The Global Social Upheaval Is Just Beginning

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David Brooks of the New York Times has apparently seen enough. He is disgusted by Donald Trump's almost assured nomination, that much he has made plain. But that's not the resignation that he delivered in a column last week. Misunderstanding and underestimating the level and intensity of unrest out in the rest of this vast country away from the narrow DC-NYC corridor, and this frustration and, yes, anger counts for Sanders' continued thorn in Hillary Clinton's side, Brooks claims something like coming to terms with all this. In other words, after spending so much time trying to delegitimize populism's near revolt, he finally admits they may have had a point all along.

"This declinism intertwines with other horrible social statistics. The suicide rate has surged to a 30-year high - a sure sign of rampant social isolation. A record number of Americans believe the American dream is out of reach. And for millennials, social trust is at historic lows."

Who can blame the popular disgust? The elites in this nation still try to use the same old clichés as if the words themselves are the object and potency in this land of opportunity for all; and if any group or faction doesn't agree, they must be racist, xenophobic or guilty of any other modern Progressive sin. Trump's supporters have been dismissed as angry white males jealous of the rise of especially Hispanics through unchecked immigration. These are the narratives that have kept "elites" like David Brooks in the dark.

The truth of the matter is far simpler and startlingly easy to find. Angry white males are angry not because other groups have risen at their expense but rather because no other group has risen - save one. The money sector of the economy, the center of every bailout and crony handout, is all that is left of this land of opportunity. As Brooks writes later in his column, "We'll probably need a new national story." We are no longer possible for the ancient American dream of rags-to-riches.

And that is pure, unadulterated garbage.

It starts with the primary economic narrative. Janet Yellen claims the economy is so near to full employment that her committee must actively consider removing monetary "accommodation." They have, in fact, raised the federal funds rate once already. With US businesses supposedly hiring at a pace not seen in decades, Mr. Brook's confusion over America's dissatisfaction almost seems warranted; why would the electorate be so angry when America is booming? The left side sees the problem as all that purported booming being hoarded by the 1%, staking out even greater inequality; the Republican side continues to maintain "stimulus" worked and even that it worked well. Therefore, to them, the problem is Americans.

There has been of late, however, some noticeable softening economic views, but only insofar as this sudden and "unexpected" weakness will only be temporary (can no longer claim "transitory" as that was last year's). This economic deviation from the narrative is not due to any domestic problem, they believe, but more so "the dollar" and overseas turmoil impacting US exports. Bernanke's distinguished courage has made all the difference so that the US economy is the steady rock with which to weather the foreign financial storm (or at least that the US is the "cleanest dirty shirt").

The Commerce Department this week released its monthly US trade figures, and the news was particularly grim. Exports fell 6.2% year-over-year in March after declining only 3.8% in February, suggesting that February's 29th day was actually all there was of improvement over February 2015 (which was only 28 days long). All that, however, wasn't actually the bad news. Imports declined 9.3%, and in seasonally-adjusted terms dropped to just $173.5 billion. Like exports, the seasonally-adjusted volume in March 2016 was the lowest since December 2010.

This continued decline in 2016 follows a year in which overall exports fell 4.4%, going from $2.34 trillion in calendar year 2014 to just $2.24 trillion last year. That isn't where Trump (and Sanders) figures, though, as it only explains the intensity rising into this political crescendo. The anger developed and smoldered in direct relation to the longer term that is, again, easily observed in these numbers. Total imports at the prior peak in calendar year 2008 were $2.1 trillion. In other words, despite the passage of seven years and constant policy "accommodation", total imports rose not even 7% total (not per year).

That tells us a great deal about the overseas problems as foreign export nations have been so utterly confused by the FOMC and mainstream commentary this entire "recovery." Economists keep talking about the strength of the American economy and its consumer fed by low interest rates and QE-driven financialism, while China and the rest wonder where all that consumerism can be hiding. It isn't hitting their books. Our trade partners see 7% in seven years and know straight away the unemployment rate is a lie, and a big one.

