The Wall Street Examiner » Wall Street Examiner Exclusives Get the facts. Thu, 18 Sep 2014 02:50:56 +0000 en-US hourly 1 To ECB or Not To ECB, That Is The Question Mon, 08 Sep 2014 22:02:30 +0000 Read more →

This is a syndicated repost courtesy of Radio Free Wall Street. To view original, click here.

Will the ECB’s new lending program really make a difference? Lee Adler gives a definitive answer, tells why, and tells you what to look for to take advantage or protect your portfolio.

Subscribers may click here to open or right click to download this video and play in your media player.

To listen to audio only, click here.

To see samples of past videos on a delayed basis go to our Youtube channel.

Why should you subscribe? Here’s how one subscriber puts it.

Today’s RFWS was absolutely outstanding. (I’m glad I actually watched this one rather than just listening while running.) When it comes to financial journalism, Lee, you remain an island of sanity in a huge sea of crap. Thanks.


Subscription prices will be going up in mid September. Join now and lock in the current price! Use the form below.

If you are not a subscriber and would like to see or hear not only today’s program but all weekly video programs, click this button to start your subscription. It takes less than a minute to complete the signup form and start watching or listening to all Radio Free Wall Street programs. To learn more click here or join and listen right now. By clicking this button, I agree to the Wall Street Examiner’s Terms of Use.

3 month subscription to Radio Free Wall Street podcasts, renewing automatically unless canceled. Price: $39.00




Please send your questions and suggestions for future programs.

[contact-form] ]]> 0
US has Lost 1.4 Million Full Time Jobs Since 2008, Thanks To The Fed Sun, 07 Sep 2014 20:26:09 +0000 Let’s cut to the chase. According to the BLS household survey (CPS), there were 1,446,000 fewer people working full time in August than in August 2008.

Total and Full Time Employment- Click to enlarge

Total and Full Time Employment- Click to enlarge

That’s after an increase of 210,000 full time jobs in August. That’s the actual count, not the seasonal abstraction, so we have to compare that with past Augusts to get an idea if its any good or not. August is a swing month, sometimes up, sometimes down. The average change over the prior 10 years, which included a couple of ugly years in the recession, was -63,000. So this number wasn’t bad. It was slightly better than August of last year and 2012, but come on! It’s still 1.4 million below 2008? In 2008, the economy was in full collapse mode. The Fed has expanded its balance sheet by $3.7 trillion since August 2008 and there are fewer full time jobs now than then? Remind me again what that $3.7 trillion has bought.

The Fed, Full TIme Jobs, and Stock Prices- Click to enlarge

The Fed, Full TIme Jobs, and Stock Prices- Click to enlarge

Since August 2009, near the bottom of the recession, the US economy has added 6.25 million full time jobs, a 5.5% increase. That amounts to $588,000 in Fed QE per added full time job. But that’s ok. It’s been great for bankers, securities brokers, and hedge funds. While the number of full time jobs increased 5.5% stock prices rose 175%. It’s all good!

Or not. I have argued for a long time, and others have picked up the call lately, that the Fed’s policies have rewarded financial engineering at the expense of job creation. The Fed has made it profitable for corporations to borrow free money to buy back the stock options that they issue to their executives rather than investing in expanding their businesses and creating jobs. The Fed’s policies have enabled corporate executives and their financial enablers to conduct a massive skimming of the US economy and wealth transfer at the expense of everybody else. By promoting this behavior, not only has Fed policy been ineffective in stimulating real growth, it has been a moral outrage, decimating the middle class and robbing the elderly of their life savings as they’re forced to consume principal.

The result has been that growth in full time jobs barely keeps pace with population growth. The ratio of full time jobs to total population was 48.4% last month. That’s finally above the August 2009 reading of 48.2%. August 2009 was the bottom of the recession. At the bottom of the 2003 recession, before the housing bubble took off, this ratio was at 52%. In terms of a recovery in the number of jobs that might support a family, the Fed hasn’t supported recovery, it has suppressed it.

