Good News – Bad News

Stocks rebounded hard last week with the Dow Jones Industrial Average rallying 3% and the broader S&P 500 advancing 3.17%.

Stocks made a textbook bounce higher off the 50-day moving average.  A bounce up off the 50-day moving average is generally considered to be a bullish indicator for stocks.

When it comes to analyzing the performance of stocks, it’s impossible to ignore the correlation between the Fed’s expanding balance sheet and the rise in stocks.  This correlation can be best summed up by observing – the Fed prints and stocks rally.

Yet, when looking at the broader economy, despite the recent positive reports, one has to be concerned with debt levels in the private sector and in the public sector.

This past week, there was good economic news reported.  I have often noted here that the official unemployment rate is not necessarily a great metric when it comes to measuring employment due to the fact that the calculation methodology has changed over the years to make the official number look more favorable.  The labor force participation rate is, in my view, a better measure of the true employment picture.

When examining the labor force participation rate, one comes to a positive conclusion.  CNS News reported this week (Source:  https://cnsnews.com/article/national/susan-jones/634-labor-force-participation-trump-era-high) that the labor force participation rate is rising.  This from the article (emphasis added):

The labor force participation rate reached a Trump-era high of 63.4 percent, up from 63.2 percent in December, because the civilian labor force increased by 574,000 in January, after accounting for annual adjustments to population controls, BLS said.*

In January, the civilian non-institutional population in the United States was 259,502,000. That included all people 16 and older who did not live in an institution (such as a prison, nursing home or long-term care facility).

Of that civilian non-institutional population, 164,606,000 were participating in the labor force, meaning that they either had a job or were actively seeking one during the last month. This resulted in a labor force participation rate of 63.4 percent, the highest it’s been since June 2013.

That’s significant improvement using a measure that is more accurate than the official unemployment rate.  An increase in the labor force participation rate means that more people are working and are re-entering the workforce.

However, it is less reported that much of the economic expansion that we’re seeing is debt-fueled.  Less any of you more politically partisan readers begin to point fingers at one political party or another, I’ll remind you that this trend began more than two decades ago and has been in my view the cause of the bust cycles of 2000-2002 and the meltdown of 2007-2009.  Debt can only accumulate to a certain level before the trend has to reverse.

Since the last meltdown, the Fed has been ‘expanding its balance sheet’ a.k.a. printing money.  While that has created a level or prosperity, it will ultimately have a price as high levels of debt always need to be dealt with.

There is presently about $1.6 trillion in student loan debt (Source: https://www.forbes.com/sites/zackfriedman/2020/02/02/student-loans-bernie-sanders-elizabeth-warren/#7c84f2ef35e10), about $1.2 trillion in automobile debt (Source:  https://www.investopedia.com/personal-finance/american-debt-auto-loan-debt/) and about $1.1 trillion in credit card debt (Source:  https://www.thebalance.com/average-credit-card-debt-u-s-statistics-3305919).  That’s about $4 trillion in those three categories alone.

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This will be a drag on the consumer spending dependent US economy at some future point since debt can only accumulate on the consumer side to a finite level.  Consumers can only collectively accumulate debt as long as their collective income can service the debt.  Once the ability to service the debt stops, so does debt accumulation.

To put the $4 trillion number into perspective, that’s enough money to buy nearly 141 million new Ford F-150 pickups.  Let that sink in.

Keep in mind that level of debt doesn’t include mortgage debt and other forms of consumer debt.  Total household debt is now about $14 trillion as noted by this chart published by Statista (Source:  https://www.weforum.org/agenda/2019/11/u-s-household-debt-climbs-to-13-95-trillion/).

Notice that is notably higher than at the time of the last economic bust.

But the debt doesn’t stop in the private sector.  Public sector debt has also exploded. 

The reality is that public sector debt is really private-sector debt since the responsibility for repayment rests squarely on the private sector.  (Unless of course, you’re among those who believe that money can be printed indefinitely with no consequences.)

The national debt is now more than $23 trillion and the underfunded liabilities of Social Security are more than $40 trillion.  Medicare’s underfunded liabilities are about double that of Social Security’s.  Just these federal liabilities total about $1.5 million per US taxpayer.

And, that doesn’t consider state and municipal debt.  While there are some municipalities that are fiscally sound, many are not.

The “2020 Financial State of Cities” reports (Source:   https://www.truthinaccounting.org/library/doclib/Financial-State-of-the-Cities-2020.pdf ) that unfunded debt in the 75 most populous cities was more than $323 billion combined.

The report found that taxpayers in the City of New York would each need to cough up more than $60,000 to get the city back in black ink.

Chicago residents would need to come up with more than $37,000 per taxpayer.

Honolulu, Philadelphia and New Orleans round out the bottom five with per taxpayer liabilities of more than $25,000 in the case of Honolulu and Philadelphia and more than $18,000 in the case of New Orleans.

Everywhere you look, massive, unpayable levels of debt exist.  Moving ahead, it’s obvious that politicians and policymakers on the Federal level will be called upon for bailouts.  Should the politicians and policymakers acquiesce, more money will need to be created.  We know how that will end.

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