For Clues On The Economy, Follow The Money

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For Clues On The Economy, Follow The Money

“There is nothing new on Wall Street or in stock speculation. What has happened in
the past will happen again, and again, and again. This is because human nature does
not change, and it is human emotion, solidly built into human nature, that always
gets in the way of human intelligence. Of this I am sure.” –Jesse Livermore

The profitability of lending/investing money is a function of both the rate of return on the money loaned/invested and the return (payback) of the money. The historically low interest rates are squeezing lenders by driving the rate of return on the loan toward zero (note: “lenders” can be banks or non-bank lenders, like pension funds investing in bonds).

As the margin on lending declines, lenders, begin to take higher risks. Eventually, the degree of risk accepted by lenders is not offset by the expected return on the loan – i.e. the probability of partial to total loss of capital is not offset by a corresponding rate of interest that compensates for the risk of loss. As default rates increase, the loss of capital causes the rate of return from lending to go negative. Lenders then stop lending and the system seizes up. This is what occurred, basically, in 2008.

This graphic shows illustrates this idea of lenders pulling away from lending:

The graph above from the St Louis Fed shows the year over year percentage change in commercial/industrial loans on a monthly basis from commercial banks from 1998 to present. I have maintained that real economic growth since the initial boost provided by QE has been contracting for several years. As you can see, the rate of growth in lending to businesses has been declining since 2012. The data in the chart above is through October and it appears like it might go negative, which would mean that commercial lending is contracting. This is despite all of the blaring media propaganda about how great the economy is performing.

The decline in lending is a function of both lenders pulling back from the market, per reports about credit conditions in the bank loan market tightening, and a decline in the demand for loans from the private sector. Both are indicative of declining economic activity.

This thesis is reinforced with this graphic:

The chart above shows the year over year percentage change in residential construction spending (red line) and total construction (blue line). As you can see, the growth in construction spending has been decelerating since January 2014. Again, with all of the media hype about the housing market, the declining rate of residential construction suggests that the the demand side of the equation is fading.

The promoters of economic propaganda have become sloppy. It’s become quite easy to invalidate Government economic reports using real world data. Using the Government-calculated unemployment rate, the economic shills constantly express concern about a “tight labor market.” Earlier this week, Moody’s chief economist Mark Zandi asserted that (after the release of the phony ADP employment data) the “job market feels like it might overheat.” The problem with this storyline is that it is easy to refute:

The graph above is from the Bureau of Labor Statistics productivity and costs report. The blue line shows unit labor costs. As you can see, unit labor costs have been decelerating rapidly since 2012. In fact, labor costs declined the last two months. The last time labor costs declined two months in a row was November 2013.

See the problem? If labor markets were “tight” or in danger of “overheating,” labor costs would be soaring, not falling. This is why I say the shills are getting sloppy with their use of manipulated Government economic reports. It’s too easy to find data that refutes the propaganda. I remember Mark Zandi from my junk bond trading days in New York. He was an “economist” for a fixed income credit analysis service (I can’t remember the name). I thought his analytic work was questionable at best back then. I continue to believe his analysis is highly flawed now. Recall, Moody’s is the rating agency that had Enron rated triple-A until shortly before it collapsed. That says it all…

Speaking of the labor market, I wanted to toss in a few comments about November’s employment report. The BLS headline report on Friday claims that 255k jobs were created in November. However, not reported in any part of the financial media coverage, “seasonal-adjustment gimmicks bloated headline payroll gains, where unadjusted payrolls were revised lower but adjusted levels revised higher” (John Williams’ Shadowstats.com).

The point here is that, in all likelihood, most of the payroll gains in the BLS report were a product of the mysterious “seasonal adjustment” model used. Per the BLS report, another 35k were removed from the labor force as defined. Recall that anyone who has not been looking for a job in the previous four weeks is removed from the labor force statistic. Furthermore, and never mentioned by the media/Wall St., the BLS report shows the number unemployed increased by 90k in November.

I don’t know when the stock market bubble will lose energy and collapse.  What I do know is that each time the U.S. stock market disconnects from reality, there’s a period of “it’s different this time,” followed by the crash that blind-sides all of the so-called “experts” – most of whom like Dennis Gartman do not have their own money in the stock market (it’s well-known that Jeremy Siegel invests only in Treasuries).  The retail lemmings who think they’ll be able to get out before the crash will see their accounts flattened like a Japanese nuclear power plant.

Most of the commentary above is from my Short Seller’s Journal, in which I present stocks  to short every week (along with options suggestions).  You can learn more about this newsletter here:   Short Seller’s Journal subscription info.

I’ve been a subscriber for a good part of the year and really enjoy my Sunday evening read. Thank you – received sent this morning from “William”

Investment Research Dynamics

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Dave Kranzler

Dave Kranzler spent many years working in various Wall Street jobs. After business school, he traded junk bonds for a large bank. He has an MBA from the University of Chicago, with a concentration in accounting and finance, and graduated Oberlin College with majors in Economics and English. Dave has nearly thirty years of experience in studying, researching, analyzing and investing in the financial markets. Currently he co-manages a precious metals and mining stock investment fund in Denver and publishes the Mining Stock and Short Seller Journals.