Liar, liar, pants on fire!

September 14-20, 2024

Big news. The US Federal Reserve has cut the key rate. But the main news is that for the first time in four years it has been cut by 50 bps at once, from 5.25-5.5% to 4.75-5%.

Fed Cover Letter:

▪️Economic activity continues to expand at a solid pace.

▪️Job growth has slowed.

▪️Unemployment has increased but remains low.

▪️Inflation is moving steadily toward the 2% target.

▪️Risks to the Fed’s dual mandate (inflation/labor market) are balanced.

▪️Economic outlook is uncertain.

▪️The Fed’s future monetary policy depends on macro data.

Now a few words about this. It is somehow awkward to even talk about economic activity; all the indicators of recent weeks (including the data in the second section of this Review) show that it is declining.

The pace of job creation over the past two months has averaged 116,000 per month, while the July meeting data showed an increase of 167,000. The average unemployment rate has increased to 4.25% from 4.05%. In percentage terms, that means an increase of about 5%. Quite a lot for conservative numbers, especially if we are talking about, from the Fed’s point of view, “growing at a solid pace.”

Inflation data is provided in the previous review, inflation is growing, here the Fed leadership is openly lying. The situation is bad both with retail sales and with household income (see Pavel Ryabov’s analysis in the final section of the Review). Conclusion: there is some serious reason why the Fed is sharply reducing the rate despite objective data. Our opinion on this issue can be found in the last section of the Review.

Macroeconomics. Chinese data is bad again. Foreign direct investment is -31.5% per year, very close to the historical anti-record of 2009 (-32.6%):

Overall, fixed capital investment is +3.4% per year, the worst performance since the beginning of the year; without the fluctuations of 2020/23, this is a record low:

Industrial production slowed to a similar low of +4.5% per year:

The same with retail sales (+2.1%), not counting Covid, they have a historical bottom:

Unemployment is rising:

The decline in prices for new buildings (-5.3% per year) is approaching the anti-record of 2015 (-6.1%):

Eurozone construction output down 2.2% y/y, 6th straight negative:

Eurozone Economic Sentiment Index (ZEW Survey) Weakest in 11 Months:

As in Germany specifically:

Moreover, the latest assessment of the current situation is the worst in 15 years (not counting Covid, whose lows, however, are also nearby):

Leading indicators in Australia have failed to rise monthly for six months:

US Current Account Deficit Nears Record High in 2022:

Let me remind you that in the previous review we explained that American manufacturers are being displaced by foreign ones.

The number of single-family new buildings under construction in the US is at its lowest in 3.5 years:

US existing home sales have returned to a 14-year low set a year ago:

Japan’s CPI (consumer inflation index) is at a 10-month high (+3.0% per year), electricity prices are at a 43-year high (+26.2%):

UK consumers are the most pessimistic in six months:

The level of public sector debt in the UK, according to preliminary estimates, reached 100% of the country’s GDP in August. According to a report by the National Statistics Office (ONS) of the United Kingdom, such figures were recorded for the first time since the 1960s.

The US Federal Reserve cut the rate by 0.50% at once to 4.75-5.00%; two more cuts of 0.25% each are expected before the end of the year; in 2025, the rate should decrease by another 1.00%, and in 2026 – by 0.50%; GDP and inflation forecasts were reduced, and unemployment – increased; the decision was not unanimous – 1 vote was for a more modest rate cut:

The Indonesian Central Bank unexpectedly cut the rate by 0.25% to 6.00%. The South African Central Bank did the same (-0.25% to 8.00%).

The Brazilian Central Bank, on the contrary, raised the base rate by 0.25% to 10.75%.

The Bank of England has not changed anything, although 1 board member voted for a new rate cut. The monetary policy of the Chinese Central Bank and the Bank of Japan has remained the same.

Main conclusions. Since the question of the reasons for the rate cut is fundamental, I am providing quite a lot of additional information compared to the usual situation. The data is taken from the research of Pavel Ryabov, who is currently the best specialist in studying large digital arrays of statistical information.

Let’s start with weak data on retail sales in the US.

“It doesn’t matter how much better or worse the data turned out to be than the forecast, since there is nothing more manipulative than forecasts, so let’s get straight to the actual data, which, by the way, is not very accurate.

Retail sales grew by only 0.05% m/m in nominal terms, although the July data was revised up by 0.1%. For the year, the nominal growth is only 2.1%, while taking into account inflation, the growth is 2.7% y/y according to our own calculations based on the deflator in goods according to BLS data (deflation is observed).

In 8M24, nominal growth was 2.3% y/y and +2.5% y/y adjusted for inflation, over two years, growth was 5.7% and 4.2%, respectively, over three years (to 8M21), retail sales grew by 16.5% and 4.8%, and over 5 years (to 8M19), nominal growth was 37.8% and 20.7% adjusted for inflation.

