Have We Begun the Third Leg Down?
Bill Quick

Spengler » The Exhausted U.S. Economy, and a Lesson for Republicans

In support of an argument around another issue, Spengler cites the following:

…on Monday the Institute for Supply Management reported the steepest drop in manufacturing orders since December 1980:


Not only did the U.S. economy stop hiring in December, with just 74,000 workers added to payrolls; it stopped ordering new equipment. The drop in orders is something that only has occurred during recessions (denoted by the shaded blue portions of the chart)


This should be no surprise in retrospect, given two disastrous underlying trends. One is the decline of real median household income:


The other is the collapse of the labor force participation rate, which is the flip side of the coin: if fewer adults are working, median household income will be lower.


Average hours worked are down 1% from pre-recession levels. That doesn’t seem like a lot, but it’s the equivalent of 1.4 million jobs in a labor force of 140 million. The U.S. has restored 2.5 million jobs since the financial crash, but adjusted for hours worked, it’s the equivalent of just 1.1 million jobs.


Apart from student loans, the only category of consumer credit that expanded during 2013 was automobile loans. The replacement wave appears to be over and car sales have slumped.


Americans know better: in late January, 74% of respondents to a Fox News poll said the country still was in recession.

In short, all the underpinnings of any sort of consumer support for recovery have either continued to plungle, or have recently plunged sharply.  For years I’ve predicted that the crash of 2008-2009 was merely the first drop in a longer three-stage movement:  Crash, recovery, big crash.

As Spengler points out:

Last year’s 30% runup in the S&P 500 was founded on the firm belief that things would get better in the future as they always had in the past. Can the stock market be so wrong? Twice in my lifetime, the stock market has given ridiculously wrong signals: during the tech bubble of the 1990s and the mortgage bubble of the 2000s. The Fed’s unprecedented provision of liquidity cheered the stock market, but it did not persuade lenders to lend or borrowers to borrow.

In fact, the entire “stock bull market” has been entirely supported by vast injections of financial crack pounded directly into the veins of the economy via the banking system.  But as any good drug addict knows, more and more of the Good Stuff is required to achieve the same effect, and eventually you reach a point where the amount of High Octane necessary to maintain the effect is enough to kill the addict.

At that point, the addict and/or the addiction enters a death spiral.  Third legs down are all about death spirals.  Which makes me just a tad bit nervous about the recent toppy action in the equities markets.


Posted in Markets permalink
Bill Quick

About Bill Quick

I am a small-l libertarian. My primary concern is to increase individual liberty as much as possible in the face of statist efforts to restrict it from both the right and the left. If I had to sum up my beliefs as concisely as possible, I would say, "Stay out of my wallet and my bedroom," "your liberty stops at my nose," and "don't tread on me." I will believe that things are taking a turn for the better in America when married gays are able to, and do, maintain large arsenals of automatic weapons, and tax collectors are, and do, not.


Have We Begun the Third Leg Down? — 2 Comments

  1. Pingback: Bill Quick Channels his Inner Karl Denninger

  2. I haven’t yet been able to find the right words to adequately describe an idea floating in my head in the form of a “gut feeling”. Bill comes closest yet to putting my thoughts to paper here. There is an old saying on Wall Street and that is “Don’t fight the Fed”. Even though Obamanomics are an Obamanation and this recovery ” ” is laughable, the Fed’s unprecedented ZIRP and QE’s have papered over these facts. Which leads into the inflation vs deflation debate. Both camps have very good arguments for their stance of either pro-inflation or pro-deflation. What actually happens is determined by what a group of bureaucrats in Washington DC who meet every 6 weeks and are known as “The Fed”. When they print money via QE they get inflation. Whether this shows up as goods prices rising (runaway CPI price inflation) or paper asset price rising (Dow doubling, high yield nominal and spread yield lows, UST yield lows) it is still inflation. Read “Tomorrow’s Gold” by Marc Faber, amongst others. As soon as they back off QE or “taper” money printing, deflation takes the helm. Equity and bond prices unwind first since they were the immediate beneficiaries of money printing.

    So inflation vs deflation is in the hands of a couple dozen bureaucrats and politicians in BoshWash corridor. However, regardless of which course they take, meddling in market prices and hence sending false signals to market players sends false signals leading to malinvestment which leads to slower growth and eventually permanent recession.

    Welcome to the Union of Soviet Socialist States of America. Where Georgian girls is still always on our minds, since that’s the only peaches we’ll get to enjoy soon enough. That or Slobovits.