]]> 0
Non Farm Payrolls Faux Headline Number Is Misleading Fri, 05 Sep 2014 13:59:06 +0000 The seasonally adjusted nonfarm payrolls headline number for jobs added in August was 142,000.  The consensus guesstimate of Wall Street economists had been for a gain of 223,000. Traders took the “miss” as bullish. There’s just one problem. The impression given by the headline number is wrong. The actual, unadjusted jobs count was right on trend. There was no material deviation whatsoever.

Actual real time withholding tax collections, which I track in the weekly Treasury update, were very strong during the August 12 reference week for the payrolls survey. Based on the strong tax collections and the actual unadjusted jobs count, job growth remained on the same track it has been on in August.

The actual, not seasonally adjusted data shows that the real conditions on the ground have not deviated one iota from the trend of the past 3 years. The actual year to year gain in nonfarm payrolls of 1.85% was within and still near the top of the growth rate range that has been fairly constant since December 2011.

The actual month to month change was a gain of 327,000, which was weaker than August 2013’s +427,000 but well above the 10 year average for August of a gain of 150,000 jobs. July’s performance had been the strongest July since 2005, so it’s not surprising that a few less jobs were added this August. The July-August  2 month net change was very similar to that of 2012 and 2013. There’s no sign in any of the actual unadjusted counts of a real deviation from trend.

As is often the case, the seasonally manipulated number this month is misleading. The media unfailingly ignores the actual data, and therefore transmits a message which gives a false impression. This is why it is essential to read and analyze the actual data instead of the seasonally adjusted abstraction.

Nonfarm Payrolls- Actual- Click to enlarge

Nonfarm Payrolls- Actual- Click to enlarge

This is only part of the story however. I will post additional charts on the jobs data later. But meanwhile, Thursday’s data on initial claims continued to show a dangerously maladjusted, overheated economy.

]]> 0
The Real Impact of the Newest ECB Super Mario Game Thu, 04 Sep 2014 18:50:25 +0000 The problem in EU is too much debt, particularly too much bad debt. Under the circumstances anything the ECB does to stimulate credit is pushing on a string. It won’t stimulate loan demand when the only way to get healthy for most players in Europe is to reduce the overhang of bad debt.

The deleveraging in Europe is healthy and will continue. The banks will take the Euros received in these asset sales to the ECB and will continue paying down their other ECB loans and will continue extinguishing debt and money. The ECBs balance sheet will grow little if at all.

But the asset purchases will liquify bank trading portfolios and some of that cash will find its way where it always does, to the last Ponzi Game Standing, the US stock market. There are three main pumpstations into just one worldwide liquidity pool. It does not matter who is doing the pumping. The same players are playing in the pool and they’ll continue to play the same games they have played for the past 5 1/2 years.

Central Bank Pumping Flows To US Stocks- Click to enlarge

Central Bank Pumping Flows To US Stocks- Click to enlarge

The newly announced program is just another silly Super Mario game. Meanwhile, read more on this here.

]]> 0
Record Low Claims Send Year Long Warning Signal That End Is Nigh Thu, 04 Sep 2014 16:38:18 +0000 Extremely low initial unemployment claims have an ominous track record. Record low claims suggest a distorted, overheated, bubble top economy. On both occasions in this century when claims have reached a similar percentage of total nonfarm payrolls at this time of year, the stock market has subsequently collapsed within a few months.

The overheating that has been indicated in the claims data for months has begun showing up in other data, including today’s ISM Non Manufacturing survey, which reached a level last recorded in 2005 as the housing bubble was screaming toward a peak. The excesses and distortions are real in certain sectors of the economy, while others get left behind. In any bubble economy, when the sectors that are in the most extreme bubbles begin to weaken, it has been only a matter of time until the entire bubble driven economic house of cards collapses.

