Lies, Statistics and Recession

About That “Solid” Economic Data Today…

There’s nothing technically “wrong” with this headline…

The S&P 500 did rise to a record, the economic data is solid and tech stocks are rising. (Micron Technology issued a banger of a forecast for the rest of the year; shares are up 14% on the day.)

But the headline doesn’t paint a complete picture.

Let’s zero in on the day’s economic data…

• The Commerce Department issued its third and final guess on second-quarter GDP growth — an annualized 3.0%, in line with Wall Street’s expectations

• First-time unemployment claims for the week gone by totaled 218,000 — below Wall Street’s expectations, indeed a four-month low

• Orders for durable goods — anything designed to last longer than three years — came in flat for August. That’s a win compared with Wall Street’s expectations for 2.7% drop.

So it’s all good, right?

“My forecast of a coming recession has not changed,” says Paradigm’s macroeconomics maven Jim Rickards.

“We may be in one already. It’s happening about as expected (maybe taking a bit longer to emerge) in line with the data.”

After today, four more days remain in the current quarter. The “GDPNow” forecasting tool from the Federal Reserve Bank of Atlanta is projecting 2.9% annualized growth. A very “solid” figure.

But Jim is among a handful of economic renegades who see an anomaly: “GDP is supposed to be a near-mirror image of GDI (gross domestic income),” he says, “but there’s been a wide divergence in recent quarters. GDI is growing much more slowly and may soon be declining slightly.

“In the past, when GDP and GDI diverge, GDI tends to be more accurate and GDP plunges quickly to re-converge with GDI.”

A similar anomaly shows up in the job numbers.

When the Labor Department reports the job numbers on the first Friday of the month, the headline number the media fixates on is the “establishment survey” — so called because it’s a survey of business establishments, asking if they’ve added or cut payroll.

But there’s also a “household survey” — which as the name suggests, is a survey asking who in a household is working and who’s not.

The two figures “should be about the same, but the employer survey has held up well while the household survey has recently been declining,” says Jim. “Again, the household survey is the more accurate of the two when the measures diverge.

“This means the employer survey (that’s the one that gets all the headlines) may be set to fall and move in line with the household survey. That process may have started already based on the latest employment report released on Sept. 6 in which the employer and household data were roughly the same, but both were disappointing.”

Yep, as we mentioned at the time, the wonks at the Bureau of Labor Statistics conjured a mere 142,000 new jobs for August. The July and June numbers were revised downward.

“This shows,” says Jim, “that the weakness in the labor force actually began several months ago. Worse, “more than 100% of new jobs were part-time (when full-time jobs are netted against part-time jobs).”

Jim’s conclusion: “Reliable data indicates a recession while ‘headline’ data says all is well. This means that when the headline data converges, the correction could be swift and brutal and catch investors off-guard.

“A nasty stock market correction (20–30% or more in one or two months) would be the last shoe to drop.

“Real stock values are driven by factors that are much larger than stock fundamentals and interest rates. They’re driven by inflation, deflation, currency fluctuations and business cycles. Investors need to be aware of these cross-currents in setting their portfolio allocations. Simply cheering on higher index levels isn’t enough.

“Gold is often a good hedge in such scenarios, but don’t ignore Treasury notes.”

Dockworker Strike Impact: Worse Than COVID?

At least one CEO in the supply chain says it’s too late to avert a dockworker strike come next Tuesday. The only question now is how long it lasts.

There’s still no movement in the impasse between the International Longshoremen’s Association and the U.S. Maritime Alliance. The current contract expires Monday. If there’s no new deal, 45,000 workers at East Coast and Gulf Coast ports will walk.

Acting Labor Secretary Julie Su has been in contact with both sides — but unlike in the dispute at West Coast ports last year, she’s not stepping in to mediate. The Biden administration says she’ll negotiate only if asked by both sides to do so — and a few days ago, the union told the White House to back off.

Once a strike is underway, “if it just lasts for a day or two, it’s probably not a huge deal,” says Ryan Petersen of the logistics firm Flexport.

“If it lasts for more than a few days or more than a week, you're going to get massive cascading effects of backlog building up of cargo that needs to get moved and can't,” he tells Yahoo Finance.

Indeed he says the impact in that case would be worse than the COVID shutdowns. “In the COVID instance, those were caused by a huge increase in demand for goods. This is really different. This is a decrease in supply, much worse from an economic impact standpoint.”

The biggest impact probably won’t be with consumer goods for the holidays. What’s most at risk appears to be auto parts, perishable foods and pharmaceuticals. Might want to call the doctor for a refill today, just in case…

After a September to Remember…

“October marks a critical turning point for stocks,” says Paradigm chart hound Greg Guenthner — looking ahead to the month that begins next Tuesday.

