Government Stats Both Hide and Reveal Situation Fraught With Peril

Don't ask me how they come up with this stuff. Like GDP growth of 0.2%. Here we go again with the usual headline seasonally adjusted (SA) nonsense. They take a couple dozen fictional seasonally adjusted components for quarterly change, from an admittedly limited sample that they warn will be updated and revised, and then they crunch them all together with an arcane formula and annualize both the sampling error and component by component seasonal adjustment errors. In other words they multiply the sum of the component errors times 4.

It just makes no sense. The WSJ has graphic that shows prima facie that the quarterly numbers are all over the place while the year to year change has been reasonably steady, showing a clear trend with minor oscillation along the way over the past 5 years.


Source: U.S. GDP Expands at 0.2% Pace in First Quarter - WSJ

Real time Federal withholding tax collections suggest that the actual growth in the economy was greater than this annualized SA GDP number would indicate. The year to year gain in average daily withholding taxes collected in Q1 was +4.6% on a nominal basis. Adjusting for wage and salary inflation that equates with a real gain of around 2.5%-3%. That supports the year to year growth of GDP of 3%. That annual growth rate was the fastest since +3.1% in Q4 of 2013, and the second fastest since 2011. There's nothing in the data to suggest a real slowdown in the first quarter as the headlines suggest.

Real GDP and Federal Withholding Taxes - Click to enlarge

Real GDP and Federal Withholding Taxes - Click to enlarge

Lest you think that the GDP being on trend is somehow bullish, allow me to disabuse you of that notion. First, these numbers in no way justify the bubble in stocks. That's purely a manifestation of central bank money printing. Stock prices have little to do with economic growth. They've been rising by orders of magnitude faster than the economy has grown. Conomists euphemize that as "appreciation," or the more arcane "multiple expansion," and justify it by the fact that competing fixed income yields are so low. That ignores the fact that fixed income is also in a central bank driven mania.

The concept that asset inflation isn't inflation or is justified by low interest rates is insane. The high prices of stocks and bonds are nothing more than the inflation caused by money printing. Inflation hasn't infected consumer prices because consumers have no more money with which to consume than they had 10 years ago. The printed money has not trickled down. It has pooled at the top where it starts, with the dealers and speculators who funnel it into financial markets, not into the productive parts of the economy.

To illustrate, since the March 2009 bottom the Fed's balance sheet expanded by 456%. The S&P 500 rose by 165%, while GDP increased by only about 13%. Real average hourly earnings of production and nonsupervisory workers have only risen by a total of 1% over that time. The middle class has been shut out from any gain whatsoever. It is arguable whether ZIRP and QE have boosted real GDP growth. There obviously isn't any proportional correlation. The economy might have done just as well or even better had not these extreme policies induced such extreme distortions, like massive diversion of capital into financial engineering schemes.

Fed Assets, Stock Prices, GDP and Wages- Click to enlarge

Fed Assets, Stock Prices, GDP and Wages- Click to enlarge

The asset bubbles which form as a result of these processes periodically collapse, as the oil price bubble recently did, and that hammers consumption goods inflation. In actuality, ZIRP and QE have been deflationary for consumption goods as these waves of liquidation sweep through the commodities. It's likely that stock and bond prices will come back to earth as well, and that trillions in fictitious capital will be vaporized. Timing remains the issue.

The banksters and assorted other plutocrats who own the financial system and political institutions have done really well. As they have gradually bought the political process, they've been able to install their hand picked, inbred, home grown flunkies in government and at the world's central banks to do their bidding. The bosses have also been careful to ensure that the wealth doesn't spread.

These forces are bad not just the financial markets, which will probably correct violently and remorselessly at some point; they are bad for society at large as well. If these trends continue, Baltimore will be just the tip of the iceberg.

Markets top out when the data is strong, not weak, because that's when central banks pull the plug. Weak economic data is bullish because it encourages the central banks to print, and printing in the modern world has proven to inflate asset prices. Strong data is bearish because that's what makes central bankers pull the punchbowl, something that they do only when forced to by the fear that allowing bubbles to inflate even more is worse than pricking them now.

My bet here would be that the Fed is well aware that the headline GDP number here is transitory, and that the economy is trundling along the same track it has been on for the past several years. That will keep things on track for incremental tightening to begin this year especially if stock prices break out to new highs in the weeks ahead.

The pooling of the liquidity they've created at the top of the structure has created enormous stresses, not just on the middle class, but on the foundation of the financial system. It will pressure the central bankers to begin to begin to siphon off some of this liquidity. Given the degree and scope of the asset bubble inflation and attendant maladjustments they have created, this process will be fraught with peril.

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

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