By David Stockman as originally published on Contra Corner and reprinted here with permission
Goldilocks is a conceit of monetary central planning and its erroneous predicate that falsifying financial asset prices is the route to prosperity. In fact, it only leads to immense and unstable financial bubbles which eventually crash—–monkey-hammering the purported Goldilocks Economy as they do.
It also leads to a complete corruption of the economic and financial narrative on both ends of the Acela Corridor.
To wit, the Fed’s serial financial bubbles on Wall Street are falsely celebrated as arising from a booming main street economy. In fact, they are an economic dagger that bleeds it of investment and cash and exposes it to “restructuring” mayhem from the C-suites when the egregious inflation of share prices and stock option values finally gets crushed by another financial meltdown.
In this context, the Washington Post (WaPo) is out this morning with brutal takedown of our friend Larry Kudlow for his ebullient whistling past the graveyard on the eve of the financial crisis and Great Recession. It would be an understatement to say he didn’t see it coming, but it’s also completely unfair not to acknowledge that 95% of Wall Street and 100% of the FOMC were equally bubble-blind.
In fact, when Larry Kudlow waxed eloquently in a piece in the National Review about the awesome economy the George Bush Administration had produced in December 2007, he was just delivering the Wall Street consensus forecast for the coming year:
There’s no recession coming. The pessimistas were wrong. It’s not going to happen. At a bare minimum, we are looking at Goldilocks 2.0. (And that’s a minimum). Goldilocks is alive and well. The Bush boom is alive and well. It’s finishing up its sixth consecutive year with more to come. Yes, it’s still the greatest story never told…….In fact, we are about to enter the seventh consecutive year of the Bush boom.
Well, not exactly. The worst recession since the 1930s actually incepted that very month and 10 months latter came Washington’s hair-on-fire moment when the monetary and fiscal spigots were opened far wider than ever before— bailing out everything that was collapsing, tottering, moving or even standing still.
Still, Kudlow (like most of Wall Street) was not about to give up on his love affair with Goldilocks until she positively betrayed him. Thus, by February 2008 when the economic clouds were gathering, Kudlow insisted that,
Maybe we are going to have a mild correction. Maybe not,” adding: “I’m going to bet that the economy will be rebounding sometime this summer, if not sooner. We are in a slow patch. That’s all. It’s nothing to get up in arms about.”
By summer, of course, there was no economic rebound and the housing market was going down for the count. But Larry was not about to give up on Goldilocks, and, in fact, espied the bottom of the housing crunch and better times for the economy straight ahead:
Media reports painted a pessimistic picture of today’s release on existing home sales, which fell 15 percent from a year ago and recorded higher inventories. But inside the report was an awful lot of very good new news, which appear to be pointing to a bottom in the housing problem; in fact, maybe the tiniest beginnings of a recovery…..For example, the median existing home price has increased four consecutive months and is up 10 percent since February.
The point here, however, is not to make Larry Kudlow look especially foolish; he was just a more colorful and cogent consensus peddler than most of his bubblevision compatriots. Instead, what is powerfully enlightening about Kudlow’s National Review piece and his subsequent Goldilocks swooning is the reasons he gave for his ebullient outlook on the future.
To wit, he kept doing a perfect Janet Yellen imitation, reciting all the flashing green indicators on the main street economy that were showing up on his dashboard. What he had to say back then, in fact, is nearly identical to what the Wall Street and Fed economists are saying today.
In the original National Review piece he argued that the “in-coming data” couldn’t be more upbeat, meaning that the few stray voices of pessimism beginning to emerge at year-end 2007 were dead wrong:
The pessimistas are a persistent bunch. In 2006, they were certain a recession was just around the corner. They were wrong. Instead, the economy posted two consecutive quarters of near or above four-percent growth.
Earlier today, a doom and gloom economic forecast from Macro Economic Advisors was released predicting zero percent growth in the fourth quarter. This report is off by at least two percentage points. These guys are going to wind up with egg on their faces.