That is because they were built up on a vastly different America. In the seven years prior to 2008, total US imports grew by 84.4% (and if anyone might be worried that the dot-com recession is skewing that result, comparing imports in 2008 to imports at the prior peak in 2000 shows the same yawning asymmetry, +73%). The Chinese, in particular, for their own economy but also as the basic transmission to the rest of the global economy (the pivot in the global supply chain), had come to expect 20-30% growth in imports to the United States up until 2008; they built their entire economic "miracle" on it. Total imports from China to the United States (from the US perspective in dollars) averaged 5.7% in the five years since 2010, with just 3.3% growth in 2015. From 2002 through 2007, the average was 21%.

It has only gotten worse of late, with US imports from the Middle Kingdom in March 2016 dropping 27.4% from March 2015. There are calendar effects on both sides of the Pacific to consider, but even factoring a nearly 16% gain in February total imports from China contracted by almost 7% in Q1. To go from expecting a return to 20+% to -7% is not a difference of degree it is a paradigm shift.

This drastic alteration is not solely a trade issue. If you plot US factory orders against total US imports, as I have done, you find an identical trajectory and pattern that eliminates all other considerations. This pattern is unlike anything seen before and since it occurs in two distinct data sets it eliminates the possibility of idiosyncrasy. Like US imports, we see the same lack of "recovery" that has only spun into now sustained contraction.

Total domestic factory orders fell 6.6% in calendar year 2015 from the prior year. At only $5.66 trillion (a number that obliterates the obvious obfuscation that manufacturing is unimportant or "just 12%" of GDP) in 2015, that leaves the level of production orders barely more than the $5.48 trillion registered in 2008 (less than 4% higher). By contrast, between 2001 and 2008 factory orders advanced 41% (or 31% if you begin at 2000).

The common theme between US import levels and domestic factory production is US consumers. Both imported and domestically-produced goods are intended for the same general market. Though they are competition, they both tell the same story and its one that David Brooks (or Janet Yellen) doesn't seem to grasp. There is something very, very wrong in the US economy and it isn't racism or xenophobia that is propelling populism. The rest of the world knows it because they are suffering the same for it.

The elite prescription for all this anger is to convince the angry that immigrants are a further economic boom and that white males should undertake more schooling. If immigrants do the jobs that Americans don't want and the current booming labor market is leaving behind the uneducated, encouraging more to sign up for student debt while offering yet more nebulous, nonspecific job training programs might actually seem a sensible political response. From the perspective of the economy as it is, the one that America itself has figured out, it is a direct slap in the face. They well know that these "solutions" are not that at all, because the issue isn't jobs that Americans won't do, it is that there are no jobs, period.

As I wrote last week:

"Like the Japanese Ministry of Health, Labour and Welfare, the US Bureau of Labor Statistics keeps track of total hours worked in the US economy. The change in labor utilization in the aggregate, in direct contrast to what the unemployment rate suggests, is so severe and obvious that the data series could appropriately be retitled as the US Index of Screwing Over American Workers."

This week, the BLS updated the index to include March 2016 (while making minor revisions to last quarter). With another quarter in the books, the index rose to 111.767. That means the total gain in total hours since the second quarter of 2000 is now 2.31%, adding upon the 1.94% growth through Q4 2015. Despite a 19% increase in the total potential labor pool (civilian non-institutional population), actual labor utilization has barely budged above a level first reached just about sixteen years ago! Thus, the Fed declares almost "full employment" today even though there are still more than 45 million Americans receiving SNAP assistance compared to the 17 million that did at "full employment" in 2000. They may occupy the same academic planet, but these are very different worlds.

