Truth About the Economy Leaks Out Through Cracks in the Mainstream Narrative
Last week, Jim Grant argued that the US manufacturing economy is flirting with recession, if it isn’t there already. He said the horse of speculation is ahead of the cart of enterprise. In other words, even though asset prices such as the stock market and real estate are rising, creating the illusion of economic prosperity, the actual underlying economy is a mess.
This reflects the views of a few other people like Peter Schiff and Mike Maloney who have argued that the US has already entered a recession. But by-and-large, these are voices crying in the wilderness. For the most part, mainstream analysts and government officials have not acknowledged the underlying problems in the economy. Even so, every once in a while, the truth leaks out through cracks in the mainstream narrative.
CNBC recently published an article by Pento Portfolio Strategies president Michael Pento arguing that a recession has already arrived:
While investors have been focused on the perennial failed hope for a second half economic recovery, they have been missing the most salient point: the US most likely entered into a recession at the end of last quarter.”
Pento highlights five generally overlooked data-points to make his case.
- The plunging price of copper.
- The downward trending Baltic Dry Index. (Measures the demand to transport dry commodities overseas.)
- The narrowing spread between 2 and 10-year Treasury notes. (At the tightest level since November 2007.)
- Declining industrial production.
- Falling non-farm payroll. (In decline since October of last year.)
Pento sums it up this way:
The falling copper price, tumbling global trade, a flattening yield curve, weakening industrial production, and the rolling over of monthly job creation all point to an economy headed into contraction.”
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Many will argue that the US can’t be in a recession because we have not had two consecutive quarters of negative real GDP. During Q4 2015 and Q1 2016, real GDP posted 1.4% and 0.8% growth. But Pento dug deeper into the numbers:
When deflating nominal GDP by the core rate of Consumer Price Inflation (CPI) published by the BLS, you get real GDP of just 0.3% in Q4, and negative 0.8% during Q1. Therefore, the economy is dangerously close to a contractionary phase; and is already in one when averaging the prior two quarters (at minus 0.25% when adjusted by core inflation).”
This explains the Fed’s reluctance to raise interest rates. It can’t. And as Pento points out, it raises an even bigger question: what will the Fed do when it finally wakes up and faces the facts?
The Fed already has a bloated balance sheet in relation to GDP and only a few basis points to reduce borrowing costs before short-term rates hit zero percent. Therefore, there just isn’t much the Fed can do this time around. Therefore, this next recession could last even longer than the previous one.”
But Peter says that won’t stop the Fed from trying. In fact, he believes Janet Yellen and company will ultimately sacrifice the dollar on the altar of the stock market through another round of quantitative easing.
No matter what the Fed ends up doing, it seems clear we’re in for some rough economic times ahead.
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