The long-term trend of retail sales growth in real terms is 4.3% in 2010-2019, post-Covid growth slowed to 3.6%, despite aggressive growth in 2020-2021 (stagnation has been observed since mid-2021), and the current growth potential is half the long-term trend, and this is taking into account the official deflation!

What is important to note here? To a large extent, the annual result was due to fairly strong indicators at the end of 2023, and if you compare Aug. 24 to Dec. 23, – taking into account inflation, retail sales grew by only 0.7% and this is the worst indicator since the 2008 crisis!

In a comparable comparison (August of the reporting year to December of the previous year), the average growth in 2010-2019 was 2.7% taking into account inflation, which is comparable to the average growth in 1993-2007, and in 2020-2023 the rate increased to 3.8%.

Since 1993, weaker indicators than in 2024 were at the beginning of the recession in 2000 and in 2007-2008. The result for 8m24 is almost 4 times worse than the historical long-term trend in a comparable comparison and this is taking into account deflation in the product group (very doubtful).

It would be strange to expect a different result against the backdrop of slowing incomes, zeroing out savings and the exhaustion of the 2020-2021 sustainability buffer.”

The second most important factor is consumer demand.

“Consumer demand is the foundation of the American economy, forming up to 70% of US GDP. The resource for demand is income, and it is the analysis of the income trend that will allow us to estimate the turning point.

Over 7m24, the average monthly growth rate of real disposable income decreased to 0.10% (in July it was 0.11% m/m), over the last 12m – 0.09% compared to 0.21% in the period from 2010 to 2019, 0.25% in 2017-2019 and 0.25% in 2020-2023.

The growth rate of real disposable income fell by at least 2.5 times relative to the medium-term norm.

The annual growth rate has decreased to 1.1% and each time the income growth rate has balanced at 1% or lower for at least six months, the risk of a recession has increased to 80%.

Approximately 60% of income is formed through wages and here the trend is also downward. In 7M24, wages in real terms grew at an average monthly rate of 0.2% (in July – 0.19%), in 12M – 0.15%, while the long-term norm of 2010-2019 was at 0.22%, and the medium-term norm of 2017-2019 at 0.25%, and in 2020-2023 the average monthly growth rate was 0.14% due to high inflation.

At the same time, expenses remain high. In July, growth was 0.38% m/m in real terms, for three months – 0.39% on average, compensating for the failure at the beginning of the year, which allowed the average monthly rate for 7m24 to be brought to 0.19%, for 12m – 0.23%. Is this close to the norm? Quite, in 2010-2019 the average monthly growth rate was 0.2%, in 2017-2019 at the level of 0.21, and in 2020-2023, expenses grew by 0.25% per month.

It turned out that consumer demand remains within the long-term norm with a strong deviation of income by 2.5 times from the norm, which leads to the depletion of savings (more on this in the next material).

Such a disproportion cannot continue for a long time (more than 1.5 years, and already more than a year). Either expenses will fall sharply, or income will increase, but there is no basis for income growth.”

Here we need to make a fundamental remark. As we have already noted more than once, the US monetary authorities have now adopted the Dubinin-Chubais model of 1995-98 to replenish the budget. Only in our country the GKO market was supported, while in the US it was aggregate demand. In other words, the situation mentioned by Pavel Ryabov (maintaining demand against the backdrop of falling incomes) is a consequence of constant budgetary stimulation against the backdrop of a growing budget deficit.

Both we and numerous experts have repeatedly explained in recent months that there are no more resources of such a scale (trillions of dollars) on the world financial markets, it is necessary to either reduce the US budget deficit or start issuing. The first case is unacceptable in the context of the election campaign, and immediately after too, since in this case Kamala Harris could be impeached before she even begins to perform her duties. And if Trump wins, then in such a situation he will organize a total purge of the state apparatus from supporters of the financiers.

The only option left is issuance. But it will cause a rapid increase in inflation, which will collapse financial markets. There is still hope that the rate cut will increase the banking multiplier, which will give some excess money in financial markets. And this is one of the reasons why Powell is in such a hurry to cut the rate.

Let’s continue to provide detailed data on the situation in the US economy.

“Industrial production grew by 0.8% m/m (many calculated almost 10% in annual terms).

How to create the appearance of success where there is none? That’s right, revise the reference base for the worse. The data in June was revised down by 0.26%, and in July immediately by 0.57%, so the very good data in August is nothing more than a “game with numbers”, since according to the previous comparison base (before revision) the growth was only 0.2% m/m.

Industrial production in August did not change compared to last year – a symbolic growth of 0.04% y/y and minus 0.03% compared to Aug. 22, an insignificant +0.35% compared to Aug. 19 (over 5 years) and only +0.49% compared to Aug. 14 (over 10 years).

To smooth out the volatility of the data, we can look at 8m24, where industrial production fell by 0.24% y/y, there was zero growth of 0.06% compared to 8m22, and there was no change at all – 0.01% compared to 8m19.

