Death Throes Of The Bull

By David Stockman – Re-Blogged From

The fast money and robo-machines keep trying to ignite stock rallies, but they all fizzle because bad karma is beginning to infect the casino. That is, apprehension is growing among whatever adults are left on Wall Street that 84 months of ZIRP and $3.5 trillion of Fed balance sheet expansion, aka money printing, didn’t do the trick.

Not only is the specter of recession growing more visible, but it is also attached to a truth that cannot be gainsaid. Namely, having stranded itself at the zero bound for an entire business cycle, the Fed is bereft of dry powder. Its only available tools are a massive new round of QE and negative interest rates.

But these are absolutely non-starters. The former would provoke riots in the financial markets because it would be an admission of total failure; and the latter would provoke a riot in the American body politic because the Fed’s seven year war on savers and retirees has already generated electoral revulsion. Bernie and The Donald are not expressions of public confidence in the economic status quo.

So the dip buying brigades have been reduced to reading the tea leaves for signs that the Fed’s four in store for 2016 are no more. Yet even if the prospect of delayed rate hikes is good for a 50-handle face ripping rally on the S&P 500 index from time to time, here’s what it can’t do. The Fed’s last card—-deferring one or more of the tiny interest rate increases scheduled for this year——cannot stop the on-coming recession.

And it is surely coming. We got one more powerful indicator on that score in this morning’s data on core capital goods orders (i.e. nondefense excluding aircraft). Not only were they down sharply from last month, but at $65.9 billion were down 11% from the September 2014 peak, and are also now below the prior cyclical peaks in early 2008 and 2001.

In fact, core CapEx orders in December were at a level first reported in April 2000, and that’s in nominal dollars. In real terms, they are down nearly 25%.

Needless to say, there will be pandemonium in the casino when the downturn is no longer deniable. That’s because the main prop under the market today is, in fact, the Wall Street mantra that bear markets never happen in the absence of a recession and that none is purportedly visible.

On that score, it is no use listing and documenting all the flashing red lights or that the BLS jobs report is both a lagging indicator and virtually worthless. Today in a nearby column,  Lance Roberts reminds that at the top of the cycle the BLS nearly always over-reports employment gains, and that these estimates get revised away in the four subsequent iterations of the data over the next several years.

But in the current context, he thinks there is something especially fishy. Namely, that the continuing decline of the labor market participation rate is not consistent with the allegedly robust job count gains, and also it is not consistent with any prior historical relationship between the two.

But here is the potential problem for the Fed’s dependence on current employment data as justification for tightening monetary policy – it is likely wrong. Economic data is very subject future revisions. While the current employment data has indeed been the strongest since the late 1990’s, there is a probability that the data is currently being overestimated.

The reason is shown in the chart below.


If the employment gains were indeed as strong as the Fed, and the BLS, currently suggest; the labor force participation rate should be rising. This has been the case during every other period in history where employment growth increased. Since the financial crisis, despite employment gains, the labor force participation rate has continued to fall.

No, the consumers of America cannot shop the nation out of recession, either. That would take robust job and earnings gains, which are not happening, or a new round of household leverage gains, which are not remotely feasible given the condition of “peak debt” now prevalent.

On this score, we reported the other day that the vaunted strength of auto sales was actually nothing of the kind; and that we are likely at the turning point in the auto sales recovery cycle because virtually anyone


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