The World is Fixated on Debt and Interest Rates

The world is fixated on interest rates.

Yesterday the RBA decided to keep rates on hold…for now.

The Aussie dollar was once again taken into the warm embrace of currency traders. Jumping — make that hurtling — above 74 US cents.

With Aussie rates on hold and Dammit Janet unlikely to move the cash dial in the US, it is risk on again.

Dow up. Gold up.

What’s up?

According to Reuters, the Fed will decide to leave rates on hold:

The U.S. economy created the fewest number of jobs in more than 5-1/2-years in May as manufacturing and construction employment fell sharply, which could make it harder for the Federal Reserve to raise interest rates.

Truth be known, the US economy did not create the fewest number of jobs…the statisticians at the US Bureau of Labor Statistics (BLS) did.

Forget about the economy, it was the BLS’s seasonally-adjusted spreadsheets that couldn’t conjure up better employment figures. I bet you those boys and girls at the BLS burnt the midnight oil trying to push the figure higher. In the end, frustration and resignation would have been condensed into one simple sentence: ‘But boss…we just can’t get any more employment blood out of this economic stone.’

The employment numbers (in the US, Australia, Europe, et al) are about as genuine as Kevin Rudd being ‘an economic conservative’. The figures are a by-product of bureaucratic statistical torture. People who give up looking for work? Strike out, no longer unemployed. Work more than one hour per week? Strike out, no longer unemployed.

The official unemployment numbers are only meaningful for political spin — ‘we have created this many jobs’. The numbers are so big no one really comprehends them. And the unemployed and under-employed wonder where this mythical land of endless jobs is located.

The numbers can make for a good or bad headline, but they’re a poor reflection of what’s actually happening on the ground.

Then there’s the small print in the announcements.

In the BLS data released last week, this was the final paragraph (emphasis mine):

The change in total nonfarm payroll employment for March was revised from +208,000 to +186,000, and the change for April was revised from +160,000 to +123,000. With these revisions, employment gains in March and April combined were 59,000 less than previously reported.

Those ‘plucked out of the air’ US employment numbers, the ones that created such merriment in the markets in March and April, were not quite what they seemed. Now there’s a surprise…

How can you make a rounding error of 59,000 jobs? PLEASE!!!

This small print correction just goes to show how rubbery the employment numbers really are.

Over the years, now stretching into decades, ever so subtle changes have been made to the definition of unemployment. Little by little — like Michael Jackson’s face — the current definition bears only a passing resemblance to the original.

A company in the US,, continue to publish unemployment and under-employment data using the old-fashioned definitions — when a job was a job.

According to ShadowStats calculations, US unemployment and under-employment has remained constant at 23% since 2009. In addition to this rather sobering number is that the majority of new jobs created have been in the lowly paid service sector. The sector of the economy that actually produces ‘stuff’ is contracting.

According to MarketWatch:

David Rosenberg, chief economist and strategist at Gluskin Sheff, notes that goods-producing employment has contracted for 4 months in a row, with 77,000 jobs lost over the time period. That’s the kind of decline last seen in Nov. 1969, May 1974, Dec. 1979, Oct. 1989, Nov. 2000 and May 2007 — all of which predated recessions, by an average of 5 months.

The US economy is a mirage…always shimmering on the horizon. The Fed has been able to (more or less) maintain the illusion for over seven years. My guess is that, in the coming months, the ‘smoke and mirrors’ behind the official numbers will be revealed, and a US recession may loom large. When this happens, we’ll start hearing murmurings of another round of QE later this year. Popular thinking is that US rates are going to rise, but I think otherwise. We’ll see.

Whether we consciously recognise it or not, what we are witnessing is not normal. There is gross distortion of official data to conjure up figures that mask the truth. Central bankers overtly interfering in markets — buying corporate and government bonds, shares, ETFs — to keep asset prices afloat. Taking interest rates into the negative. All this is widely accepted as ‘normal’. Nothing could be further from the truth.

