The Great Disconnect

Today the calendar rolls to October.

October’s very mention plunges Wall Street into horrific sweats.

The Panic of 1907. The Crash of 1929. “Black Monday” 1987.

They each share October in common.

So blackened is October’s reputation, market observers have fashioned a term for it — the “October effect.”

But as we revealed at September’s onset, September is the stock market’s leanest month historically.

October is as tame as a tabby besides it.

Yardeni Research proves the average October return historically is 0.4%.

A slender gain — but a gain.

And Investopedia informs us that more bear markets have ended in October than begun in October.

Downturns in 1990, 2001 and 2002 all reversed in October.

But climate is what a fellow can expect. Weather is what he actually gets.

What type of weather might this October hold before us?

A Poor Start to the Month

Initial barometric readings do not encourage.

The Dow Jones lost 343 points today. The S&P shed 36… while the Nasdaq gave back 90 points.

Gold, meantime gained $12 and change today.

For reasons we look to the latest manufacturing data…

September’s manufacturing Purchasing Managers’ Index — coming by way of the Institute for Supply Management — came rolling out this morning.

Any reading below 50 indicates contraction.

The September figure registered 47.8%.

That is the lowest reading since June 2009. It is also the second consecutive month of contraction.

The new export orders index came in at 41% — lowest since March 2009.

And global manufacturing overall is down with a flu…

September manufacturing PMIs from South Korea, Indonesia, Italy, Sweden, the U.K. and South Africa all printed below 50.

“We have now tariffed our way into a manufacturing recession in the U.S. and globally,” moans Peter Boockvar, chief investment officer of Bleakley Advisory Group.

Laments Torsten Slok, Deutsche Bank chief economist:

“There is no end in sight to this slowdown, the recession risk is real.”

Insiders Are Selling Their Stocks

Meantime, our agents inform us that the foxes — corporate insiders — are selling their own companies’ stocks at the greatest clip since 2000.

Total jettisonings run to a combined $19 billion through mid-September. At the going rate they will total $26 billion by year’s end.

Only during the dot-com derangement of 2000 did insider selling eclipse current levels.

In fairness… we have no light into how these insiders spent the proceeds of stock sales.

If they emptied them back into the stock market to diversify their holdings, insider sales would give a false alarm.

But if corporate insiders are hunkering in against approaching weather… then we must draw a different conclusion entirely.

These insiders — after all — best understand their companies’ prospects.

We suspect this is the likelier option.

If they are anticipating a mighty gale, you might do well to batten down yourself.

How much longer, we wonder, can the great disconnect between stock market and economy endure?

The Great Disconnect

The Federal Reserve expanded its balance sheet nearly $4 trillion post-financial crisis.

It went mostly into Wall Street. The stock market has trampolined over 200% since scraping bottom in March 2009.

But add together all interventions to hold the financial system up since 2008. These include, notes analyst Lance Roberts of Real Investment Advice:

Three-massive Federal Reserve-driven “quantitative easing” programs, a maturity extension program, bailouts of TARP, TGLP, TGLF, etc., HAMP, HARP, direct bailouts of Bear Stearns, AIG, GM, bank supports, etc.

Their combined costs equal an impossible $33 trillion. For some slight perspective… $33 trillion is nearly twice 2014’s GDP.

Yet it has paid a poor dividend…

The economy has expanded a mere 24% since 2008.

As Roberts reminds us, the return on investment for that $33 trillion reduces thusly:

Every $8.53 of monetary intervention… yielded a mere $1 of economic growth.

A dollar of debt just doesn’t do the duty it once did.

The Broken Money Multiplier

Assume, if you can somehow, an economy unburdened by crushing debt.

In this unknown economy the debt multiplier might argue a plausible case for itself.

Fifty years ago, $1 of debt yielded perhaps $4 of growth, real or otherwise. But each new dollar packs less and less wallop. The debt piles up, year by indebted year…

Ultimately comes the point when the new dollar fails to push at all. It rather begins to drag… like a millstone hung about the neck.

United States national debt has doubled since 2010 — and presently rises above $22.6 trillion.

Total debt, public and private, runs to some $70 trillion.

And to show for it?

The United States economy has now endured a record 12 consecutive years without 3% growth.

It is on the tracks for unlucky 13.

Recoveries from previous recessions — in contrast — routinely exceeded 3%.

And real U.S. GDP growth has averaged 2.16% post-crisis — far beneath the typical 4.3% post-recession average since WWII.

We must conclude that the present arrangement is wrecked beyond hope. And that the United States has passed beyond all salvation.

Meantime, the Federal Reserve drags the nation deeper into debt-filled doom…

The End of the Road for Monetary Policy

Two rate cuts it has implemented since July. Despite official protests otherwise, additional rate cuts await.

Here is what they facilitate:

More debt. More fraud. More delusion. More humbug.

But when it fails to extend the show presently running… will the world snap finally to its sober senses?

That is, will it let natural market forces clear out the existing rot?

No. It will not.

In will come more debt. More fraud. More delusion. More humbug.

Only this time it will take the form of fiscal policy — not monetary policy.

It will go under the term Modern Monetary Theory (MMT), or helicopter money, or fiscal stimulus, or what have you.

They are all essentially one.

The government will empty money directly onto Main Street. From there it will fan out in widening circles.

The money will wend its way through the stores, theaters, salons and eateries.

It will drive a seemingly flourishing trade… and appear to raise the economic level.

But it is a desert mirage.

A Raid Upon the Future

A debt-fueled consumption boom — financed by artificially low interest rates — steals future growth to promote the illusion of present growth.

And the greater the present larceny… the less future growth.

It is a snake devouring its tail.

A healthy, sustainable economy does not rest upon consumption. It rises instead from a sturdy foundation of savings and productive investment.

A consumption spree will likely yield a gorgeous inflation — with little growth to go with it.

But that is tomorrow’s problem. Our hands are plenty full with today’s…


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning