The Two Janet’s And The Perfect Storm Ahead
By David Stockman
The Bloomberg news crawler [this Friday] morning [was] heralding the heart of our thesis: Namely, that “flush with cash from the tax cut”, US companies are heading for a “stock buyback binge of historic proportions”.
This isn’t a “told you so” point. It’s dramatic proof that corporate America has been absolutely corrupted by the Fed’s long-running regime of Bubble Finance. Undoubtedly, the C-suites view the asinine Trump/GOP tax cut not as a green light to invest and build for the long haul, but as manna from heaven to pump their faltering share prices in the here and now.
And we do mean a gift just in the nick of time. The giant Bernanke/Yellen financial bubble is finally springing cracks everywhere, putting corporate share prices and executive stock option packages squarely in harms’ way.
So what could be more timely and efficacious than an enhanced, government debt-financed wave of stock buybacks to rejuvenate the speculative juices on Wall Street and embolden the robo-machines and punters for another round of buy-the-dip?
Indeed, corporate stock buying is now cranking at a $1 trillion annual rate or nearly double the rate of the last several years. That huge inflow of cash and encouragement to Wall Street will undoubtedly break the market’s fall in the short-run; and over the next several quarters, perhaps, enable an extended stop-and-start stepwise decline rather than a sudden sharp plunge as in the fall-winter of 2008-09.
It also underscores why the Paul Ryan school of conservative policy wonks got it so wrong on the corporate rate cut. They still dwell in a pari passu world where higher after-tax rates of return would, in fact, stimulate increased investment, growth, employment and income. But they utterly fail to recognize that the Fed destroyed that world long ago, and that the current noxious regime of Keynesian monetary central planning is the deadly enemy of both economic prosperity and traditional free market-oriented conservative policy.
That is to say, the giant growth retardant in today’s economy is resident in the Eccles Building, not the US Treasury. Yet by slashing the corporate tax rate without off-setting spending cuts, and before first fixing the central bank problem, they have produced an epic mess.
And it is this mess—which we have described as a thundering monetary/fiscal collision—that will finally cancel-out the interim prop to the market from the corporate buyback binge. Moreover, on top of that we now have the Donald truly off the deep end with the launch of his one-man world trade wrecking show.
We describe it that way because when it comes to big picture policy impacts there is almost nothing the President can do on a unilateral basis to move the needle. Thus, he got nowhere on ObamaCare “repeal and replace” because there was no functioning majority on Capitol Hill; and he lucked out completely on his ballyhooed tax cut.
To wit, it happened only because the Congressional GOP was desperate to post a legislative success–any success–that it could use during the 2018 campaign as a reason to retain a Republican Congress. And that legislative trophy will come in especially handy if it becomes necessary as a matter of political survival to figuratively extend the mile-long trek from Capitol Hill down to the Trump White House by a considerable multiple of the same.
But trade is the one policy arena where the Donald can go completely rogue owing to the insidious section 232 of the 1962 trade act. The latter literally gives the President open-ended powers to impose tariffs and other trade protections in behalf of any industry deemed essential to “national defense” that is purportedly being injured by foreign competition.
Needless to say, the Donald’s un-varnished, un-vetted and un-shackled
thoughts whims on most any topic are a thing of considerable disruptive potential. But when it comes to trade, his mind beats to the sound of a drummer not from this world or even possibly the next.
In follow-up to yesterday’s flying projectiles of steel and aluminum tariffs, Trump was all-in this AM on his twitter account, and what he had to say needs exactly no exegesis:
When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!
We must protect our country and our workers. Our steel industry is in bad shape. IF YOU DON’T HAVE STEEL, YOU DON’T HAVE A COUNTRY!
Never mind, of course, that from a narrow statistical vantage point there are only 376,000 US jobs in all of primary metals including steel, aluminum, copper, nickel and sundry lesser metals and alloys. By contrast, downstream metal using industries employ upwards of 8 million in durable goods alone and960,000 in the auto sector, which happens to average about 3,000 pounds of steel and aluminum per vehicle.
