SVET Markets Weekly Update (October 3, 2022)



Week 40 promises to be a busy one. From the number of newsworthy updates we can mention the following:

  • Monday: ISM Manufacturing PMI for September;
  • Tuesday: JOLTs Job Openings for August;
  • Wednesday: Balance of Trade for August;
  • Friday: Unemployment Rate for September.

Purchasing managers are considered to be good enough to foresee the future of domestic economy better than anyone else. However, it far from being supported by numbers.

The ISM Manufacturing reached its lowest point of ~30 three time in its history.

  • The first time it happened during the second term of the Harry Truman administration. This period is also called ‘1949 recession’ or ‘post-war recession’ in a literature for economists see its major causes in the WW2 war-machine slowing down as less tanks and gun-meats had been consumed by victorious govs.
  • The second time when ISM almost hit the 30 bar happened at January 1975 on the aftermath of the Franklin National Bank collapse. Although ISM is supposed to be the leading indicator, 47 years ago it marked the end of the 1973–1975 recession. Only a year after this, in January 1976, ISM rose back to 60+.
  • May 1980 marked a single time in the ISM history when it fell below 30. It was the pick of the so-called Volcker Recession. By April 1980 FED rate, pumped by ‘crazy Paul’, hit 17.5 percent. Accordingly, unemployment reached 7.8 percent and GDP was reduced by 2.2 percent.

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Side note:

Time and time again markets demonstrate their capacity to self-correct even after the prolonged periods of the drastic downfalls. Often it happens when macro indexes are at their lowest levels, predicting more gloom to come. For example in 1949, after 6 months of downsize, DJIA started to grow in a summer of that year, when ISM closed to ~30, going from under 160 to above 220 in one-and-a-halve year. As in 1949 and in 1975 ISM reaching 30 coincided with the markets bottom in 1980. Afterwards DJIA rose from ~760 to above ~1000 in less than a year.

Despite of those facts FED continues to disregard entrepreneurs ability to make things better much faster than anticipated. Govs monkeying with the economy has the very long and very gruesome history. Powell, who is firmly set to repeat the catastrophic mistakes of his predecessors, is absolutely immune to a common economic sense. He, as many other clueless bureaucrats put by politicians in charge of the economy before him, tries to force very complex and integrated social and economic systems, from which the contemporary world is made of, to work according to dusted academic theories.

Adding to this conundrum Powell proceeds with an abnormal speed, dictated by his political associates, and with the unusual even for FED absence of a good professional sense. Powell is a lawyer. He has never really had any practical business experience or even theoretical assertion with how the real economy works. Consequently, he orientates himself on several economic indicators, all of which have the long history of misrepresenting the future.

Moreover, as all other non elected bureaucrats with an insane power at his hand, Powell has the bad habit to close his ears to what experts and professionals on a ground are saying. He only listens to his closest political allies and to high ranked govs officials. As all other high positioned, rapidly dilapidating Babyboomers, Powell has created his own bubble, inside of which he intends to stay protecting himself from the necessity to adapt to the rapidly changing environment.

Consequently, we can be certain, that the real damage to the US economy inflicted by Powell, will far exceed our present expectations.

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Statistically, the current PMI level (52.8 in August of 2022, the same as in July) had been very rarely held without it plunging below 50 within the next six months. We are now at the very start of this process with purchasing managers still feeling themselves unrealistically positive about the economic prospects.

Most of them just follow the media-infected crowd (most forecasters expect only a slight PMI decrease in September — to 52.2 max) without trying to macro-analyze many factors at once. However, with all those political and economic tendencies gradually shifting to deep negatives and with Powell (together with all Babyboomers generation of so-called ‘leaders’) as arrogant and as incompetent as we have ever had, we can expect PMI (and all other macro indexes) going much further south.

One of the formal indicators which gives an ammunition to FED anti-economic-growth rhetoric is the state of US job market, which demonstrates the outstanding sturdiness despite all Powell efforts to crash it.

