Consciousness of Sheep
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One of the ways we can spot propaganda is when an identical story appears across the world’s media. So it was last week, when news outlets parroted the idea that the global economy in general and the western economies in particular, were going to experience a “soft landing.” The central banks had done their job, interest rate rises had put the inflation genie back in the bottle, and it was safe to go shopping once more.
Responses to the “soft landing” story though, were somewhat mixed. Financial journalists and central bank economists took to the airways to claim that the economy was in far better shape than was predicted last year. Indeed, even the UK had apparently dodged the recession the experts had previously said was coming. Stock markets, on the other hand, seemed to take the news badly, with declines in share prices… albeit modest ones. Bond markets went the other way, with yield curve inversions – an accurate predictor of recessions – widening further. Clearly not all of these groups can be right. So what is going on here?
Given their track record, the central banks are very likely to be wrong. The two things that their “soft landing” narrative is based upon are the post-lockdown Chinese economy and the unexpectedly high jobs growth in the USA. This is based on the belief that the post-lockdown economy will follow a similar path to the post-crash economy after 2008. Then, it had been the growing Chinese economy which had revived the entire global economy. And so, with China finally reopening after three years of extreme lockdown, a similar burst of Chinese growth is expected both to increase the supply and lower the cost of manufactured goods, thereby stimulating consumption in the western economies.
As if to bear this out, the US economy unexpectedly added 517,000 jobs in January, including 30,000 new jobs in retail. While similar jobs numbers have failed to appear in the UK and Europe, this did not stop economists and journalists here from promoting the same “soft landing” narrative – aided additionally by the apparent (although there is still time for an end of winter cold snap) avoidance of the widely predicted energy crisis. Clearly, it is now time to stop talking the economy down and to get our credit cards out once more… except…
Except that all three soft landing elements – Chinese growth, US jobs and European energy surpluses – are a mirage, little different to a hallucinated oasis to someone dying of thirst in the desert. The Chinese economy is no longer able to grow in the way that it did after 2008, when it added huge amounts of infrastructure and energy generation. And to make matters worse, with Covid now rampant, even with the very low death rates seen in the west, China is going to lose several million people who would otherwise be fuelling domestic demand. On top of this, there are the as yet unknown impacts of China’s move toward the new BRICS trading system, which are hardly likely to be positive for the western dollar economies.
Meanwhile, European energy security only appears to be real. As Haris Doukas and Vlasios Oikonomou at Euractiv explain:
“First, the overall picture hides side aspects. The high-consuming industries have taken a hard beating, with a considerable number of metal foundries and fertiliser industries shutting down in the last months.
“In Eurostat’s tables the Intermediate Goods Industry category, which includes metal production, shows a continuous reduction from June onwards. Of course, in addition to the preceding months, the performance in the coming months is of great interest too.
“Research carried out last October by the German Institute Ifo shows that 3 out of every 4 processing industries declared that they succeeded in the last 6 months in reducing fossil gas consumption without production reduction. However, the same research reveals that fewer than 40% said they could achieve further gas consumption reduction without production reduction.”
The reason things turned out better than expected may well owe more to this year’s very mild winter than to the resilience of the EU economy to further energy shocks… shocks which are inevitable at some point, now that Europe has burned its bridges with Russia and Eurasia more generally.
And then there were those highly anomalous – some might, not unreasonably, say “rigged” (they came out just prior to Biden’s state of the union address) – US jobs numbers. Certainly, they helped to justify the Fed’s latest interest rate rise and the promise that rates are going to stay higher for longer. This is because central banks use the discredited Phillips Curve model which assumes a causal link between employment and inflation – that if employment is rising, so too will inflation. And so, it is only when we witness sustained increases in unemployment that the central banks will begin cutting interest rates once more. But again, those jobs figures are a mirage. As Robert Barone at Forbes explains:
“The big spike in the Payroll data was out of kilter with what has been occurring in the rest of the economy and in other labor market data… most or all of the +517K job gains wasn’t due to new job creation, but to benchmark revisions, seasonal adjustments, and population controls, all keywords for what we can only describe as statistical magic. Morgan Stanley concluded that without the population adjustments, the Household Survey (which was up an even larger +894K), only rose +84K, while Rosenberg Research concluded the real Payroll number was only +44K.”
