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A Bad Recipe: Failing Growth Amidst Sustained Global QE, Debt & Bubble Valuations

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dan_kurzDan Kurz is a CFA with over two decades experience working in Zurich, Switzerland as a thematic strategist for Credit Suisse CIO Office. Dan’s site, DK Analytics, offers deep and broad analysis at the macro and micro level.


Economic growth came in at a tepid 0.7% in the first quarter of 2017. Nevertheless, officials at the Federal Reserve continue to insist the economy is strong. They held interest rates steady in April, but insisted hikes were still on the table. In fact, the Atlanta Fed forecast Q2 growth to come in at over 4%. 

Peter Schiff called the Atlanta Fed’s prediction “crazy,” nothing that they are starting out with a much higher estimate for Q2 than they had in Q1, despite having all of this information about how weak the economy was in Q1 that they didn’t have a few months ago. 

And that’s the crux of the matter. The actual economic data doesn’t support the economic optimism, nor the Fed’s monetary policy. In this in-depth analysis of the current economic and policy climate, Dan Kruz makes a strong case against the policymakers’ optimism.

Introduction (“It’s the economy, stupid!”)

US real GDP growth for Q1:17 was 0.7% with downward revisions likely given increasing weakness throughout the first quarter in retail sales and in auto sales. Yet the Fed remains upbeat on growth while it maintains that further increases in the Fed Funds rate are all but a given. The fly in the ointment: the faltering US economy, which will increasingly stress banking system solvency; money center bank solvency is the privately-owned Fed’s true mandate. In the meantime, the rest of the world keeps “printing.” How long until the Fed rejoins the overt QE party? Is the Fed raising the Fed Funds rate to a miniscule level so that it can offer a few rate decreases prior to revisiting its ZIRP?

The Atlanta Fed’s initial 4.3% real growth estimate — just revised down to 3.6% — for the second quarter (again) lacks virtually any credible growth reinvigoration driver; even the inventories to sales ratio remains elevated compared to 2010 – 2014 levels amidst sharply decelerating real GDP growth. This is especially apt in view of real US disposable income rising only 1.9% year-over-year. Let us explain: an overstated “1.9%” juxtaposed against a heavily understated “real world” inflation rate (any average American consumer knows that true inflation is much higher), the continued Main Street cross of Obamacare, the means-and-confidence-sapping high “real world” unemployment rate in America, a sharply lower number of online job ads, and the material growth in household, corporate, and government debt aren’t, collectively, indicative of a “fat” US economic growth pipeline! And neither is a projected massive, 8,000-store plus US retail sector consolidation in hugely overstored America thanks to lackluster sales (BTW, less than 9% of US total sales are online sales, and a fair portion of those are by “bricks-and-mortar” chains):

3,000 retail store reported closings YTD 2017 vs 1,200 reported in same period in 2016.

In the meantime, the world’s second biggest (?) economy — which has “stuffed” retail shelves in the US (and the west in general) with wares — is stuttering, casting an additional pall over global growth. China is that other “command & control” posterchild of debt-induced misallocations (incl. real estate bubbles), solvency issues, and rapidly expanding liquidity/counterparty concerns (below). This is not an idle concern, for the world economy runs on available credit.

  •  “BEIJING — China’s central bank announced on May 2, 2017 that it had pumped more than 590.3 billion yuan ($85.6 billion) into the market via multiple tools in April. The People’s Bank of China (PBOC) said it injected 495.5 billion yuan via the medium-term lending facility (MLF) to keep liquidity basically stable.
  • April 1, 2017: China’s central bank injects $89.9 bln of liquidity in March, up nearly 50 percent from the previous month, even as financial markets feared a cash crunch.
  • March 21, 2017: PBOC said to inject funds after missed interbank payments; rural banks among smaller institutions said to miss payments; Chinese money market rates climbed to highest since April 2015.”

Statism and Cronyism, US Style, Continued (that DC swamp is still bubbling over)

In the interim, the US government’s already pathetic fiscal discipline has gone from bad to worse under Republican control of both the executive and the legislative branches of the federal government, proving what we have continued to maintain in various publications, namely that both the Republicans and the Democrats are big government, redistributionist parties (or, as I’ve said to a close friend for over 20 years: it’s either big government with a left blinker or a right blinker, but it is still big government or statism!):

President Donald Trump said he’ll sign a bipartisan $1.1 trillion spending bill that largely tracks Democratic priorities and rejects most of his wish list, including funds for a wall on the U.S.-Mexico border.”
We’re very happy with it,” the president said Monday in an interview with Bloomberg News. … The president said he will sign the bill if it remains ‘as we discussed.’”

Let us get examine, a bit more graphically, just how Trump is jettisoning his goals — and many of his “Main Street” election promises — via his readiness to sign a congressional spending bill that was effectively determined by the Democratic congressional minority in cahoots with the “K Street” Republicans (the establishment). Plus, the Democratic minority successfully blackmailed the (erstwhile) GOP with government shutdown threats if sustained profligate spending isn’t assured, much less increased. Neither Trump nor leading Republicans have the stomach for a shutdown to better align government spending with tax receipts; in actuality only a fraction of the US government ever shuts down, and impacted government workers get full pay and additional “vacation.” Sadly, soundbites trump addressing huge threats to solvency. Politics as usual, it would appear.

Speaking of politics, the president refuses to fire and replace up to 3,000 political appointee holdovers from the Obama administration that are thwarting implementation of Trump cabinet secretaries’ decrees. How can (executive branch) agency spending reductions and/or regulatory reforms take place if the bureaucrats that run the administrative state are largely aligned against the administrations’ policy goals? And why hasn’t Mr. “You’re Fired” done the obvious? Is nepotism an issue? Or is Trump, when push comes to shove, too enthralled with big, active government after all?

Read the rest of Dan’s article here.


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