From the perspective of the unemployment rate, the trade and factory figures make absolutely no sense. How can Americans have become so stingy on spending when the labor market has so roared to life as to awe every economist? If you instead hear what Americans are saying about the actual job market, the lack of spending makes perfect sense. The fact that none other than the BLS itself provides alternate data that confirm this view is only that much more criminal in its elite denial. It is perhaps the perfect encapsulation of this upside down age that if you wanted to know anything of use about the US economy starting in 2014 (or 2012, for that matter) you would have done far, far better listening to communist China than the bright beacons of "freedom" and "free markets" at the Federal Reserve. The comfortable academics in DC can survive easily on whatever bias (trend-cycle) the BLS can cook up for the major payroll numbers, but the communist economy lives and dies on actual trade flow. China's disruption is our depression.

The dreariness of this economic landscape entirely devoid of life, vibrancy, and opportunity bleeds directly into the social disorder that so troubles Mr. Brooks now. Can anyone rightfully blame Americans for what he calls "declinism" given the sets of numbers above? This is not some minor deviation, a typical recession that temporarily depresses activity in only a small window. We are talking about decades here, an economic disruption so lengthy that it is almost surprising it has taken this long to lead to even this relatively calm level of social disorder and political rejection. It is a true and utterly disgusting testament to the hold of mainstream economics, that for so long the striking impoverishment of America would be called and accepted as the Great "Moderation."

David Brooks does deserve some credit, however, and even perhaps applause. His belated response is to announce that he finally "hears" the populism and seems genuinely interested in figuring it out. The response of the economics "profession" is something altogether different. We know that already by their behavior being instituted globally in one continuous line of "stimulus" after "stimulus" after "stimulus." While they have so far escaped judgment on the direct line of failure after failure after failure, there are at least some standards for their conduct - standards they themselves created.

The Federal Reserve has declared monetary policy will be forthright enough so that inflation in the United States will be 2%. We can argue the wisdom of such a target (and there is none in it) but that is beside the point. For their own reasons, they have staked the supposedly vast reputation and power of their own hands on sustaining, over time, that level of inflation - for which they further define, dating back to 2000, as the PCE deflator.

The last time that measure of consumer inflation registered 2% in the US was for April 2012. Through the latest figures for March 2016, the leaves a span of 47 months, just shy of four years, where the Fed has claimed that it is enforcing its inflation target but has not. You can understand temporary deviations, as no target of any financial or economic indication can ever be so steady. But four years?

The FOMC has not reacted with indifference to this, of course. During that time, the FOMC added two additional QE programs (I number QE3 as both QE3 and QE4, appropriately, because they were offered at different times and in different markets with, in discrete perspective, different agendas) that expanded its balance sheet in both MBS and UST's by an astounding $1.7 trillion combined. If you predicted in 2006 that the central bank in the United States would be buying $1.7 trillion in bonds and mortgage paper after buying about $600 billion only a few years before that you would have been laughed off as crazy, as if you were suggesting the historical echo of Weimar Germany such would be the "money printing."

In October 2012, just as the first MBS transactions were stapled into the TBA market and dollar rolls there, the PCE deflator almost touched the 2% target, registering a seemingly hopeful 1.94%. It has been all downhill since, but nobody of authority or reach has reassessed their views of the US central bank, its mandates or especially whether it might possess enough basic comprehension to even do what it claims it can. They cannot meet their own inflation target, and haven't in a length of time that is threatening to be labeled in partial decades already. On the employment mandate they have "conveyed" one view of it that cannot be found anywhere else, replaced instead by growing social tension and political disorder.