In a previous article, Barone pointed to an overlooked element within the jobs data which is all too familiar here in the UK:
“The number of jobs, while important, doesn’t tell the entire employment story because, while the Payroll Survey counts the number of jobs, it doesn’t distinguish between full-time and part-time jobs or hours worked. The total number of jobs may rise, but if they are all part-time, and if hours worked fall, then economic activity declines. And that is what happened in both November and December. Last month hours worked fell -0.3%. That small percentage doesn’t seem like a lot, but when spread over 159 million people employed, that’s a lot of hours. According to Wall Street Economist David Rosenberg, when hours worked are taken into account, the equivalent number of jobs fell -150K in December (and by -300K in November). Looking elsewhere for corroborating evidence, we find that the factory workweek fell -0.25% in December and has been flat or down in every month since February.”
Because of the way employment – and the measurement of employment – has changed over decades, under-employment is more of an indicator than jobs. For example, as the economy slows, businesses will not immediately fire workers – particularly if, as in 2021, they had recently experienced labour shortages – but will cut hours in response to rising costs and falling demand. One result of this is that the jobs numbers can appear far stronger than is actually the case. Moreover, there is usually a lag between workers being fired and employment data falling. For example, large firms – on both sides of the Atlantic – are required to give formal notice of redundancies before they can lawfully fire workers. This is why the tens of thousands of job losses announced in tech corporations like Google and Microsoft have yet to filter through. And it is possible that the tech sector – because of its financial reserves – was able to over-hire during the labour shortage, and thus may have more redundant workers to let go. But even after workers have been laid off, they do not automatically appear in employment data if they are entitled to some form of severance package. It might be three or even six months after they are fired that they will appear in the unemployment figures.
Against these mirages, there are some real economic indicators which point to more of a nose-dive into the tarmac than a soft landing. The most obvious of these is the Baltic Dry Index – a measure of dry goods being traded around the world – which has fallen from its 2021 supply-shock peak and is now below its November 2008 low point:
Indeed, container shipping prices are collapsing from the highs recorded in 2021, as global trading seizes up… a practical example of the old adage that “the answer to high prices is high prices.”
One peculiar indicator of bad times ahead within the latest UK GDP figures, is a big increase in the repair of motor vehicles and motorcycles. While this may be good news for mechanics, coming alongside reports that second hand car sales have fallen due to lack of supply, this is strong evidence that as living standards continue to fall, people are hanging onto their old cars for longer – patching them up rather than trading them in. Indicators of this kind, along with the decline in all production and construction, along with domestic retail sales and house building, explain why stock and bond market investors are at odds with the soft landing narrative being spun by the central banks.
Both alternative stories though, are at odds with each other. Stock market investors appear to be expecting the central banks to revert to the 2008-2021 approach to the economy. That is, once it becomes clear that the economy has gone into reverse, investors imagine a return to quantitative easing and much lower interest rates – the so-called “Fed Put.” This is why share prices fell in response to the apparently positive US jobs and UK GDP numbers, since without negative news to send share prices tumbling, there is little prospect of the central banks cutting rates and restarting QE.
Like stock traders, bond traders are anticipating rate cuts. Unlike stock traders though, the reason bond traders are betting on interest rate cuts is because all of the indicators are pointing to a severe economic downturn, very likely worse than the crash of 2008. And one reason for this is that, while the details of the 2008 crisis may be different, the broad process looks eerily similar:
- A big spike in energy costs causing price increases across the economy
- Central banks responding by raising interest rates
- High interest rates and high prices fuelling a “crisis of under-consumption”
- Falling consumer demand and increasing bad debt crashing the real economy
- Banks tightening lending standards causing the currency supply to shrink
- Economic demand crashing further, leading to insolvencies, unemployment and even more bad debt
- Banks no longer trusting each other’s assets due to too much bad debt
- Governments and central banks having to intervene to prevent a systemic meltdown…
We are currently at the stage where banks have tightened lending standards beyond the point where the money supply itself has fallen across the western economies. And the process is worsening in the USA, UK and Europe. The result is that we are now in an economic version of musical chairs because there is no longer enough money to go around. It is only a matter of time before we get the first run on a bank, after which we will find ourselves in a new credit crunch as banks cease lending to each other.
This, I believe, is the story the bond market is trying to tell us… that the “inflation” really was temporary – a product of a once and done spending blip as economies reopened and consumers spent the money they had saved, into a global supply shock as producers failed to keep up with demand. This situation has since gone into reverse. Demand has crashed, unsold inventory is rising, disinflation has already begun, and deflation is coming to a high street near you in the not-too-distant future.
The only question that remains is just how much of the quadrillions of dollars’ worth of derivatives which – with the help of 12 years of QE and low interest rates – reinflated the pre-2008 bubble, will turn out to be bad? Most likely – as I have written many times over the years, everything which turned out to be “too big to fail” last time around, will be revealed to be too big to save this time.
As you made it to the end…
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