The Case For Free Trade

The Marxists and Socialists are winning the day, folks.   Apologies for the simpleton buzzwords but they are all the rage these days.

The escalation of the trade war is bad, bad, bad news and could if we are not careful, end in a shooting war.   Many argue that one of the main factors that motivated Japan to bomb Pearl Harbor was the U.S. cutting off of trade, mainly in airplane parts and aviation fuel, with good reason, however, as imperial Japan was running rampant throughout Asia.

No, we’re not suggesting war is imminent but we admonish you to study history.

A potential  Thucydides Trap supersedes all the bluster, posturing, tweets and goes way beyond just trade.

China: Guilty On Some Charges

Yes, China has been a bad actor in many areas, including intellectual property theft, being stingy in further opening its markets, among others. They do need and should be addressed in a multilateral framework with the heft and support from our allies, who are with us on many of our disagreements with the Middle Kingdom, by the way.   In that framework, we believe this mess could have been wrapped up long ago and U.S. farmers would be in much better shape.   Nevertheless, some kudos for POTUS for finally taking these issues seriously.

However, China guilty of making quality and less expensive products that Americans prefer over domestic goods?  Using tariffs as a blunt tool to address the issues discussed above?  Totally absurd.

Make China pay for its sins by other means, not through higher prices and taxes on the American consumer and businesses or inflicting pain on the U.S. farmer.

Moreover, we totally reject the “Art of the Deal” bullshit.

There is no plan, no method in this madness.  The negotiations on the U.S. side are all impulse, based on economic ignorance and steeped in a very dangerous nationalism at the top, vacillating from tweet to tweet, and our negotiating team is conflicted with a deep seeded dialectic between the hardliners and doves.

Karl And Tariff Man

Check out the date on this thing.  What happened on February 23, 1848?

Look it up.


Hat Tip:  Deep Fake Anachronisms

A spectre is haunting the world — the spectre of protectionism.   The world is going to be much poorer.

Tariff Man has no clue and seems to share the same philosophy as Karl about free trade.

Who’s your Socialist, now?  Protectionist policies are almost always pure socialism, folks.

The Case For Free Trade

Take a hypothetical case of a pair of blue jeans that had been made in China, for example, but motivated by politics, through policies and jawboning are now manufactured in America.  The cost could increase from $10 to, say, $80 per pair (again, a hypothetical price).   Not only would inflation skyrocket, but there would also be almost no consumption and zero production of the American made blue jeans because most middle-class consumers could not afford them.  Trading and exchange in blue jeans would thus cease to exist.

At best, very few new jobs – and expensive ones, at that —  would be created and many old jobs lost, through retaliation or the reduction in demand as real incomes of consumers would decline.

Sorry, folks.  When I go to Costco or Walmart and purchase a BBQ for $200 less than the American made version in the next aisle,  I don’t consider that as “an act of war” perpetrated by China on America or our workers nor do I feel the Chinese are ripping me off.   Moreover,  my trade deficit with Costco or Walmart, and by extension with China, just went up by $500.

Do I feel unpatriotic about buying Chinese goods?  Absolutely not.

I am a proud flag-waving, card-carrying compassionate American capitalist.

In fact, the very purchase of the cheaper imported Chinese good increases my real income by $200 that I can now spend at the local restaurant, give the waitress a bigger tip and get my car that needed tune up, all, of which expand economic growth and creates additional jobs.

Trade Adjustment Assitance 

Absolutely, the U.S. manufacturer and its workers of the American made BBQ have been hurt by Chinese competition.  No question.

That $200 I saved, however, part of what economists call the “gains from trade”,  should include a small fee, tax, or whatever euphemism Grover Norquist would accept, to fund a program to help those workers hurt because of my free choice to buy the Chinese over the American product.  Remember “Free to Choose?”

We have been all over the case to expand the Trade Adjustment Assistance (TAA) program, which has an annual budget of approximately only $600 million to help those displaced by free trade.   That is an outrage as much as it is stupid, and one of the reasons why we are in such a political mess and the world teeters on the brink.

Moreover, Trump paid $12 billion to pacify U.S. farmers as China targeted soybean imports in retaliation for his trade war.   Now there are reports that POTUS is considering purchasing an additional $15 billion in farm products as China will almost surely retaliate against Friday’s new tariff hike.

That $27 billion is almost five years of the TAA program annual  budget.  Don’t you think that would have been better spent on helping the displaced workers from trade in the first place?  The U.S. and the world would be growing at a faster clip and all of its workers, including farmers, would be much better off.

Yes, the opening of China was big and very disruptive, and while many greatly benefited, U.S. policymakers were ill-prepared and ignored the costs of the new Chimerica.

But, China’s not going away, folks.  It’s impossible to Make China Small Again.

The Price of Gas And Free Trade

Why is it when the price of gasoline declines we are all happy, our real incomes increase and feel much better off yet we have no worries or consideration for the oil roughnecks in Midland, Texas or the workers in the small towns in, say,  North Dakota who are devastated by the fall in oil prices?

Could it be because there is no foreigner to blame for their pain?

We are beginning to buy into the argument we all are hardwired genetically and predisposed to fear and blame those who are “different” or foreign for many of our problems, which is the consequence and evolution of spending 95 percent of all human existence on the savannah fearing and fleeing the “different.”   Robert Sapolsky, the Stanford professor, writes,

To understand the dynamics of human group identity, including the resurgence of nationalism—that potentially most destructive form of in-group bias— requires grasping the biological and cognitive underpinnings that shape them.  Such an analysis offers little grounds for optimism.

Our brains distinguish between in-group members and outsiders in a fraction of a second, and they encourage us to be kind to the former but hostile to the latter. These biases are automatic and unconscious and emerge at astonishingly young ages. They are, of course, arbitrary and often fluid.

Humans can rein in their instincts and build societies that divert group competition to arenas less destructive than warfare, yet the psychological bases for tribalism persist, even when people understand that their loyalty to their nation, skin color, god, or sports team is as random as the toss of a coin. At the level of the human mind, little prevents new teammates from once again becoming tomorrow’s enemies.  – Robert Sapolsky

We all need to better train and strengthen our prefrontal cortex to control the impulses of our amygdala.   Try using that in a presidential campaign stump speech.

The Fork In The Road

Socialism has won the day, at least for today.   Governments are trying to control and manipulate the preferences of individual consumers in the name of…whatever.

This is really the blowback from the result of unfettered capitalism, not giving a rat’s ass about the workers hurt by free trade and underfunding programs such as  Trade Adjustment Assistance.   If this escalates the whole world is going to be much poorer and a significantly more dangerous place to live.

The complacency is stunning.  The classic boiling frog syndrome.


There you have it, folks, our rant for the weekend.   Take it or leave it but it is our firm conviction, which may or may not become a reality.  We hope it doesn’t and even if it does, many will claim an alternative reality or other excuses for the mess that has become.

Don’t say you weren’t warned.



Posted in China, Economics, Trade War, Uncategorized | Tagged , , , | 1 Comment

Nonfarm Payrolls & Employment Data Diverging


  • Last Friday’s nonfarm payrolls exceeded expectations with the first four months now averaging 205k jobs created, right on the monthly average since October 2011 
  • The employment data is moving the other way, however, falling 103 in April and has come in negative three of the first four months of the year
  • Though a monthly positive nonfarm payroll number has coincided with a negative employment number around 19 percent of the months since 1990,  three out of four consecutive months is a novelty
  • This may be the result of the fact that nonfarm payrolls are not capturing the pain in the agricultural sector and the potential shrinkage of the informal labor market due to the crackdown on immigration
  • The employment-population ratio came in at a little under 61 percent in April, still well below its April 2000 peak and the local high just before the Great Financial Crisis (GFC)
  • Demographics may explain part of the failure of the employment-population ratio to make new highs but even the percentage of employed 16-64 year-olds has yet to capture the high just before GFC
  • Seniors, the 65 years and older cohort group, are remaining in the workforce at a greater pace with more than 70 percent more seniors now employed than before the GFC. This compares to just around 5 percent for the 16-64 year-olds  
  • The percentage of the senior population now employed has increased from around 10 percent in the 1990s to close to 20 percent.  We suspect much of it has to due to the lack of adequate retirement savings
  • The unemployment rate is a very flawed statistic, especially when comparing two-time points in the economy

Last Friday’s payroll data blew out expectations with a monthly gain of 263 new jobs yet employment fell again by 103k, the third decline over the past four months.  This is the first time in our database, which begins in 1990, that a positive monthly payroll number had an opposite sign of the employment data in three of four consecutive months.

That should make all of us sit up and listen.



In fact, during 2019 nonfarm payrolls have increased by 820k — nothing spectacular, by the way — averaging 205k per month, which is right on the monthly average since October 2011, all while total employment has fallen by 300k.  What is impressive about the payroll growth is that most believe the pool of surplus labor is becoming increasingly shallow.

Why The Divergence? 

Our priors are that nonfarm payrolls are not capturing the extreme pain currently taking place in the farm belt.  Whereas the ag sector is included in the employment data.

“Even if the trade war ends, with this oversupply of corn and soybeans and wheat, we’re still going to have low prices,” Grassley said in an interview. Separately, the U.S. House of Representatives’ Agriculture Committee plans to hold a hearing on May 9 to review the rough Farm Belt economy.

So far this year, personal income for farmers is down 25 percent, the steepest decline since the first three months of 2016, according to an April 29 Commerce Department report. Regional banks, meanwhile, are holding their own. 

For farmers, more pain may be ahead. The Federal Reserve Bank of Kansas City last month said farmland prices may decline, and owners may receive lower returns on capital invested. That’s a change from the early stages of the downturn, when farmland values were relatively stable, and served as an attractive source of collateral for loans.  Bloomberg, May 3



Not certain if it can entirely explain such a large divergence, however.

Comparison of CES and CPS Surveys  

The nonfarm payroll data are collected using the Current Employment Statistics (CES) survey, commonly known as the payroll survey and do not count the farm sector.  The employment data does and is collected using the Current Population Survey (CPS) and is known as the household survey, which is also used to calculate the unemployment rate.

There are several differences in the methodology of the two surveys.  Most important, the payroll survey not only excludes the agricultural sector but also the self-employed. Moreover,  multiple jobholders are counted for each job.  That is if a person holds three jobs, all three jobs are counted in the payroll surveys whereas it would only count once in the household survey.




Historically the two measures of the labor force track fairly well.



The chart below illustrates the ratio of the nonfarm payrolls to employment has remained in a range of around .92 to .97 since 1990, with the April number, .965, closing in on its high.

During two of the three expansions since the 1990-91 recession, the ratio moved higher.  We’re not certain why the ratio declined during the expansion in the first decade of the century but suspect it had something to do with the housing bubble.  Everyone and their mother turned into commission only real estate agents, jobs not counted in nonfarm payrolls.  Nor are start-ups or the informal labor market.



Employment-Population Ratio

The chart also illustrates the Employment-Population Ratio, the percentage of the working population 16-years and older that is employed.  Interestingly, the ratio peaked in April 2000 at 64.7 percent when the unemployment rate was at 3.8 percent.

The percentage came in at 60.6 percent in April, much lower than the 2000 peak and even well below of pre-GFC peak of 63.4 percent in December 2006, when the unemployment rate was 4.4 percent.

What’s up with that?  Isn’t this the greatest economy ever?


Some of it can be explained by simple demographics.

The table below illustrates how the U.S. population is aging and the proportion of the working-age population (16-64) is declining.




Even still, the percentage of the working-age population that is employed is lower than what it was before the GFC (see chart below).

We were also really surprised that the data so strongly confirmed our suspicions that seniors — the older than 65 years cohort group — have almost doubled their employment as a percentage of their rapidly growing population from around 10 percent in the 1990s to around 20 percent in the April data.

The growth of employed seniors 65-years and older since the month before GFC began is nothing less than stunning,  73.4 percent more seniors are employed versus only 5.4 percent for the 25-64-year-old cohort group.  Kind of depressing that a growing number of older folk can’t retire and go fishing.

We will be out with more in-depth analysis soon but the participation of more seniors in the labor force, many who are probably forced to work due to a lack of adequate requirement savings, has increased the size of the labor pool.

Couple this with the fact the percentage of the employed working-age population has still yet to reach the pre-GFC and all-time highs,  the surplus labor pool is probably much larger than most have estimated and explains the punk growth in wages.


Unemployment Rate 

Given our analysis above, how is it that the unemployment rate is at a 50-year low? We suspect it is the quirkiness of how participation in the labor force is measured.

What are the basic concepts of employment and unemployment?

The basic concepts involved in identifying the employed and unemployed are quite simple:

  • People with jobs are employed.
  • People who are jobless, looking for a job, and available for work are unemployed.
  • The labor force is made up of the employed and the unemployed.
  • People who are neither employed nor unemployed are not in the labor force.

Who is counted as unemployed?

People are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Actively looking for work may consist of any of the following activities:

  • Contacting:
    • An employer directly or having a job interview
    • A public or private employment agency
    • Friends or relatives
    • A school or university employment center
  • Submitting resumes or filling out applications
  • Placing or answering job advertisements
  • Checking union or professional registers
  • Some other means of active job search

Who is not in the labor force?

As mentioned previously, the labor force is made up of the employed and the unemployed. The remainder—those who have no job and are not looking for one—are counted as not in the labor force. Many who are not in the labor force are going to school or are retired. Family responsibilities keep others out of the labor force. Since the mid-1990s, typically fewer than 1 in 10 people not in the labor force reported that they want a job.

A series of questions is asked each month of persons not in the labor force to obtain information about their desire for work, the reasons why they had not looked for work in the last 4 weeks, their prior job search, and their availability for work. These questions include the following (the bolded words are emphasized when read by the interviewers).

  1. Do you currently want a job, either full or part time?
  2. What is the main reason you were not looking for work during the last 4 weeks?
  3. Did you look for work at any time during the last 12 months?
  4. Last week, could you have started a job if one had been offered?

These questions form the basis for estimating the number of people who are not in the labor force but who are considered to be marginally attached to the labor force. These are individuals without jobs who are not currently looking for work (and therefore are not counted as unemployed), but who nevertheless have demonstrated some degree of labor force attachment. Specifically, to be counted as marginally attached to the labor force, they must indicate that they currently want a job, have looked for work in the last 12 months (or since they last worked if they worked within the last 12 months), and are available for work. Discouraged workers are a subset of the marginally attached. Discouraged workers report they are not currently looking for work for one of the following types of reasons:

  • They believe no job is available to them in their line of work or area.
  • They had previously been unable to find work.
  • They lack the necessary schooling, training, skills, or experience.
  • Employers think they are too young or too old, or
  • They face some other type of discrimination.- Bureau Of Labor Statistics

We also suspect the national opioid crisis is reducing, and/or participation in, the labor force thus having, at the very least, a marginal reduction in the unemployment rate.  We have yet to find a study that quantifies the effect but are still searching.  Nevertheless, the unemployment rate by definition must be lower on the margin even the working age population is affected.

Opioid addiction costs many lives, harms livelihoods, depresses labour market participation, and entails significant public healthcare spending. Death rates have surged in the past decade, particularly as (illicit) synthetic opioids have become more available around the country. The correlation with nonparticipation in areas most beset by opioid addiction suggests that addiction ultimately impairs participation.  – OECD, 2018

Measures Of The Unemployment Rate

Of course, there are different measures of the unemployment rate.

U3 is the official unemployment rate. U5 includes discouraged workers and all other marginally attached workers. U6 adds on those workers who are part-time purely for economic reasons. The current U6 unemployment rate as of April 2019 is 7.30 percent. – Macrotrends

Nevertheless, we view the U3 unemployment rate as pretty much useless as a comp indicator across time due to the vagaries in measuring the labor force though it does give a crude measure of the health of the labor market.  Comparing the unemployment rate across different years is meaningless, in our opinion.

It is like the old baseball stats that are similarly meaningless but just won’t die.

As a statistic, RBIs were not only misleading but dishonest.  They depended on managerial control, a hitter’s position in the batting order, park dimensions and the success of his teammates on getting on base ahead of him. –  Branch Rickey

The RBI stat is responsible for more bad postseason award decisions than any other single factor in baseball history…RBI just don’t tell us anything useful about a player’s individual performance in a game, a season, or a career, but they remain prevalent in the minds of writers and fans.  – Smart Baseball

The BLS and the National Income and Product Accounts could use some updating and Sabermetrics.


It’s always prudent to dig deeper, go beyond the headlines and look under the hood, folks.  Never so true in our post-Truth, alternative facts, and spin to win bullshitting era.

