Wednesday, June 7, 2017

Stock Market Overview and Prevailing Economic Conditions

There are a number of technical and fundamental concerns for the US and global economies, which are not being clearly or fully disclosed by the various Government reporting agencies and the media.
The Real Employment Situation: The recently released employment number for the month of May 2017, on the surface, showed disappointing non-farm payroll gain of 138,000 new jobs, and less than expected wage growth, even though the unemployment rate dropped to an all time low of 4.3% for all the wrong reasons.
The underlying data within this report reveals even more troubling trends, such as in addition to the number of employed workers dropping by 233,000, the composition of these jobs raise even more red flags, because in May 2017 the US lost 367,000 full-time jobs, offset by the gain of 133,000 part time jobs -- representing the biggest drop in full-time jobs since June 2014.
The only positive aspects within the report was that there were 30,000 new jobs added in the food services and drinking places, but, unfortunately, the manufacturing jobs, once again, declined by more than 1000.
As mentioned, the headlines state that the US has enjoyed 80 months of continuous job growth, with unemployment hitting 4.3%, the lowest since 2001; however, there is more to this "strong" number than viewed by the untrained eye.
The Birth and Death Rate Employment Model: A full 93% of the new jobs reported since 2008, 6.3 million out of 6.7 million, were added through the business birth and death model, a highly controversial model, which is not supported by the data. On the contrary, all data, on establishment births and deaths, point to an ongoing decrease in entrepreneurship.
Nearly 90% of the jobs created in the past decade were nothing more than a "statistical" adjustment in some Bureau of Labor Statistics (BLS) models.
The BLS introduce the birth/death adjustment, in order to account for jobs created or lost by new business formations or bankruptcies each month. This started during the Reagan administration, since President Reagan felt the Bureau was under counting the jobs that his administration had created. The birth/death model used to have a terrible name, "the bias adjustment factor." This adjustment is computed using a model based on probability-based sampling methodology.
Before 2003, few jobs were added through the adjustment, despite the fact that net business formations were much stronger during that period. However, during the 2007 to 2009 recession, the birth/death adjustment continue to add a lot of jobs -- 904,000 jobs were added in 2009 alone. We would assume, through the great recession, when business defaults skyrocketed, that the birth and death adjustment would be a net negative and subtract from the overall jobs numbers, instead of adding to it. 
Furthermore, it turned out that a full 30% of jobs created since 2010 or 4.5 million out of 15 million jobs were added via the birth/death adjustment. It is also interesting to note that 40% of the jobs added in 2016 came through the adjustment.
The reason the BLS wanted to include this adjustment was a perception that they were under counting jobs created through new start-up business formation, which has not been the case. There are multiple studies that have tracked a consistent decline of new business creation, and the deteriorating entrepreneurial environment in the US.
Weak Economic Growth, 1930s vs. Present Decade: The rate of economic growth over the past 10 years is exactly equal to the average rate that the US economy grew during the 1930s. Perhaps this fact shouldn't be surprising, because we already knew the previous administration was the only President in history not to have a single year when the economy grew by at least 3%. Of course, the mainstream media continue to push the perception that the US economy is in "recovery mode," but the truth is that the current era has far more in common with the great depression than it does with times of great economic prosperity.
The average annual rate of Gross Domestic Product (GDP) growth, from 1930 to 1939 was 1.35%, and from 2007 to 2017 was as well annually averaging 1.35%. The 1930s, of course, had their big ups and downs, but the average rate of economic growth during that decade was exactly the same as we had seen over the past 10 years.
This past decade's $10 trillion in deficit spending has produced possibly the worst economic growth as measured by GDP in our nations history, perhaps even slower than during the great depression. This stagnant, new normal, low growth economy is leaving millions of working age people behind, who have given up even trying to participate, with many doubting the attainability of the American dream.
The Federal Reserves next Rate Hike: It is highly expected that the Federal Reserve will raise interest rates, once again, in mid-June 2017, and begin the long process of unwinding it's $4.5 trillion portfolio of government debt known as the "balance sheet." Lower than expected inflation might stop the Fed in their tracks, a possibility that is being priced into the various bond markets.