This is actually funny – the calculation is not in percentages or even tenths of a percent, but in hundredths of a percent. Considering the number of industries within industrial production, tens of thousands of companies, the methodology for integrating hundreds of thousands of product units, seasonal coefficients, and many other statistical tricks, balancing by hundredths of a percent over many years looks unusual.

In any case, the main conclusion is that there is no growth in industrial production, although there is no decline either. There is a long-term sluggish stagnation on a high comparison base (historical maximum). The problem is that this historical maximum has not changed for 15 years.

In 8m24, manufacturing fell by 0.5% y/y and mining is also poor – a decline of 0.5% y/y, but electric power and utilities are growing by 1.7% y/y (due to electricity).

Among manufacturing, in 8m24, only oil refining is in the black – 3.8% y/y, chemical production – 0.7% y/y, microelectronics and components – 3.9% y/y and aerospace production and production of other types of transport – 1.9% y/y.

Structural transformation is no longer so obvious, since more and more knowledge-intensive industries with a high processing depth are plunging into the negative area.”

In other words, in terms of the real sector of the economy, there is no positive trend, and the current situation is maintained only due to budgetary incentives with an ever-increasing budget deficit.

And in the financial sector, a rather rare situation is observed, which can be called “credit paralysis”.

“This is a fairly rare phenomenon, occurring approximately once every 15 years, which manifests itself in a sharp reduction or cessation of credit growth in the economy, taking into account inflation.

The reasons for credit paralysis can be both on the supply side (tightening of lending conditions, growth in interest rates, a crisis of confidence, liquidity problems) and on the demand side (freezing of investment activity, slowdown or reduction of income in the economy).

The last time credit paralysis occurred was from Q4 08 to Q3 13, when credit deleveraging was realized by almost 13%, taking into account inflation. Even earlier, this was from Q3 91 to Q2 93, and before that in the early 80s and mid-70s.

The growth of credit in the economy before 2009 was considered normal in the range of 4-6% per year, and anything higher is a credit boom or compensation for the reduction in previous years. After 2009, growth in the range of 2-4% is considered normal.

Since the beginning of 2023, the rates have dropped to zero and have been near zero for 1.5 years. Since Dec. 21, the accumulated growth is within 1%, i.e. 2.5 years without increasing loans. In 2022, nominal growth was eaten up by inflation, and since 2023, against the backdrop of slowing inflation, nominal rates have also been declining. As a result, at zero.

Bad on all fronts:

•  Consumer credit (credit cards + unsecured loans + car loans + student loans) is growing by only 1.7% y/y at par, while in Q1 22 growth reached 9.8%, and since 2009, typical growth has been in the range of 4-6%.

•  Mortgage loans (for individuals and for non-financial organizations in total) are growing by only 2.7% y/y at par (minimum since Q2 2015) vs. 9.3% y/y in Q1 22.

•  Corporate loans are growing by 4.2% y/y, which is the minimum increase in 10 years. Since Q1 23, the growth is around zero, the normalized smoothed growth rate over two years is around 3% and is significantly in the negative, taking into account inflation.

The total loan portfolio for the entire non-financial sector is 36.2 trillion, where corporate loans are 10.8 trillion, consumer loans are 5 trillion, and mortgage loans of all types are 20.4 trillion.

It is important to note that a recession or crisis always occurred as soon as the loan, taking into account inflation, slowed to zero or went into the negative.

The panic rate cut did not happen because “the economy is wonderful and stable,” as Powell said, but the real reasons are:

•  Credit paralysis

•  Degradation of credit quality

•  Splitting of debt markets

•  Catastrophic situation with interest expenses of the US Treasury

•  Record squeeze of the spread between money and debt markets since 2008.

The situation is close to entering the “catastrophe” zone, but not yet a catastrophe.”

We have provided such a detailed analysis (and thanks again to Pavel Ryabov) because this is the first time we have encountered manipulation of such a scale on the part of the US monetary authorities. It was necessary to show the real picture in detail, otherwise questions like: “Are you sure, they can’t lie that much, maybe there are some other data?” would inevitably arise. We remind you that all of Pavel Ryabov’s data is based on official data. If we take real inflation (at least as interpreted by Larry Summers, i.e. about 8%), the picture becomes even more dire. In fact, in this case we can safely talk about an almost inevitable catastrophe.

Thus, the final conclusion based on the data provided is that the main indicators of the real US economy are slowly sliding down according to official data and are shrinking quite quickly according to real data (the rate of decline is about 0.5% per month). But even the current picture is supported only by debt mechanisms, both budgetary and commercial. The potential of which is also on the verge of exhaustion (in the budgetary ones it has simply been exhausted).

In the current situation, it is almost impossible to find a way out of the situation. This fall, the US will face extremely difficult processes both in the financial sphere and in the real sector. In our opinion, the monetary authorities will resort to serious emission with a sharp increase in inflation. Since this will allow at least for a few months to maintain the illusion that the situation is under control.

Well, our readers have been warned. For this reason, we wish them a good rest on the weekend so that they can start using the information they receive to their advantage during the work week!