We were one of the first out with our skepticism about the 3.2 percent Q1 GDP print.

The number was much weaker than it appeared.

Private domestic demand (also known as real final sales to private domestic purchasers) –personal consumption + nonresidential and residential fixed investment – which is the traditional driver of robust and sustained economic growth contributed less than 35 percent to Friday’s headline growth number. This was the lowest proportional level since Q4 2009.

The bulk of GDP growth came from the combination of a big inventory build, net exports, and government spending (see table below). 

Empirical probabilities suggest that Q2 economic growth will be significantly lower than Q1 with the high likelihood of the final reading of growth in the quarter will be lower than the initial print.  GMM, April 28th

A few days later, a friend sent us this,

To Morgan Stanley’s economists, a lot of the boost can be explained by an unexpected surge in inventories (adding a 0.44 percentage point increase to GDP), a surge in net exports (1.2 point), and larger government spending (0.4).  They didn’t view this as sustainable and are expecting the growth pace to slow to 1.1% in the second quarter, ending June 30.    – Chief Investment Officer

The Price Of Gas  

I showed some dude in a beer pub yesterday a picture to prove a point in a discussion we were having.  He instantly retorted the picture was fake.  It was shocking as much as it was depressing.  We are losing all basis for meaningful dialogue.  Facts don’t matter as many are increasingly becoming to believe facts don’t even exist.

We are losing our culture and country.

As a consequence, the price of gaslighting has never been lower and never so effective.

Gaslighting is a form of psychological manipulation that seeks to sow seeds of doubt in a targeted individual or in members of a targeted group, making them question their own memory, perception, and sanity. Using persistent denial, misdirection, contradiction, and lying, it attempts to destabilize the victim and delegitimize the victim’s belief.  – Wikipedia 

If this is the greatest economy of all-time, why does it feel so shitty and why are so many so angry?

Furthermore, it’s only a matter of time before our national economic data is labeled fake news and the product of manipulation by the “deep state.”

Dig deeper and sharpen your pencils, folks.

Posted in Employment, Uncategorized | Tagged , , | 7 Comments

Some Background On China Trade Talks

Some perspective from a prior post on President Trump’s predisposition toward free trade.

We hope for a good trade deal and China caves on everything.  We also hope for the end of poverty, world peace, and everyone to self actualize this year but will it happen?

Come on, man, let’s be realistic.  China’s not about to give up it’s sovereignty to Trump.  See our post from yesterday.

In my experience in participating in and negotiating several multibillion sovereign debt restructurings, a good and doable deal is one where both sides win more than they give up yet at the same time both sides are not entirely jubilant with the final outcome.

…in a long-term relationship with the other party, drive for a win-win. Exercise caution driving for a win-lose. People [and Countries] have long memories, and you might encounter them again, perhaps when they are in a position of relative strength. — BizJournals

Trump is notorious for driving for a win-lose outcome.  Xi will having nothing to do with it.

No Free Trader In The White House


Yesterday’s NY Times guest Op/Ed confirmed our suspicions about President Trump,

Furthermore,  we don’t believe President Trump is a free trader at heart but more of a protectionist and neo-mercantilist.  There is no “Art of the Deal” – see his waffling on immigration  – and no method to the administration ’s madness to negotiating anything, for that matter,  but only driven by impulse and myopia.  — Global Macro Monitor, June 24, 2018

Anyone who works with him knows he is not moored to any discernible first principles that guide his decision making….President Trump’s impulses are generally anti-trade and anti-democratic.  – Anonymous,  NY Times,  September 5, 2018

Today it’s solidified,

The market has been in complete denial on this issue dismissing the trade war rhetoric as “Art of the Deal” nonsense.   We suspect the market is in for a nasty reckoning when they have their epiphany.  Stay tuned.

(updated Sept. 7, 2:22 eastern)

Trump Letter


Trump Letter_2

Source:  Daily Mail

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BFTP: Don’t Say You Weren’t Warned On China Deal

BFTP = Blast From The Past

China’s Pushback In Trade Talks Over Sovereignty


Note our comment from an earlier post this evening,

Seriously, folks,  do you really think the Middle Kingdom, with all its history and past glory, after climbing back to global superpower status, is now going to cave and give up some of its sovereignty because Trump demands it?