Self-evidently, the 25% and 10% tariffs on steel and aluminum, respectively, will raise their input costs by those percentages, whether customers use domestic or imported metals because the purpose of these tariffs is to put a high domestic floor under what are otherwise world market based prices. Accordingly, the Trump tariffs will send economic harm cascading downstream—to say nothing of the virtually certain chain reaction of retaliation and counter-retaliation that these moves will foster in the global trading system.
So there is indeed a perfect storm brewing. After rattling around the White House for 13 months and frequently acting as if he doesn’t even run the cabinet departments (e.g. why didn’t he fire his dunce AG long ago?), the Donald has finally found the one policy grenade that he can toss into the fray all on his own. And in the very field where his ideas are as half-baked, naïve and incindiary as they come.
To be sure, it is almost certain that the Trump tariffs will get tied up in litigation just as the Muslim bans have been. After all, SecDef “Mad-dog” Mattis himself has attested that DOD accounts for only3% of steel and aluminum industry output. So the “national defense” fig leaf for the Donald’s impetuous foray into rank protectionism will likely come under withering assault in the courts.
But that will not mitigate the near-term turmoil because the above quoted tweets make abundantly clear that on the matter of trade, Trump means to become a one-man wrecking crew; and that there is no one around the White House who can take away his primary weapon in the global trade war which is sure to ensue. Namely, his twitter account and its incendiary capacity to insult and incite trading partners from one side of the planet to the other.
In the context of the Donald’s newly launched trade war, we advert to the other menace bearing down on the Wall Street casino—notwithstanding the current buyback binge and the dip-buying reprise it is likely to ignite (a bit of that was evident in today’s big reversal to the green on the S&P 500).
We are referring, of course, to what we have previously described as a thundering monetary/fiscal collision. Never before have both financial arms of the US government—-the Treasury and the central bank—-engaged in the simultaneous selling of securities with such malice aforethought as is now coming down the pike. During the year ahead (FY 2019) something in the order of $1.8 trillion of cash will be drained out of the bond pits to fund the $1.2 trillion fiscal deficit and the Fed’s $600 billion QT bond-dumping exercise.
While we have little doubt that the market will ultimately clear this crushing supply/demand imbalance, we have no hope at all that it will be at anything near the current 2.85% yield on the 10-year UST. What will eventually clear the decks is a “yield shock” that pushes the UST back into the 4-5% zone where it belongs (a real yield of 250 basis points plus 2.0% inflation).
As to the monetary policy side of the equation, Jay Powell and his drunken band of Keynesian central bankers are finally doing the right thing, albeit for the wrong reasons. That is, they are plowing full speed ahead to “normalize” monetary policy because they mistakenly believe we have arrived at the nirvana of “full-employment” and that it is therefore safe to reload their dry powder in order to be ready for the next recessionary downturn.
As we indicated earlier, however, safety on main street has nothing to do with it. What we actually have is a monumental financial powder keg in the casinos—so there is absolutely nothing safe about the Fed’s pivot to higher rates and QT. In fact, its normalization policy amounts to an exercise in tossing matches at Wall Street until ignition is finally, if unintentionally, achieved.
Moreover, we do think they will take it right up to the ignition point. While Powell is more a business-oriented Keynesian than was school marm Janet Yellen and her dashboard of 19 labor market indicators, he still views the main street economy just a few months or quarters at a time as she did.
In effect, the new Fed chair is just part of the Two Janets–the one who wears trousers and a tie. Both view the main street economy through the Keynesian beer-goggles of short-term deltas in the so-called “incoming data” that tell them nothing important or reliable.
Indeed, these indicators show utter failure on any kind of reasonable trend basis, but in the very short-run they have been bolstered by the global growth spurt emanating from the Red Ponzi’s massive pre-coronation credit impulse.
That’s over and done, of course, with credit expansion cooling rapidly and manufacturing output nearing the 50.0 crossover line in Chinese purchasing manager surveys. So the chart below on domestic US freight shipments captures the true story perfectly.
