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Wall Street Narratives Distort Reality; A Deep Recession Is Rapidly Approaching



Volatility remains the major feature of financial markets. You are correct if you interpret the word “volatility” to include a downtrend in equity prices. This is the kind of action one normally sees in a “Bear” market. The table below shows the changes in the major U.S. indexes from their year-end peak values to the end of April, May and to the close of business on Friday, June 10. It wasn’t a pretty week with the major indexes down between 3.0% and 5.4%. Both the Nasdaq and the Russell 2000 are well into “Bear” market territory while the S&P 500 may well be there next week. It appears that, contrary to the narrative on Wall Street that the approaching recession will be “mild” and won’t occur until next year, investors are recognizing that the recession will be ugly and will likely come sooner than later.

Part of the issue for the markets is the inflation scenario. We deal with it in detail later in this blog. The 8.6% Y/Y CPI print on Friday was the catalyst for Friday’s sell-off. As shown in the table, while markets took a breather in May (“Bear” market rally), the downtrend reignited this past week.

The chart at the top of this blog shows a comparison of the top-10 equity market sell-offs during the first five months of the year. Note that, despite the rhetoric coming out of Wall Street and the May “Bear” Market rally, as of the end of May, over the 122-year period, the severity of the equity sell-off is tied for third.

Employment – What the Data Says

In today’s world, the media, including the financial media, appear to report with a point of view. Without digging deeper, one would never get the whole story. We reported in our May 9th blog that the +428k net new jobs number reported in the Payroll Survey for April was closer to +148k once all the nuances were considered. While the headline was lower than April’s, May’s Payroll Report (+390k) was somewhat better. But again, after considering that about +100k was added from the assumed growth of small businesses (the Birth/Death imputed add-on), the counted number of +290k falls to under +200k if ADP’s count of small business jobs (-92k) is used. Hence, this number was on the weaker side. Nowhere did we see any mention that the Retail Sector laid off -61k, or that the factory workweek and overtime hours declined. In fact, overtime hours are down three months in a row; the first time this has happened in seven years. In addition, those working part-time for economic reasons (they can’t find full time because business is slow) rose by +349k and has now risen in three of the last four months.


ADP is the largest payroll purveyor in the U.S. They are able to count the number of employees who get paid from their internal records, and they can divide them by the size of the businesses they serve. The ADP data is trending lower, much lower as seen from their monthly total employment estimates: Dec: +780k; Jan: +512k; Mar: +249k; May: +128k. For small businesses, which are much more sensitive to changes in the economic environment than are large businesses, ADP’s numbers show May: -92k and April: -123k. Year to date, the number for small business employment is -278k. In addition, the weekly data on Initial Jobless Claims, while still fairly low, have started to increase, and layoff announcements (Challenger) are on the rise. Thus, we think that the employment data will continue to deteriorate as the year progresses.

The New “Narrative”

In the face of deteriorating employment data and, worse, poor Q1 results from major retailers (see below), the Wall Street narrative has changed from a “strong” economy to that of a “mild” recession that won’t arrive until next year. The incoming data say something much different.

Let’s start with Q1 corporate reports. In mid-May, Walmart WMT (WMT) and Target TGT (TGT GT ) reported sales, earnings and guidance that disappointed Wall Street analysts. Both said that consumers purchased fewer “discretionary” items. WMT said consumers spent more on food and less on discretionary items. Home Depot (HD) and Kohls (KSS) offered much of the same, so it appears that the Retail Sector is reeling (per the -61k layoffs in May in this sector noted above). But the weakness is not confined to Retail. Both Microsoft MSFT (MSFT) and Tesla TSLA (TSLA) disappointed with TSLA announcing a 10% workforce reduction! Also note that, of the four major indexes shown in the table above, it is the Nasdaq (tech heavy) and the Russell 2000 (small businesses) that are down the most. The fall in the Russell doesn’t surprise us because small businesses are much more sensitive to the economic environment than are large ones. But the fact that investors have run from tech should be of concern. MSFT’s miss may be prescient.

