Tag: news

US Budget Deficit Hits $607 Billion In 9 Months, As Spending On Interest Explodes

The US is starting to admit that it has a spending problem.

According to the latest Monthly Treasury Statement, in June, the US collected $316BN in receipts – consisting of $162BN in individual income tax, $94BN in social security and payroll tax, $3BN in corporate tax and $22BN in other taxes and duties- a drop of 6.6% from the $338.7BN collected last June and a reversal from the recent increasing trend…

… even as Federal spending also dipped, down 8.8% from $428.9BN last June to $391.1BN last month.

… where the money was spent on social security ($88BN), defense ($65BN), Medicare ($79BN), Interest on Debt ($32BN), and Other ($126BN).

This resulted in a June budget deficit of $75 billion, better than the consensus estimate of $98BN, and an improvement from the $147 billion deficit in May and as well as slightly less than the deficit of $90.2 billion recorded in June of 2017. This was the second biggest June budget deficit since the financial crisis.

The June deficit brought the cumulative 2018F budget deficit to over $607BN during the first nine month of the fiscal year, up 16% over the past year; as a reminder the deficit is expect to increase further amid the tax and spending measures, and rise above $1 trillion.

Most Wall Street firms forecast a deficit for fiscal 2018 of about $850 billion, at which point things get… worse. As we showed In a recent report, CBO has also significantly raised its deficit projection over the 2018-2028 period.

But while out of control government spending is clearly a concern, an even bigger problem is what happens to not only the US debt, which recently surpassed $21 trillion, but to the interest on that debt, in a time of rising interest rates.

As the following chart shows, US government Interest Payments are already rising rapidly, and just hit an all time high in Q1 2018. 

Interest costs are increasing due to three factors: an increase in the amount of outstanding debt, higher interest rates and higher inflation. A rise in the inflation rate boosts the upward adjustment to the principal of TIPS, increasing the amount of debt on which the Treasury pays interest. For fiscal 2018 to-date, TIPS’ principal has been increased by boosted by $25.8 billion, an increase of 54.9% over the comparable period in 2017.

The bigger question is with short-term rates still in the mid-1% range, what happens when they reach 3% as the Fed’s dot plot suggests it will?

* * *

In a note released by Goldman after the blowout in the deficit was revealed, the bank once again revised its 2018 deficit forecast higher, and now expect the federal deficit to reach $825bn (4.1% of GDP) in FY2018 and to continue to rise, reaching $1050bn (5.0%) in FY2019, $1125bn (5.4%) in FY2020, and $1250bn (5.5%) in FY2021.


Goldman also notes that it expects that on its current financing schedule the Treasury still faces a financing gap of around $300bn in FY2019, rising to around $750bn by FY2021, and will thus need to raise auction sizes substantially over the next couple of years to accommodate higher deficits.

What does this mean for interest rates? The bank’s economic team explains:

The increase in Treasury issuance and the ongoing unwind of QE should put upward pressure on long-term interest rates. On issuance, the economic research literature suggests as a rule-of-thumb that a 1pp increase in the deficit/GDP ratio raises 10-year Treasury yields by 10-25bp. Multiplying the midpoint of this range by the roughly 1.5pp increase in the deficit due to the recent tax and spending bills implies a 25bp increase in the 10-year yield. On the Fed’s balance sheet reduction, our estimates suggest that about 40-45bp of upward pressure on the 10-year term premium remains.

And here a problem emerges, because while Goldman claims that “the deficit path is known to markets, but academic research suggests these effects might not be fully priced immediately… the balance sheet normalization plan is known too, but portfolio balance effect models imply that its impact should be gradual” the bank also admits that “the precise timing of these effects is uncertain.”

What this means is that it is quite likely that Treasurys fail to slide until well after they should only to plunge orders of magnitude more than they are expected to, in the process launching the biggest VaR shock in world history, because as a reminder, as of mid-2016, a 1% increase in rates would result in a $2.1 trillion loss to government bond P&L.

Meanwhile, as rates blow out, US debt is expected to keep rising, and  somehow hit $30 trillion by 2028…

… without launching a debt crisis in the process.