The mainstream disinterest in all this, David Brooks notwithstanding, is remarkable - and telling. In late March, Dr. Paul Krugman met with Japanese Prime Minister Shinzo Abe in a policy setting. Japan is, of course, the pre-eminent domain of failed central banking. There has been "stimulus" of every sort imaginable across now two generations and instead of learning to not be Japan economists all over the world are now seeing only Japan as our future. Maybe finally realizing what that might mean as a real possibility, Dr. Krugman was perhaps more open than he has been for a long, long time (relatively speaking, I don't want to make too much of it). Absent were the confident even arrogant calculations of fiscal "boosts" and the exact dollar amount needed in light of calculated hysteresis hurdles. He made four points of emphasis, three of which I'll quote here:

"The first is that we are now in the world of pervasive economic weakness. In many ways, we are all Japan now. This complicates policy for everyone including Japan. The second is that the linkages among major economies are strong. They are stronger than much conventional economic discussion suggests, largely I would argue because of capital flows. This is very important to speak about. The third, which may be of particular concern here is, we are seeing the difficulty in achieving goals through even very bold and unconventional monetary policy."

If the world does become Japan, it will be because of those further two points. The third isn't a mystery, as it is contradicted by the second. They both share the common thread of the eurodollar system. For Krugman to even suggest "capital flows", as wrong as that is on a technical level, is a very big deal. Orthodox economics is perfectly clear about what it views as money and monetary reach; the world's nations, they believe, run under a closed system with very little monetary spillage between. Further, according to orthodoxy, each system's central bank (or Treasury, Finance Ministry, etc.) determines the main money "supply" or general conditions. The eurodollar is the exact opposite of this dogmatic view.

In May 1970, respected British commentator and author Paul Einzig wrote in Euromoney Magazine (I am eternally grateful to Izabella Kaminska of FTAlphaville for undertaking the effort of traditional, actual research in a library to unearth this and other important contemporary commentary) a heavy and devastating critique of the aftermath of the Radcliffe Report that was commissioned in 1957 in the UK and issued in 1959 with the task "to inquire into the working of the monetary and credit system, and to make recommendations." He wrote of the "surprising" exclusion of any mention of the eurodollar in that report:

"In extenuation of this major omission it must be recognized that during the late fifties the Eurodollar market was of relatively small importance and was widely regarded as a passing phenomenon that had arisen through the coincidence of fortuitous temporary circumstances...But while there could be an excuse for ignoring this institution in 1959, there could not possibly be an excuse for underrating it after the experience of 1969. It is my contention that, together with the other major changes that occurred between 1959 and 1969, it calls for another inquiry into the working of the monetary system. And since Eurodollars are essentially international, the inquiry must be conducted on an international scale, with the participation of all major countries concerned."

This was during the first years of the Great Inflation that would destroy the last remnants of the old monetary order (which in many ways was the plan). In the forty-six years since that was written, however, nobody in position of international or central bank authority took his advice. The eurodollar was passed off as some "investment choice" that was supposedly still within the comfortable boundaries of each closed system because that is what economists and central bankers wanted to believe. The eurodollar was a fatal threat to orthodox economics and its holy pursuit of econometrics and (pseudo) precision just as it was trying to kick off the age of central bank and monetary control.

The devastating economy of the 21st century, however, is finally forcing economists to at least admit the smallest possibility of what should have been core philosophy dating back to the 1960's, if not the fifties. All the signs are there: "money printing" that not only doesn't budge inflation but is completely overwhelmed by in the other direction; global commodity collapse; global trade retreating and doing so at only a quickening pace; deflationary economic trends that go on year after year and only get worse, spilling quite far into rising social chaos. It all adds up to one thing - declining "money" supply. It is so obvious in the very way that the orthodox textbook describes it; there is every reason economists should be all over this except for the fact orthodox economic theory didn't and doesn't want to be.

Because that self-interested, narrow monetary and economic view survives to this day Janet Yellen forces herself to believe that $1.7 trillion in balance sheet expansion is somehow "stimulus" and then that the 5% unemployment rate is the actual operative condition of the closed US economy. From the eurodollar perspective, the one that sees 2008 properly not as a hard and deeper business cycle but as a paradigm shift in global money, Trump, Sanders, and global social upheaval were all expected even if their exact names and places were blanked out at the start. Unfortunately, what is further expected now is that this might only be the beginning. Japan, after all, looms large. "Declinism" isn't destiny it is a choice, one that was made fifty years ago.

Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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