The Feds are about to run out of money.
No, we’re not talking about a government shutdown – that was avoided when yet another continuing resolution was passed to keep it operating through December. After that we have no idea what will happen. What we do know is that the Federal Highway Trust Fund is set to expire on October 29 unless a new bill is passed, which hasn’t been done yet.
Unlike the larger federal budget the attention this is getting is scant at best, so the possibility that it will be lost in the shuffle is pretty high. The implications are rather vast because federal funding is what keeps highway construction moving along. Without it, everything might grind to a halt as early as November.
Last Friday the monthly Bureau of Labor Statistics (BLS) Employment Report came out, and it was lousy. Instead of an expected gain of 200k jobs it came in at 142k – a miss of 58k or 29%. The reaction in the financial press was swift and conclusive – there is no way the Fed can raise interest rates given this weakness. But there’s a bigger problem with the report than that.
It honestly can’t be believed.
It’s fashionable to say that the BLS cooks these reports to get the results they want and that no one should believe the government reports in general. That’s a general paranoid delusion that is utterly unreasonable all around. But the reports can’t be taken as pure gospel when they don’t come in exactly where they should be because there is no way they can possibly be as accurate as is demanded.
Because of a death in the family, I have to run a repeat. This is from 2012, when things looked a lot more bleak than they do now. I’m running it without any updates because that 2012 perspective is interesting. Things are better, but not a ton better. Good enough? Not yet, but will it be?
Imagine you are in a space ship hurtling toward a black hole. You might try to turn the ship around and fire the engines full force. The problem is that the blast from your engines only adds mass to the black hole, making its gravitational pull even harder. What do you do? Fire the engines harder to try to hit escape velocity?
That may sound like a silly analogy for our ecnonomy, and it is definitely far from complete. But as the brilliant John Mauldin discusses in his “Thoughts From the Frontline”, the black hole of debt is posing some very unusual economic problems. This “singularity” is, simply put, a place where the normal equations that describe the universe of economics no longer apply. What can we do when everything we know no longer works?
Tax reform is on the minds of many Republican candidates, and that’s a good thing. Donald Trump revealed a plan, suggesting he may be a serious candidate after all. This announcement came as his poll numbers were slipping, so we may have a hint what voters think about actual policies. Jeb Bush released his plan earlier this month with the distinction of being called “weird”.
The point is that we are talking about taxes and serious tax reform, which is good. No one should expect one plan to suddenly spring forward and cut through the elaborate mess we have. Then again, once the knife is out, you could carve a better tax code out of a banana. But what really is needed? What is “simplification” or “reform”? Let’s start at the beginning.
Before we can call the economy “good”, we have to be in a situation where good news is taken as unvarnished good news. And that seems to have finally happened.
Janet Yellen outlined in great detail exactly why interest rates not only have to start rising by the end of the year, but why they have to go up to around 2% before the Fed is done. The market responded positively, getting another shot of good news this morning. Has the monkey of cheap money finally been scraped off their backs?
17 September is the date. We find out then, at the end of the Federal Reserve Open Market Committee (FOMC) meeting, whether or not the benchmark Fed Funds Rate is raised. Nearly everyone agrees that it’s likely to happen, either in September or in December. But trillions of dollars will be riding on the moment when the press release is issued on the Fed’s website telling people what exactly is happening.
Except for one thing – we won’t know exactly what will happen because the stock and bond markets may react in odd ways that are not easily predicted. The same is true for currency traders.
What it all comes down to is whether or not the FOMC thinks it is a good time to start or not. The arguments for and against are fairly easily summarized, but to Barataria the case is strong for a rise – especially if the net medium-term effect is that consumer rates go down.
Monday is Labor Day. This is a critical day for labor in America because its success is about to define our economic future, at least for the next few months. By the time you read this, you may know how many jobs were officially created in August. If it was 220k or more a September increase in the Fed Funds rate is likely. If it was under 180k there probably will not be a rate increase.
The ADP Employment Report, which is less prone to noise in the first place, came in with a middling 190k gain in jobs.
What’s great about this is that Labor’s success in the last month could kill the stock market, pitting labor directly against investment. There’s nothing productive about that arrangement, but it highlights how strange the world has been. This oddly critical holiday is a good time to recap some of the topics that Barataria has gone over the last few months.