There must be a reason why Retail is behaving so poorly (remember consumption is 70% of GDP!). The chart below says it all. Despite the fact that wages have risen at a faster pace over the past year and a half than they had for many years, inflation has risen even faster, so real (inflation adjusted) earnings are falling behind. Note in the chart below that falling real earnings are often associated with recessions. It isn’t really rocket science!

The Inventory Overhang

Inventories are too high. One could have gleaned that from the TGT and WMT reports that consumers purchased fewer discretionary items. Over the past year wholesale inventories are up 24% and retail inventories 15% and stand at a 38-year high. We also note that the CA ports are reporting near record unloadings. That indicates that supply chains are becoming unclogged and that inventories will rise further.

Much of this appears to have been a function of the “shortage” narrative that was a major theme in 2021. That narrative caused businesses to order early as they worried about not having goods on their shelves. Now they have the goods, but consumers aren’t buying them. We expect this excess inventory will go “on sale.” (That should help the inflation issue!) In fact, on Tuesday (June 7) the following headline appeared on CNBC: Target expects squeezed profits from aggressive plan to get rid of unwanted inventory. The sub-headline was: Target said it will take a short-term hit to profits as it cancels orders and marks down unwanted merchandise. Walmart, which saw inventories grow 33% Y/Y, and Kohl’s (40%) are in the same boat. Many others, too. We expect discretionary merchandise to be “on sale,” if not now, then soon.

The Consumer Strength Myth

Part of the narrative has been that consumer balance sheets are strong, and they have significant savings, so consumption will remain elevated. Again, that is ancient history. The savings rate, which was over 30% when Washington D.C. was giving money away, has now fallen to a 14-year low of 4.4% (see chart). Not much there to spur consumption!

In addition, over the last four months, consumers, in an attempt to maintain their living standards in the face of rising food and fuel prices, have gone on a borrowing binge. There has been a record run-up in credit card debt to the tune of $38 billion in April alone and $120 billion over the last four months (11.2% growth and a 22% annual growth rate). As one would expect, delinquencies are also on the rise: 60-day delinquencies for sub-prime credit card holders are up six months in a row; 11% of credit card holders with credit scores below 620 are delinquent, and 8.5% of car loans/leases are also delinquent.

Cracks in the Housing Market

The New Home sector is a major contributor to GDP. We have seen new housing inventory go from a couple of months supply to nine months. Mortgage applications to purchase have been falling on a week-to week basis over the last several months and are -21% lower than a year ago. This is no doubt a function of rising mortgage rates which have gone from the 3% area to more than 5.5%. Which means that the monthly mortgage cost for a median priced home a year ago is now 50% higher. April’s Existing home sales are down nearly -6% Y/Y, pending sales -9% and new home sales -12%.

Worse, the rise in interest rates have caused a -75% Y/Y falloff in mortgage refinances. Often, consumers borrow against the appreciated value of their homes for big ticket items, like home improvements, to finance an expensive vacation, or even to purchase a car. The fact that such applications have fallen so far, so fast implies a dramatic slowdown in such purchases. In fact, the data say that overall refi-mortgage applications are at a 22-year low.

Big-Ticket Items Tank

It’s not just housing. For the last several months, The University of Michigan’s Consumer Sentiment Survey has indicated that consumers were not in any mood to purchase homes, cars, or other big-ticket items as seen from the chart showing consumer intentions to buy cars.

Lo and behold, we now see new car sales (passenger cars and light trucks) were down -30% Y/Y in May.

The U of M’s sentiment gauges continue to point lower. The chart below shows that the overall Consumer Sentiment Index for June has fallen to the lowest level in its history.

Because U of M’s sentiment gauges continue to point lower, we can expect that major purchase statistics will continue to deteriorate for the foreseeable future.

The Tight Labor Market

The champions of the “mild recession” narrative say the economy is still vibrant and point to the labor market. They say the Unemployment Rate is still 3.6% and “Now Hiring” signs are everywhere you look. The answer is that the tight labor market preceded the pandemic. Part of this issue is demographic in nature, because as baby boomers are retiring, replacements aren’t 100% there. But much of the problem has been caused by the narrative itself. That is, the view that there aren’t enough workers has caused both over-hiring and labor hoarding. We see this in the productivity statistics. In Q1, productivity eroded at an annual rate of -7.5%. That number is huge, and we haven’t seen such a number since 1947! Over the last three quarters, productivity has fallen at a -1.9% annual rate. That’s a harbinger for recession as poor business results will cause right-sizing.

