on noting what is most worrisome:

"World borrowing is more than twice the size of the value of goods and services produced and 225% of global gross domestic product. This is 12 percentage points higher than the peak of the previous financial crisis in 2009."

And the U.S. is singled out as a primary debt offender, e.g.

"Vitor Gaspar, the director of fiscal affairs at the  IMF, singled out the U.S. for criticism, saying that it was the only advanced country that was not planning to reduce its debt pile - with the recent tax cuts keeping public borrowing high.

The fund urged policymakers to stop 'providing unnecessary stimulus when economic activity is already pacing up' and called on the U.S. to 'recalibrate' its fiscal policy and increase taxes to start cutting its debt."


This previous significant reporting is relevant to the following more recent  WSJ reports:

1)'Markets Flash Caution For Stocks' (p. B1, April 14-15):

Evidence for crowded positioning, elevated valuations and fears that growth may be losing momentum.


2)'The National Debt Is Worse Than You Think', (p. A18, April 18)

"Today's outlook for revenue growth is based on policy that's unlikely to pan out. The CBO estimates that if current policy continues the cumulative deficit will rise a further $2.6 trillion over the next decade, to a staggering $15 trillion.


'3)Supply Starts To Crimp Growth' (p. B1, April 25)

Economic data are showing a strained supply side.  Set against global demand, supply chains are 'struggling to keep up'. This is increasingly a global phenomenon. 

4) 'Don't Get Hung Up On Yields' (p. B16, April 25)

Yields marching higher comes at an odd time, since the recent economic news hasn't been great. But what it also shows is that investors are operating with blinders on and ignoring events, such as the rise of right populists in Europe, and staggering global debt,  that they ought to have on their radar. Too much irrational exuberance, including using leverage to purchase more stock shares. 

 5) In GE Ouster, Dow's Limits Stand Out' (p. B12, June 21)

See earlier description of effects.

6) 'Consumer Spending Rise Has Dark Side (p. B1, July 16)

The Federal Reserve reported outstanding consumer credit debt rose $24.6 billion n May from a month earlier, or nearly double the $12.8 billion economists expected.

6) 'Tariff Threat Gets Closer To Consumers' (p. A8, July 18)

Massive increased costs on a variety of consumer products from cars and car parts, to furniture, to mobile phones, home improvement items, networking gear and seafood.  Takeaway? Consumers may have to go into more credit card debt to afford the higher prices of durables, especially, if their wages continue to stagnate. 

7) 'Fed Shouldn't Ignore Yield Curve' (p. B9, July 23)

The Fed isn't worried about the yield curve, for the same reason it wasn't worried before the 2008-09 financial crisis, but it should have been. (The yield curve is the difference between shorter and longer term Treasury yields - a key indicator for the future of the economy.)

"Today evidence abounds  - from supertight spreads, to negative yields, to high stock valuations to the popularity of structured products - that investors are willing to take risks to capture yield."

More irrational exuberance!

8) 'Stock Outflows Swell In Flight For Safety' (p. B13, July 27)

Investors are fleeing U.S. stocks at a rapid clip  as continuing market volatility and trade tensions pushes them to seek safety among less risky assets such as U.S. Treasurys. The exodus coincides with the implementation of the first round of tariffs between the U.S.  and China.

9) 'Stocks Are Up Despite Troubles' (p. B1, July 27-28):

Four primary risks exist now to the market's momentum: i) higher bond yields, ii) global economy - debt impacts, iii) Trump's trade war, especially new tariffs, iv) European politics.  Investors aren't pricing in much of a drag from the rest of the word, wrongly."

10)'Save Interest For Rainy Day' (Martin Feldstein,  p. A17, July 27):

"The downturn is almost certainly on its way. The likeliest cause would be a collapse in the high asset prices that have been created in the exceptionally relaxed monetary policy of  the last decade. It's too late to avoid an asset bubble. Equity prices have already risen far above their historical trend.  The price -earnings ratio of the S&P 500 is now more than 50 percent higher than the all time average, sitting at a level reached only three times in the past century.

The inevitable return of these asset prices to their historical norms is likely to cause a sharp decline in household wealth and in the rate of investment in commercial real estate. If the P/E ratio returns to its historical average, the fall in share prices will amount to a $9 trillion loss across all U.S. households."


