The Trump Recession

Bulls finally got confirmation of a double rate cut for September. Now they will find out if it's what they really wanted after all.

As I chronicled on Twitter, This was the worst week of my life, however from a stock market perspective, the market went nowhere from the pre-Labor Day (PCE) inflation news to this week's post-Labor Day collapsed jobs report, stocks went nowhere for the week. But what bulls got in the process is confirmation that the Fed is behind the curve on cutting interest rates.

One point I would add about Friday's disastrous jobs report is that a month ago, the jobs report was 73k which was worse than expected. After that report, Trump had a tantrum and claimed that the data was bogus. He fired the BLS director on the spot and replaced her with his own stooge. This month (August) the data came in far WORSE than last month. And so what did we hear? Nada. Nothing from Trump about HIS disastrous number and crickets from Trump ass kissers who enable this incoherent policy.

Economist Mark Zandi is calling it only a "jobs recession" so far, but suffice to say that when the Federal government is borrowing 6% of GDP annually, the true definition of recession is functionally meaningless. There were no recessions since WWII that were -6% of GDP on an annualized basis.

What this means more importantly, is that the economy and markets are rolling over into a deflationary paradigm, one in which stocks are hyper-overvalued and Treasury bonds are hyper under-valued. Unfortunately investors are in no way positioned for this paradigm shift.

This chart shows the stock / bond ratio at this juncture:

If the economy has entered a full blown recession starting now then it would be similar to 2007 when stocks peaked in November 2007 which was offically the start of recession, although no one knew it at the time. Again, the definition of recession is now in question but I am specfically referring to a combination of consumer pullback, jobs market implosion and mass deleveraging.

What ends economic cycles is holding interest rates too high for too long until mass deleveraging occurs. And as we know this level of interest rates has essentially "frozen" the housing market with sellers holding out for high prices and buyers low balling prices. Historically that freeze in home sales resolves to the downside.

Over the past month, the copper / gold ratio which is a proxy for global economic activity has collapsed to a 50 year low while stocks have been hitting new all time highs. Again, all predicated on the universal belief that central banks can both create bubbles AND prevent them from exploding.

Then the question becomes should we be concerned about inflation taking off if the Fed cuts rates? I think the inflation numbers are on auto-pilot for the next several months due to the trade war impacts. But after this one time trade war inflation blip I think inflation will fall off a cliff.

Contrary to popular belief we are not in a "Keynesian" economic paradigm. Despite Trump's multitude of commandments, we remain very much mired in a global "Supply Side" paradigm which is inherently deflationary due to immigration and outsourcing. Now we can add Artificial Intelligence to the list of massively deflationary forces.