President Xi already seems to be preparing his population for the worst case scenario, warning of “challenging times ahead” possibly in the event Trump goes ahead with the tariff hikes.  Maybe we are reading too much into it and maybe not. – GMM

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Baseball Giants Are Born This Day

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No Labor Infrastructure For $2 Trillion Infrastructure Spend

Democratic congressional leaders announced Tuesday after a meeting with President Donald Trump that an agreement had been reached on the price tag for a potential infrastructure plan: $2 trillion.  — CNN

We are reposting and a piece we wrote a few years ago to reiterate our skepticism on a massive infrastructure spend, which apparently resurfaced today as Trump, Chuck, and Nancy reached some kind of agreement on a big deal.   Seriously, are you kidding me, $2 trillion?
Yes, fix the potholes, repair the bridges, modernize JFK and La Guardia, and build out broadband.
No Labor
If you haven’t noticed, the U.S. has a labor shortage and no more so than in the construction industry.  Moreover, infrastructure labor, what the BLS labels “Heavy and Civil Engineering Construction“,  is extremely scarce,
The Heavy and Civil Engineering Construction subsector comprises establishments whose primary activity is the construction of entire engineering projects (e.g., highways and dams), and specialty trade contractors, whose primary activity is the production of a specific component for such projects. Specialty trade contractors in Heavy and Civil Engineering Construction generally are performing activities that are specific to heavy and civil engineering construction projects and are not normally performed on buildings. The work performed may include new work, additions, alterations, or maintenance and repairs. – BLS
It ain’t easy to take an unemployed coal miner, for example, move her from West Virginia to Queens for training to repair the runway at JFK or chip and paint the George Washington Bridge.
The data in the table illustrate only 747k workers were employed in heavy and civil engineering construction in February or just 0.50 percent of total nonfarm payrolls!
Furthermore,  job growth in the industry has been fairly robust over the past two years, almost 4x that of total nonfarm payrolls, which we suspect has reduced any slack in the sector’s labor force.
Good For China
Because of, in large part due to the labor shortage, we suspect many projects will have to be outsourced to, say, China once again.    Bad for the bilateral trade deficit that POTUS obsesses about.
Read further into our old post and you will see how the modernization of the of San Francisco-Oakland Bay Bridge, probably one of the largest infrastructure projects in the past decade, was outsourced to China.   The alternative is to allow for more immigration, coupled with massive training programs.  Whoops!
The modern Bay Bridge is nice but if the goal of policymakers is to create jobs and boost long-term economic growth they could do much better.   Certainly, fix the potholes and bridges but, come on, man, the main focus of policy should be on fixing the nation’s education infrastructure.
Isn’t it time to redouble efforts to prepare the labor force for the coming automation of the economy, and not succumb to fatalism and the futilitarians who preach “universal basic income” as the only hope for a disappearing middle class?
This takes leadership, however, which is also in scarce supply today.
Rebuild The Educational Infrastructure
We believe that rather than trying to turn coal miners and their children into CalTrans and bridge construction workers and engineers, policymakers should refocus their efforts on the long-term and prepare the workforce for the Fourth Industrial Revolution.
Moreover, infrastructure, as the one now being considered, creates only a temporary economic boost, though a better infrastructure creates positive externalities and increases overall economic productivity.
A concerted effort to begin teaching children, say, coding and the basics of the new technology beginning in primary school and following it through to the senior year of high school, including a test in order graduate would be a much more productive and efficient use of taxpayers’ (and Japanese and Chinese bondholders) scarce resources, in our opinion.
Python, which is becoming the coding language of choice for AI and big data, is really not that hard to learn.   There are even now fun games to teach coding to third graders.

I introduced twenty 3rd graders to programming in a special 75-minute session, using computer art and video games as motivation.

We began with physical activities. We then moved to a pen and paper exercise and then to programming in TurtleScript. Finally, we talked about some of the big ideas in computer science and saw some examples of games in codeheart.js  that my college students wrote in their first semester of programming.  – Casual Effects

Let’s get at it!
P.S..  With trillions of dollars being tossed around by the politicos, coupled with the rise of  Modern Monetary Theory,  the deflationistas must be, or should be, shitting razor blades.