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Venezuela’s Socialist Hyperinflation Turned People Back To Barter System

Authored by Mac Slavo via SHTFplan.com,

In the wake of socialist Venezuela’s massive hyperinflation, citizens have returned to the original monetary system in order to survive. 

While it is virtually impossible to visualize the inflationary trend in Venezuela, Bloomberg’s Cafe Con Leche index signals a roughly comparable level of 43,478%. More absurdly, annualizing the last three months of data, paints an even more dismal picture: inflation of 482,153%.

Looking at just the past month, Reuters reports that June inflation accelerated to 128.4%, the fastest this year, from 110.1% in May, according to opposition legislator Angel Alvarado. Even more shocking, food prices rose by 183% in June.

“It is by far the worst hyperinflation suffered by a Latin American country,” Alvarado said in an interview.

The barter system is now prevalent in the collapsed economy of the authoritarian dictator, Nicolas Maduro.

Barter is one of the best ways to trade goods, considering its almost impossible to tax those transactions and since money in Venezuela is as difficult to come by as food and medicine, that’s now the preferred method of trading goods and services. Women in Venezuela have been turning to prostitution and asking for payment in food instead of cash for a while now, and as the regime tightens its grip on the private sector, more will have to turn to trade to survive.

Once the richest country of Latin America, Venezuela, which sits on world’s largest oil reserves, now has a bleak future. People in this oil-rich country are scrambling for money, food and basic necessities. They have taken to swapping different items and even doing chores in exchange for packages of flour, rice, and cooking oil.

“There is no cash here, only barter,” said Mileidy Lovera, who is a 30-year-old mother of four. Lovera spoke with Economic Times while hoping to trade a cooler of fish that her husband had caught for food to feed her children or medicine for her son who has epilepsy.

Venezuela has experienced the death of cash. Payment for even the cheapest of goods and services would require unwieldy piles of banknotes or fiat currency, and there simply are not enough of those in circulation.  While wealthy formal businesses in cities can get by on bank transfers and debit cards, such operations are largely out of the question in rural areas.

The economic collapse, which began under socialist President Nicolas Maduro’s government, has driven nearly one million people to migrate to other places in search of food, medicine, or other basic life necessities. Others have stayed and fight each other with machetes for some “quality garbage” that is thrown out.

Economists have even begun placing the blame on the current government – a socialist regime which actually leans more towards communism (and the two are almost the same thing anyway). Many economists say the central bank has not printed bills fast enough to keep up with inflation.  “It’s a very primitive payment system but it’s also very primitive for a country not to have enough cash available,” said Luis Vicente Leon, an economist.

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Tax Code Loophole Could Allow 21% Tax Rate For Nation’s Richest

The tax code is so horribly intricate, convoluted and difficult to follow that the Trump administration may have inadvertently just gifted those who store cash and investments offshore another major tax cut – allowing them to tap the 21% corporate rate – without even knowing it.

Not unlike the patchwork job that the Federal Reserve has been performing on the economy, the tax code has been constantly revised and re-written for years, although nobody has had the fortitude to realize that maybe just stripping a good portion of it away would do us a lot more harm than good. With this type of backwards thinking comes ridiculous mistakes, like the one unearthed recently. The nation’s wealthiest can now potentially tap the 21% corporate tax rate for personal earnings offshore.

For years, the tax code has been laughed at due to its complicated nature and voluminous content. Year after year, election after election, politicians promise to try and clean up the tax code, making it easier for “the rest of us” to understand. It never happens.

The Trump administration has tried to take steps in simplifying things, recently releasing a postcard sized version of Form 1040 for most people who don’t have complicated returns.

But only now – months after Trump has signed his tax cuts into law – are accountants starting to realize that cutting the corporate tax rate may have inadvertently created a tax loophole that could allow some of the nation’s wealthiest people – who are usually the ones with access to expensive tax accountants and experts anyway – to be taxed at the corporate rate. Bloomberg reported on the story:

An obscure tax provision from the 1960s that was left untouched by President Donald Trump’s overhaul could let wealthy individual investors seize for themselves the largest corporate tax cut in U.S. history.

The measure — signed into law by President John F. Kennedy — was designed to prevent Americans from indefinitely shielding themselves from taxes by keeping investments offshore. It forced them to pay taxes annually on these investments, but gave them the option to have that income taxed at the corporate rate instead of at individual rates.

