If This Really Is A Recovery, Why Aren’t We Using More Electrical Power?

Publishing note: unless there are significant market developments I intend to take a few weeks off.  I need a break.  Also I’ll have a new e-mail address beginning next week as I’ll have a new ISP.

Janet Yellen may not have raised interest rates this week, but Mr Bear couldn’t care less.  We can see it in the market.  In bull markets double-digit declines from an all-time high are reasons to buy.  But EARLY in bear markets, recoveries from double digit declines are reasons to sell as we’ve seen since about mid-July.  In the table below recoveries from double-digit Dow Jones declines last just a day or so before the market comes under selling pressure, again driving the Dow Jones down 10% or more from its May 2015 last all-time high.

Looking at the Dow Jones’ BEV chart we see the Dow’s last BEV Zero (all-time high) was on May 19^th (eighty-six trading days ago).  The current decline may be just a correction in a greater bull market, if so the Dow Jones will recover from its double digit correction and soon be making new BEV Zeros.  But consumers, government and corporations are all being crushed by the burden of overwhelming-consumptive debt.  This is global problem that isn’t going away until this burden of debt goes first.  What the markets may not want, but may actually need is a big bear market, an opportunity for Mr Bear to clean out the garbage from every ones’ balance sheet. 

With the market currently “stabilized” many “market expert” don’t see it that way.  But had the FOMC decided to surprise the market with even a 0.50% increase in the Fed Funds rate today with no comment for the media on their future intentions, (a routine “policy action” before Greenspan became Fed Chairman), we may have seen another 1000 plus down day on the Dow Jones and heard shrieks of anguish from the bond market.

The market is fragile in September 2015.  “Policy options” pondered by the IMF, ECB, World Bank and the BIS, as well as the FOMC are openly discussed in the media for fear that any unexpected action sprung on the markets could create a panic which would overwhelm their best efforts to “stabilize” it.  The smart money knows this.  No longer are they looking for reasons to purchase stocks but for opportunities to sell.  That’s why every time the Dow Jones comes within 10% of its May 19^th all-time high, sellers come into the market, driving it back down to double digits, as happened again this week.

This is not just speculation on my part; look at the NYSE 52Wk H-L Ratio.  It’s been fourteen months since new 52 Wk Highs have exceeded new 52 Wk Lows by more than 10%, and 52Wk Highs have been overwhelmed by 52Wk Lows since March.  In the thirty-three trading days since August 1^st, only one (yesterday) has seen more NYSE 52Wk Highs than Lows.  Would you call this a bull market?

Moving along to the Dow Jones Total Market Group (DJTMG) Top 20, or the number of DJTMG indexes within 20% of their last all-time high we see it ended the week at 42 of 74. 

That may not seem like much, but when the Dow Jones made its last all-time high in May, the Top 20 was at 51.  Looking at the chart below we see the Top 20 peaked in July 2014.  Since 1992 once the Top 20 peaks and begins to decline, it hasn’t reversed until a big-bear market bottoms passes.

Again Yellen decided not to increase interest rates this Thursday, just like every FOMC meeting has since July 2006.  Below is a chart plotting the past twenty years of Fed Funds (Blue Plot) and US Treasury long bond yields (Red Plot).   Looking at these plots, after seven years of ZIRP it’s hard believing a 0.25% increase in the Fed Funds rate could be a cause of global concern.  But the IMF, BIS, the ECONOMIST Magazine and other establishment institutions have publically announced their concerns that raising interest rates now would be a mistake.  So what is the cause of their concern?  The “green shoots” economists saw sprouting as far as the eye could see in 2009 must certainly be stout little trees by this time.  So how could raising the Fed Funds rate by a mere 0.25% possibly thwart the “growth” fostered by years of subsidized low interest rates and trillions of dollars of Quantitative Easing?

The most likely answer to that question is that “growth” in the post-credit crisis era is largely an inflationary illusion.  The “policy makers” know this perfectly well.

Come the next crisis in the financial markets, the cause will be the same as the last crisis in the financial markets – counterparty failure in the derivatives market.  And just like the last crisis, it will be the same Wall Street banks and politically connected financial institutions who will be unable to perform on hundreds of trillions in interest rate swaps sold to money managers to “hedge interest rate risk.” 

Wall Street’s problem is simple to understand; for decades they’ve sold hedges (interest rate swaps) to insure money managers’ risks against rising bond yields / declining bond prices.  Knowing that global central banks would prevent bond yields from rising for the foreseeable future, the big banks sold these interest rate swaps to their clients knowing that there was zero likelihood of these derivatives ever coming into the money.  All the major brokerages also knew that if bond yields did increase they would be instantly bankrupted, but not before this year’s Christmas bonus checks of seven or eight digits were pass out.  Considering everything, they saw no practical need to maintain reserves in case interest rates and bond yields should increase.   

The problem the 2007-09 credit crisis introduced to this scheme was that no one in a position of authority anticipated how writing quarter-million dollar mortgages to the chronically unemployed would result in waves of defaults in the mortgage market.  What they apparently didn’t understand during the housing boom was how counter-party failure on derivatives written by the big banks hedging these risks threatened to take down the entire global financial system.   Since 2007-09 nothing has changed:

• The big banks are still fleecing their clients in the derivatives markets, selling fraudulent insurance products they know cannot perform as promised. 
• President Obama still refuses to use the Justice Department to prosecute his friends violating well established statutory and case law.

