The employment report for September seemed to corroborate the economic weakness we have seen everywhere else. As we suggested would be the case some time ago, even the strongest supporters of the Fed are starting to wonder why sustainable growth is nowhere to be found after all of the supposedly stimulative effects of QE. If Wall Street was not busy pumping out auto loans to anyone who wants a new set of “wheels” at stunningly long loan terms and without much regard for credit scores, auto sales would be much lower than the current run rate. We remember quite well from our bond days that once the delinquencies on those loans turn clearly up, that game will be over. Nonetheless, even with auto making running at unsustainable levels, industrial production for manufacturing fell for the third time in the past four months in September. Ford and GM equities seem to see through the charade by remaining un-bubbly.
The Fed and its former chairman, Mr. Bernanke, can brag all that they want to about the “official” unemployment rate being at 5.1%, but we all know that number is statistically owed to the reality that the labor force participation rate is at 40-year lows. The job market looks great if you stop counting large numbers of people who have given up looking for work. The “rose-colored glasses” seem to enable many on the Street to focus on only the number of jobs created in a given month without factoring in that not all jobs are of equal quality. We enjoyed our time in the restaurant industry back in the day, but we do not think that waiter and bartender jobs are of the same caliber as factory jobs. Most economists don’t care to admit that foodservice is the source of a lot of jobs in recent quarters. It took the slower payroll growth of the last few months to wake up some slumbering analysts to the idea that all is not well. Jobless claims are always low at the late stages of cycles and speak little or nothing about the pace of actual hiring.
The current business inventory-to-sales ratio is at a recessionary 1.37, so the road ahead looks bumpy to say the least as those unsold goods are worked down. When the CEO of a major industrial supplier, Fastenal, says that we are in an industrial recession, we listen. We will not bore you much further, but we could add quite a few more names to the list of companies that are having a much tougher go of it this year in the industrial sector and the trouble is not confined to the depression in energy. For instance, Caterpillar is enduring the worst run of sales for its heavy equipment in quite a number of years. As we have said all year, it is a mighty strange environment for the Fed to be talking about raising rates because growth is so good.
The Fed has already taken short rates to zero and held them there for years and other central banks also tried numerous money printing efforts which did not ultimately lead to sustainable growth. Both Europe and Japan have been printing money with abandon this year. With China no longer able to provide the engine of global growth because its $20 trillion debt binge has become a drag, many are wondering what to make of the current environment.
We have to laugh at all of the talking heads whose main thesis for an investment idea for years was predicated on a company’s exposure to China as that nation boomed. Many of the same ones are suddenly touting that China does not matter even as it faces a stunning amount of overcapacity in more sectors than we can count from steel to housing. It reminds us of the last cycle when we were told that the blowup in subprime mortgages was trivial because it was a small segment of the overall market. We know where that went.
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