That Is Not a Good Thing: US Unemployment Rate Falling

The main rug on which perma-bulls stand is the falling unemployment rate in the U.S. A falling unemployment rate seems like a good thing for markets but is it?

Japan Unemployment Rate

We all know that Japan's economy has been in trouble for decades as its central bank scrambles to prop up the economy. The Bank of Japan is buying massive amounts of index ETFs, rapidly increasing its holdings as a proportion of the market cap.

What you may not know is that Japan's unemployment rate has hit the lowest level in decades.

The reason Japan's economy is not improving in lockstep with the falling unemployment rate is that good paying manufacturing jobs are on the decline, while lower paying medical and service sector jobs are on the rise.

Does a declining manufacturing sector sound familiar? It should. The loss of good paying manufacturing jobs is what's happening in the U.S.

All jobs are not equal as the unemployment rate suggests. Japan and the U.S. are replacing higher paying manufacturing jobs with lower paying service sector jobs.

If a falling unemployment rate is not good for Japan's economy, why would everyone believe that it was so great for the U.S. economy? As traders, we have to be careful not to be fooled by a low unemployment rate.

US Government All In On Consumer Growing Stronger

The U.S. government is pulling out all the stops on the idea that consumers are strengthening, and that GDP will surge higher in the second half of 2016.

Below is the latest Real Personal Consumption Expenditures released on Monday.

Personal income also continues to grow…

Growing real personal consumption and income has led to an upward revision in Q3 GDP…

If the economy is going to strengthen by so much in Q3, why hasn't the Fed raised interest rates? A whopping six years after the Great Recession supposedly ended, why are rates still at emergency low levels?

Traders have been lied to for so many years by the U.S. government, the Federal Reserve, and Wall Street, nobody knows what to believe anymore. For example, every year Wall Street analysts and the Federal Reserve do a rain dance in the mainstream media to the tune that the economy will strengthen in the second half of the year. It has not happened.

We have five consecutive quarters of falling earnings. How can the economy be strengthening when sales and hence earnings are falling for most S&P 500 companies?

There is so much dishonesty going on about the fundamentals of the U.S. economy that I prefer to weight my analysis more on technicals. Fundamentals are what the “smart money” is saying. Technicals are what the “smart money” is doing.

Velocity of Money Declines To Lowest Level Ever Recorded

The velocity of money has declined to the lowest level ever recorded, and the decline seems to be accelerating.

The quantity theory of money is based on the equation of exchange. This equation is: M x V = P x Q.

M equals the money supply.
V is the velocity of money, or, the amount of income generated each year by a dollar of money.
P is the general price level, as measured by an index, such as the consumer price index.
Q is the quantity of real output sold.
P * Q is P times Q, on the right side of the equation, equals the nominal or inflation-adjusted output of the economy, as measured by the gross domestic product.

In its simplest terms, the quantity theory of money says that the price level varies in response to changes in the quantity of money. Put another way, changes in the price level are caused simply by changes in money supply. The money supply goes up 20%; prices go up 20%. If the money supply goes down 5%, prices go down 5%.

The velocity of money has declined to 1.44, the lowest level ever recorded. From 1960 to 1990, the velocity of money average between 1.7 and 1.9. It reached a peak of approximately 2.2 in 1997 and has fallen ever since.

A declining velocity of money means people are hoarding cash and not spending it. A key component of “trickle down economics” is an increase in the velocity of money. The trickle down economic model is broken in my opinion.

The falling velocity of money also means that the Fed is in a battle with deflation, not inflation as their policy statements seem to suggest.

GDPNow Coverage Dropped: Just Another Fed Manipulation Tool

Last month I dropped coverage of GDPNow after the GDP forecast was dropped by a huge amount right before the actual GDP release. Immediately after the GDP release, they release a Q3 GDP estimate that was at 3.7% which supported the Fed's yearly lie that the economy was set to strengthen in the second half of the year.

GDPNow is just another Federal Reserve perception manipulation tool in my opinion. Last month, I felt I had enough data to support that argument, and so I removed the GDPNow forecast chart from the right sidebar of the blog.

Today I peeked in on the GDPNow forecast just for the heck of it.

After the massive bogus GDPNow upward revision supporting Yellen's assertion that the second half of the year was going to be so much stronger, now the GDPNow forecast is slowly being lowered, LOL.

Traders got burned on the Q2 GDPNow forecast where the Fed plunged the forecast right before the official Q2 GDP release. Then traders got burned on the GDPNow forecast where they raised it to +3.7%. I feel that removing the GDPNow forecast from the blog was the right call.

