The warning signs are there but very few look for them or want to see them. But it’s a dynamic in which once you see it you can’t “unsee” it. A teacher I know told me this morning that Colorado school districts are quietly cutting staff across all districts. The only reason this would be occurring is that the State is projecting a decline in tax revenues. The only reason tax revenues would be declining is because economic activity is slowing or contracting. And Colorado supposedly has one of the more “vibrant” State economies.
The soaring level of “hope” that, for some unexplainable reason, accompanied the election of Trump is now crashing. The so-called “hard data” which somewhat measures the level of economic activity never moved higher in order to justify the optimism – an optimism tragically seeded in ignorance. As an example, the Kansas City Fed released its economic survey today. The composite index crashed from 20 to 7. Not surprisingly, Wall Street snake-oil salesmen – otherwise known as “economists” – were expecting a reading of 17 on the index.
As for individual components of the index, the average workweek and number of employees dropped; the production component of the index fell precipitously; and new orders collapsed. In fact, new orders expectations fell below the pre-Trump level. The six-month outlook metric – aka the hope index – plunged to its lowest level since November.
The truth is that all of the regional Fed economic activity surveys were largely driven by “hope,” which registered in the form of new orders for goods that will sit on the shelves of car dealers and non-food retailers and in the form of “expectations” about the level of economic activity in six months.
But there has not been any follow-through in form of actual growth in economic activity to justify the unrealistic level of “hope.” Real disposable income and the real level of retail/auto sales have been declining on the way to a tail-spin plunge. Any pulsations in final retail sales and home purchases have been fueled by the parabolic issuance of sub-prime quality debt. In fact, an increasing percentage of home purchases are from aspiring flippers. We are at the point in the cycle, just like 2007-2008, in which many of these flipper purchases will never end up with end-users and instead will land on bank balance sheets.
Auto sales through the end of March were down 10% since the beginning of 2017, resulting in the steepest decline in auto sales since 2009. New car inventory at some of the biggest auto dealers around Denver is spilling over into the giant parking lots at vacant malls as OEMs push overproduction onto the dealer network. Once the debt capacity of those still buying pick-up trucks at record incentive pricing hits the wall, the auto industry will see a spectacular cliff-dive. The Government is too broke to provide the “cash for clunker” safety-net put in place in 2010.
In addition to trillions in printed (electronically generated) currency, the Fed has been able to fabricate the illusion of economic growth with an enormous amount of credit creation. Credit is debt-issuance. The part about debt that is conveniently overlooked by economists is that borrowed money behaves like printed money until it has to be repaid. The problem is that most debt created in the U.S. is never repaid. For instance, the level of outstanding Government debt has been increasing every day since before Nixon closed the gold window. This is not “debt” in the traditional sense of a loan that gets repaid. This is money printing.
Consumer and corporate debt levels have been rising in parabolic fashion and are at all-time highs. Given that large chunks of this debt will never be repaid, just like in 2008-2009, the issuance of this debt is the same as printed money. Amusingly, though not surprisingly, the Fed stopped reporting the total amount of debt outstanding in the system (Government + Corporate + Household) on March 25, 2016. On that day the total debt outstanding was $63.5 trillion. It’s likely well over $65 trillion by now. That debt, until it’s repaid, is no different that printed currency.
This would be great in a pretend world in which debt could be issued to borrowers ad infinitum. It would be the proverbial money tree on which free lunches blossomed for everyone forever. Unfortunately, debt can not be issued in increasing amounts to eternity. Currently it would appear as if the non-Government borrower segment of the debt statistic has reached its borrowing capacity. It happens gradually then all at once. The United States is getting close to the “all at once” stage.
This is why the Deep State has resorted to the last stage of history’s Empiric life-cycle curve: when all else fails start a war…