The Ugly Truth About the US Economy

For many months I have been warning my readers that the actual employment picture in the US is much weaker than the data has been suggesting.  Today, we finally got the confirmation that I have been awaiting when the Bureau of Labor Statistics revised down by 818,000 the number of jobs the US economy added for the twelve months as of March 2024.  This in and of itself portrays a story about the strength of the US economy that is very different from the one the authorities were touting, but it is only part of the picture.  In fact, the supermajority of the jobs that have been created have been part-time jobs, with full-time jobs faring much worse than the authorities would like us to believe.  

The rising level of unemployment that I have written about extensively is turning out to be a far more accurate gauge of the economy’s strength than the job growth data.  Yes, there has been some growth, but it has been quite modest.  This modest growth belies the massive amount of government intervention we have seen to try to boost economic growth.  In a little more than three and a half years, the Federal government has borrowed and spent over $8 trillion while the Fed has pumped trillions of dollars more into the system.  Even with all of that artificial stimulus, the economy is actually quite sluggish. That is clearly not a pleasant recipe for long-term sustainable growth.  Rather, it is a perfect example of the government’s strategy of kicking the can of down the road for as long as possible to give the appearance of a solid economy.  This behavior can forestall a downturn for a while, but unfortunately, there will be a point beyond which a severe economic crisis cannot be avoided.  

As much as our governmental leaders don’t like it, ebbs and flows of economic strength are natural and healthy.  It is natural for elected officials to want to take credit for positive economic developments.  It is equally natural for them to do everything possible to try to avoid having to confront economic problems and crises.  People, however, don’t progress in their mastery of skills in any field without periodic setbacks.  It is an essential part of the learning and growth process.  Whether it be learning a language or a sport, or anything else, progression does not come in a straight line.  Economies, being reflections of people, are no different.  Periodic setbacks are an inherent part of the human condition.  When companies lose money and go out of business, there is short-term suffering and loss, but typically lessons are learned, and the next venture can be planned and managed more successfully.  This is how progress occurs.  Learning comes from setbacks and losses, and it's these experiences that pave the way for improvement and growth.

Masking broad economic inefficiencies by covering up gross imbalances and weaknesses in any system is a fool’s errand.  On a societal level, we will all suffer from this foolishness in the end because the debt load and eventual economic crisis will be far more devastating, with far more pain inflicted than we would have experienced with less interference from the government right at the start. Of course, some targeted government intervention can be helpful and necessary, but masking extreme economic problems by borrowing and spending tens of trillions of dollars just to make things seem better is a very dangerous and foolish path to follow.  

As the US keeps building up more and more debt, the eventual fallout from this practice will be crushing.  Sure, a government can hide things and forestall a crisis for a long time, but eventually the bell tolls and the day of reckoning will come.  If we look at Japan, then we can get an idea of how excessive government interference and micromanagement can lead to decades of economic pain.  For the Japanese, the result has been stagnation.  In other cases, it has led to runaway inflation.

The Japanese economy in the 1970’s and 1980’s was deemed to be a miracle economy.  Japan emerged from World War II in tatters, but by the 1980’s, Japanese economy was a remarkable export machine that astounded Western analysts.  At one point, the  emperor’s palace in Tokyo had a market value that was greater than all of the real estate in California. Then the bubble burst and the government tried to micromanage the dramatic fallout.  They bailed out hundreds of zombie companies in an unparalleled effort to kick the can down the road in the hope of engineering a near-impossible economic recovery without pain.  

Over the next thirty-five years, Japan built up massive amounts of government debt, supporting the zombie companies and the struggling economy in an idiotic effort to keep things looking good.  These companies were literally like the walking dead – they looked to be alive, but they were just empty shells that had no life force or positive prospects. The government borrowed and spent trillions of dollars rather than just recognizing the truth – these companies were just lifeless shells that should be terminated. Instead, Japan has now ended up with record levels of debt and a moribund economy that has flatlined for more than thirty years. Many people in Japan are wealthy as they are incredibly disciplined savers, and the strong companies in Japan are strong and healthy, but overall, the Japanese economy is a mess. 