As it happened, Q4 2007 GDP came in slightly positive, but it was all downhill from there. It was Kudlow who got the egg—along with nearly the entirety of mainstream Keynesian economists.
For example, the Bush Administration’s hapless chief economist and freshwater Keynesian, Ed Lazear, insisted as late as May 2008 that no recession was in sight; and the FOMC spent the whole summer of 2008 debating whether or not the unexpected economic “slowdown” then materializing was only a temporary blip.
Still, Larry Kudlow was just getting started with his egg-in-your face bluster in December 2007. Here’s the gravamen of his confidence, and it was all about the swell numbers pouring in from main street:
Here are the facts: Americans are working. The 4.7 percent unemployment number remains at an historical low. On a three-month rolling basis, the U.S. economy has added over 100,000 jobs. Meanwhile, the household job count shows that an average of 303,000 jobs have been added in the last three months. This is noteworthy because it suggests that the job market is turning around.
Hours worked are growing more than 1-percent annually, while workers’ wages are running 3.8 percent, a full percentage point ahead of inflation. As for this week’s productivity report, it was nothing short of spectacular: the 6.3 percent productivity gain was the best in four years. A rise in productivity is good for growth. It’s good for profits. And it’s good for low inflation.
Speaking of inflation, business inflation is down from 3.5 percent just over a year ago to 1.5 percent today. Meanwhile, oil prices have retreated to $88. And, to top it all off, last night we received a tremendous new number showing household net wealth has headed even higher. It stands at a record $59 trillion dollars. That’s more than seven percent above a year ago.
Well, let’s see. Relative to the 303,000 monthly average gain on the household (HH) survey that Kudlow was hyping back then, it turns out that the HH survey rose by an average of 430,000 jobs during the three months ending in February 2018—so maybe we are now ahead of the game.
Then again, maybe not. If you average the last six months the number drops to 277,000; and over any reasonable period of recent time it’s been all over the lot, and in fact has averaged just 204,000 new jobs per month since the eve of the 2016 election.
We wouldn’t call the above February surge anything but another random oscillation in a survey that is virtually junk from a statistical integrity viewpoint, and, in any case, doesn’t even measure employed people. That is, second, third, and fourth part time jobs all count as another point on the BLS scoreboard.
That said, our more essential point is that the BLS numbers are generated by a trend-cycle statistical model, not an honest-to-goodness body count, or even sample extrapolation, from the actual main street economy. So these goal-seeked numbers (i.e. the Fed is stimulating, so full-employment must happen) are notoriously unreliable at cyclical turning points like late 2007 and early 2018, as well.
Accordingly, such times become a cherry-picker’s delight, and Larry Kudlow was no slouch as a cherry-picker—-even by Wall Street standards. In fact, here is the same 16-month trailing chart for the HH survey where Kudlow espied the 303,000 monthly job gain in his December 2007 National Review piece.
Can you say, Larry, I’ll have another bowl of them cherries!
Turns out that the 16-month average was even weaker than today. Job gains averaged just 133,000 per month, and like the above 16-month chart, the monthly changes was flopping around all over the deck.
Well, that’s until they started cliff-diving—and thereby putting in mind Ronald Reagan’s famous story about the little boy, who upon being shown into a room full of horse manure, began to frolic around joyfully. Said he, “there’s got to be a pony in there somewhere!”
Needless to say, Kudlow picked the cherries and found the pony, too. And he was by no means alone—-either back then or once again, now.
As shown below, the big November surge that got Kudlow his 303,000 month job gain average was the last hurrah. The main street economy that would soon be taken down by a collapsing housing/mortgage bubble, and the subsequent Wall Street meltdown that inexorably followed when its own financial meth labs—which concocted the subprime securitizations which fueled the housing mania—blew up in its face.
All told, jobs disappeared over the next two years. Indeed, the high water mark of 146.6 millionHH jobs that Kudlow hung his hat on was not regained until September 2014—–nearly seven full years later!