The Wall Street Journal recently published a blistering article entitled Years of Fed Missteps Fueled Disillusion With the Economy and Washington in which the Wall Street Journal writes

The Fed’s struggles will be on display from Friday to Sunday when it gathers for an annual retreat in Jackson Hole, Wyo. On issues of growth, inflation, interest rates, unemployment and how to fight a recession, basic assumptions inside the central bank’s complex computer models have been upended.

All traders should be watching what comes out of Jackson Hole today.

Countries Dump U.S. Debt At Record Pace

In 2016, foreign countries have dumped a shocking $192 billion worth of U.S. Treasury bonds. This dumping of bonds is the biggest selloff of U.S. debt since 1978.

China, Japan, France, Brazil and Colombia are the leading countries that are dumping U.S. debt.

U.S. Treasury bonds are the safest investments in the world. Countries often hold large portions of their cash reserves in U.S. Treasury bonds. Countries are dumping U.S. debt because they need the money.

Most countries are selling everything including the kitchen sink to come with the money required to pay the bills and to try and stimulate their economies.

Foreign sales of U.S. debt appear to be primarily driven by economic necessity.

Debt Sales Also Driven By Record National Debt

The U.S. debt held by China is $1.243 trillion, as of April 2016. That's 30% of the $4.046 trillion in Treasury bills, notes, and bonds held by foreign countries. The rest of the $19 trillion debt is owned by either the American people or by the U.S. government itself.

Between 1789 and 1992, the entire national debt was about $4 trillion. Today, $4 trillion is just what we owe other countries. The total $19.3 trillion national debt could be spooking U.S. debt buyers. At what point do debt buyers begin to question the ability of the U.S. government to service the $19.3 trillion national debt? The U.S. government can't even hike rates more than a quarter-point some seven years after the last recession because the economy is so weak. If the U.S. economy goes into another downturn, that will mean more stimulus and spending that will drive the national debt beyond $23 trillion in the blink of an eye.

U.S. government debt as a percent of GDP has recently broken above 100%.

[graphiq id=”4iWDyD7B3YF” title=”Gross Government Debt of United States in Percent of GDP” width=”440″ height=”582″ url=”” link=”” link_text=”Gross Government Debt of United States in Percent of GDP | FindTheData” ]

With the U.S. consumer's buying power destroyed by years of offshoring at the hands of corrupt political parties taking money from foreigners, what value does the U.S. have beyond its natural resources? At some point holding U.S. debt becomes too risky and not worth the low yields paid as shown in the chart below.

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Mainstream Media Hyping Gasoline Savings Again

I just can't get behind the idea that consumers are saving so much money at the pump that it's going to be a boom for consumer spending. Savings at the pump boosting consumer spending is the same claim that the mainstream financial media has made for the last two years. The Wall Street Journal writes

Regular gasoline averaged $2.15 a gallon on Monday versus $2.72 a year earlier, according to the Energy Information Administration. With gasoline prices persistently lower on the year, American households are set to have poured about $12 billion less into the tank since Memorial Day than over the same period last summer.

The $0.57 a gallon is not going to make any difference in consumer spending and the monthly retail sales report. I use about 10 gallons of gas a month to get to work and back in my 30 MPG car. The $2.72 versus $2.15 a gallon saves me $5.70 a month. No big deal. I use my car almost exclusive to get to work and back. Let's say that someone drives ten times more than I do, and so they use about 100 gallons of gas a month. That's a savings of only $57 a month. Folks, $57 a month is not going to make people go out and shop more. Lower gas prices boosting consumer spending is just the same sort of media hype we had in 2014 and 2015.

Remember this CNN article from December of 2014

Every penny that gas prices decline puts about a billion dollars into Americans' pockets, according to Stephen Stanley, Chief Economist of Amherst Pierpont.

What a bunch of baloney that statistic turned out to be. I remember counting all the pennies oil dropped then multiplying each by $1 billion and thought consumer spending was going to explode higher, LOL. I think what these mainstream financial media publishers do is that they look at the stories people clicked on during August of last year, and they re-write the story and run it again in the current year. Shame on the mainstream media once, shame on me twice. I can't afford to buy the hype this time around.

Civil Unrest In Milwaukee As Blacks Hunt Whites

I warned about the rising civil unrest and the dangerous racist group Black Lives Matter here. Any police-involved shooting of an African-American prompts a fast mobilization of communists and socialists to the area for the destruction of businesses and private property.