The headline, seasonally adjusted (not actual) number for initial unemployment claims for the week ended August 30 was 302,000. That was just 2,000 more than the consensus guess of Wall Street economists. It was such a good guess that it rendered the Wall Street game of expectations versus announced data moot this week, especially given the much more important news out of the ECB, which announced that it would begin outright purchases of asset backed securities in October. That will undoubtedly lead to more asset inflation, but that’s another story.

In the big picture for unemployment claims, the actual, not seasonally finagled numbers, which the Wall Street captured media ignores, shows claims still near the levels reached at the top of the housing/credit bubble in 2006. That’s after nearly 12 months of nearly continuous record readings. Since September 2013 when the number of claims first fell to a record low, the data has suggested that the central bank driven financial engineering/credit bubble has reached a dangerous juncture.

Stock Prices and Initial Claims- Click to enlarge

Stock Prices and Initial Claims- Click to enlarge

Thanks to their focus on the made up seasonally adjusted (SA) numbers, news media press release repeaters have given little indication that by historical standards the numbers have represented a danger sign. They have recognized the record levels but the media echo chamber continues to present that as positive, rather than the danger sign that it is.

Here are the actual numbers, along with the data showing why those numbers are so troubling.

According to the Department of Labor, “The advance number of actual initial claims under state programs, unadjusted, totaled 248,570 in the week ending August 30, a decrease of 317 (or -0.1 percent) from the previous week. The seasonal factors had expected a decrease of 3,581 (or -1.4 percent) from the previous week. There were 269,359 initial claims in the comparable week in 2013. ”

Initial Claims- Click to enlarge

Initial Claims- Click to enlarge

Actual initial unemployment claims were 7.7% lower than the same week a year ago. The normal range of the annual rate of change the past 3.5 years has mostly fluctuated between approximately -5% and -15%. The current number is centered within trend norms. There are no signs of weakening yet.

The actual week to week change last week was a decrease of just a few hundred, which is less than a rounding error. A small drop is normal for the last week of August. The average of the prior 10 years for that week was a decrease of -900.

New claims were 1,793 per million workers counted in July nonfarm payrolls. This compares with 1,851 per million in this week of 2007, which was when the housing bubble was on the verge of collapse, and 1,905 per million in the comparable week of 2006, around the top of the bubble. In September 2013, this figure set a record low. In each ensuing week the numbers remained at or near record levels.

Initial Claims Per Million Workers- Click to enlarge

Initial Claims Per Million Workers- Click to enlarge

With record readings having persisted for 12 months, the actual numbers have given us fair warning that the Fed sponsored financial engineering bubble may not have much longer before it too begins to deflate. The numbers persisted at extreme levels at the tops of the last two bubbles for a year before the collapses got rolling. The foundations were already beginning to crumble by the time the first anniversary of record readings rolled around. Based on those standards, time is not on the bulls’ side.

]]> 0
Let’s Get Real- Manufacturing Didn’t Suck But Construction Spending Did Wed, 03 Sep 2014 21:17:34 +0000 By now you have heard of the great news on factory orders and construction spending in July. Construction spending beat consensus expectations. The pundits had expected a 1% increase on the seasonally finagled headline number for construction and got 1.8%. The headline seasonally adjusted July increase in factory orders was a whopping 10.5%. Wall Street conomists had been expecting a slightly crazier gain of 11%. They knew about a big aircraft order that would skew this measure to unparalleled heights.

These data are not adjusted for inflation, so it’s enlightening to look at them on an inflation adjusted basis, and in the case of factory orders, backing out the transportation equipment orders to see what the rest of the manufacturing sector looked like.

As usual I looked at the actual, not seasonally adjusted basis and considered the actual trend, rather than an arbitrary seasonally adjusted, month to month number. Seasonally adjusted data usually comes fairly close to depicting the overall trend, but it is misleading often enough that I see no reason to use it when we can just as easily look at the actual data and see the trend in that without massaging the numbers to make the trend smoother.

