The Great Disconnect Between America and the Market

America may be down with disease and disorder. But the stock market is up on faith and the Federal Reserve.

Thus America gets pulled this way… while the stock market gets pushed that way.

As a certain Marshall Gittler styles it, he who directs inves‌tment research at BDSwiss:

The disconnect between what the average person sees happening in the world and what they see happening in the financial markets is getting wider and wider.

We hazard this disconnection may soon span so broad… the average person will see only the market’s distant dust.

The gap expanded today…

2.76 Million Private Sector Jobs Lost, the Stock Market Jumps

We learn the private sector dispensed 2.76 million pink slips of paper last month. This information comes by way of the May ADP National Employment Report.

Yet while the American worker continues falling backward, the stock market raced further ahead today…

The Dow Jones pulled ahead 742 points. The S&P jumped out another 27 points; the Nasdaq, 74.

Gold, meantime, took a severe trouncing today — down nearly $31.

And the 10-year Treasury yield surged nearly 12% today… to 0.081%.

Why did bullish optimism win the day?

A Massive Surprise

A survey of Refinitiv economists had projected 9 million lost private-sector positions.

Thus they “missed” dreadfully — to the downside.

But is the 2.67 million a true figure? Or is it a statistical phantom, a false return?

Even one of the president’s economics henchmen — Mr. Kevin Hassett — scratches his scalp in wonder:

This number is so much below expectation, or what you would get if you built up from the claims number, that I wonder about it… The number is so good, it’s such good news, that I really have to dig deep into it and see if there’s not something funny going on, because it’s pretty far removed from what we’d get if we just added up the claims data and so on from the last survey.

Our wager is on “something funny going on.”

“Merely Because We Like the Devil’s Chances Does Not Mean We Like the Devil”

We could be mistaken of course. We would be pleasantly mistaken… if mistaken.

Merely because we like the devil’s chances does not mean we like the devil.

Our hopes are rather with the angels. We are with them.

Friday may nonetheless reveal a clearer image. That is when the United States Department of Labor issues its own, more comprehensive unemployment report.

Economists as a body forecast 8 million total May pink slips.

They further project the May unemployment rate to come in at 19.7% — a good stretch past April’s 14.7% — and the worst since the Great Depression.

A 19.6% reading would nonetheless defeat consensus. The stock market would likely declare a victory, run further ahead… and speed further from view.

76 Months to Come Back?

The United States economy — meantime — may scratch, may claw to merely keep up.

When may unemployment return to its pre-pandemic lows?

To steal a possible glance into the future… let us first look back to the certain past… to the previous recession.

Over six years lapsed before employment fully recovered — 76 months.

Assume a parallel projection.

Pre-pandemic unemployment would come back in 2026.

It could be sooner than 2026 of course. Yet it could be later than 2026.

Later, because the pandemic may flatten multiple industries for years and years.

These include the travel and hospitality industry, the restaurant industry, the entertainment industry, et cetera.

Again we declare for the angels. We hope these industries emerge intact… and far sooner than we imagine.

But we fear the angels face long odds.

Each Recovery Recovers Less

Meantime, today’s debt burden sits heavier on the economy than in 2008. And debt drags on an economy… as an anchor chain hung about a man’s neck drags on the man.

Total pre-pandemic debt levels ran to $75 trillion or some other enormity. And debt is coming on in heaps.

Headway will therefore be limited, the sledding more difficult.

Here Michael Lebowitz and Jack Scott of Real Inves‌tment Advice pencil an imaginary line. This line connects the 1990 recession, the 2001 recession, the 2008–09 recession… and the present recession.

And the line forms a downward arc:

  • The [2008–09] recession was broader based, and affected more industries, citizens, and nations, than the prior recessions of 1990 and 2001
  • The 2008–09 recession and recovery also required significantly more fiscal and monetary policy to boost economic activity
  • The amount of federal, corporate and individual debt was significantly lower in 1990 and 2001 than 2008–09
  • The natural economic growth rate for 1990 and 2001 was higher than the rate going into the 2008–09 recession.

What about growth rates to come?

Half the Previous Rate of Growth

These two gentlemen draw up to this conclusion:

“The economic growth rate going forward may be half of the already weak pace heading into the current recession.”

As we have asked before: From what sources will growth originate?

Meantime, the Congressional Budget Office estimates:

The pandemic will hack $8 trillion off real GDP these next 10 years… and $15.7 trillion off nominal GDP.

Real GDP minuses out inflation’s false additions, of course. Nominal GDP does not.

This lost GDP — if the figures are accurate — is GDP lost forever.

What Will Never Be

It is aborted wealth, pre-murdered wealth.

It represents houses never constructed, automobiles never assembled, airplanes never flown, jobs never offered, dream vacations never taken…

It represents computers that will never compute, televisions that will never televise, hacksaws that will never hacksaw, medicines that will never medicate, air conditioners that will never condition the air…

It represents businesses that will never do business.

That is, this lost GDP represents a diminished national life. And potentially a vastly diminished national life if the true numbers prove even worse.

One year of slack growth, two years of slack growth, these are endurable.

Yet a string of annual losses are not…

The Long Run

Average real annual economic growth since 1980 runs to 3.22%.

Yet since 2009… that figure has fallen to 2.23%.

What if pre-2009 3.22% growth held steady?

Jim Rickards estimates the United States would be $4 trillion wealthier.

Run it 30, 50, 60 years, Jim concludes… and you arrive at a dismal conclusion:

A society that grows at 3.22% will be twice as rich as one that grows at 2.23% over the course of an average lifetime.

Absent a return to trend… ours will be the society half as rich…


Brian Maher
for The Daily Reckoning

The Daily Reckoning