Bloomberg noted that the provision was virtually never used as the highest corporate rate had traditionally been the same or higher as the highest individual rate, but that has now changed.

For the past few decades, investors have had little reason to pick the corporate rate, since it was nearly the same as the top personal rate. But that all changed in December, when Trump’s tax law slashed the corporate rate to 21 percent — 16 percentage points lower than the top federal individual income tax rate.

One expert in the article is quoted as saying “…we just forgot about it.”

As to how it will work specifically: Investors have to create companies offshore where they can stash their passive income generating investments. From there, they can choose to pay the corporate rate, instead of their regular income tax rate, on what they earn. The money is taxed a second time if its moved back into the U.S., but for investors with a longer term horizon, this loophole could still create a major tax break.

The potential corporate rate cash-in derives from a complicated and controversial part of the tax code known as Subpart F. Congress passed the section in 1962 in an attempt to prevent companies from deferring taxes in overseas subsidiaries by keeping the profits abroad. Despite the deterrent, researchers have estimated that U.S. companies stashed more than $3 trillion of their earnings overseas. The recent tax law creates a mandatory tax — at a one-time low rate — that applies to those offshore earnings.

Subpart F also includes a section, 962, that allows individual taxpayers to act as if a “phantom” domestic corporation stands between them and their foreign company. Congress created that section as a way to put individuals on equal footing with those who held actual domestic corporations that owned a foreign subsidiary.

That said, those who plan on taking advantage of this loophole likely should do so with some expedience, as it would seem doubtful that it is going to last, especially once there is a public backlash to this latest gift to the rich.

In general, this loophole can only be described as another typical piece of inefficiency from the countless layers of government bureaucrats who continue to believe that overregulation and putting Band-Aids on things is a favorable solution instead of simply reducing the amount of government in our lives. The constant patchwork job that the government and the IRS are doing on the tax code is now – clearly more than ever – counterintuitive. After an embarrassing error like this, will the government start to get the point? Probably not.

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Yes, Hate Groups Can Hold Meetings in Libraries, Too

The American Library Association (ALA) is refusing to back down from its stance that hate groups have the right to meet in public libraries.

Last week, the ALA revised its interpretation of the Library Bill of Rights to note that library meeting rooms should be open to all kinds of organizations. “If a library allows charities, non-profits, and sports organizations to discuss their activities in library meeting rooms,” the revised interpretation says, “then the library cannot exclude religious, social, civic, partisan political, or hate groups from discussing their activities in the same facilities.”

While the revision is new, the ALA’s policy is not. In fact, under a section titled “Hate Speech and Hate Crime,” the organization’s website explains that as “sanctuary spaces for First Amendment ideals,” libraries must protect hate speech and “symbols of hate.” Hateful conduct, however, “is not tolerated.”

Still, some people were upset that the ALA would reaffirm the First Amendment rights of hate groups. Many took to Twitter to express their displeasure:

The ALA responded by explaining that while it doesn’t endorse hate groups or speech, the First Amendment leaves no choice in the matter. “Publicly funded libraries are bound by the First Amendment and the associated law governing access to a designated public forum,” read a statement from James LaRue, director of the ALA’s Office for Intellectual Freedom. “A publicly funded library is not obligated to provide meeting room space to the public, but, if it chooses to do so, under law cannot discriminate or deny access based upon the viewpoint of speakers or the content of their speech.”

It’s encouraging to see that even in the face of criticism, the ALA is reminding libraries that the First Amendment protects everyone’s right to free speech. As the Supreme Court has held on numerous occasions, hate groups can express themselves just like anyone else. What they say might be despicable, but they still have the right to say it.

LaRue may have put it best on Twitter. “Are we so afraid of hate speech that we’d give up all the rest?” he wrote.

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Defeated Dem Leader Crowley Might Be Mounting A 3rd Party Run, Ocasio-Cortez Warns

Democratic socialist wunderkind Alexandria Ocasio-Cortez is worried that her former opponent, Rep. Joe Crowley, the chairman of the House Democratic caucus, isn’t going to simply stand back and allow her to unseat him in November.

Ocasio

In a tweet sent Thursday, Ocasio-Cortez warned her followers that Crowley is mounting “a third party challenge against me and the Democratic Party – and against the will of @NYWFP”.