First, construction spending rose just 1.8% on a year to year basis. The growth rate has been persistently cooling since January when it was a robust 8.7%. The dead cat bounce that began in 2011 is now approaching stall speed. God forbid the Fed should let interest rates on construction loans rise. Even with free money from the Fed, there’s hardly any demand for construction loans. They are still below the lowest levels of the 2002 recession, as well as below the level of July 2009, which most observers agree was the bottom of the “Great Recession.”

Real Construction Spending- Click to enlarge

Real Construction Spending- Click to enlarge

Real factory orders were better. They surged by 5.9% year to year, which was within the range of change of the past year. There’s no sign of slowing there yet. Real manufacturing orders are now back to the level of 2006, at the top of the housing bubble, but they’re still below the levels of 2007 and 2008, when the US economy was on the verge of collapse. Purchasers of manufactured goods hadn’t figured that out yet.

Real Factory Orders- Click to enlarge

Real Factory Orders- Click to enlarge

Dare I point out that the last two times manufacturing orders were this strong were at the top of a tech bubble and the top of the housing bubble?  That would be interesting enough, but the fact that it has taken 5 1/2 years of free money from the Fed to get this far is troubling.



]]> 0
Central Banks Are Behind Demand For Financial Assets, And US Treasury Is Biggest Supplier Wed, 03 Sep 2014 15:30:39 +0000 Dow Jones’s Marketwatch, inexplicably, does a better job of being “fair and balanced” in reporting financial news than its sister in crime, the Wall Street Journal, or their evil stepmom, Fox Business. The great humanitarian seeker of truth and paragon of journalistic virtue, Rupert Murdoch, controls all of them. So it’s surprising to find occasional points of light in that evil empire. Marketwatch’s Washington Bureau Chief Steve Goldstein is one of them, and one of a few financial journos who at least makes an effort to seek and report the facts, rather than hewing strictly to Wall Street’s company line. I had a conversation with Goldstein on Twitter on Tuesday.

Goldstein had tweeted, “How much good data is needed for Treasury bulls to capitulate? (Lots, probably, but 10-yr up 7 bps today).”

I inferred that he was referring to the idea that good economic data should push Treasury yields higher. It’s a broadly accepted misconception that there’s a cause/effect relationship between economic data and bond yields. I sent him a Tweet alluding to the real drivers of Treasury prices, supply and demand. “Maybe, but there’s a temporary shortage of cash now as Treasury issues $87B in new paper 8/28-9/4, including $32B today.”

He responded, “That’s surely not issue (no pun intended) at the long end.”

Me in a series of tweets: Sure it is. Absolutely positively. The cash must be raised to pay the bill. This is enormous supply in one week.

But it’s a short term effect. Couple days at most. Then the market snaps back to whatever trend it’s on.

Treasury supply is one of THE most important, and widely ignored, short term market drivers for both bonds and stocks.

It directly impacts the Primary Dealers in their market making functions, and other buyers, across the spectrum of markets. 

Goldstein was open enough and curious enough to ask me if I had data. So I sent him my latest Treasury and Fed reports, along with the emailed comments reproduced below, which briefly illustrate a couple of key points in how I view markets. The Fed and US Treasury are the major players in driving price trends in the markets along with two other mammoth central banks.

Goldstein then asked “What’s the correlation between S&P 500 and Treasury issuance, and how does that compare to QE?” This question really gets to the heart of what drives the markets, and what’s wrong with them.  Below is my quickly penned, somewhat disjointed response.

That’s a great question with an answer that requires more than a one liner.  Here are a few thoughts off the top of my head, which probably don’t directly answer the question, but do give an overview.  Generally, as Treasury issuance declines there’s less competition for stocks from a supply/demand perspective.  In theory its bullish for stocks (See Clinton era) but the unprecedented nature of QE from the 3 major central banks since 2009 has so tilted the playing field that almost nothing else matters. Treasury supply is the biggest driver of the increase in the total supply of financial assets, but $6.2 trillion in central bank money printing since 2009 renders it almost moot.

Fed, ECB, BoJ Combined Total Assets- Click to enlarge

Fed, ECB, BoJ Combined Total Assets- Click to enlarge

The correlations between QE of the 3 major central banks and both stocks and Treasuries are high, with Fed and BoJ correlating most highly with US stock prices.  Briefly discussed here  and here (videos).