Feldstein's argument - given the preceding  - is that it is essential to keep raising interest rates (the Federal funds rate) to at least 4 % over the next two years, to have room to maneuver out of a recession and stock crash should  these occur. And again, all the alarms are blinking red, despite the hubris and denial of so many, inebriated by irrational exuberance.

Arch-forecaster Nate Silver, in his book, The Signal and the Noise- Why So Many Predictions Fail But Some Don’t  warned (p. 347):

"Of the eight times in which the S&P 500 has increased at a rate much faster than its historical average over a 5-year period , five cases were followed by a severe and notorious crash, such as the Great Depression and the Black Monday crash of 1987”.

But even if Silver's statistical projections don't get you roused, the highlights of the preceding six months should, if you've taken the time to read them.  This brings us to collation of the information and then asking the question: Okay, the Trump asset bubble economy is like the "Titanic" heading for the iceberg, so what will be the signs of imminent sinking?  What warnings will we have?

Actually, very little if you're not already paying attention  - including to three things that could trigger a massive deleveraging: a) Trump's insane trade war, b) the ever mounting global debt c) the unwinding of  the Fed's remaining $3.8 trillion in QE (quantitative easing) assets.

In the first case the situation is vastly more perilous than either the political pundits or corporate media let on.  The fact Trump had to go to a Depression- era program to snatch $12b of taxpayer money for a bailout (sorry, Mnuchin, that's the word I'm using) is not a good sign.  It is indeed only a temporary fix and not a very good one. If it doesn't work - and it won't - then what?  Added to that, only a few of the more insightful farmers in flyover country appear to grasp it isn't just a loss of current revenue to pay their outstanding debts, but a loss of their markets - i.e. in China, Mexico which they'd spent years cultivating. Once those markets are gone to competitor nations there will be little, if any, chance of regaining them. That means permanent debts - many farm foreclosures- and little money for more bailouts.  (Apart from which many other trade sectors, e.g. the fishing industry, may also be looking for gov't handouts by then.)

It is also well for people of any sense to treat ALL Trump's statements on trade as LIES.  I cite here the WSJ piece, 'Europeans Dispute Trump Trade Claim' (July 28-29, p. A5)  in which we learn:

"While Mr. Trump told an Iowa crowd Thursday that "we just opened up Europe for you farmers", officials in Brussels later said he did no such thing."

Adding later:

"The U.S. side 'heavily insisted to insert the whole field of agricultural products', Mr. Juncker told reporters immediately following the meeting, 'We refused that because I don't have a mandate and that's a very sensitive issue in Europe."

Part of what he was referring to was GMO crops, a very "sensitive" issue for the EU citizens indeed..  In any case, given Trump's claims were palpable bullshit, the farmers again are left with no outlets for  their produce. Their wares will then keep piling up in silos, storage bins while other nations, like Japan, step in and reap the benefits.  Chance of getting their original markets back after Trump's trade war games are over? Slim and none.

Meanwhile, the mounting global debt has reached stupendous levels and already been warned abut by the  IMF which took a dim view of the U.S. tax cuts,  that only added to that debt.  As per a Bloomberg report from May, "the U.S ran a $466 billion current account deficit last year, meaning it imported far more than it exported".  In addition, the U.S. remained the "largest driver of global current account balances in 2017, running the world's largest deficit and adopting policies - i.e. a shift to much larger deficits via tax+ cuts - likely to increase imbalances in coming years."

The U.S. rightfully and properly ignored deficits to staunch the Great Recession and pull the nation back from the fiscal- credit  abyss, i.e. via stimulus spending ($797 b) in 2009 . But Washington not only failed to wipe out the red ink when the economy rebounded, but added much more via massive, uncalled for tax cuts. Now the red ink is a red tsunami and the entire global debt has rendered most assets suspect, or under water, meaning based on using leverage for purchases.

Bottom line: this current economic "explosion" is built on quicksand. You cannot base a sound economy on exploding debt. Rising debt also threatens to weaken the global power of the U.S. as it increasingly depends on foreign investors to lend money to the Treasury. As of now, the Chinese own 5.7% of all U.S. Treasury securities to the tune of $1.2 trillion. Americans had better pray every night Trump doesn't piss them off in his goofy trade war to the extent of calling in those markers.