We are referring here to the privately published Cass Freight Index, which is based on hundreds of large US shippers from a broad array of industries—including consumer packaged goods, food, automotive, chemical, OEM, retail and heavy equipment–which use all modes of transportation including trucking, rails, barge and intermodal. Unlike much of the government GDP data which is distributed for for free and is probably worth about what users pay for it, the Cass Index is paid for by business customers who demand accuracy and transparency.
The stunning thing about this key metric of real main street activity, which is measured on an honest-to-goodness volume basis, is that there has been no recovery at all. As of January 2018, the index was still 14% below its pre-crisis peak, and has actually been trending slightly lower for the past three years.
But as they say on late night TV, that’s not all. The truth of the matter is that the January reading of 99.7 was a touch below the 100.0 reading from 18 years ago in January 2000, when Bill Clinton was still in the White House and Donald Trump was still a New York City Democrat. So if you are inclined to think that main street growth has been honing-in on the flat line—as in zero, zilch and zeds—you cannot find any better support than the picture below.
Except this isn’t what they see on Wall Street or the Eccles Building owing to the cult of the stock market. In the current price-discovery-free context that modern central banking has rendered, the only thing that really matters is short-run deltas that can be grabbed by head line reading algos and day traders as a signal to hit the “buy” key.
In fact, on a year-over-year basis the Cass Freight index is up a whopping 12.5% from January 2017, where it is riding the cresting movement of exports, imports and domestic goods triggered by the giant China credit impulse of 2016-2017. So you can call that a sloppy wet one from Emperor Xi, but it signifies exactly nothing about the sustainable state of the main street economy.
Indeed, you can peruse a whole heap of Fed meeting statements, minutes and speeches by the Two Janets and you will find no mention of the multiplicity of flat-lining and non-recovering indicators that abound on the main street economy. The chart below merely provides a few more examples–including gas and electric utility production, wholesale trade employment and manufacturing output.
All of them have flat-lined after the initial rebound from the Great Recession, and all of them are still below or at their 10-year ago pre-crisis level. Yet an economy surely is not in the pink of health or in any way healed when its use of gas and electric power is flat or when the output of goods or activity levels at wholesale have stalled out at decade ago levels.
Nevertheless, the Two Janets have found their way clear to wax on about a “recovery” narrative that is absolutely refuted by both the data and the deep economic malaise in Flyover America that put the Donald in the Oval Office.
So now comes the perfect storm. The first Janet and her predecessors put the Donald in the Oval Office by a policy of cheap debt that inflated Wall Street, strip-minded main street and sent American production and jobs off-shore. That’s because the essence of Bubble Finance was the prevention of a market based regime of high interest rates, low consumption and the deflationary cleansing that was necessary to keep the US economy competitive in a mercantilist, statist and credit bloated global economy.
Now the King of Debt paces around in the Oval Office oblivious to the baleful effects of the debt bomb he has helped unleash and the trade war projectiles that he has now tossed into the fray.
Meanwhile, the second Janet sees only smooth sailing on his GDP dashboard and financial equipoise in what is purported to be a prudentially regulated and reformed Wall Street. So he is plowing ahead with the epochal monetary policy pivot that will finally end 30 years of Keynesian fantasy by triggering a bond market “yield shock” and a consequent collapse of the Wall Street house of cards.
Oddly, it is not the four rate hikes in 2018 which Powell promised Congress this week that will actually prove to be the monetary trigger-man. Instead, it’s the silent, escalating pace of QT that will eventually do the job.
As we said yesterday, the Fed does not operate in a vacuum of time and space. The punters and front-runners who got hideously rich buying what the Fed was buying during the ghastly era of QE will be making the pivot, too, and long before the academics and apparatchiks who run the central bank figure out what is going down.
That is to say, by transforming the money and capital markets into outright gambling casinos and momentum driven wagering joints the Fed has sown the seeds of its own demise.
One the other side the impending perfect storm, we doubt that the Donald will still be standing. But we know that the Two Janets will be reviled for years to come.
TLB recommends other pertinent financial articles from David Stockman’s Contra Corner.
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