She then asked her supporters to donate so she can combat the flood of “dark money” that she (rightly) suspects might follow.

That’s the New York Working Families Party, an independent party that is influential in New York State politics, where the party has become associated with progressive issues on what was, until Ocasio-Cortez’s stunning primary victory, believed to be the far left flank of the Democratic Party (that was before leftists associated with the Democratic Socialists of America started openly endorsing communism).

The issue, as is explained in the New York Times article tweeted by Ocasio, is that Crowley won the WFP primary, so his name is expected to appear under their ballot line. Crowley could choose to have his name removed from the WFP line, as is customary in the state when the WFP candidate doesn’t match the Democratic candidate. Yet, Crowley has repeatedly declined to remove his name from the ballot line.

He has also, according to Ocasio-Cortez, stood her up for three planned concession calls. This could mean one of two things: Either Crowley has yet to decide whether it’d be worth it to run as an independent against the Democratic Party candidate (just like former Democratic Sen. and VP candidate Joe Lieberman did back in 2006), or he’s already mounting a whisper campaign, choosing to sit back and hope that the voters in his district are repulsed enough by Ocasio-Cortez’s socialist principles to vote him instead.

To anybody who was paying attention to the 2016 primary race between Bernie Sanders and Hillary Clinton, this shouldn’t come has a surprise. Crowley has publicly said he’d back Ocasio-Cortez after she defeated the 10-term incumbent for the Democratic nomination to run for his seat representing New York’s 14th Congressional district. Crowley’s spokesman has told the Times that he’s not running. But there’s still enough time left before election day for that to change.

Because if you thought the Democratic establishment would obey the will of its voters and embrace a 28-year-old socialist Latina over a 20-year veteran and former contender for the leadership, then you thought wrong.

And as a reminder, here is the socialist platform on which she ran.

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ACLU Asks Police Not To Attend a D.C. Community Meeting on Policing

The American Civil Liberties Union (ACLU) is requesting that representatives from D.C.’s Metropolitan Police Department not attend a public safety meeting where residents are expected to voice concerns about the agency. The request highlights growing tensions between officers and residents in the nation’s capital, as well as the ACLU’s own rapidly evolving position on balancing speech and assembly rights against concerns about safety and comfort in the public arena.

The meeting was called by the D.C. City Council’s Committee on the Judiciary & Public Safety after an incident occurred earlier in the week between police and a resident of the Deanwood neighborhood on the north side of Ward 7, which is predominantly black. Two police officers identified as Whitehead and Gupton descended upon a residency and began to conduct a questionable search. One was seen peering through a truck window before heading to the backyard. The events were captured by Jay Brown on his cellphone, who asked whether or not they had a warrant to search the home where his sister and niece live.

Brown asked Gupton what he was looking for, and Gupton would not tell him. Police later told the family that they believed a suspect dumped a gun in the area, but surrounding neighbors and children in the area were not alerted.

Brown and his family believe the search was a form of intimidation, as they are currently in the middle of a legal battle with the Metropolitan Police Department. Brown’s nephew, Jeffrey Price, died in May after his illegal dirt bike crashed into a police SUV. Police told the family that Price was speeding and going down the wrong side of the road when the crash ensued. The story was challenged when witnesses and video from the scene indicated that an officer later identified as Michael Pearson pursued Price, which is against police policy, and attempted to cut off the dirt bike with his police SUV, leading to the crash.

Brown said the officers’ search “further traumatized the family.” He added, “There will be no trust in the community unless we have some type of change in the way our police are operating in our city, because right now they’re conducting themselves like a lawless gang with no supervision.”

After the search, the family filed a suit with the ACLU. In turn, the ACLU’s D.C. office delivered a request on behalf of the Public Oversight Roundtable organizers regarding police presence at Thursday’s meeting. A press release asked police to “respect organizers’ request and keep a minimal, if any, presence” at the meeting, which was held in the Deanwood Recreation Center. The request cited “recent events.”

Monica Hopkins, executive director of the D.C. office, said that while the organization was pleased that Chief of Police Peter Newsham planned to attend the event, it was equally important “for community members to have an opportunity to share their concerns without feeling pressure from law enforcement.”

