"Despite the ongoing antics in Washington the market remains less than 5 points (at the time of this writing) from its all-time closing high. If the markets were concerned about economics, fundamentals or potential default, stock prices would be significantly lower. The reality is that as long as the Federal Reserve remains convicted to its accommodative policies the argument for rationality is trumped by the delusions of Mo' Money."The debt ceiling debate continues into its third week as the impasse between the Democrats and Republicans continues unabated. The latest proposal to lift the debt ceiling, fund the government and repeal a portion of the "sequester," in exchange for a 2-year delay of the economically damaging medical device tax, was soundly rejected by the White House on Friday. Furthermore, the House Republicans have sent up 14 separate funding resolutions to keep portions of the government operating which, likewise, have been rejected by the Senate. This leaves the House Republicans, at this point, held "hostage" by the administration for a funding bill that would be "political suicide" for the party as a whole.
"In order for profitability to surge, despite rather weak revenue growth, corporations have resorted to four primary weapons: wage reduction, productivity increases, labor suppression and stock buybacks. The problem is that each of these tools create a mirage of corporate profitability. The problem, however, is that each of these not only have a negative economic consequence but also suffer from diminishing rates of return over time."
"To begin, the civilian population of the U.S. aged sixteen and over has grown from 234.9 million people to 245.9 million. This is the universe of people that we need to follow to see what has happened in the labor market. That is, since the population of potential workers has grown by 11 million, the goal of this column is to determine where all 11 million of those people went.Based on the national labor force participation rate, we would expect about 7.1 million of our 11 million people to join the labor force, either as employed or unemployed. Instead, the number of people in the labor force increased by only 1.3 million-from 154.2 to 155.5 million people. That is an enormous, unanticipated change in the proportion of people in the labor force. Whether the change is demographic, due to labor market conditions, or caused by government policies, something unusual is going on."
"As you can see there have been very few months since the turn of the century where employment has exceeded population growth.This explains two things:1) Why the employment to population ratio has plunged along with the labor force participation rate; and2) That employment gains, so far, have been a function of businesses hiring only to meet the demand increases caused by an increase in population rather than from a growing economy.The latter point is very important and relates directly to an issue that has been lurking silently in the background called "labor hoarding."
"As Washington is struggling with debt and all its political ramifications, American companies and consumers are embracing it, running up record amounts in 2013.Whether it's corporate loans, all quality levels of bonds or simple consumer credit, the debt party is back on in the U.S., whether it's in the boardroom or the living room."
- Consumer credit of $3.04 trillion as of Q2, +22% over past three years
- Student loans +66% over past three years
- Total household debt is $13 trillion, almost back to 2007 peak.
- Government debt almost $15 trillion
- Through September junk bond issuance is a record $372B, +27% y/y
- US loan volume is $1.53 trillion through Q3. +25% y/y
- Globally, syndicated marketed loans hit $2.93 trillion Q3, +15% annualized gain
- High-risk leveraged loans global volume hit $1.23 trillion, highest since 2007
"However, it is also not an absolute certainty that the many individuals in the 'no recession' camp will be right either given the fact that the data revisions to much of the 2012 economic data, which will come later this year, will likely shown an economy that is much weaker than currently estimated. As stated above there is very little 'wiggle room' for the economy at this point to absorb much of a shock. With real final sales plugging along at 1.9% and the output gap above 6% the slack in the economy is huge. As a reminder these numbers are generally levels more associated with recessions and not four years into a recovery.A recession will inevitably come it is simply part of the economic and business cycle. The Fed may be able to slow, or distort, economic cycles but they cannot repeal them entirely. Whether a recession comes this year, or next, is largely irrelevant the issue will be the damage caused to investors by the impending reversion as reality collides with fantasy."
"Suffice it to say that I consider the stock market to be near the highs of a decidedly unfinished cycle.The upshot is fairly simple. We presently observe both a hostile long-term outlook from a valuation standpoint, and a hostile intermediate-term outlook from an estimated return/risk standpoint.I continue to believe that much of the impact of QE is based on superstition - the result of investors misattributing the 2009 market rebound to monetary policy. It's certainly true that replacing $3.6 trillion of interest-bearing securities with zero-interest cash encourages investors to reach for yield in riskier securities, but that's not what ended the crisis. In hindsight, the risk of widespread bank insolvency ended the instant the Financial Accounting Standards Board relieved banks of any need for balance-sheet transparency, deciding in early-2009 to abandon mark-to-market accounting. Of course, it seems more heroic to attribute the recovery to courageous monetary policy than to applaud a handful of bureaucrats with green eyeshades for caving in to Congressional pressure and moving the banking system that much closer to a Ponzi scheme."