.... is reversing.  Finally.

In fact it can be argued that it was precisely the day in September when The Fed announced its "50 point cut" that marked the turn.  The astonishing part of that is the fact that while the 13 week bill had been on a general downward yield trend since July the 10 year in fact was the primary turn at the announcement.

No matter; it is basically flat right now, coming into the next announcement this week.

There is, of course, this little thing happening tomorrow.

But the inflationary impulse that was put into the system with that "cut" befell the general problem with this sort of game: You can control system liquidity, but your ability to control where it goes is much more-limited.  Specifically what hasn't happened is material improvement in home affordability, and while the market has gone up a bit its more like gasping for air as it flails in the water at present and worse, there's a non-confirmation in the Nasdaq which topped in early July -- and the Russell hasn't made new highs either.

Nobody, of course, ever pays attention to that sort of thing, but you certainly should.  Thin markets, where leadership is not followed on, are dangerous.  Add on to that higher and higher margin debt levels and you've got a warning.

Now consider that rate environments tend to be multi-decade -- 20 or 30 year, sometimes as much as 50 year -- cycles.  They typically are not only a few years in duration and in fact it certainly would appear that the last one, from 1980 to 2020, has reversed.

In a generally-declining rate environment financing becomes progressively easier and rolling over debt becomes cheaper with time.  This in turn encourages increasing the leverage in your business and the system as a whole.  But when that reverses, and it certainly appears it has, then debt becomes more expensive with time and in many cases rolling over debt is not just more expensive -- it can't be afforded at all.

The implied difference in return from business between being able to take a 5% interest rate for $1 million (costing you $50,000 a year) and roll it over for 3% (costing you $30,000 a year), thereby adding $20,000 to your net and the reverse where that same rollover now subtracts $20,000 from your net is profound and the more leverage you have on the worse the impact.

Four decades of people figuring out what is a "reasonable" forward P/E when the refinancing is always to the benefit of cash flow and then when that trend reverses suddenly the refinancing is equally negative to cash flow is bound to have an impact on what someone thinks they should pay on a forward basis in the markets -- whether the thing being bought is stock or anything else, like, for instance, a house.

In the time period from 2010ish to around 2018 it was obvious the cycle was ending.  Again, these are long-term -- multi-decade -- cycles.  But has the corporate world responded by taking down their debt levels?

That's a "no."

So what is inevitably going to happen when that huge pile of debt has to roll over during the next few years when it comes to corporate profitability -- or even survivability?

You could forgive people for not paying much attention to this -- after all how many professionals do you know who were in the markets in any way in 1980, right around the time the last cycle turned?  I was just coming of age at that time; I had no knowledge of the impact of the former cycle when it came to borrowing and taking on leverage (foolish during that period, and if you tried it you usually got bankrupted) yet essentially everyone in the business world today was not around for enough of the former cycle to understand it because you'd have to be well into your retirement years to have experienced it.

Who is in the game and old enough to have had a decent amount of experience with the previous cycle?

Warren Buffett -- and he's sitting on over $300 billion in cash right now, having been quietly selling down Berkshire's portfolio.  To put a not-so-fine line on it roughly a third of Berkshire is sitting in cash, a record, and if this rate pattern is anything like those in history generally higher rates are in the forecast for the next three decades, not the next couple of years.

(back)

Its the semi-annual ritual of course -- Spring forward, fall back.

Who remembers when we didn't -- we just stayed on DST, ostensibly for energy consumption purposes.

I'm of mixed view on the entire "time zone" thing.  It doesn't, of course, change anything in terms of your circadian rhythm unless you always fight against it -- that is, you don't go to sleep when its dark and don't wake up when it isn't, generally.  After all if you're not a slave to the clock why do you care what it reads?  Ah, but most of us are, right?  School, work, etc.  Yeah that.

Plenty of people say "well pick one and stick on it" but the argument really isn't so much about that for one simple reason -- the closer you are to a pole, so for us the further you are north -- the more-extreme the shift in daylight .vs. night is with the seasons.  In Florida isn't that extreme at all; now go up to Marquette in MI in the summer and talk with me about it.  Its rather interesting in the summer to be at a campsite up north and there's still daylight beyond 10:00 PM.  Yeah, its twilight, but it not dark out -- official sunset just happened about a half-hour ago!

On the other hand try that stunt in the middle of December when sunset is at 5:00 and you won't see the giant flaming ball come over the horizon until 8:30 tomorrow!

If you wonder why ancient people feared the Sun might disappear entirely as they were freezing their butts off..... well that would be why.

Where I live is, from my point of view, the "right" compromise for me.  Everyone's different of course; there are seasons here but generally-speaking the stupid-cold (and attendant snow) if it happens in a given year is short and the snow amount rational.  I've lived where it snowed nearly every night from November until mid-March and that's a hard pass for me today.  Didn't really like it then, like it much less now.  On the other hand flat, hot and stupidly-humid has its bad sides too.  Florida prior to the widespread availability of A/C was a "very nice in February; not so much in July" type of place.