The ECB typically correlates more closely with Treasury yields. There are reasons for all of these.

Fed, ECB, BoJ, Drive Stocks and Treasuries - Click to enlarge

Fed, ECB, BoJ, Drive Stocks and Treasuries – Click to enlarge

Think in terms of supply and demand for financial assets. Stocks and bonds are different but they are both financial assets and are driven by aggregate demand for financial assets. Since 2009, aggregate demand has been driven by central bank printing. The Fed and BoJ both liquify many of the same primary dealers who make markets in everything. So it’s not surprising to see US stock prices move in the same direction at the same time as the direction of Fed and BoJ balance sheets.

The ECB is different. It does not buy assets directly and does not operate via Primary Dealer network. Its operations are virtually always lending operations and are voluntary except when the financial system is in crisis and banks would collapse without the funding. At the same time, the ECB correspondents are the same large banks that operate in US markets, including many Primary Dealers. 4 Primary Dealers are European banks and most large US banks operate in the Euro system, so those flows can and do go directly to fund a UST carry trade when crisis conditions are extant.

The Fed has more or less calibrated the amount of QE each month to the amount of T supply. Since there are always other buyers of Treasuries, this creates the excess liquidity that Bernanke expected to boost stock prices. The only problem was that his trickle down theory doesn’t hold water. It pooled at the top.

As Treasury supply declines, the Fed needs to do less QE. At the same time, the BoJ is still pumping into world liquidity pool and ECB is threatening to. Those are the wild cards that could keep markets levitated and Treasury yields suppressed as the Fed cuts its purchases to near zero. The Fed will keep its balance sheet flat, but will still be buying around $15B per month in MBS reinvestment purchases, which will still flow into Primary Dealer accounts.

There are many, many moving parts in this. I also track FCB purchases of Treasuries, Primary Dealer weekly purchases, banks etc. etc. etc. Different things are moving different markets at different times. Careful observation of a wide variety of central banking, government, fiscal, and banking trends is essential to catching the first signs of trend change.

In terms of careful observation, I apply technical analysis to economic data. It’s essential to recognizing trends and turning points.  No fancy econometric models, which are garbage, anyway.

Finally, I sent him this.

Fed Assets vs. Treasury Supply- Click to enlarge

Fed Assets vs. Treasury Supply- Click to enlarge

]]> 0
Fed May Be Tapering, But Its Partners In Crime Aren’t – Video Thu, 28 Aug 2014 18:46:28 +0000 Lee Adler tells CNBC Africa that the Fed may be tapering, but the key to the US market will now be in the actions of the BoJ and ECB.  Subscribe to the Professional Edition for my proprietary research.

]]> 0
The Bull Market Will End When The Fed and Friends Decide, Then We Get To Pay For Their Madness Wed, 27 Aug 2014 20:24:41 +0000 We all know the market is rigged. We may not like it, but facts is facts. The world’s largest central banks have thoroughly rigged the game. They figured out they could do it and they have used QE as an instrument of market manipulation, particularly stock market manipulation, since 2009. On the surface, the idea was to promote “Trickle Down.” Only it doesn’t work. The trickle pools at the top.

Eventually the lack of trickle forms a bulging bubble and display of wealth disparity becomes so great that even central bankers, who are difficult to shame, become embarrassed enough to stop pumping it to even greater extremes. Only, when you prick a bubble, it doesn’t just gradually drain out. It explodes like the goo spewed on a mirror from a giant pustulous teenaged facial boil when squeezed.

Bears are fond of the idea that market rigging works until it doesn’t, that somehow, things just become so extreme that the stock market and economy just spontaneously combust, but sadly, in economic matters, there is no justice. There is no restitution or retribution. There is only power.