This is truly bizarre stuff that, in this world of warped values, now passes for responsible economic management. Politicians condone it because it gives them a free kick — no hard decisions to be made…just print more money.

Billionaire bond guru Bill Gross, in his latest newsletter, put the past four decades into perspective with this statement:

my take from these observations is that this 40-year period of time has been quite remarkable – a grey if not black swan event that cannot be repeated. With interest rates near zero and now negative in many developed economies, near double digit annual returns for stocks and 7%+ for bonds approach a 5 or 6 Sigma event, as nerdish market technocrats might describe it. You have a better chance of observing another era like the previous 40-year one on the planet Mars than you do here on good old Earth.

For the non-technical among you, the Greek letter Sigma is used as a measure (the standard deviation) of how much events vary around the average.

We have lived, and are living, through THE MOST ABOVE-AVERAGE period in history. So rare is a 5 or 6 Sigma event, Gross believes it’ll happen again on Mars before it is ever repeated here on Earth. Folks, this is not normal. This is ABNORMAL, writ in large letters that hardly anyone is taking notice of.


Because this transformation from real to unreal has happened over such a long period.

Again, little by little, the changes have occurred to the point where we no longer know what constitutes genuine market activity.

As a society we no longer question the BS being put out by central bankers, bureaucrats, institutional economists and politicians. Years of misinformation have played havoc with our guidance systems.

While society still believes in the omnipotent power of the central banker, there is a least one more QE in the Fed locker. One last shot at trying to extend and pretend the myth of the past 40 years: that we can create prosperity with more and more debt. All we’ll need is a bad run of numbers and an adverse reaction on Wall Street to trigger it.

Sometimes it is the little things you notice that give you that a-ha moment. When you realise how disconnected we have become from financial reality.

For me it was on the tube in London the other day. That ad (above) typified just how far we have drifted from normality.

Source: Vern Gowdie
[Click to enlarge]

Capital One is promoting how easy it is to obtain one of their credit cards…with, in small print, a 34.9% interest rate.

Hop on the app and a minute later you’re given the OK — ‘Congratulations. Apply and we’ll say Yes’.

What could be easier than that…instant approval.

I started work in the ANZ Bank in 1977 (nearly 40 years ago). Back then, being deemed credit-worthy was definitely a little more demanding.

The old bank Johnnies out there will remember how customers went on bended knee to the bank manager, with a savings record in hand, to demonstrate they had the capability to repay the bank its money.

Even in the days of 18% interest rates, personal loans (as best as I can remember) never got close to 34.9%. Today we have zero bound rates, and yet institutions are charging these hopelessly addicted or naive credit schmucks easy access to money at 34.9%. They hanged Ned Kelly for theft less than this.

What I am witnessing is a world away from the normality my life experiences have anchored me to.

Which is why Bill Gross’ observation of a 5–6 Sigma event makes a lot of sense to me. For those of you old enough to remember life before the greatest credit boom in history, take comfort in the fact that you are not going mad. It is the world that is unhinged.

How much longer can we keep drifting towards Mars before the bubble bursts and we freefall back to Earth?

Will it extend to a 50-year, 8–9 Sigma event, or will it all be over in the next months or years?

My guess is it will be sooner rather than later.

The dynamics that created the last 40 years just aren’t there anymore. Boomers are moving on from credit-fueled consumption to retirement. Debt levels (in percentage to GDP) have gone from low to very high. Welfare promises are ridiculously generous. Assets are being priced on multiples previously seen just before the Great Depression and the bursting of the Dotcom bubble.

Just when you think everything has been pushed to the extreme, the Fed seems to find another way to keep us from succumbing to Earth’s gravitational pull.

This is why you should not be surprised by another round of QE to take this extraordinary period of history to one final crescendo.


Vern Gowdie,
For Markets and Money

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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