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The Fight Over Brett Kavanaugh Is a Preview of a Future In Which All Political Arguments Are Health Care Arguments

That Democrats would mount a ferocious opposition to Donald Trump’s nomination to replace Anthony Kennedy on the Supreme Court was a foregone conclusion: Before the name was released, Democratic strategists publicly discussed the need to oppose the nominee regardless of who it was. After Trump announced that he had picked Brett Kavanaugh, one prominent liberal activist group accidentally sent out an email slamming Trump’s nomination of “XX.” The exact reasons why they would oppose any Trump nominee could come later.

Later is now, and Democrats appear to have settled on a tip for their spear: Although abortion and the possibility of Roe v. Wade being overturned will no doubt figure prominently in Democratic messaging, the party’s leadership is pushing health care as the primary reason to oppose Kavanaugh. In particular, the notion that he might prove decisive in a vote to overturn Obamacare’s preexisting conditions rules.

“We Democrats believe the number one issue in America is health care and the ability for people to get good health care at prices they can afford. The nomination of Mr. Kavanaugh will put a dagger through the heart of that cherished belief that most Americans have,” Senate Minority Leader Chuck Schumer said earlier this week.

This is not just a preview of the fight over Kavanaugh, or even of the coming midterm election, although it is certainly both. It is also yet another indicator of how, in the age of Obamacare, all political arguments tend to become health care arguments.

The Democrats’ case against Kavanaugh, as much as there is one, has to do with a legal challenge now working its way through the court system. A group of conservative states led by Texas is challenging the constitutionality of Obamacare, arguing that because the individual mandate was upheld as a tax, and was set to zero by last year’s GOP tax law, it no longer raises revenue, and therefore is no longer constitutional as a tax. Furthermore, the challengers argue that because the mandate is central to the law, the entire statute should be struck down. Somewhat unusually, the Trump administration has declined to defend the health care law in court, filing a brief arguing that although much of the law should remain in place, the preexisting conditions rules should be struck down along with the mandate.

The Democratic line of thinking is that should the challenge ever reach the Supreme Court, Kavanaugh, as both a Trump pick and a former senior White House staffer under George W. Bush, would likely side with the Trump administration.

As a legal argument, this is at best a stretch. The Texas-led case is weak enough that it has been criticized by legal experts all over the ideological spectrum. It’s not even clear whether the states have standing to sue. The probability is low that the Supreme Court will ever hear the case.

But even if it did, Chief Justice John Roberts’ opinion, which states that the “only consequence” of failing to comply with the mandate is triggering a tax penalty, seems to hint that he would not buy the argument that other parts of the law should fall if the mandate is struck down. That means there would likely be five votes to keep the rest of the Affordable Care Act in place, regardless of how Kavanaugh voted.

Kavanaugh’s own record on Obamacare, meanwhile, suggests that he might take a minimalist approach to the law: In a dissent, he wrote that the courts should “respect” the “legislative effort” behind the law, and give significant weight to its “vital policy objectives.”

The Supreme Court is unpredictable. It is impossible to completely rule out the possibility that it will rule in a way that significantly alters or affects the health care law. But the evidence suggests that Kavanaugh is unlikely to be the decisive vote in any foreseeable case.

However, it would be a mistake to see this line of attack merely as Democrats misjudging the viability of the Texas lawsuit. For many Democrats and their supporters, this is about developing a political message designed to unify the party and carry it to victory in the 2018 midterms. It does Dems no good to treat any Republican threat as insignificant.

Organizing around Roe and abortion access would no doubt motivate the party’s base, but it could prove a problematic message for some red state Senate Democrats. The Joe Manchins (D–W.V.) and Joe Donnellys (D–Ind.) of the world, however, will have a far easier time supporting Obamacare and the various forms of coverage it regulates and supports. This is why Sen. Manchin’s response to Kavanaugh’s nomination was to warn that “the Supreme Court will ultimately decide if nearly 800,000 West Virginians with pre-existing conditions will lose their health care.”

So between the Democrats’ successful opposition to last year’s GOP repeal effort, and the role they want Obamacare to play in the 2018 midterm, it would appear that the future of American politics will increasingly revolve around health care policy—even when the connection is more a product of partisan convenience than real concern. That will be especially true for Democrats, who are likely to find the issue favorable for as long as Republicans continue to treat health care mostly as an afterthought.