Power corrupts, and the corrupt exercise power to their own ends. That principle drives this bull market. It’s about the aggregation of wealth in the hands of the corrupt and powerful. And there are none so corrupt, or more powerful, than central bankers. They are the minions of the puppet masters. We are the puppets, dancing as they pull the strings.

So if you think that this patently manipulated bull market will just suddenly and spontaneously end, and that the manipulators will suddenly get their due, please disavow yourself of that quaint notion. Yes, prisoners will be taken when the end comes, but those who are in power will remain in power. A few will retire, as Robert Rubin, Larry Summers, Timothy Geithner, Alan Greenspan, and Ben Bernanke once did. But as always, a new class of manipulative power mongers and their sycophants waits in the wings to take their places.

If you don’t think that the Fed is the cause of bear markets as well as bull markets, you are kidding yourself. Markets don’t spontaneously combust. They fall when the Fed decides. And the Fed has decided. Normally in such cases we’d expect that the market would top out and begin to fall within the next 12 months. The timetable is not “data dependant,” as the current mastermind, Mrs. Akerloff, says. The decision has been made. They’re shutting this down, data be damned.

However, there are two wild cards this time. The Fed has two partners in the market manipulation business. The BoJ and ECB both are manning the pumps into the same liquidity pool. The BoJ apparently intends to keep pumping after the Fed stops. The ECB is threatening to start pumping, although it’s debatable whether its rules would permit the outright securities purchases that so directly impact the markets. So we don’t know yet how these wild cards will impact things. We must continue to watch tehir actions closely.

As for crashes, it’s arguable that the Fed would want a crash but crashes occur because the Fed cannot control the unwinding of the bubble. Crashes are a side effect of that. The Fed is aware of the risk, but it accepts it, believing that it can reverse the course of things when the time comes. Perhaps the next time the time comes it will be too late, because this time they have gone too far.

Let’s look at the evidence showing that the market tops out when the Fed decides and not by some accident of fate.

The Fed has posted historical time series data on its balance sheet on the web since 2002. I have been tracking it every week, and even every day on the NY Fed’s daily operations pages, ever since. So I’ve managed to accumulate some familiarity with the details of the Fed’s operations and their direct and indirect impacts on the markets. It’s a matter of careful observation. As the great scientist philosopher, Professor Lawrence Berra, said, “You can observe a lot by watching.”  There’s no rocket science involved. These are processes that unfold slowly before our very eyes. The answers are there for those who bother to watch carefully.

Below is a graph of the Fed’s balance sheet from 2002 to 2008 showing that the stock market topped out in 2007 when the Fed pulled the plug on balance sheet growth. It then became even more aggressive when it drained its System Open Market Account in 2008 while funding non traditional direct loan programs, but keeping the overall assets level. That draining of the SOMA crippled the Primary Dealers and the markets spiraled out of control until the Fed reversed course. There was clear cause and effect between the Fed’s actions and the 2007-09 bear market.

Fed Assets and SPX 2003-08 - Click to enlarge

Fed Assets and SPX 2003-08 – Click to enlarge

The weekly data for 1996-2002 is also available. Make no mistake. The Fed also triggered the 2000-2003 bear market. After watching the internet and technology bubble spiral out of control in late 1999 and early 2000, the Fed decided that enough was enough and pulled the punchbowl in 2000, halting its balance sheet growth altogether for 9 months in the year 2000. It started growing its assets modestly in 2001 and after, but it was too little to have any market impact as it added less than $5 billion per month. The pendulum had swung and the Fed was content to allow it to run its course. The markets would turn when the selling had exhausted itself in 2003.



From 2003 through 2006, the Fed expanded its balance sheet by $150 billion at a fairly steady rate of $3.125 billion per month. Contrast that to $100 billion plus per month under the various incarnations of QE in recent years. Miracle of miracles, from 2003 to 2007, the stock market recovered on its own, as if by magic, without heavy handed Fed intervention. But in 2007, the Fed again pulled the punchbowl, and it blundered in 2008 when it shrank the System Open Market Account and starved the Primary Dealers of cash when they needed it most, rendering them unable to make and maintain orderly markets.