While the Initial Jobless Claims are still fairly low, they have recently started to rise. We also note that layoff announcements (from Challenge) are on the rise.

Inflation and the “Transient” Issue

The May CPI number was quite ugly on Friday (June 10) with the Y/Y inflation rate rising to 8.6%. The main culprits, once again, were food which was up +1.2% M/M (+10.1% Y/Y) and energy (+3.9% M/M; +34.6% Y/Y). These are taxes on the real spending power of households, especially lower/middle income ones. As a result of the energy spike, airline fares rose double digits and are now 38% higher than a year ago, and the energy costs also spilled over into delivery services and freight costs. The “core” inflation rate (ex-food and energy) rose an ugly 0.6% and only fell on a Y/Y basis (6.0% from 6.2%) because of “base effects,” i.e., the denominator (moving from April 2021 to May 2021) spiked higher.

Nonetheless, we still maintain the view that this bout of inflation is “transient.” We know that this is a discredited word. The problem with that word is that it was never defined as to time frame, so imputed to it was a short period, like 2 or 3 months. The term actually means “not permanent.” And that remains our view. As to time frame, likely another 12-18 months barring any non-economic events (like Russian aggression). At this stage, we see significant downward pressure on inflation for the following reasons:

· Demographics – the demographics in the U.S. and in major developed markets (older populations) are such that disinflation/deflation results. We saw this in the U.S. economy between the Great Recession and the pandemic;

· Fiscal policy has turned from giving away money to one of a significantly shrinking deficit;

· The money supply is now contracting, and the velocity of money is still near record lows;

· The Fed has not only caused interest rates to rise, but they have now begun Quantitative Tightening (QT); liquidity is drying up and that will impact financial markets (likely already has);

· Vendor delivery delays are easing – the ISM measure is at a 14-month low;

· The supply chain logistics appear to have eased – the near-record unloadings at the CA ports support this view;

· Multi-family units will come to market at a record level in the 2nd half of 2022; that will stop the rise in rents;

· The U.S. dollar is strong which reduces the cost of foreign goods;

· Commodity prices appear to have peaked:

  • Lumber: -43% over the last 3 months;
  • Steel rebar: -22% from its peak;
  • Iron Ore: -35% from its peak;
  • Baltic Dry Index: -20% since mid-May;

· Major retailers will be reducing inventories (reduced prices); TGT already announced its major inventory reduction;

· Wage growth has slowed to about half of its 2021 rate; it will further moderate as the unemployment rate rises.

Final Thoughts

The indicators are all saying that the recession will come sooner and be deeper than currently expected:

  • The Citigroup Economic Surprise Index is deeply negative;
  • The Atlanta Fed’s GDP forecast for Q2 is now 0.9% (June 8), down from 1.9% on May 27 and 2.5% on May 17;
  • U of M’s overall Consumer Sentiment Index dove to 58.4 (prelim) in May from 65.2 in April – that’s a big move for that index, and, as we discussed earlier, it has proven to be a leading indicator for car and home sales.

For consumers:

· Lower/middle income earners are suffering from a large inflation tax – that is impacting consumption;

· Upper income earners are suffering from a “Bear” Market in equities, and that has a psychological impact on their spending;

· The implications for the economy:

  • Inventory reductions (things “on sale” should help reduce inflation);
  • Cost cutting as profit margins erode;
  • That means layoffs and rising unemployment.

(Joshua Barone contributed to this blog.)


Teacher, Police And Firefighter Pensions Are Being Secretly Looted By Wall Street



America’s severely underfunded public pensions are allocating ever-greater assets to the highest cost, highest risk, most secretive investments ever devised by Wall Street, such private equity, hedge funds, real estate, and commodities—all in a desperate search for higher net returns that, not surprisingly (given the outlandish fees and risks), fail to materialize. Transparency—public scrutiny and accountability—has been abandoned, as pensions agree to Wall Street secrecy schemes that eviscerate public records laws.