Yes, it has become the official FED policy — they want the employment rise to as far as 5 percent in order to peoples stop spending and start worrying about the future of their children instead. That is the contemporary governance system we all support by our complacency — a couple of old dudes running our lives according to their psychotic fantasies.

The number of job openings (JOLTs) in the US rose to 11.2 million in July of 2022 — the first increase after three months of declines. Jobs increased in transportation, warehousing, utilities, arts, entertainment, federal government (of course:)), but decreased in manufacturing (exactly what we need to cause more inflation:))

In the new century there have been three deep deeps for JOLTs: in July 2003 when a number of jobs fall below 3 million two years after the dotcom boom; in July 2009, when, after the mortgage market collapse, jobs openings were on the record low, almost reaching to 2 million (its record low in two decades); and on April 2020, when JOLTs stood on 4.7 million after stupid govs decided to cure all of us by the in-house incarceration.

Compare to more than 11 million vacancies we have now there is still a long way to go down — to less than 6 million jobs available in October 2024 (according to what the JOLTs graph superficial analysis predicts). Meanwhile, public experts foresee that it will decrease only to 10.65 ml in September.

One of the reasons the US economy sustains its long-term growth trajectory for so long is US producers exporting most of its costs, creating the large and growing trade deficit.

After the start of demilitarization epoch in 1990th, when state borders were opened for international entrepreneurs, they changed the face of the world economy from the claustrophobic, local manufacturing markets orientated, to the open one. This thirty+ years rush to the limited prosperity-of-the-fittest was largely based on new technologies, innovations and knowledge exchange.

Accordingly, the trade deficit rapidly increased from under 100 millions in the beginning of 90th to more than 20 billion at the end of that decade. During the next ten years (up to the start of the mortgage collapse in mid-2008, when importers sharply cut their oversees productions, reducing trade deficit to 30 billion) this deficit widen to more than 60 billion. The next decade-and-a-halve deficit reached under 100 bl. A record of 107 bln was registered in March 2022, when sudden energy price spike reflected on all US gas consumers after the start of Ukraine war.

In July 2022 the trade deficit narrowed to a 9-month low — of USD 70.7 billion. With that exports were up to a new all-time high of USD 259.3 billion (rise in exports of services offset a decline in goods shipments) as imports went down to USD 329.9 billion (a rise was registered in shipments of vehicles). The largest deficit — that with China — went down more than 10 percent to USD 33 billion. Prognosis put the August deficit at 68 bln, expecting a further decrease in imports volumes and prices despite a slow revival of trade with China.

The strong dollar policy pursued by FED might only exacerbate the trade deficit making US exports (goods and services) more costly for foreigners. However, this effect will be upset by reduced imports which is expected to shrink as the world economy stops to be open dividing into several enclaves run by local elites now getting into the full anti-globalist, defensive mode. So trade balance is expected to slowly decrease in the nearest years going back to 20–30 billion — its low average during preceding two decades.

The US unemployment rate graph is probably one of the most studied in the economic history. Together with the inflation rate it now attracts unmitigated attention of all mass medias and their readers. However, it is one of the most misleading ones.

In the modern, technologically enhanced economy the unemployment level is impossible to measure for the mere definition of ‘job’ has been changed dramatically in the past 20 years. It now includes almost all human occupations. Only secrete govs obsession with the absolute, totalitarian control, which shred itself in the cloak of the ‘academic respectability’, keeps that cumbersome and outdated indicator afloat as an ‘objective’ measurement of govs policies.

After the unemployment rate hit its absolute record level of 14.7 percent in April 2020 after the total enclosure was introduced the unemployment rate precipitately dropped to 3.5 within in less that 12 months — the unique episode in the modern economic history. The debilitating (for all our freedoms) fact that govs are now capable to switch economies on-off like a light-ball supports Powell in his assertions that he might soft-land the economy as easy as they shut it down. LOL :)

Meanwhile, the unemployment rate rose to 3.7 percent in August — the highest since February. The number of unemployed people increased to 6.014 million, while employment levels went up to 158.732 million. The labor force participation rate increased to a five-month high of 62.4 percent in August.

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