The dominant role of health care policy in national politics has of course long been a fixture in many other Western nations, and of course U.S. politics have often touched on health care as well. But the passage of Obamacare in 2010 elevated and amplified those debates here in the U.S., rendering the issue permanently prominent.

In many ways, that is the fundamental nature of Obamacare and a significant part of its political legacy. By adding subsidies and regulations to individual plans operating in the private market and expanding Medicaid, the law solidified the idea that health care is primarily the responsibility of government, and that frustrations with the delivery and provision of care should be resolved in the public sphere. It did not socialize the nation’s health care system, but it did socialize the debate about health care.

In the process, it all but ensured that numerous future political fights, like the one over Kavanaugh, would be fought on the terrain of health policy. And although the coming battle over single payer on the left could change this dynamic somewhat, it seems more than likely that health care will remain a convenient, catch-all reason for doing or opposing “XX.”

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Smart Money Exodus Continues Despite Daily “Buy-The-F**king-US-Open-Dip” Cycle

Every day is different, right? It’s an efficient, random-walk, right?

Wrong!

Whether it’s the machines vicious-circling their own pattern-recognition algos or The NYFed’s PPT Desk arriving at work and taking charge, the US equity market has exhibited a strong intraday ‘seasonality’ for the past two months.

As Bloomberg exhibits below, the reality of trade wars take a bite out of stocks overnight, only to suddenly and inexplicably bid as the US equity markets open. However, once European markets close, the intraday party is over and sellers come back en masse, dumping into the US equity market close.

 

“This type of back and forth price action has defined 2018 thus far,” said Frank Cappelleri, senior equity trader at Instinet LLC.

“We’ve seen strong moves in both directions fade quickly, no matter what time from we’re talking about it — be it intraday or over multiple weeks. The long-lasting moves of last year have been challenging to find for nearly six months now, making it hard to trust any budding trend up to this point.”

As Bloomberg notes, the contrasting performance may also reflect divergent sentiment in the U.S. versus the rest of the world. Perhaps not coincidentally, the S&P 500 has outperformed stocks from Europe to Asia as tax cuts bolstered profits for corporate America… because Trump’s trade war has to be perceived as a positive for the US economy (and stocks – as everyone knows – are discounting the awesomeness of the economy going forward, just like they did in March 2000 and Dec 2007)

And at the same time, as “trade war’ rhetoric has recently re-escalated, VIX has plummeted divergently…

However, as we have noted previously, while Johnny 5 and his algo acquaintances ‘PPT’ the US markets intraday, the consistency of the late-day fade implies the smart-money – which tends to trade when the market is at its most liquid – is continuing its exodus of the stock market, happily selling to dissonant retail investors and corporations…

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A “Monetary Policy Accident” Is An Under-Appreciated Risk

Authored by Lance Roberts via RealInvestmentAdvice.com,

Last week, the Bureau of Labor Statistics published the latest monthly “employment report” which showed an increase in employment of 213,000 jobs. It was also the 93rd consecutive positive jobs report which is one of the longest in U.S. history. Not surprisingly, the report elicited exuberant responses from across the financial media spectrum such as this from Steve Rick, chief economist for CUNA Mutual Group:

“The employment report this month demonstrates yet again the robust strength of the labor market. After a red-hot May, June kept up steady momentum in jobs and certainly hit back at any worries among economists who thought hiring was beginning to plateau after an inconsistent past few months.”

There is little argument the steak of employment growth is quite phenomenal and comes amid hopes the economy is beginning to shift into high gear.

But if employment is as “strong” as is currently believed, then I have a few questions for you to ponder. These questions are important to your investment outlook as there is a high correlation between employment, economic growth and, not surprisingly, corporate profitability.

Let’s get started.

Prelude: The chart below shows the peak annual rate of change for employment prior to the onset of a recession. The current annual rate of employment growth is 1.6% which is lower than any previous employment level prior to a recession in history.

Question: Given the low rate of annual growth in employment, and the length of the employment gains, just how durable is the job market against an exogenous economic event? More importantly, how does 1.6% annualized growth in employment create sustained rates of higher economic growth?