I’ll tell you something else that hasn’t changed since Obama became president; economic demand for electrical power (EP) has stagnated, as is painfully evident in the chart below.  As EP is measured in kilowatts, an engineering unit of measurement, making it an excellent metric to gauge true economic activity.  Much superior to dollar based GDP data which is subject to changing methodologies in its calculation over the years, and prone to the inaccuracy of the inflation adjustments necessitated by the continual inflation of the money supply. When the economy is roaring along, Electric Power consumption increases for a variety of reasons: assembly lines operate for longer hours, more stores and offices are lit up, consuming power unlike darkened factories and commercial space.  Farmers consume more tractors, shovels and hoes and other supplies, all requiring electricity to manufacture. 

There’s justice to this 2008-15 decline in demand for electrical power; Obama did run for office on promises to punish electrical utilities and the coal industry.  Also his Marxist sympathies as noted in his book: Dreams from My Father (a noted Communist from Kenya) have not made the Federal bureaucracy supportive of free-market enterprise. 

I have no sympathy for our president, or his supporters about how demand for EP has flat-lined for the past seven years since he took office, something which didn’t even occur during the depressing 1930s.  One thing that hasn’t flat-lined since Obama became president has been growth of the national debt (chart below).  The Keynesians used to boast how growth in the national debt “stimulated economic growth”, as they did with their first three episodes of QE.  But as we see above, since August 2008 the rules have changed when it comes to “stimulating” the economy.

Below is a Bear’s Eye View (BEV) of EP’s 52Wk moving average (Red Plot in the EP chart above).  Since the late 1960s EP has developed significant seasonal factors for cooling in the summer and heating in the winter.  The 52Wk M/A smooths them out, and the BEV plot makes evident how the current decline in EP is unique in the history of electrical power consumption by the American economy.  During the Great Depression the gap from one new all-time high to the next was 277 weeks.  Our current gap has lasted for 371 weeks.  After seven years of “economic stimulation” by the authorities, Electric Power usage still shows no sign of moving on to new all-time highs.

Here’s EP BEV chart from 1969 to present.  The most interesting thing about this chart is EP’s connection to “monetary policy.”  The double-digit interest rates of the Volcker Fed resulted in a 4% collapse in EP during the early 1980s, the largest in four decades.  That done, interest rates began declining as the economy recovered with EP once again making new all-time highs.  But the implementation of ZIRP during the Bernanke Fed had an altogether different effect on EP: chronic anemia in the demand for electrical power.

Bernanke played his part in this long running economic malaise, but the implementation of ZIRP during the Bernanke Fed wasn’t the actual cause of our anemic growth in electric power usage.  The growing burden of consumptive debt on the economy is.  Looking back at the national debt in 1983 when EP saw a 4% decline in the chart above, we see that since 1983 it has increased by nearly 1400%!

Now let’s have a look at the growth in consumer debt since 1987 in the chart below.  The parasitic-credit creation in the housing market and the school loan program has been no less.  Without the discipline of a gold standard in which banks fear a predictable run on their gold for reasons of over extending consumer and commercial credit, the banking system has grown to become a parasite on the productive elements of the economy.

But that’s not how bankers, politicians, or most people see the banking system.  What’s not to like about an institution that’s willing to extend credit at attractive low rates during a time of financial crisis.  During the 2000-2002 tech wreck CNBC hosted many “experts” who identified the problem as one that could be solved if everyone was willing to shop until they dropped using their credit cards.  Here’s a quote from Robert McTeer, former President of the Dallas Federal Reserve Bank.

“My term for what happened to the economy as we were gliding in for the proverbial soft landing is that we hit an air pocket. Fortunately, we were flying high enough so that the sudden decline in growth didn't cause us to crash-land. If we all join hands and go buy a new SUV, everything will be all right. Preferably a Navigator.”

- Robert McTeer, President Dallas Federal Reserve Bank: Remarks before the Richardson, Texas, Chamber of Commerce, 02 Feb 2001

It’s no secret.  The “policy makers” are on the record that one of the prime objectives of their inflationary policy is to “stabilize” and “promote economic growth” in the economy.  Typically they point to the rising stock indexes as an indication of the success of these policies.  However, as is evident in the chart below, there is a growing gap between the growth seen in CinC (monetary inflation) and the valuation of the Dow Jones. 

Also note each subsequent bear market decline grew progressively deeper as this gap grew.  This was no coincidence. Inflating a bubble in housing of the entire United States created a vastly larger pool of financial-toxic waste than did inflating a bubble in just the stock market.  So it was not unexpected that the Dow Jones would experience more downward pressure following its 2007 peak than it did in 2000.  Logically then, the current bubble inflating the valuation of all financial assets, including now the bond market, should cause our current bear market to bottom far below the 54% decline seen in March 2009.  The failure of EP to make a new all-time high since August 2008 strongly suggests that all efforts to stimulate actual economic activity via monetary inflation have failed.  The consequences for this failure will be most severe. 

Mark J. Lundeen

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