Paper Lanterns & How Not To MAGA

Authored by EconomicPrism’s MN Gordon, annotated by Acting-Man’s Pater Tenebrarum,

Mud Volcanoes

There are numerous explanations for just what in the heck is going on with the economy.  Some are good.  Many are bad.  Today we’ll do our part to bring clarity to disorder…

Two data series it is worth paying attention to at the moment: the unemployment rate (U3) and initial claims. As the chart at the top shows, when the former makes a low it is time to worry about the economy. Low points in the U3 UE rate slightly lead the beginning of recessions. Claims on the other hand are near coincident indicators of the stock market, this is to say, lows in initial claims tend to happen within a time period of four to six weeks surrounding major stock market peaks (in most cases they lead slightly, but small lags have occasionally occurred as well). Note: neither indicator confirms an imminent turning point as of yet – initial claims would e.g. have to rise to around 300k in order to do so. The same is true of other major recession indicators, their most recent readings do not yet confirm that the business cycle is about to turn down. However, there is a lot of circumstantial evidence that indicates such a downturn may soon be confirmed, including recent market moves (i.e., deteriorating stock prices and rising credit spreads). [PT]

Several backward looking economic fundamentals show all is well. Third quarter gross domestic product increased at an annual rate of 3.5 percent. And the unemployment rate, if you exclude something called discouraged workers, is just 3.7 percent – a near 50 year low.  By these metrics, the economy’s never been better.

Still, it doesn’t take much snooping around to uncover what’s really going on. Cracks in the economy’s foundation are transforming from minor hairline fissures to full blown surface fractures at about double the rate that Imperial Valley mud volcanoes are consuming Union Pacific Railroad tracks.  These full blown surface fractures will further multiply as the planet approaches the next financial crisis.

Gaia’s pustules… the mud volcanoes of Gobustan, a mysterious moving mud volcano near the Salton Sea and  a cold mud pot in Glenblair, California. [PT]

At the moment, for example, the auto manufacturing and housing sectors are breaking down.  Last week, General Motors announced they plan to cut 14,000 jobs and close five factories.  What in the world is going on?

We suspect that General Motors’ present failings have something to do with the fact that they aren’t very good at making cars.  Do you own a General Motors car?  Do you know anyone who owns a General Motors car?  We don’t either.

An early GM reputation destroyer – the 1971-1977 Chevi Vega. According to Popular Mechanics: “Legend has it that when Chevrolet Division Manager John DeLorean went to the GM Proving Grounds to get his first look at a prototype of the new 1971 Chevrolet Vega, the front of the car literally fell off onto the ground. But that bad omen didn’t keep DeLorean from putting the Vega on the market”. [PT]

The housing market also appears to be cracking up.  Existing and new home sales are on the decline.  Similarly, the pace of home price appreciation has declined for six straight months.  Soon enough, actual home prices will be in decline too.

Auto manufacturing and housing are both canaries in a poorly ventilated coal mine.  In particular, these two sectors are very sensitive to credit costs. A moderate rise in interest rates and they keel over.  No doubt, there are many debt encumbered corporations that are one or two quarterly earnings reports from also slumping over.

How Not to MAGA

After being subjected to nearly a decade of the Fed’s low interest rate fabrications, something remarkable has happened.  The economy has reconfigured itself in an abnormal way.  Hence, the Fed’s efforts to normalize interest rates without triggering a massive cascade of debt defaults is proving impossible.

Of course, further rate hikes, which would purge the rottenness from the system, would ultimately put the economy on a sounder footing.  Yet this is politically impossible.  President Trump’s made it loud and clear to Fed Char Jay Powell that he wants low interest rates and high asset prices.  Not the reverse.

Decades of extreme Fed intervention into credit markets are what created today’s instabilities and vast wealth disparities.  Does Trump understand that low interest rates and high asset prices are at odds with his promise to MAGA?

What’s more, the Fed’s massive credit creation scheme bears the primary responsibility for accelerating globalization and China’s rise over the last several decades.  Where did American consumers get the endless supply of credit to consume all the made in China goods?

Recognition of the extent and magnitude to which the Fed’s cheap credit distorted the global economy would require honest thought and contemplation.  Renouncing, as opposed to demanding, further credit expansions would require sacrifice.  These are not Trump’s strong suits.

Instead, he wants simple answers to complex problems.  And he has hacks like Peter Navarro yapping in his ear about the marvels of trade tariffs.  That, somehow, the act of cutting off one’s head to cure a headache, would solve America’s embarrassing trade deficit with China.

The trade deficit with China keeps growing, which is a big “so what”? The balance of trade does not say anything about a nation’s prosperity. After all, it is balanced by an offsetting capital account surplus.  [PT]

Trade tariffs are precisely how not to MAGA.  Maybe Trump knows this.  And maybe Trump knows what he’s doing.  Without question, table pounding and chest beating have served him well throughout his career.  So has making outlandish and grandiose claims.

But where all this current bluster will lead is to a place that’s utterly foreign to Trump…

Paper Lanterns

President Trump and his cohorts recently met with the Group of 20 nations in Buenos Aires, Argentina.  This included a Saturday night dinner with the President of China, Xi Jinping.  The supposed discourse at hand was the escalating trade war between the two countries.

Unfortunately, a joint statement wasn’t issued following dessert. This subsequently led to an enormous hubbub.  First, there was word of a 90-day truce on the imposition of new trade tariffs.  Then Trump tweeted something about China agreeing to buy lots of American made stuff.  Thus, stocks went on a fabulous binge on Monday; the Dow Jones Industrial Average gobbled up over 287 points.

Xi and Trump gaze at each other across the salad in Buenos Aires. [PT]

Then China, if we remember correctly, contradicted the supposed 90-day truce.  Hence, on Tuesday, the Dow Jones Industrial Average purged 799 points.  After that we lost track of the latest rumors of what was actually discussed, as none of it made much sense.

For all we know, the dinner’s discussion was a friendly exchange of tips and tricks for using big data to assign social credit scores to citizens… and how to reprimand and restrict people for behavior deemed uncouth.  Perhaps, following the main course, the conversation devolved to a braggadocio give-and-take of locker room talk.

What we do know is that no real progress was made towards a trade agreement.  What we also know is that no real trade agreement, other than window dressing, will ever be reached between China and the United States.  Here’s why…

Negotiating with China is completely different than negotiating with New York contractors or the mayor’s office.  No middle ground can be reached because no middle ground exists.  What Trump is up against is outside the realm of the art of the deal.

For example, paper lanterns have been used in China since the early days of the Han Dynasty… roughly a century and a half before Jesus of Nazareth turned water into wine.  Yet no one really knows the history or origin of paper lanterns.

Shanghai Lantern Festival – in China they like to be properly lanterned up, but it is not quite clear why. The lantern makers are all for it, that much is certain. [PT]

What is their purpose?  What do they represent?  Are they aesthetically pleasing?

No one knows.  And no one cares.  But day after day, millennia after millennia, the people hang their paper lanterns all the same.  Paper lanterns, in essence, are draped across outdoor markets and alleyways for no apparent reason.

Such vagaries have been interwoven into the fabric of Chinese culture for several millennia or more.  These vagaries are implicit to negotiating with Xi Jinping.

Hence, the only thing Trump’s trade negotiations will achieve is paper lanterns.  A little window dressing that the stock market can feel good about for a day or two… before a technology cold war – or worse – stands the global market place on its collective head.

Long paper lanterns.  Short everything else.

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