The Fed could have restored order to the markets simply by restoring that cash it had drained from the dealers as it did under QE1. It then could have stepped aside and let the markets and US economy go through the natural cyclical process of healing as they always had done unfailingly in the past. This time the manipulators had a technological revolution in energy production at their backs, but have never acknowledged its impact. Instead, the Fed and its sycophants have undeservedly given all the credit for recovery to Bernanke, with the megalomaniac himself leading the chorus. They are wrong, but we must await the slowly unfolding judgment of history to show that.

Since  2007, with the madman Bernanke in charge, we’ve seen not one but three massive expansions of the Fed’s balance sheet. Making matters worse, the ECB and BoJ mimicked Bernanke, creating monstrous imbalances throughout the world. Their universal solution to the problem of too much bad debt was to extend and pretend, adding more and more debt to the towering inferno of debt that was the problem in the first place. There will be a price for this madness, and we will all learn first hand what that will be, in due time.

]]> 1
The Real Force Behind US Economic “Growth,” Such As It Is, Is Not The Fed Tue, 26 Aug 2014 22:05:37 +0000 Industrial Production - Click to enlarge

Industrial Production – Click to enlarge

As the stock market has scooted off into Fed driven bubble territory over the past year, industrial production, on the surface at least, appears to be expanding quite nicely. After briefly going negative in mid 2013, the annual growth rate turned upward and has been accelerating, reaching 4.3% in July. This measure is by units of production, therefore no inflation adjustment is required. It’s a pretty impressive performance for the nation’s factories, mines, and utilities.  Can the Fed take credit for that growth, or was there something else that drove it?

The answer is that Fed is not only not responsible for that growth, it is responsible for once again putting us in grave danger. The financial engineering bubble the Fed has enabled does not create real wealth, it only transfers it from one class of economic actors to another. In this case, it has gone from a dwindling middle class to the bankers and corporate plutocrats who control the levers of power. That’s a story which I have covered in these pages for years. You know the details.

The industrial production data provides some real insight into the drivers of real growth in the US economy, such that it exists.

Media pundits and the Wall Street establishment like to back out defense and aviation to arrive at a core figure for industrial production, but as Alan Tonelson pointed out, while extremely volatile, their contributions to the total index are relatively small and have little impact on the trend over time. I like to deconstruct the index differently to get a better idea of how the US economy is really doing.

In fact, take away energy and the rest of the US economy isn’t doing that well. In some ways, it’s not growing at all. What growth there is appears entirely due to the energy boom and its ripple effects. Thank goodness for that boom and the technological changes that led to it. Environmentalists may feel differently, but without that growth in energy the US economy would be in even deeper trouble than it is.

The energy boom deserves far more credit for what growth there is in the US than does the Fed, but you will never hear the Fed’s cheerleaders acknowledge that. It’s also the most likely reason that the US is doing better economically than Europe and Japan. Both the BoJ and ECB have tried massively stimulative monetary policies over the past 5 years with little impact. Europe and Japan have been swinging between no growth and contraction for the entire time since 2009 while the US has seen modest expansion.

Here are a few charts that shed some light on the facts. First, manufacturing, now growing at a rate in excess of 4% has finally crawled back to the peak levels of 2007, just before the US economy collapsed. However, the June seasonal peak was below the level of 2007’s peak. While manufacturing is back to where it was in 2007, it’s no stronger, and the US and the rest of the world are a lot bigger now than they were 7 years ago. Relative to population growth, US manufacturing and the jobs that go with it, are still lagging.

Manufacturing Production Index- Click to enlarge

Manufacturing Production Index- Click to enlarge

Electric Power generation is necessary not only for industrial and commercial activities, but for our regular needs and wants of daily living. There are few things which we do at work or at home for which electricity does not play a role. Consequently, electric power generation had been in a secular growth trend from the inception of the measure in 1974 until 2008. But then that all come to a standstill. We use no more electric power today than we did in 2008, in spite of the US population being about 6% greater now than then. The question is whether the flattening of this trend is a matter of greater technological energy efficiency, or forced conservation and reduced demand due to the pressure on real household incomes. It’s probably a little of both, but the trend suggests that across the entire wealth spectrum the experience of economic growth has been extremely limited. We have seen lots of income data supporting that conclusion. Only those near the top of the curve have experienced “growth.”