“It concludes the worst six months of the year for U.S. equities, kicking off the best time of year to buy stocks…

“October not only signals a significant shift in seasonal trends — it also has a knack for bottom-ticking the market, marking the low of 13 bear markets since World War II, per the Stock Trader’s Almanac (most recently, the Dow ripped 14% in October 2022).”

Of course, we’re not in a bear market right now. Checking our screens, the S&P 500 is in record territory this morning at 5,741.

“Stock market bulls aren’t searching for potential support zones,” says Greg. “Instead, they’re exploring unchecked levels of overhead supply.

“First-half leaders are making up lost ground following the late-summer selling session. Rotation is leading to broadening participation beneath the surface. And a new leadership group is emerging: small caps. These conditions would be better described as the second year of a bull run, as opposed to the end of an ugly downtrend.”

What about the fact it’s an election year? Going back to the first Eisenhower-Stevenson contest of 1952, average October returns during election years look like this: Dow -1%, S&P 500 -0.9%, Nasdaq -2.2%.

All of which is interesting but not necessarily useful: “Seasonality studies serve as a road map, not a definitive forecasting tool,” says Greg. ”In fact, the most useful information comes when markets buck seasonal trends (like they’re doing right now).”

His guidance: “Remain cautious” — and give Mr. Market time to adjust to the start of a new cycle of interest-rate cuts by the Federal Reserve. It’s only the fourth time so far this century. Nothing dramatic, but “stay alert for a little chop, and maybe a fake-out or two lower as we kick off Q4.”

Elsewhere in the markets, the commodity complex is all over the place.

Crude has sunk another 2% today to $68.20. The pop over $72 two days ago had zero staying power. Next target? The $66 lows over earlier this month.

But that other economically sensitive commodity, copper, sits at three-month highs of $4.46 a pound. It’s been a whale of a rebound off the sub-$4 lows in early August.

Precious metals, you ask? Gold is holding steady in record territory, the bid $2,664 at last check. Silver slipped after we went to virtual press yesterday, but now it’s back within a dime of $32.

Bitcoin, meanwhile, has pushed past $65,000 for the first time since early August.

Trial Run?

Hmmm…

“Prime Minister Benjamin Netanyahu has asked officials to begin discussing measures to limit the circulation of black market currency to curb illegal activity in Israel,” says The Jerusalem Post.

“Part of the proposal suggests limiting private ownership of large amounts of cash alternatives such as gold, silver and coins.”

How large is “large”? We don’t know.

Also under consideration is phasing out the 200-shekel note — barely $50 at current exchange rates. A separate article at Bitcoin Magazine cites the Hebrew-language newspaper Globes as saying “most of the 200-shekel bills are not used for purchases, but for the accumulation of black capital.”

“In the medium term,” says Israel’s Ynet news site, “the plan calls for a drastic reduction in cash use, aiming to eliminate cash transactions altogether within a few years, with payments to be made exclusively through bank transfers or credit cards.”

Sounds as if Israel is looking to go the way of India — a story we’ve been following for eight years now.

But to the best of our knowledge, Indian leaders have never suggested limiting ownership of gold. It’s too ingrained in the culture — given as gifts, frequently passed from one generation to the next.

We’ll be keeping an eye on this one…

Mailbag: Property Taxes

It seems we stirred the property-tax pot anew yesterday. Let’s get right to it…

“In my view,” a reader writes, “Texas property taxes are much akin to Kamala's stupid idea of a proposed tax on unrealized gains. My property values go up so my property tax goes up. Yet I have not realized any gain. It's an unrealized paper gain that I have to pay taxes on each year.”

“I have an old maxim: ‘For a given level of government, they have to extract the money in some way.’

“Without getting into the issue of overspending on dumb things by the government, the point is taxpayers expect a certain level of services - roads, schools, police etc. So if you cut out property taxes (or income taxes) the tax revenue must be made up somewhere else.

“That is why states with no income tax typically have high sales taxes, property taxes or various use taxes. In Florida I pay a toll nearly every time I get on a freeway to go very far. So my question for North Dakota is where else will the tax revenue come from?

“Enjoy the 5 even when I don't always agree.”

“Regarding the home-rich, cash-poor elderly (of which I am one…) — that’s why reverse mortgages exist!

“Pay taxes and insurance and keep the place up and you’re mostly all set! And the reverse mortgage holder takes the valuation crash risk. Oversimplified, but not enough people are taking advantage of this ‘Swiss army knife.’”

Dave responds: We don’t do “personal finance” stuff around here, but we understand reverse mortgages are a preferred strategy of the “die broke” crowd. Certainly they seem like a viable option if you’re not looking to pass on wealth to the kids or grandkids…