Our nation’s state and federal securities laws are premised upon full disclosure of all material risks and fees to investors: “Read the prospectus before you invest,” is the oft-cited warning by securities regulators. Nevertheless, teachers, police, firefighters and other government workers today are not allowed to see how their retirement savings are managed or, more likely, mismanaged by Wall Street.

For nearly a decade, the United States Securities and Exchange Commision has warned investors that malfeasance and bogus fees are commonplace in so-called “alternative” investments and, more recently, Chairman Gary Gensler has called for greater transparency to increase competition and lower fees.

Gensler has asked the agency’s staff to consider recommendations on ways to bring greater transparency to fee arrangements in private markets. “More competition and transparency could potentially bring greater efficiencies to this important part of the capital markets,” he said. “This could help lower the cost of capital for businesses raising money. This could raise the returns for the pensions and endowments behind the limited partner investors. This ultimately could help workers preparing for retirement and families paying for their college educations.”

Gensler has stated he would like to see a reduction in the fees these investments charge and has also commented on industry abuses such as ”side letters” which permit private funds to secretly give preferences to certain investors—preferences which harm public pensions.


But that’s not good enough to protect public pension stakeholders.

No one—including the pensions themselves—seems to care that the government workers whose retirement security is at risk are being kept in the dark.

The SEC needs to do more—actually alert public pensioners as to those abuses the Commission knows full well are rampant, at a minumum. Advise them, Chairman Gensler, to demand to see and read prospectuses and other offering documents related to their hard-earned savings.

Does the SEC think it’s kosher for Wall Street to conspire with public pension officials to withhold this information from investors—any investors?

Since my 2013 forensic investigation of the Rhode Island state pension exposing gross mismanagement by then General Treasurer Gina Raimondo which I accurately predicted would cost workers dearly; my 2014 North Carolina state pension investigation exposing that $30 billion in assets had been moved into secretive, offshore accounts and, most recently, my investigation of the State Teachers Retirement System of Ohio, I have provided my expert findings to the SEC staff for their review. Each and every public pension forensic investigation I have undertaken has extensively discussed Wall Street secrecy schemes that enable looting. In my book, How To Steal A Lot Money—Legally, I quote disclosures from SEC filings that detail industry abuses.

Join me, Chairman Gensler, in giving government workers a clue, a glimpse, a peek, at the alternative investment abusive industry practices that are carefully guarded by Wall Street and being hidden from them.

Teachers, police and firefighters deserve a fighting chance to protect their retirement savings.

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It Is Time To Buy Bonds



US 10-year note prices are likely to rise through August. The monthly histogram below shows that July and August have been the two strongest months for the note price.

Monthly Return- US 10-Year Notes

Blue: Average Percentage Change

Red: Probability of a rise on that day

Green: Expected Return (Product of the first 2)

These numbers are static in the sense that they change little over the years. This is only one cycle, the one-year cycle, whereas there are many cycles operative at any one time. In order to get a reading on such other rhythms, a scan is run to identify other profitable price cycles. The graph below reveals the most valuable cycles that are operative at any one time.

10-Year Note Monthly Cycle


These cycles reinforce the seasonal tendency for notes to rise. Prices have risen in 60% to 65% of the time in these summer months. With the dynamic cycle also in ascent, the probabilities rise to about 65% to over 70%. There are similar and supportive developments in the Japanese and German fixed income markets.

The cycle projection must be confirmed by market activity. The daily graph reveals that price broke through a downtrend line.

10-Year Notes Broke Through Resistance

Here is a helpful sentiment indicator that supports the bullish view. The cover page of this week’s Barron’s points to much higher rates. Applying contrary opinion, this suggests lower rates and higher note and bond prices. The first objective is 123.0.