Prelude: One thing which is never discussed when reporting on employment is the “growth” of the working age population. Each month, new entrants into the population create “demand” through their additional consumption. Employment should increase to accommodate for the increased demand from more participants in the economy. Either that or companies resort to automation, off-shoring, etc. to increase rates of production without increases in labor costs. The next chart shows the total increase in employment versus the growth of the working age population.

Question: Just how “strong” is employment growth, really? 

Prelude: The missing “millions” shown in the chart above is one of the “great mysteries” about one of the longest economic booms in U.S. history. This is particularly a conundrum when the Federal Reserve talks about the economy nearing “full employment.”

The next several charts focus on the idea of “full employment” in the U.S. While Jobless Claims are reaching record lows, the percentage of full time versus part-time employees is still well below levels of the last 35 years. It is also possible that people with multiple part-time jobs are being double counted in the employment data.

Question: With jobless claims at historic lows, and the unemployment rate at 4%, then why is full-time employment relative to the working age population at just 49.9%?

Prelude: One of the arguments often given for the low labor force participation rates is that millions of “baby boomers” are leaving the workforce for retirement. This argument doesn’t carry much weight given the significantly larger “Millennial” generation which is entering into the workforce simultaneously.

However, for argument sake, let’s assume that every worker over the age of 55 retires. If the “retiring” argument is valid, then employment participation rates should soar once that group is removed. The chart below is full-time employment relative to the working-age population of 16-54.

Question: At 50.43%, and the lowest rate since 1981, just how big of an impact are “retiring baby boomers” having on the employment numbers?

Prelude: One of the reasons the retiring “baby boomer” theory is flawed is, well, they aren’t actually retiring. Following two massive bear markets, weak economic growth, questionable spending habits and poor financial planning, more individuals over the age of 55 are still working than at any other time since 1970.

The other argument is that Millennials are going to school longer than before so they aren’t working either. The chart below strips out those of college age (16-24) and those over the age of 55. Those between the ages of 25-54 should be working.

Question: With the prime working age group of labor force participants still at levels seen previously in 1988, just how robust is the labor market actually?

Prelude: Of course, there are some serious considerations which need to be taken into account about the way the Bureau of Labor Statistics measures employment.  The first is the calculation of those no longer counted as part of the labor force. Beginning in 2000, those no longer counted as part of the labor force detached from its longer-term trend. The immediate assumption is all these individuals retired, but as shown above, we know this is exactly the case.

Question: Where are the roughly 95-million Americans missing from the labor force? This is an important question as it relates to the labor force participation rate. Secondly, these people presumably are alive and participating in the economy so exactly how valid is the employment calculation when 1/3 of the working-age population is simply not counted?

Prelude: The second questionable calculation is the birth/death adjustment. I addressed this in more detail previously, but here is the general premise.

Following the financial crisis, the number of “Births & Deaths” of businesses unsurprisingly declined. Yet, each month, when the market gets the jobs report, we see roughly 200,000 plus jobs attributed to positive net business creation.

Included in those reports is the ‘ADJUSTMENT’ to account for the net number of new businesses (jobs) that were “birthed” (created) less “deaths” (out of business) during the reporting period. Since 2009, the number has consistently “added” roughly 800,000 jobs annually to the employment numbers despite the fact the number of businesses was actually declining.

The chart below shows the differential in employment gains since 2009 when removing the additions to the monthly employment number through the “Birth/Death” adjustment. Real employment gains would be roughly 7.04 million less if you actually accounted for the LOSS in jobs. 

We know this number is roughly correct simply by looking at the growth in the population versus the number of jobs that were estimated to have been created.

Question: If we were truly experiencing the strongest streak in employment growth since the 1990’s would not national compensation be soaring?

Prelude: If the job market was as “tight” as is suggested by an extremely low unemployment rate, the wage growth should be sharply rising across all income spectrums. The chart below is the annual change in real national compensation (less rental income) as compared to the annual change in real GDP. Since the economy is 70% driven by personal consumption, it should be of no surprise the two measures are highly correlated.

Side Question: Has “renter nation” gone too far?

However, if we dig in a bit further, we see that real rates of average hourly compensation remains virtually non-existent.