Electric Power Generation- Click to enlarge

Electric Power Generation- Click to enlarge

The real driver of whatever growth we have seen in the US in the past 6 years has been in getting oil and gas out of the ground and into the economic stream. Since 2009, energy production has risen by over 50%. Oil and gas extraction has been growing so fast that its share of industrial production has risen from 26% in 2006 to nearly 30% today.

Oil and Gas Production Index- Click to enlarge

Oil and Gas Production Index- Click to enlarge

At some point this trend will begin to slow. I don’t pretend to know when that will be, but when it does, the US economy is likely to look a lot less rosy than it appears today. Non Energy industrial production is just about back to 2007 levels after a strong growth spurt in the last 12 months. Even though direct energy production is removed from the index shown below, it’s likely that the ripple effects of the energy production boom played a role in this growth.

Non Energy Industrial Production- Click to enlarge

Non Energy Industrial Production- Click to enlarge

Does this lack of growth since 2007 justify the stock market being 28% higher today than it was in 2007. When the Fed and its partner major central banks, the BoJ and ECB finally pull the punchbowl will prices come back to earth with a thud? I think the answer to that is “yes,” but for those of us in the markets, timing is the issue, which I cover in the Professional Edition.

What about the growth in energy capacity, that is, the construction of all those oil and gas wells that are required to produce that energy? What impact has that had since 2007?


Capacity has grown by 50% since 2008. It looks like this.

Industrial Capacity- Oil and Gas Production - Click to enlarge

Industrial Capacity- Oil and Gas Production – Click to enlarge

Ask yourself where the US economy would be without this enormous investment and without the tremendous annual increases in actual production.

While the Fed is behind the enormous ramp in stock prices since 2008, the Fed’s cheerleaders give it far more credit than is deserved for the economic “recovery” that has left too many Americans behind. That “recovery,” like so many booms in history, is largely due to an accident of technology, an innovation so great that it has driven economic growth in the US for the past 5 years. We know this because growth in those parts of the world lacking in oil and gas reserves, or where for other reasons this technology has not been widely adopted, have not grown, while the US has. Likewise, in those areas of the US where there are oil and gas resources, growth has been far faster than in areas where there is not. A prime example… without oil and gas, there would be no low tax economic miracle in Texas.

This lucky accident of technological history is completely independent of the Fed’s policies of QE and ZIRP. Those policies were not necessary for this boom in energy. It was going to happen regardless of the level of interest rates or the mountains of cash the Fed pumped through Primary Dealer trading accounts. Historically normal interest rates and money creation would not have slowed this boom one iota.

Conversely, had the Fed never instituted ZIRP and QE, the massive financial engineering asset bubble currently putting the world at renewed risk never would have happened. With the boom in energy rippling out into the US economy, this bubble and its high frequency trading, stock option buybacks, and the immoral crushing of the nesteggs of America’s elderly, was wholly unnecessary. The dislocations that will result when the world’s central banks finally relent from these policies will extract another terrible price, a price that did not need to be paid. It is only a matter of time.

We can already guess the excuse which the Fed’s cheerleaders and apologists will have then. It will be that the Fed did not do enough.

These policy makers, these economists, these media pundits, simply refuse to consider the facts. They dare not question their models and their false heroes. They are incapable of admitting error. They are incapable of embarrassment. They have no conscience and no shame. These are the qualities of our economic policy makers and those in the self congratulatory media echo chamber who aspire to be like them. It is why we will simply go on careening from one crisis to the next from generation to generation.

As individuals and money managers with consciences all we can do is protect ourselves from those crises as best we can. We must arm ourselves with the facts and act upon them when the times require.

]]> 0