Here is a video of the Black Lives Matter group targeting “white people” in Milwaukee last night.

The clip shows angry rioters chanting “black power!” before asking “is they white?” as cars slowly drive past.

“Yeah they white!” someone says, prompting the mob to run towards the vehicle.

“Yeah they white, get their ass!” screams another.

Here is another video from Milwaukee where people are chanting “black power!” as they burn down a gas station.

What is unbelievable is that the Democrat party praised the racist group, Black Lives Matter.

The clip below shows a racist man justifying the violence by claiming that rich people don’t give blacks enough money.

Milwaukee Police Shooting

Folks this is only partly about the Milwaukee police shooting an African-American. The man, 23-year-old Sylville Smith, shot and killed by a Milwaukee police officer was charged last year in a shooting and then charged again, with trying to intimidate a witness in that same shooting, according to the Milwaukee Journal Sentinel. The police officer's body camera showed Smith turning toward the officer with a gun in his hand. There is a bigger anti-capitalist, anti-private property, anti-police movement going on here orchestrated by communists and socialist groups that I wrote about here.

Destruction of Businesses Will Hurt The Stock Market

Communist and socialist groups are part of Black Lives Matter. These groups do not like the notion of private property, and so they attack businesses in the area. They bus in violent communist and socialist groups to an area, destroy the private businesses in that area, then leave the people who live there to suffer the aftermath.

Folks as stock traders, we invest in business. You can say goodbye to the stock market if the police can't protect private property.

So far the attacks against privately owned businesses are small and so I do not expect an immediate impact on the broader stock market from what is happening in Milwaukee.

What also is concerning for stock traders is the idea of “rich people don't give enough money to black people”. Notice how Bernie Sanders, a socialist, almost became the standard bearer for the entire Democrat party! The idea that rich people are supposed to give African-Americans money, presumably because of their race, is insane. And who exactly are these rioters defining as “rich”? If you are white and drive around in a new car, you might get flagged by an African-American mob as a rich guy who isn't giving African-Americans enough money! After all, if you have a new car, a new smartphone, a new house, that's inherently unfair to communists and socialists, and so they have a right to take it away from you. A significant psychological shift by the populace into this mindset will destroy the stock market and so the attacks against private property are a long term trend we need to watch.

Real GDP Per Capita Shows Rocky and Unstable US Economy

The real GDP per capita shows just how rocky and unstable the U.S. economy continues to be since the Great Recession.

Most stock traders know what real GDP per capita is, but let's quickly review for anyone who doesn't.

GDP is the market value of all finished goods and services, produced within a country in a year. There is nominal GDP and real GDP. Nominal GDP is a mirage because it's calculated based on the dollar amount of finished goods and services. Inflation, the difference between a loaf of bread at $0.25 in 1970 and $2 in 2016, skews GDP. According to GDP or nominal GDP, if the entire economy consisted of that one loaf of bread, then GDP grew by eight times or 800% between 1970 and 2016. That's not right because the same one loaf of bread was produced and sold so the GDP should show zero growth.

Real GDP attempts to remove the inflation mirage by using a fixed set of prices, such as the prices from 2009, to calculate GDP.

The other skewing factor of GDP is population. There are a lot more people today than in 1950. To remove the skewing effects of the population from GDP, we can divide GDP per person or per capita.

Below is a chart of real GDP per capita.

The grey areas on the chart above mark past recessions. Notice that whenever the percentage change from a year ago (Y axis) falls below zero, there is a recession. Real GDP per capita declines during recessions. Now let's zoom in on the chart above so you can better see the terrifying reality of the economic recovery after the Great Recession.

The shocking truth is that the U.S. economy has almost gone into a recession twice since the Great Recession. In Q3 2011, the percentage change year over year (PCYOY) of real GDP per capita dropped to 0.419% narrowly avoiding a recession. In Q2 2013, the PCYOY fell to 0.306% just narrowly avoiding a recession once again. We are currently on a move down that began in Q1 2015 with declining earnings of S&P 500 companies. Whether the zero line holds, this time, remains to be seen.

Economic Reality

The mainstream media and the Federal Reserve have woven a tale of economic improvement since the Great Recession that is completely absent of the fact that the U.S. economy has almost gone into a recession twice since the recovery began. Worse, the GDP has been contracting since the beginning of 2015, and we are currently heading for another test of the zero line. Perhaps the mainstream media and Federal Reserve think that the public doesn't need to be spooked by this reality. However, as amateur stock traders and investors, we need to know just how unstable the economy is.