Question: Again, if employment was as strong as stated by the mainstream media, would not compensation, and subsequently economic growth, be running at substantially strong levels rather than at rates which have been more normally associated with past recessions?

I have my own assumptions and ideas relating to each of these questions. However, the point of this missive is simply to provide you the data for your own analysis. The conclusion you come to has wide-ranging considerations for investment portfolios and allocation models.

Does the data above support the notion of a strongly growing economy that still has “years left to run?”  

Or, considering the fact the Fed is tightening monetary policy by raising rates and reducing liquidity, does the data suggest a “monetary policy” accident and recession are an under-appreciated risk?

But then again, maybe the yield-curve is already telling the answer to these questions. That however depends on which yield curve you look at. For our latest on the Fed’s shifting narrative on the value of the yield curve please read our latest article – The Mendoza Line.

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Charges Against Stormy Daniels Dropped On Technicality Amid Human Trafficking Investigation

Charges against Stormy Daniels have been dropped on a technicality following her early Thursday arrest at an Ohio strip club as part of a human trafficking and prostitution sting.

Daniels was observed using her bare breasts to smack patrons, as well as grab the breasts of female patrons, according to the arrest report. 

At approximately 11:30 a dancer using the stage name Stormy Daniels, later identified as Stephanie Clifford made her way to the main stage and began performing. The majority of the patrons got up from their tables and stood immediately adjacent to the stage throwing dollar bills at Ms. Clifford. During her performance after removing her top exposing her breasts she began forcing the faces of patrons into her chest and using her bare breasts to smack the patrons. The officers observed Ms. Clifford fondling the breasts of female patrons…. 

…Ms. Clifford leaned over, grabbed Det. Keckley’s head and began smacking her face with her bare breasts and holding her face between her breasts and against her chest. Ms. Clifford then made her way over to Det. Lancaster and performed the same acts on him forcing his face into her chest between her breasts and began smacking his face with her bare breasts.” 

You can read the police report below in its entirety. 

Fortunately for Stormy (real name Stephanie Clifford), the law she was arrested under a law that requires “regular” performances, while she had only performed once at the Sirens Gentlemen’s club. That said, she was scheduled to perform Thursday night as well – meaning that had the Columbus PD charged her after her second performance at the club, the charges might have stuck.

Two other women were arrested along with Daniels (real name Stephanie Clifford); Miranda Panda or Marion, Ohio and Brittany Walters of Pickerington, Ohio.

“All three were charged with Illegal Sexually Oriented Activity in a Sexually Oriented Business,” reads a statement from the PD. Daniels was charged with three counts of the same violation “for illegally touching three different undercover Vice detectives.”

The investigation began last fall, after Columbus police were made aware of various illegal activities occurring at various strip clubs across the city. 

Following Stormy’s arrest, her attorney Michael Avenatti sprung into action, firing off a string of tweets: “Just rcvd word that my client @StormyDaniels was arrested in Columbus Ohio whole performing the same act she has performed across the nation at nearly a hundred strip clubs,” adding “This was a setup & politically motivated.”

10TV’s Angela An spoke with Michael Avenatti by phone Thursday morning.

“I have reason to believe it was politically motivated,” Avenatti said. “There’s no question these officers were undercover at that strip club. They knew my client would be performing there and I find this to be a complete waste of resources.”

Daniels was arrested under an Ohio law known as the Community Defense Act, which prohibits anyone from touching a nude or semi-nude dancer, unless they are related. 

Specifically, the act “prohibits an employee who regularly appears nude or seminude on the premises of a sexually oriented business, while on the premises and while nude or seminude, from knowingly touching a patron who is not a member of the employee’s immediate family… …or allowing a patron who is not a member of the employee’s immediate family or another employee who is not a member of the employee’s immediate family to touch the employee or employee’s clothing. “

Some “touches” face more serious penalties. Touching a dancer’s genitals, buttocks or the “female breast below a point immediately above the top of the areola” is a first-degree misdemeanor, punishable by up to six months in jail and a $1,000 fine. A second offense is a fourth-degree misdemeanor, punishable by up to 30 days in jail and a $250 fine. – Dispatch.com

And thanks to the word “regularly” in the statute, Daniels is now a free woman after posting a $6,000 bond, and all charges have been dropped.  

Police report: 

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