Category Archives: The Economy

Fair Tax

There’s much whining that Trump’s tariffs are going to be paid by the U.S. consumer in the form of higher prices for imported goods.

That’s right. And that’s a good thing. Trump has lowered income taxes and needs another source of revenue to compensate. Tariffs, in effect, are a form of consumption tax.

Back in 2009, I blogged my recipe for diverting the nation from the financial disaster now awaiting us. I fear that it is too late, but the first bullet on my list was:

Rebuild the nation’s balance sheet by encouraging savings and penalizing consumption. The primary tool for doing this would be the replacement of the income tax with a consumption tax.

Unfortunately, it is far too late. But replacing income tax with consumption tax is the right thing to do. And yes, I am aware that penalizing consumption will, well, reduce consumption. That’s OK, especially if it reduces the number of huge testosterone-fueled black pickups.

Deflation Watch

ECRI chimes in – I told you so.

The plunge in oil prices, which dropped below $50 this week, blindsided many businesses and investors. But the inevitable decline was foreshadowed months ago by a downturn in commodity prices, as measured by ECRI’s Industrial Price Index (IPI) which was previously known as the JoC-ECRI IPI*…….

…..Oil price inflation has now plummeted to a 32-month low – its worst reading since early 2016 (bottom line). But industrial commodity price inflation, as measured by the IPI, has already dropped to a 33-month low, and is still falling (top line), signaling continued downside risk for oil price inflation.

Deflation Watch

Crude Oil (WTI) is through $50/bbl to the downside.

Only two prices matter; energy and labor.

I assume Powell knows this and that’s why he goosed markets yesterday. He’s worried that he’s broken something. He has.

Jawboning

Well Trump saw the market was down 300, more or less, so… he got on the wires and said that “China talks are going well” and he thinks “US will reach a trade deal with China.”

That’s a blatant attempt at jawboning the market higher. Of course the algos went berserk. What BS. But it shows how important he thinks the stock market is to electoral success, and that he will do “whatever it takes” to keep it up. Well until Tuesday’s close, anyway. After that he will likely be able to blame the Dems.

Meanwhile the ten-year is solidly above 3% and rising. Dems will need a miracle. Expect a panic soon.

Three More Days

Trump needs to hold this market together, if not continue the rally, for three more days, until the mid-term voting is concluded as the polls close on Tuesday of next week. More learned minds than mine have opined that the force behind the rally is short-covering by some large fund that is massively short gamma (e.g., has a short put position). Moi, I think that the explanation is more mundane and is closely related to Trump’s need to hold things together.

Supposedly the seasonality is positive after the mid-terms, but I have to wonder as the level of vituperation from the Dems would seem to bode ill for the political climate. The Dems seem to have no agenda but to oppose and/or impeach Trump and prove that Hillary was robbed. Time to move on, folks.

The employment report this morning included more than a hint of inflation, which is usually toxic to the stock market. Given the historically (hysterically?) extreme level of valuation, risk is off the charts.

Be careful out there.

Close To The Event Horizon?

From ECRI’s Lakshman Achuthan:

Notably, the combined debt of the US, Eurozone, Japan, and China has increased more than ten times as much as their combined GDP [growth] over the past year.

Remarkably, then, the global economy—slowing in sync despite soaring debt—finds itself in a situation reminiscent of the Red Queen Effect we referenced 15 years ago, when tax cuts boosted the US budget deficit much more than GDP. As the Red Queen says to Alice in Lewis Carroll’s Through the Looking Glass, “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

The R Word

From highly respected Ned Davis Research via Zero Hedge:

Expect a global recession. It either has begun or will begin shortly. Though no guarantee, as 7.89% of the time since 1970 when the global economic indicators that make up this model were above 70, a recession did not occur.

Inflation?

The increase in average hourly earnings (AHE) was taken as a sign of economic strength. Well, no. AHE is aggregate earnings divided by aggregate hours worked. So if hours worked is declining faster than earnings, AHE goes up. But is a sign of weakness. From ECRI.

In another case of up means down, the NOPE index is signalling trouble.

Economy On Fire?

CNBC says the economy is “on fire” after today’s establishment survey report of an increase of 201,000 jobs.

From the household survey in the same report, the number of people employed fell by 423,000. The labor force shrank by 469,000.

Pretty weird fire, if you ask me. Mostly just reflects the fact the these are random numbers and guesses.

Savings And Confidence – Hmmm

Thanks to Zero Hedge