Misplaced Policy Thinking – $1 trillion infrastructure build

Posted on 

As the stock market celebrates and is downright giddy over the prospect of a massive fiscal expansion through a one trillion dollar infrastructure build,  we are less sanguine and propose a different and more long term policy track.
The U.S. doesn’t have the skilled labor and experience to do such a large infrastructure spend and will have to depend on Chinese and foreign firms and labor to implement the program,  just as the U.S. built out its railroads in 1830-60s with Chinese labor.

The mega infrastructure build this decade in the SF bay area was the rebuild of the SF Bay Bridge, done by a Chinese firm, by the way.

Bridge Comes to San Francisco With a Made-in-China Label – NY Times

SHANGHAI — Talk about outsourcing.

At a sprawling manufacturing complex here, hundreds of Chinese laborers are now completing work on the San Francisco-Oakland Bay Bridge.

Next month, the last four of more than two dozen giant steel modules — each with a roadbed segment about half the size of a football field — will be loaded onto a huge ship and transported 6,500 miles to Oakland. There, they will be assembled to fit into the eastern span of the new Bay Bridge.

Furthermore,  the U.S. is at full employment and only 936K  (as of Ocotober 2016, including supervisors)  of the labor force is employed in heavy construction and civil engineering.  You can’t take an unemployed banker and have him/her build a bridge or hospital.  This is not like the WPA and CCC during the great depression where the unemployed built campgrounds, for example.

If implemented, expect big inflation in a few years.  The markets are already beginning to price it in with the collapse of the global bond markets and a huge rally in the dollar.

The U.S. will thus have to rely heavily on immigrant labor and foreign firms for its $1 trillion infrastructure build out.  Exactly the opposite of what Trump has campaigned on. Ironic, no?

Finally,  many construction jobs will be automated in 10 years anyway and most, if not all new,  jobs will be in software and coding.  We have been writing, no, warning about this for years.

The idea of paying families that lose their jobs to automation and robots, say, $50k per annum, is already being discussed in the private sector and policy circles, commonly known as the “universal basic income“.

The brave new world of robots and lost jobs

A look at the numbers suggests that the country is having the wrong economic debate this year. Employment security won’t come from renegotiating trade deals, as Donald Trump said in a speech Monday in Detroit, or rebuilding infrastructure, as Hillary Clinton argued in Warren, Mich., on Thursday. These are palliatives.

The deeper problem facing the United States is how to provide meaningful work and good wages for the tens of millions of truck drivers, accountants, factory workers and office clerks whose jobs will disappear in coming years because of robots, driverless vehicles and “machine learning” systems. – David Ignatius, Wash Post, Aug 11, 2016

Instead of a one-off massive infrastructure program, the U.S. should massively revamp its education system,  teaching coding to second graders and continue through graduation.  And ramp its vocational training for those not inclined to take a software job.   But this faces violent opposition from the special interests – not excluding the public sector and teachers unions — and will take political vision, will and courage.  We need a new Sputnik moment and we better get on with it.  Quickly.

The Japanese spent the U.S. equivalent of almost $20 trillion of infrastructure build from 1991 to 2009,  building bridges to nowhere and got them nothing — well maybe staved off a greater depression —  but a debt of over 200 percent of GDP and are now on the verge of blowing up.

Japan’s Big-Works Stimulus Is Lesson

Moreover, it matters what gets built: Japan spent too much on increasingly wasteful roads and bridges, and not enough in areas like education and social services, which studies show deliver more bang for the buck than infrastructure spending.

“It is not enough just to hire workers to dig holes and then fill them in again,” said Toshihiro Ihori, an economics professor at the University of Tokyo. “One lesson from Japan is that public works get the best results when they create something useful for the future.”

In total, Japan spent $6.3 trillion on construction-related public investment between 1991 and September of last year, according to the Cabinet Office. The spending peaked in 1995 and remained high until the early 2000s, when it was cut amid growing concerns about ballooning budget deficits. More recently, the governing Liberal Democratic Party has increased spending again to revive the economy and the party’s own flagging popularity.

NY Times, Feb 5, 2009

Enough of this same old archaic, not thought out policy-making,
Yes, it would be nice to have a first class and brand new “trophy” infrastructure to, say,  one up the Chinese,  but not at the expense of the future of our children. We prefer trophy children over trophy airports. Yes, fix and modernize LaGuardia and JFK; and in no way are we saying we don’t need to improve our infrastructure and restructure the way we pay for it.

