Policy Makes Economy Read Harder
The flurry of conflicting economic reports is staggering these days. While conflicting reports are not unusual, the gap between the reports is what catches the eye.
For every report showing why the economy is looking better there is another showing why that data is wrong which elicits another report showing why the refuted data is correct. And on and on and on.
This turmoil is caused by one thing alone--the unparalleled intervention of the central banks. The money rulers cannot stand by and let honest economic news ruin their cushy jobs, so they tinker. Each time they tinker there are unexpected consequences. Much of the time, in order to correct a problem in one sector, they create a problem in another sector. But often the correction does not work as intended so you finish with two sectors ailing.
Currently, the top stories are how the trucking, railroad and airline transportation stocks rose in mid-January and have continued to rise ever since. The problem is the stock move has little to do with actual confidence or growth in the transportation sector but is a direct result of company buyback of existing stock. A quick check of employment in those areas is not showing a corresponding increase that one would expect.
An interesting quote on the sector from a report over the weekend was, "Investors watch transportation shares because the market behavior of truckers and shippers tends to provide clues about the economy itself." Absolutely true in the past, but when the investors only look at share values in these days and not look at how it is accomplished, there is a major problem. Buyback programs do not reflect strength in any industry but are a manifestation of the still incredibly low interest rates fostered by the central bank. Those buyback programs present a false view of the health of the sector when accomplished with more sector debt.
As bad as the tinkering is in America, it is much more direct and therefore worse in overseas arenas.
Martin Weiss, Ph.D. used China's woes as his main point this morning. He demonstrated how quickly China's growth has fallen from an accepted10% a year to 5%. He offers the question "What is so bad about that?" as his opening into a simple statement. "There's just one pesky problem with this theory: It's wrong! It has no basis in history, fact or logic." His conclusion--'high-growth countries almost always behave like high-flying stocks. When things turn sour, they don't just slow down...they crash."
The biggest nugget on China's position came, not unexpectedly, from the People's Bank of China governor Zhou Xiaochuan. He claimed there was no need "for excessive monetary stimulus to reach the government's target of 6.5% growth over the next five years." Reading between the lines, one gets the eerie sense of of Going Back to the Future when the communists always had a five-year plan in place to improve the economy.
How is this known? The chairman of China's Securities Regulatory Commission reported, within hours of Xiaochuan's remarks, "The state would intervene if the market is not working properly or continues to fail."
Okay, it has to be one or the other. Either the system is failing or has shown cracks in the foundation or neither one of these guys would be talking this way or everything they've said is hooey. The fact Xiaochuan mentioned "a five-year outlook" is most telling.
Why is this relevant to where this column opened? Almost half everything aside from food America ships originates in China. Almost half of all global shipping involves something from China.
This brings us back to the false readings coming from the transportation sector here. The readings are based on false demand for the stocks only and this select demand comes from within the companies listed through their buyback programs. Remove the programs and the demand from other investors would be so weak the value of the stocks would be falling, not rising.
Economic gyrations, volatility in markets especially, has always been a historical indicator of rapid social and political change around the globe. Those changes, inevitably it seems, always turn into social and political disasters.
China's economy did have a remarkable long period of growth. But so did Japan's before its 22-year hiatus into recession. After a while the government central bank manipulations become counterproductive on any economy. The U.S. is no different.
Our original free capitalist economic system has slowly but surely been eroded. We are in the same boat because of our central bank "answers" as the rest of the world's national economies are.
You can only run on banker-generated credit for so long. The U.S. is approaching the 50-year mark. True we dropped the gold standard in that time but that means the economic crash, when it hits, is only likely to go much deeper with a corresponding critical upheaval politically than the Great Depression accomplished. We only got out of that through the artificial means of war.
The analysts may tell you recession angst is overdone--using transportation stocks as a basis. Global woes tell another story.
"I have sworn on the altar of God eternal hostility to every form of tyranny over the mind of man."--Thomas Jefferson
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