When we were growing up, negotiating your way through the cow paddock at the end of the street was the quickest way to school.
The paddock was a world of excitement for a young boy. Creeks to cross. Dive bombing plovers in mating season. The odd rogue bull. Snakes. What a playground.
Naturally, the paddock was full of ‘land mines’ ¬¬¬¬— ranging from the very fresh to the dry and dusty.
My older brother was a seasoned explorer of the paddock. On my first adventure into the paddock he encouraged me to jump on a week-old cow pat. Not being entirely convinced, he tapped it with a stick. It sounded hard. OK, here goes.
Two things happened.
Firstly, I was shin deep in s**t and secondly, my brother was doubled over with laughter — apparently the look on my face said it all.
This was a very practical lesson in ‘what you see is not always what you get’. The cow paddock in many ways was a great learning ground for life.
These childhood memories came flooding back to me when reviewing some data recently on the US economy.
From our distant shores, mainstream commentary gives the impression the US economy is strengthening. Any softening in the numbers is an aberration caused by cold weather or shale oil production shutdowns.
What happens in the US matters. Europe — whether you know it or not — is circling the deflationary drain. China has cut interest rates three times in six months — all is not well in the Middle Kingdom. Japan is an economic basket case kept on life support by the greatest money printing exercise in history (as a percentage of GDP).
All eyes are on the US to be the great saviour of the debt dependent economic growth model. The mad — and getting madder — professors have built this over the past 50-years. These professors of economics, the ones who determine the fate of your retirement capital, obviously never went to school via a cow paddock. Or at least that’s what I thought.
The following graph made me think at least some of them must have dirtied their shoes outside the halls of academia.
Source: Atlanta Federal Reserve
The Atlanta Fed is one of the 12 Federal Reserve Banks that constitute the US Federal Reserve.
In recent times, the good folk at the Atlanta Fed have constructed the GDPNow forecasting model — probably out of frustration.
Wall Street economists have the accuracy of a blindfolded archer when it comes to hitting the target on US economic growth.
Most quarters invariably require another downward revision.
The same story was repeated in the first quarter of 2015.
Business Insider 29 April said ‘The US economy is off to a terrible start in 2015.’
The consensus opinion was for 1% GDP growth. The actual result was 0.2% — the Atlanta Fed GDPNow model forecasted this more sober growth figure.
The talking heads blame the poor result on the weather. They’ll blame it on anything but the underlying cause, which is an over-indebted consumer with spending fatigue.
The consensus would have you believed that with the worst of the weather over, the US consumer — credit card in hand — will once again embrace retail therapy.
The consensus opinion for second quarter US GDP growth is between 2% and 4% (as per GDPNow chart).
Whereas the Atlanta Fed GDPNow forecast is for around 0.7% — hardly a minor variation to the so-called ‘blue chip’ consensus.
If all you ever read about the US economy was the rubbish in the financial columns, you’d believe the US economy is going from strength to strength. Mission accomplished. The Fed has pulled off a miracle. Obama has engineered a successful economic recovery.
The reality is the US economy is a seven-day old cow pat — looks hard on the outside but is s**t on the inside.
Look at these headlines from the past few years:
‘R-Word For U.S. Economy in 2013 is Rebound Not Recession’ — Bloomberg 31 January 2013
‘U.S. economy back on track with strong second-quarter rebound’ — Reuters 30 July 2014
‘US economy rebounding with solid if unspectacular job gains’— Associated Press 8 May 2015
Michael Jordan never had this many rebounds.
Trillions of dollars have been printed. Millions of savers burnt at the stake of zero-bound interest rate policy (ZIRP). All for what?
To pump up asset prices. Create an illusionary ‘wealth effect’ recovery. Pay back for Wall Street’s sizeable campaign donations. Enabling politicians to avoid the tough decisions. Allowing central bankers to blissfully continue with their academic theories.
There is no genuine economic recovery — more people on welfare, stagnating wages, wave after wave of retiring boomers, fudged employment data.
The crushing effects of over-indebtedness, demographics (a working base unable to support the ageing population apex) and globalisation (ability to send deflation into all corners of the world —courtesy of overproduction, cheap labour and a currency war) are far more powerful than the authorities ever thought possible. By the same token the depths of desperation the authorities have plumbed is far greater than most also thought possible.
It is coming up seven-years since Lehman Brothers sounded the starting gun on the GFC. Each year there’s been great hope that this is the one when all the hocus-pocus works. We are still waiting. Despite the odd glimmer of a rebound, the momentary spike soon resumes its all-too-familiar flatline path.
The Australian Government’s recent red-inked budget is a stark reminder of the lasting effects of Rudd-Swan-Gillard ‘recession saving’ measures — a $1 billion per month interest bill.
A pile of debt accrued for no real productive purpose is not the position you want to be in as the forces of the next and even more powerful financial crisis are gathering strength.
With all developed and developing nations heavily invested in and dependent upon the ‘debt for growth’ economic model, it’s little wonder they desperately want to believe the US (the world’s greatest consumer economy) is rebounding.
Not going to happen anytime soon. In fact the more time that elapses, the worse the numbers are likely to get. With each passing month more boomers are retiring — resulting in lost income tax revenue, increase in welfare benefits and more people living within their modest retirement income means.
What this all means is you can bet QE5 is being worked on right now and ZIRP is likely to move a notch lower to negative interest rate policies (NIRP).
The RBA, despite its official statements to the contrary, will cut, cut and cut some more when it comes to our cash rate. The global deflationary forces will leave Glenn Stevens with no other choice.
The forces of the Great Credit Contraction are far more powerful than a handful of academics.
However, credit where credit is due (no pun intended). The Atlanta Fed should be applauded for at least providing some honest forecasting on what is coming down the track.
At some point we’ll see reality trump illusion. The first warning signs will be seen in the bond market. Investors nervous about sovereign defaults or debt restructures will start pushing up long term rates.
Appreciating the US economy is a seven day old cow pat hopefully means you can take the defensive action necessary to ensure your portfolio does not end up shin deep in s**t.
When time is called on this charade, those who believed the official BS are going to know the fear I felt in that cow paddock being dive bombed by plovers and chased by a bull. That was the day I almost made my own contribution to the manure count in the paddock.
To find out how you can protect your wealth, go here.
Editor, Gowdie Family Wealth