Debit Limit Ceiling “Compromise” Will Eventually Exacerbate Inflation Woes
By Victor Sperandeo with the Curmudgeon
Two important marking movement events last week were the “Debt Limit Ceiling Compromise” and the “BLS Payroll Employment Report.” Stock markets moved higher while bonds and gold sold off.
The compromise to avoid a U.S. government default (with catastrophic consequences as per Treasury Secretary Janet Yellen) was widely expected. It was certainly not an issue for the Curmudgeon, as we wrote about the legal and systemic impossibility of a default in this article. The measure brokered between Biden and House Speaker Kevin McCarthy limits federal spending for two years and suspends the debt ceiling through January 1, 2025 (after the November 2024 elections).
As usual, the BLS report overstated the strength in the labor market at 339,000 jobs added. That was an acceleration from April’s job gains, which were revised upwardly to 294,000, and it’s a far hotter number than the 190,000 jobs that economists were expecting.
We explore both important topics in this post, with our unique insight that looks behind the numbers.
Victor’s Perspective on Debt Ceiling Bill:
The stand-out surprise here was that there is NO Debt Limit until January 1, 2025. That essentially gives the Treasury Department the latitude to borrow as much money as it needs to pay the nation’s bills during that time, plus a few months after the limit is reached, as the department employs accounting maneuvers to keep up payments.
The complexity of the deal allows schemes, gimmicks, chicanery, and sleight of hand dealings that keep advancing to new heights. This bill will result in higher inflation, which will come from huge federal government spending that will follow a recession which will begin in earnest later this year.
Curmudgeon - Liquidity Set to Contract:
Bloomberg reports that the U.S. Treasury is about to unleash a tsunami of new bonds to quickly obtain the money it needs now that the debt ceiling has been raised. This will be yet another drain on dwindling liquidity as bank deposits are depleted to pay for the new U.S. Treasury debt.
The Treasury auctions, set to begin Monday, will rumble through every asset class as they claim an already shrinking supply of money. JPMorgan estimates a broad measure of liquidity will fall $1.1 trillion from about $25 trillion at the start of 2023.
“This is a very big liquidity drain,” said JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou. “We have rarely seen something like that. It’s only in severe crashes like the Lehman crisis where you see something like that contraction.”
It’s a trend that, together with Fed tightening (QT), will push the measure of liquidity down at an annual rate of 6%, in contrast to annualized growth for most of the last decade, JPMorgan estimates.
However, Victor believes that the financial system can cope with this loss of liquidity, as there’s $2.2 trillion parked in reverse repos, which we explained in this Curmudgeon/Sperandeo post. It would be easy to let 1 trillion mature (they are rolled over daily) and that trillion would flow to the Treasury General Account (TGA).
Analysis of BLS Non-Farm Payrolls Report:
Friday’s BLS jobs report exhibited the same repeated pattern of made-up numbers. Economists have consistently underestimated the U.S. non-farm payroll numbers for the last two years. They expected an increase of 188,000 non-farm payrolls for the month of May, but instead we got a “made up” 339,000 jobs added. Let’s look behind the headline jobs numbers.
After accounting for the drop in hours worked, it’s as if the economy lost 140k jobs in May. For the January-May period, the index of aggregate hours worked is negative.
Also, the sizable jump in the unemployment rate was a surprise, rising to 3.7% from 3.4%. The BLS report showed that it is taking longer for people to find work: The number of people unemployed for 15 to 26 weeks jumped by 179,000 to 858,000. We’re not done yet!
Once again, the Birth Death Model (BDM) “created” +231,000 non-seasonally adjusted (fictitious) jobs. Without the BDM non-counted jobs, the BLS report would state +108K jobs added!
Cartoon of the Week:
Mishtalk summed it up by saying, “The BLS Wonderland reporting is back with a vengeance today as jobs and employment head in opposite directions and the unemployment rate jumps.”
The bottom line is that you can’t trust the BLS or any other U.S. government reported numbers. They are “shaked and baked” to make the economy appear better than it actually is. Please see Victor’s Conclusions for more on this pattern of deception.
Point of Order for the Fed:
If the Fed REALLY cared about the “wealth effect” resulting from increased stock prices, why do they not simply raise the REGULATION T initial margin requirement from 50% to 100%? The ability to buy stocks using a 50% margin (e.g., $100 buys you $200 worth of stock) has been in effect since 1974 and has never changed! The Fed could unilaterally raise margin requirements as they control REGULATION T. That would surely dampen speculation in high flying big tech stocks (NVIDIA, Amazon, Alphabet/Google, Meta/FB, which are all up 40+% in 2023).
Stocks are in a bubble and totally disconnected from the real economy. Workers are experiencing real declining wages while small businesses are going bankrupt at a record pace! America is being driven into a recession by the Fed on a scam that inflation is not declining fast enough.
However, stocks in some cases are at their highs and have had the highest valuations in the last two years. In particular, the FANG+ stocks (Meta/FB, Amazon, Netflix, Alphabet/Google, and Apple) are only 7.8% off their all-time highs! And FANG+ doesn’t include NVIDIA which is +169.1% in 2023!
The unchecked speculation continues. Traders have rushed into bullish options bets on the highflyer s, seeking to amplify their gains if tech shares keep climbing. Activity in NVIDIA call options hit one of the highest levels on record in recent sessions, as did the popular Technology Select Sector SPDR ETF, according to CBOE Global Markets data.
Finally, the market advance in 2023 has been incredibly narrow. The S&P 500 is up 12% this year, but it would be negative without the contribution of seven big tech companies, according to S&P Dow Jones Indices data through the end of May. Shares of the 10 largest companies in the S&P 500 climbed 8.9%, while the other 490 S&P 500 companies lost 4.3%, according to Bespoke.
To NOT have a debt limit till 2025, along with a political system that gives money to people using a printing press is like a free lunch to the 10th power.
It is best stated by George Orwell: "There are some ideas so absurd that only an intellectual could believe them; no ordinary man could be such a fool."
Sadly, the U.S. political system represents Corporate America for money and special interests for votes, and not the citizens of America.
I suggest the markets should embrace the MAD magazine slogan “What Me Worry” from the comic book character Alfred E Neuman.
According to former MAD editor John Ficarra), “For seven decades, MAD magazine has gleefully warped generations of adolescent minds with a simple message: "Everyone is lying to you, including magazines. Think for yourself!"
This mantra speaks the rare truth which you don’t get from mainstream media reporting circles these days. It also reflects my sentiments.
“Elections are when people find out what politicians stand for, and politicians find out what people will fall for.”
“The dollar will never fall as low as what some people will do to get it.”
Alfred E. Neuman, MAD Magazine
Be well, stay healthy, wishing you peace of mind.
Till next time…...
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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