Incredible as it may seem, the US government shutdown put the economy into a recession according to the latest US manufacturing output report. The negative effects of the government shutdown, like ripples in water, are traveling through the economy and we’re seeing them now in the fundamental analysis reports we track each month.
Chris Williamson, Chief Economist at Markit, said: “The flash PMI provides the first insight into how business fared against the backdrop of the government shutdown in October, and suggests that the disruptions and uncertainty caused by the crisis hit companies hard. The survey showed the first fall in manufacturing output since the height of the global financial crisis back in September 2009. We can expect GDP growth to have suffered a set back in the fourth quarter, but it is too early to estimate the extent of the slowdown. It is impossible to disentangle the impact of the shutdown from other factors that might have been at play during the month, so equally impossible to judge the extent to which business might bounce back in November.”
US Manufacturing PMI Data
Any reading above 50 indicates expansion, while any reading below 50 indicates contraction and a coming recession.
Putting the US economy into a recession was good because it “got people talking”. Nothing like a recession to get people talking. That’s like going to the funeral of a skydiver who died because his parachute didn’t open, and consoling his widow by saying, “Yeah, but I’m sure the view was great.”
Congress better hope that businesses bounce back in November.
TheStreet interviewed Sageworks’ Brian Hamilton and OANDA’s Alfonso Esparza about the weak economic data coming out since the government reopened.
Negative inflation is deflation. Deflation occurs when the rate of inflation falls below 0%. Deflation results in a decrease in the price of goods and services.
What is deflation and why is it bad?
Low inflation is good for business but if the inflation rate drops below 0%, it’s bad for business because decreasing prices mean falling profits. Even if they can borrow at low rates, businesses will not expand in a falling profits environment.
But the big negative with deflation is that it hurts borrowers by making debt more expensive to repay. Inflation makes repaying debt easier because you are repaying the debt with cheaper dollars but deflation is just the opposite. In a deflationary environment with falling prices and falling profits, it makes it harder to raise the money needed to repay debt. Businesses have trouble repaying debt because they’ve had to lower prices and thus are making less money. Individuals have trouble repaying debt because they probably didn’t get a raise. Governments have trouble repaying debt because with lower prices come lower tax revenues.
Despite what some people think, governments can’t print money to repay debt directly. They can print money to buy bonds which may eventually make its way into the U.S. Treasury but they can’t print money and directly apply it to repaying the debt because printing money generates debt. It would be a zero sum game.
Inflation vs Deflation
Inflation and deflation are measured by the Consumer Price Index (CPI). Take a look at the CPI chart below.
Looking at the chart of the CPI you can see that it is closer to the 0 line than it is to the +4% growth rate before the Great Recession began.
Is inflation or deflation the bigger threat right now?
The Adjusted Monetary Base is the sum of currency (including coin) in circulation outside Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks.
The chart above shows that the Federal Reserve has been printing money like crazy to keep the CPI and the rate of inflation from going below 0%. In fact, the Fed has gone all in and is increasing the monetary base by more than 35% year over year. The chart below shows how, since September of 2012 when the Fed announced QE to infinity, the growth of the monetary base year over year has exploded higher.
With this unprecedented expansion in the money supply by the Federal Reserve, why isn’t the rate of inflation higher and the CPI with it? The only logical reason is that deflationary pressures are much higher than what the Fed feels comfortable communicating about. The Fed is printing money like crazy and the CPI and rate of inflation are barely staying above 0%. Imagine what would happen if the Fed started pumping less money into the economy.
The Financial Times’ John Authers did an interview with Russell Napier who predicts that coming deflation will crash the U.S. economy. Check it out and let me know what you think in the comments section below.
Republicans have been planning to shutdown the government for months now in a last ditch effort to defeat and defund Obamacare. The New York Times reports, “Shortly after President Obama started his second term, a loose-knit coalition of conservative activists led by former Attorney General Edwin Meese III gathered in the capital to plot strategy.”
At a secret location, Mr. Meese and the leaders of more than 36 conservative groups signed a plan called “blueprint to defunding Obamacare,” that called for conservative leaders to push Republicans to derail the Affordable Health Care Act by cutting off financing for the entire U.S. government. “We felt very strongly at the start of this year that the House needed to use the power of the purse,” said one coalition member.
My there’s a fine line between treason and patriot these days.
This radical approach to controlling public policy amounts to blackmail: spend tax dollars on what we want, or you don’t get to spend tax dollars at all. It’s a stupid approach because it’s not going to work. The President and Democrats don’t need to do anything for the entire Republican party to implode with this kind of approach.
It’s not going to work. It was a stupid idea. The party in minority in Congress cannot usurp the authority of the Executive branch of government. Why even have a President if Congress could blackmail the President and get whatever it wants? Can you imagine the precedence this would set if President Obama capitulated? It’s never going to happen. End of story.
On Saturday, the House passed a bill by a 407-0 vote that all of the furloughed federal workers will be paid in full for lost pay during the government shutdown. Wait a minute! I thought Republicans were concerned about saving money and cutting costs. Why did they all just vote to pay government workers, for not working?
Republicans and John Boehner are looking for a face saving out. Notice that instead of demanding the repeal of Obamacare, they are now demanding talks about out of control spending in Washington. Demanding talks about how to control spending versus demanding the repeal of Obamacare are two very different things. In my opinion this means that Republican polling is showing an unfavorable public reaction towards Republicans the longer the government shutdown goes on. This means that Republicans are likely to drop their repeal and defund Obamacare position.
The U.S. Military, namely the U.S. Department of Defense, is orchestrating its own coup against the House. Defense Secretary Chuck Hagel made a surprise announcement on Saturday that he would recall next week almost all of the 400,000 civilian employees of the Defense Department who had been sent home when the government shut down. Mr. Hagel said the decision that “most D.O.D. civilians” would now be exempted from furloughs came after Pentagon and Justice Department lawyers interpreted a budget law passed just before the shutdown to include a larger number of workers. (Source: Hagel Recalls Most Defense Department Workers) In other words, the House can take their government shutdown and shove it. The Department of Defense got its own lawyers to basically argue, “what is IS?” If the House doesn’t like it, they can sue the Department of Defense in court. Until then, the DoD is sending over 400,000 civilian employees back to work next week.
Two weeks from now, the week of October 14th through October 18th, Congress goes on recess. It is unlikely Congress will leave town without agreeing to pay the bills as the government runs out of money on October 17th. What Congress usually does is to finish business and have no votes pending by 3 PM on Friday before the recess begins. My bet is the government shutdown will end by next Friday, October 11.
Peter Schiff says Democrats are to blame for the government shutdown too. Check it out because, when it comes to stock trading and gambling your hard earned money, it’s always beneficial to hear other opinions.
Understanding time frames and how traders with different stock trading strategies interact, is challenging to understand for even experienced traders. There are many different stock trading strategies that work and this lesson unifies all those stock market trading strategies into one grand unified theory lesson. Continue reading “Stock Trading Strategies: Predator or Prey”