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Will There Be War Over Taiwan – The Next Spy Thriller



I usually go through a rhythm of reading one or two serious books, followed by a few works of fiction and with summer on the way I wanted to highlight a few of both. In that regard I have just finished Laurence Durrell’s ‘White Eagles in Serbia’, an old-fashioned espionage thriller where the hero Colonel Methuen is dropped behind enemy lines in post war Serbia (he speaks excellent Serbo-Croat) and becomes embroiled in a violent plot to overthrow Tito.

The book is a warm-up to reading Durrell’s ‘The Alexandria Quartet’, a work that nearly won him the Nobel Prize. Durrell was part of an interesting Anglo-Irish family, who largely considered themselves Indian – his brother Gerald, the naturalist and writer, touches on this in ‘My Family and Other Animals’.


Though I am not an expert on these matters, I found ‘White Eagles’ a more realistic account of espionage than much of what we see in the media today (Mick Herron’s ‘Slow Horses’ is good), and overall it is a tale of derring-do that is more in keeping with the work of the founding fathers of the genre – Eric Ambler, John Buchan, Erskine Childers and Ted Allebury for example.

It also made opportune reading given what seems to be an epidemic of espionage – with reports of the Chinese hacking group APT40 using graduates to infiltrate Western corporates and notably the admission by the head of Switzerland’s intelligence that Russian espionage is rife in that country (notably in Geneva – for which readers should consult Somerset Maugham’s ‘Ashenden’ as background material).

These and other trends – such as the outbreak of a heavy cyber battle last week (against Lithuania and Norway for instance) and the increasingly public ‘clandestine’ war between Israel and Iran (they have just sacked their spy chief) point to a world that is ever more contested and complex.


Secret World

One of the new trends in the space is cyber espionage – both in the sense of stealing state and industrial/corporate secrets, influencing actors (such as the manipulation of the 2016 US Presidential election) and outright acts of hostility such as the hacking of public databases and utilities (i.e. healthcare systems). Here, if readers are looking for some serious literature I can recommend two excellent books – Nicole Perlroth’s ‘This is how they tell me the world ends’ and ‘Secret World’ by Christopher Andrew.

I am personally more intrigued by the difference between a spy and a strategist. A spy’s work could well be described as the pursuit of information about someone who is acting with a specific intent, as well as a sense of their reaction function. There are plenty of examples – from Christine Joncourt (‘La Putain de la Republique’) to Richard Sorge (see Owen Matthews’ ‘An Impeccable Spy’).

In contrast a strategist may try to plot trends and the opportunities, spillovers and damage they may cause. The US National Intelligence department is good in this regard, becoming the first major intelligence agency to publish detailed warnings on the side effects of climate damage.

Spies and strategists might work together, but history is full of examples (LC Moyzisch’s ‘Operation Cicero’) where intelligence fails to make it through the strategic process or is simply ignored for political reasons (might the early warnings on the invasion of Ukraine be an example).

Asia next?

In the spirit of the Durrells and Flemings of the world, what issues might be of interest in terms of digging into unknown knowns and unknown unknowns. Here are a few ideas, most of which are Asia focused (we might see an uptick in Asia focused thrillers).

On the diplomatic front, an interesting recent development was the visit of Indonesian president Joko Widodo to Ukraine, and then Moscow. It was a rare visit to Ukraine by an Asian leader and potentially marks the emergence or at least aspiration of Indonesia (population 273 million) as an emerging world diplomatic player. What has intrigued me so far is that there has been little coordination by the populous emerging (largely Muslim) nations (Nigeria, Indonesia, Pakistan) in the face of high energy and food prices, and that potentially Widodo could play a unifying role here.

Then, still in Asia, but on a more deadly footing, if the Western commentariat is to be believed, China is preparing an assault on Taiwan, and looking to learn from Russia’s military errors in this regard. Other countries are reacting, and I suspect that there will be much intrigue around Taiwan’s ability to acquire sufficiently powerful ballistic missiles that could strike the coastal cities of China, and relatedly how long might it take Japan to produce nuclear missiles (my sources say they could very ambitiously do it in five months!).

So, whilst the espionage literature of the 20th century has tended to be focused on Geneva, Berlin and London in the 21st century we may find ourselves reading about ‘behind the lines’ exploits in Jakarta and Tanegashima.

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