Substantially lower-than-expected inflation would be a significant hurdle for the central bank in it's objective to normalize a benchmark rate kept near zero for much of this post financial crisis economy.
The Fed officials are writing off the recent soft first quarter GDP economic numbers as "transitory" -- their go-to term for fluctuations that don't meet their preferred economic expectations.
As mentioned, the bond markets is already reflecting a much more cautious tone than the Fed regarding growth, with the benchmark 10-year note yielding just 2.18% -- a proxy for GDP plus inflation, and is thus indicating a slow growth pattern ahead.
The Approaching Recessionary Inverted Yield Curve: The compression of yields, between the short-dated and long-dated duration government debt, also mention within our latest YouTube video posting, is troubling and pointing towards a more cautious Federal Reserve.
Long-dated yields have refused to move higher, even as the Fed signals an intent to unwind it's bloated balance sheet later this year. This means a flatter yield curve has the risk of inverting, if the Fed continues to push the fed funds rate higher -- a major concern, since all recessions, over the past 50 years, have been presaged by an inverted yield curve. Also, 10 of the last 13 Fed hiking cycles in interest rates have been "miscalculations" that ended in recession.
Banks Consumption of Bad Debt: Another concern is banks all over the world have been taking on far too much bad debt that keeps turning into more nonperforming loans, especially in countries like Greece and Italy. These banks, instead of restructuring those loans to let their stock and bond holdings cover the losses, are restoring it with "financial magic tricks."
The further these national governments fall into deep debt, the higher their debt-to-GDP ratio rises, with examples all over the world, including ratios above 1000% in Europe.
Bank stocks all over the world have seen historical collapses since 2008, and you don't have to look further then Deutsche Bank in Germany to see a possible approaching crash evolving.
The response to global debt crisis, since 2008, has been to pump more free money and stimulus into the system, to keep our financial institutions from imploding, which is an unrealistic strategy for the long term.
It is simply not feasible to fight a debt problem with more debt, since the restructuring of debt is healthier in the long term, despite the short term pain.
The first trigger of the global debt crisis is going to come from Europe, where the banks and the economy are the weakest. Italy will become the next Greece, since it is simply too big to bail out. Most likely, after that, there will be a domino effect, with China following, where there is basically no stimulus plan that will be able to cover it's severe debt situation.
Key Indicators for Changes in the Economic Landscape: There are five, possibly six, key indicators to monitor, regarding a real estate market lending collapse, subsequently affecting prices, and a substantial decline in the stock market.
First, the stock market will be the catalyst or trigger for everything else, including affecting real estate valuations, and could occur when small caps are not confirming a new high, compared to large-cap stocks, especially in the US, which happened in the final stages of the stock market rally in early October 2007. 
Second, a more sudden drop in jobs growth in the US, like recently, is another indicator that our workforce is actually declining, that we have been simply hiring back the lost workers of the 2008-2009 recession.
Third, more baby boomers are going to naturally retire and leave the workforce, leading to less consumer expenditures and demand for various goods and services, which actually peaked in late-2016.

Fourth, slowing used car sales are another indicator of a downturn, which peaked last year, outlined, in detail, within our latest YouTube video posting .
Fifth, stock valuation will adjust for very slow growth, both in GDP and earnings, is another worrisome sign, with growth in the first quarter being only 1.2%, and the second quarter will likely be adjusted to much lower levels, from the current projection of 3.7% to less than 1%, in the near future.
Sixth, there remains a possibility that Trump could resign in the months ahead, due to the frustration of being unable to implement all of his various proposed campaign promises for long-term economic growth, since he would not want to be referred to as a failure or be held responsible for the next recession. Trump, unfortunately, will discover that selecting and appointing corporate board members is much easier than trying to deal with already-elected government officials in both the House and the Senate, even though the Republican Party has majority control in both houses. 
Five of the six indicators have already occurred or are very close to confirming in the near future. The sixth indicator is one that remains a possibility that could also derail both the stock market and real estate market.
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