In Japan, the Bank of Japan’s recent move to hike interest rates from ten basis points to twenty-five basis points was deemed to be a radical move.  Seriously?!!  After years of negative interest rates, a move towards a somewhat normal level of low interest rates caused a global crisis.  What does it really say about an economy when taking  interest rates up to one quarter of one percent creates so much noise and excitement.  This miniscule shift in interest rates led to the unwinding of a staggering amounts of carry plays around the world, with stock markets plummeting and the yen surging.  People were in a  near-panic all around the world.  Economies should be able to comfortably weather such a shift that appeared to be more symbolic than substantive.  As painful as it would have been, Japan should have allowed the bubble to burst and the weakest companies to fail.  The stronger companies were going to survive and eventually flourish.

Now that the ugly truth about job growth in the US is coming out into the open, the Fed will almost certainly lower interest rates next month. This is the largest downward revision to job growth since 2009, when the US was in the throes of The Great Recession. Inflation is still well above the acceptable target rate, but the Fed will downplay this issue by focusing  their message on their requirement to promote maximum employment.  The political pressure on the Fed to act will be enormous, so we can expect the Fed to justify their decision by explaining that inflation is on a downward trajectory, so it is ok to lower rates to support job growth. 

As you can see in the following chart of the US 2-year yields, interest rates in the US have already dropped by more than 20% in less than three months.  Almost half of that move has come in the past three weeks.  The nightmare scenario for the Fed would be a sudden resurgence in inflation once they start cutting rates while the economy continues to soften.  That would create a nearly impossible conundrum for the Fed, since stagflation is absolutely the worst thing a central banker can face.  Many optimistic analysts are claiming that the Sahm Rule is meant to be broken; that the rising level of unemployment  doesn’t mean anything in our new, magical economic wonderland.   They still insist that we are heading for a “soft landing.”  This remains to be seen.

Precious metals are telling us something quite different. The chart below shows gold breaking to new all-time highs, and I  believe that is a far more accurate predictor of future inflation than Wall Street analysts who make their living by promoting lots of equity market turnover.

Going forward, it is becoming increasingly clear that the dollar is coiling for a move lower against all the major currencies.  The reality of narrowing interest rate differentials is fueling this move, and there will be much more dollar weakness to follow.  For the time being, the move lower will be fairly uniform.  Eventually, the yen will take over and become the strongest currency by far.

Dollar yen’s bounce from 141.60 stopped just below 150.00, and it has now fallen all the way back to 144.50.  It will do a bit of sideways work now before eventually breaking below 140.00 yen per dollar enroute to 127.00…and then lower still.  The euro and British pound have broken out to make new highs for the year against the dollar, while other currencies are nearing their highs for 2024.  Short term, things seem a bit overdone, so some work and consolidation will be necessary before the currencies can explode significantly higher on a sustained break.  Eventually, the euro can trade as high as 1.2240, but this will take a fair bit of time.  The British pound can trade all the way back up to 1.4240, but as with the euro, this will take some time.  

What is particularly interesting about this scenario is that the same patterns emerged during The Great Recession, when general dollar weakness was eventually followed by a huge, multi-year surge in the yen’s value.  We might very well see a repeat performance with general dollar weakness followed by massive yen strength.

One key difference in today’s market scenario is that my expected pronounced, prolonged weakness in the stock market looks more and more likely to only follow after a massive surge to new all-time highs.  This would be the blow-off top that I have written about.  There are multiple scenarios that could fuel this sell-off once it comes, but it is highly likely that it is coming.  

Prepare yourselves for an extended period of very intense volatility. It is definitely on the way.  As always, wishing you all the very best of luck with your trading.

Andy Krieger