Contrary to the signal about the economy conveyed by the stock market’s prodigious move up in Q1 2016 after the initial 10% plunge, the U.S. economy continues to deteriorate – in some areas rather quickly. Zerohedge featured an article by someone named Nick Colas from some firm called Convergex in which the author promoted the idea that the U.S. economy was on balance still doing well. But his thesis lacked meaningful analytic depth.
His first premise was based on a measure of deflation he calls “the bacon-cheesburger index.” Colas makes the assertion that the price of ground beef, bacon and cheese has declined over the past year. But clearly Nick is must be fortunate enough to not have to do his own shopping. All three food items have risen over the last year, with ground beef – at least in the Denver area – up over 20%.
The likely reason Nick’s “index” is capturing “deflation” is that he is relying on the rigged Government price indices. If perhaps in his area of the country the price on these items appears to be lower, I would urge him to examine the package size. Many food manuctures are reducing the size and weight of their packaging, giving the illusion that prices are not rising. Serious students of inflation measurement are well aware of the tactics employed by the Government CPI statisticians to cover up the true rate of inflation. The “bacon-cheesebuger” index sounds something more fitting for a Weigh Watcher’s 12-step program than for use as meaningful barometer of economic activity.
In addition, Colas looks at used car prices as what he terms an “economic bellweather.” His assertion is that used car prices have “remained stable” since 2010. Wrong. I actually wrote a blog post about this a couple weeks ago. But here are the facts, sourced from Auto Remarketing: used car prices in March had their biggest price drop in three years. And here’s the unwritten headline, Nick: the only factor that has keep used car volume from collapsing is the unprecedented proliferation of the use of auto loans to fund used car purchases.
As a matter of fact, the price a buyer is willing to pay for a used car is more a function of the amount of debt the bank will extend to close the purchase. 130% loan-to-value loans are commonplace. But this is not indicative of an economy that is even equivocally healthy. This is a reflection of a Government-backed banking system that will loan to anyone just about any amount of money in order to promote the illusion of economic activity.
Nick’s last “off the grid” indicator of economic health is so silly that it’s not really worth time spent eviscerating it. It’s based on Google searches of “I want to buy house” and “I want to buy a timeshare.” Existing and new home sale activity did indeed pick up considerably after the 2008-2010 housing market crash. However this was the result of over $2 trillion in printed money injected into the mortgage market by the Fed and several more trillion in Government-backed subprime mortgage issuance. However, despite this unprecedented official intervention in the housing market, home sales volume has peaked at a level that’s about 65% of the bubble peak.
Like auto sales, home sales and prices have been predicated on the amount of debt – and the cost of that debt – that lenders, backed by the Government (FNM, FRE, FHA, VHA, USDA), have been willing issue to homebuyers. Most of the housing market activity of the last 5 years has been the product of this artificial and unsustainable market intervention by the Fed/Government. The headline here is that the housing market is now starting to roll downhill.
Based on most private-sector originated economic indicators and indexed measurements of economic activity, the U.S. economy – along with the global economy – is quickly sliding into a devastating economic abyss. This is why the level of military belligerence, especially that emanating from the United States, has been escalating at an alarming rate. But here’s three basis indicators of economic activity that require no explanation and which certainly have a lot more fundamental validity that something that sounds like a menu gimmick at Burger King:
It was reported earlier today that factor orders dropped to a 5-yr low. In addition, the Institute of Supply Managment index for the NY region dropped to September lows, with the employment index plungin. If the Fed were to step away from its constant intervention in the stock market, the price lines all three of these graphs would rather quickly look like the a weighted rope dropped down the elevator shaft of the Empire State Building.