But. economics is all about making choices.  Staying at the Best Western instead of the Trump Casino Hotel while in Vegas is fine with us if it provides a better future for our children.  $1 trillion dollars?   Come on, folks, get real.

It’s about time we start to think outside the box, don’t you think?

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Q1 2019 GDP = “Stranger Things”

It is always prudent to look under the hood after a big unexpected beat or miss on a major headline economic number.

Never so relevant than Friday’s GDP report, which blew out expectations, and appears right out of Stranger Things.   The 3.2 print was light years away from the beginning of the year panic when many thought the economy was falling off the cliff.   Declining markets almost always cause traders and investors to “retrofit their perception of the  fundamentals” to the price action – e.g.,  “the market’s going down and we are heading into recession…the yield curve is pancaking and signaling recession….the Fed needs to implement an emergency 50 bps rate cut…”   Yada, yada, yada.

Long live the Flat Yield Curve Society!

Do they not yet understand market prices are so distorted by the market socialism of government and central bank intervention, what many now call “socialism for the rich,” that there are few if any economic signals that can be derived from market prices?   We were having nothing to do with the economic panic, by the way,

We will watch and wait and don’t believe the U.S. is heading into a recession in 2019   – GMM, January 1st

Is The Coast Now Clear?  Bull Markets Forever? 

The coast is clear with the 3.2 percent GDP on Friday, right?  Bull markets forever?

Not so fast.

The number was much weaker than it appeared.

Private domestic demand (also known as real final sales to private domestic purchasers) – personal consumption + nonresidential and residential fixed investment – which is the traditional driver of robust and sustained economic growth contributed less than 35 percent to Friday’s headline growth number.   This was the lowest proportional level since Q4 2009.

The bulk of GDP growth came from the combination of a big inventory build, net exports, and government spending (see table below).   Yuckety, yuck, yuck…

In fact, some see conspiracies,

This stockpiling of goods boosted first-quarter GDP growth by about 70 basis points and helped propel growth to a 3.2% annual rate, well above forecasts.

The problem is that it is not at all obvious where these inventories came from. Goods have to come from somewhere, either produced by domestic firms or imported from abroad.

The mystery is that both production and imports fell in the first three months of the year, according to government data.

“You can’t stockpile what you do not import or do not produce,” said Robert Brusca, chief economist at FAO Economics.

The Fed reported last week that industrial output slipped at a 0.3% annual rate in the first quarter. – Zero Hedge

There have been only five quarters in the past thirty years where private domestic demand contributed so little to GDP growth.

Furthermore, over the past 72 years,  there have been only 15 quarters where personal consumption, business fixed investment and residential had such a small contribution to a 3 percent plus economic growth rate.

Now What?

Hard to say, but we ran the numbers and found that 5 of the 15 quarters after such similar aberrational 3 percent plus growth as was the case in Q1 2019, where private domestic demand’s contribution was so small, experienced negative growth.   Only 3 of the 15 quarters did economic growth accelerate.

The average growth deceleration of this sample was 435 bps quarter on quarter.

Empirical probabilities suggest that Q2 economic growth will be significantly lower than Q1 with the high likelihood of the final reading of growth in the quarter will be lower than the initial print.

Stay tuned.





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White House Correspondents Dinner

This is good!  Historian Ron Chernow delivers keynote at tonight’s annual White House Correspondents Dinner, which was boycotted by the Trump Administration.


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More Brexit Polling

More than half the public – 55% – now think it would have been better never to have held the EU referendum given the difficulties of reaching an agreement on Brexit, according to the latest Opinium/Observer poll.

…If a second referendum were held between the options of leaving the EU on the prime minister’s deal or remaining in the EU, 46% say they would vote to remain (unchanged on a fortnight ago) while 34% would vote to leave (down 4%).  – Guardian, April 27th

Confusion reigns as Farage and the Brexiteers will claim victory in the EU Parliamentary elections, which will begin on May 23rd.



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World’s Fastest Growing Economies

We have updated the GDP growth rates for the 2019 and the 2020 forecasts and ranked the world’s fastest growing economies in the ginormous table below.  The data are from the April 2019 IMF’s World Economic Outlook.

G20 Growth


World Growth

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