Likewise, the 1% growth of labor hour didn’t foretell anything, either. After Q4 2007, the US economy shed more than 15 billion labor hours during the next six quarters.
The long and short of it is that the incoming data from the Washington statistical mills is overwhelmingly and inherently a lagging indicator—meaning that economists and Wall Street cheerleaders, as the case may be, can always dig up enough favorable monthly and quarterly deltas to keep the Goldilocks narrative going.
The danger of lagging indicators, in fact, could not be better illustrated than be the cherry that capped off Kudlow’s December 2007 encomium to Goldilocks. To wit, the fact that household net worth had been reported at an all-time high the previous quarter (Q3 2007) and was up 7% from the prior year.
Needless to say, September 2007 was about as close as you please to the tippy-top of the Greenspan housing/Wall Street bubble, and those twin bubbles were dully reflected in the Fed quarterly net worth calculation.
So by Q1 2009, the household net worth number was down by the tidy sum of $12 trillion or nearly 20%. And it took four years of madcap money printing at the Fed to reflate housing and the stock market sufficiently to regain the Q3 2007 level that Kudlow had sighted as evidence that Goldilocks was headed for near eternal life, world without end.
We dwell on Kudlow’s last Goldilocks affair because it’s exceedingly timely, and in more than one way.
That is, it’s a reminder that the leading indicators are embedded in the Wall Street bubbles, not the main street labor, business and GDP data, and that the next recession will arrive as a great shock and surprise when the bubble finally splatters; and also, that Larry Kudlow is now in a great position to help accelerate the latter’s arrival.
That’s because his newly appointed task will be to dig through Ronald Reagan’s proverbial room full of horse manure to reassure the Donald that there is a pony in there somewhere. In fact, as we said on bubblevision yesterday, Larry Kudlow is one of the most talented and persistent data miners around.
In a word, Larry Kudlow can be counted upon to reassure the Donald that a boom is just around the corner, and that the nation’s skyrocketing budget deficits are nothing to worry about.
As he told CNBC yesterday, we are on the cusp—-meaning that economic growth will make it all go away:
LOOK, THE ECONOMY IS STARTING TO BOOM THE TAX CUTS ARE WORKING, THE DEREGULATION IS WORKING……WE ARE ALREADY, I BELIEVE, ON THE FRONT END OF A TREMENDOUS INVESTMENT BOOM.
Au contraire. At 105 months of age, the current business expansion is already running out of steam, and is in no position to absorb another thundering bubble collapse in the casino without again buckling like it did in 2008.
At the same time, the current third and greatest central bank bubble of this century absolutely cannot endure the “yield shock” that is baked into the cake for next fall. That’s when the rock of $1.2 trillionin new government borrowing smashes into the hard place of the Fed’s $600 billion annual bond dumping program.
Not unsurprisingly, the Donald is so oblivious to the fiscal calamity he is charging into that he has now even started tweeting about a second tax cut.
That’s utter madness, of course, but Larry Kudlow—-Goldilocks in hand—is just the man to sleepwalk him into the fiscal inferno.
In the interim, there is this. Even as Larry Kudlow was headed to Washington vainly hoping to fill some of the economic darkness lurking under the Orange Combover, the latter was off to celebrate the Trumpian economic boom at Boeing’s (BA) plant in St. Louis.
Now there a canary in the wind tunnel, if there ever was one!
The Donald is on the verge of unleashing a bloody trade conflagration with China. Given the immense operating leverage embedded in Boeing’s huge commercial aircraft manufacturing business, it cannot afford to miss a beat in terms of sales and shipments to it biggest customer.
Especially not after its market cap has soared from $75 billion to $200 billion in the last two years and it is being valued at a nosebleed 20X operating free cash flow.
Stated differently, Boeing is not fixing to make the American economy great again. Its hideously inflated stock price is a crash waiting to happen—just like the rest of the casino’s endless sea of bubbles.