In addition, we know that tax cuts added to an already stimulated economy can destabilize it into depression or serious recession. As I pointed out in my Nov. 29 post from last year:

"Calvin Coolidge signed into law the Revenue Act of 1924, which lowered personal income tax rates on the highest incomes from 73 percent to 46 percent.  Two years later, the Revenue Act of 1926 law further reduced inheritance and personal income taxes; eliminated  many excise imposts (luxury or nuisance taxes); and ended public access to federal income tax returns. The tax rate on the highest incomes was reduced to 25 percent.

The result was a speculative frenzy in the stock markets, especially the application of structured leverage in what were called at the time "investment trusts." In September 1929, this edifice of false prosperity began to wobble, and finally crashed spectacularly in October,  1929."

But. most of us suspect the immediate trigger could well be the Fed's unwinding of the 3+ trillions for easy money during the QE era.  As The UF puts it:

"As reported by Business Insider, a report from the global head of Société Générale's asset allocation team projected that the unwinding of easy money policies and broken politics in Washington will cause  today's market to unravel."

The 'broken politics' refers to an inability to resolve issues like the debt ceiling and out of control spending, especially with inadequate revenue coming in owing to addle- brained tax cutters.  And already Preznit Gaslight is threatening a government shutdown if he doesn't get his cockeyed "border wall", expecting the Dems to give in to his extortion.   The next debt ceiling increase is likely to exceed $22 trillion, and the money still to be unwound from the Fed's QE program is nearly $4 trillion.  Adding money for DoTurd's border wall would be one more spark to ignite the final unraveling of his "great" economy. Put it all together and you are looking at a major catastrophe ready to happen, never mind the current economic growth happy talk dominating much of the press.

The Forecaster goes on to note that other sources predict an even more dire end to this Bull, viz.:

"Legendary investor Jim Rogers says we're about to suffer the biggest stock market crash in our lifetime. And he believes it could happen later this year."

The UF goes on:

" Why should we listen to him?  The 74 year old not only helped found one of the most successful hedge funds of all time, he's made a number of market calls including the last housing crash. As Rogers observed, the debt that fueled the last downturn is nothing compared to the debt we've piled up since then. Over the last 10 years our national debt has more than doubled. His advice, 'Be worried!'

Would a stock crash- recession be the worst thing to happen? That depends on your perspective and political tribe affiliation.  Especially if you're a member of the Trump personality cult. If you're delirious about Trump and love his deregulation, tax cuts and so on, you will be hysterical after a 50 percent crash, followed by recession. You're best bet now is to stock up on anti-depressants.

For the rest of us, such events - horrific as they may be - finally portend an end to Trump's  "Teflon" cover via a fake economy based on asset bubbles and stock buybacks. As WSJ columnist Greg Ip put it regarding the current expansion based on debt and fumes (my terms), "this benefits Mr. Trump since it makes a recession less likely before he faces voters again in 2020."

My bet?  A stock crash either this year or next, coupled with Mueller's probe finding for conspiracy of the Trumpies with Russkies, will finally send this deadbeat pretender and traitor back to whatever crack in hell from which he crawled.

See also:

http://www.smirkingchimp.com/thread/robert-reich/80418/why-wages-are-going-nowhere

Excerpt:

"The typical American worker now earns around $44,500 a year, not much more than what the typical worker earned in 40 years ago, adjusted for inflation. Although the US economy continues to grow, most of the gains have been going to a relatively few top executives of large companies, financiers, and inventors and owners of digital devices. America doesn’t have a jobs crisis. It has a good jobs crisis."

And:

http://www.smirkingchimp.com/thread/will-bunch/80381/that-raise-you-were-promised-last-year-wall-street-took-it-from-you

Excerpt:

"Now, the post-tax-cut numbers are coming in, and you’ll be shocked, shocked to learn that America didn’t get that pay raise after all. In a widely read column last week for Bloomberg, Noah Smith pointed to statistics from PayScale showing that so-called real wages — your paycheck, but adjusted for inflation — actually fell in the just-ended second quarter of 2018, by 1.8 percent."

And:

http://www.smirkingchimp.com/thread/reese-erlich/80391/us-losing-trade-war-with-china

And:

http://www.smirkingchimp.com/thread/william-rivers-pitt/80403/will-this-trade-war-be-donald-trump-s-political-waterloo