A Mediocre Episode of The 5

“The financial system has become so divorced from the Main Street economy that even as the latter grew poorer, the value of financial assets and especially the stock market averages clambered to new heights on the back of corporate financial engineering gone wild…”

So wrote David Stockman in his book, The Great Deformation, published in the spring of 2013.

Two and a half years later, absolutely nothing has changed.

As we write this morning, the S&P 500 has erased its losses for the year, at 2,072. The Nasdaq opened 2% higher, climbing back above 5,000.

Earnings at Microsoft outpaced the vaunted “analyst expectations”; shares sit at a 15-year high. Alphabet, the new name for Google’s parent company, delivered a blowout earnings report, and shares jumped 9%. Amazon is up 6.5% because made it money in the quarter that just ended — which was a surprise.

And Facebook, the epitome of a company that makes boatloads of money while producing no new wealth (a feat once performed only by bankers), rests at an all-time high.

Meanwhile, more than half of all American workers brought home less than $30,000 last year. That’s according to new figures from the Social Security Administration.

Seeing as that’s the agency that collects FICA tax, we’re fairly sure we can believe the numbers….


For reference, the feds consider $28,410 the poverty level for a family of five.

We can say this much: At least we’re not hurtling toward another recession. Not now, anyway.

The regional Federal Reserve banks have issued the two most reliable recession indicators over the last two days. Yesterday brought the Chicago Fed National Activity Index. This index crunches no fewer than 85 economic numbers. It’s called every recession of the last 45 years except one — it was late with the 1973 oil shock.

Numbers below minus 0.7 signal a recession. As of now, the three-month moving average is a merely mediocre minus 0.09.


This morning, the Philadelphia Fed came out with its State Coincident Index. This index is a composite of four employment figures compiled from all 50 states. It too has a reliable history of calling recessions.

Here, the number that signals danger is plus 50. We came perilously close in the spring… but as of now, the number is a merely mediocre plus 70.


How likely is it that the “real economy” can get out of this perpetually low gear in 2016? Not very, says Jim Rickards.

He gets back to first principles in the latest issue of Rickards’ Strategic Intelligence. “If more people are working, the economy produces more,” he writes. “If each worker is more productive, the economy produces more.

“Add the workforce and productivity numbers together and you get growth in GDP. If the workforce grows 2% and the productivity of each worker grows 2%, then the economy grows 4%. You don’t need a Ph.D. to see that 2 + 2 = 4.”

“Unfortunately,” says Jim, “we are living in a 1 + 1 economy, with the labor force growing about 1% per year and productivity growing about 1% per year.”

The only reason the labor force is growing at all is immigration. Meanwhile the percentage of the working-age population in the labor force keeps shrinking — as we usually note on the first Friday of the month with the government’s job numbers. The labor force participation rate is now its lowest since October 1977.


“There are many reasons for this decline,” says Jim. “One reason is the rise of government benefits (why work when you can collect food stamps, rental assistance and free health care?). Another reason is discouragement (why work when there are no good jobs available?). A third reason is a mismatch of skills and job openings (a carpenter cannot easily become a computer programmer).”

And what about productivity? “For many years,” Jim writes, “this was the secret sauce of real growth. If the labor force were growing at only 1%, the economy could still grow at 3% if productivity growth were 2% (this is the 1 + 2 = 3 economy).”

Alas, productivity growth has hovered around 1% for most of the post-2008 “recovery”… and it’s moving in the wrong direction…

Why the flat-lining of productivity? It’s not just one thing, Jim suggests.

“One reason is that a lot of investment by U.S. companies is going abroad to foreign plants.

“Another reason is that U.S. investment is being delayed due to uncertainty about regulation, taxes, health care costs and other key factors in computing return on investment.

“A third reason is that the explosion in patent protection for business processes is restraining knowledge transfer among companies. Companies used to routinely copy each other’s best practices, resulting in improved profits for all. Today, such copying may be illegal because of patents.

“Finally, some analysts estimate that computer technology is making us less productive because of the amount of time we spend online shopping, playing video games and replying to an inbox jammed with email messages of no particular importance.”

And Facebook’s at an all-time high today, heh…

Bottom line: More mediocrity. “Labor force size and productivity trends are all you really need to understand growth prospects,” says Jim.

“Right now both factors look weak, and both will remain weak in the immediate future. The old 2 + 2 economy has become the new 1 + 1 economy.” No wonder the Fed keeps holding off raising interest rates — just as Jim forecast all year.

“Meanwhile,” says Jim, “the Fed’s easy money policies (due to low growth and low inflation) are leading to asset bubbles in commercial real estate, stocks and emerging markets. When these bubbles burst, the world will be pitched back into a crisis worse than 2008.”


Dave Gonigam
for The Daily Reckoning

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