"Time zones" as we know them were introduced by the railroads; consider how difficult it is to publish a time when a train will get to your town (and when it will leave) when every town has a sundial and its "noon" when the sun is at the highest point in the sky for that day no matter where you are.  Exactly 12 hours later it's midnight, again no matter where you are.

That works out just fine -- and in fact is nearly ideal -- for towns where nobody can reasonably get between more than two of them in a given day.  You generally, absent technology, don't want to ride a horse at night both for natural calamity risk and of course predation (of you or the horse.)  Then here come railroads and suddenly knowing that the train travels at 40 or 50mph and the towns are 100 miles apart means that if every town has its own local time figuring out exactly when it gets there and when it departs becomes far more difficult than simply adding 2 hours to whatever time it is where you started.

So America was divvied up into four time zones (at the time); Eastern, Central, Mountain and Pacific -- which roughly corresponded to the the actual shifts between the centers.  Roughly is the correct word but "close enough" works better for transportation when you now have a fixed offset within a geographic area and you know where the lines of those shifts are.

What comes with transportation?  Wildly expanded commerce, of course, which we all really do like to have.

The amusing part of "everyone has tech on their person" is that we could now go back to every town being their own local time, and if we did we could compute transit differences too, since its simply a Lat/Long position and computation -- and we all seem to have that in our pocket at any point.  It was a serious PITA then -- today, it would be reasonable.

Something to think about on "Fall Back Day."

Uhhhhhh....

Total nonfarm payroll employment was essentially unchanged in October (+12,000), following an average monthly gain of 194,000 over the prior 12 months. In October, employment continued to trend up in health care and government. Temporary help services lost jobs. Employment declined in manufacturing due to strike activity. (See table B-1.)

Well now that is a miss.

But this is not-so-good:

Health care added 52,000 jobs in October, in line with the average monthly gain of 58,000 over the prior 12 months. Over the month, employment rose in ambulatory health care services (+36,000) and nursing and residential care facilities (+9,000).

That's close to a double from the averages over quite some time, but its the "new normal" and yet our health care is, when you look at objective metrics, both ridiculously more-expensive and not as effective.  So this says that cost has gone up but output, measured by both quality and quantity of life per-person, hasn't.  This is just about math with no adjustment for how someone feels (which does matter, but in economic terms... not so much.)

Within professional and business services, employment in temporary help services declined by 49,000 in October. Temporary help services employment has decreased by 577,000 since reaching a peak in March 2022.

"Layoffs" start here.  There is no severance required.  When companies find themselves with what they perceive as "too much" labor the first people who get cut are temporary workers.  Here we go.

I've been tracking for 20+ years the 12 month adjusted employment number (for working-age population) and it has been in the dumps; not having a positive month since last November.  The particularly-troubling shift in that number has stubbornly refused to show up in the headline or other metrics, including employment/population ratio or weekly paychecks -- until now.

The market's immediate reaction was not to collapse; the best read on that is futures players think The Fed will add more gasoline to the liquidity fire.  We'll see on that; I have maintained their original 50bips was a large policy mistake, still believe it was, and that inflation is coming roaring back in the early part of next year no matter who wins Tuesday.  The bigger question here, particularly with the revisions in this report (August, specifically, was revised down from +159 to +78, so by half) leads one to ask lots of questions; sampling error, of course, is always real but when you miss by 50% and all the misses are in one direction it's hard to believe that's the explanation.

This time, however, all the internal data sets -- weekly checks .vs. hourly rate, employment rates among all four educational attainment groups and more tracked the headline number, so I see nothing in this specific report that flags as being wrong, whether from sampling error or otherwise.

IMHO something wicked this way comes, and softening employment into an inflationary spike in another 2-3 months is exactly the sort of 1970s outcome that occurred from what, from my analysis, looks like the same policy error that was made then.

Let's do the MTS, since its now out for the entire fiscal year.

First, on gross spending: Federal total spending was $6,751,552 million, a 10.6% increase from last year.  Those who claim that "spending has been held to the previous level" are lying; the previous year was $6,134,526.  It not only was higher it skyrocketed and this is a direct 10.6% increase that either comes from inflation or taxes.

So how about taxes?

Well, this year they totaled $4,918,736 million, a 10.8% increase from last year.  So guess what -- you were taxed ridiculously more too, and thus yeah, it came straight out of your pocket.

Surprised?  Guess who sets the amount of every single tax?  Congress.  Your congressperson, to be specific, and your two Senators.  All of them decided and executed on screwing you blind to the tune of a 10.8% increase.  Now some got more of it and some less, but that's the number across everyone.

Incidentally taxes assessed on "corporations" are actually paid by the customers, and that's you so spare me the "fair share" nonsense as the larger and richer the corporation (e.g. WalMart) the more-likely it came straight out of your wallet.

The total deficit (that is, spending minus revenue) was $1,833,816 million, an increase of about 7.5% from last year.  Note that this is directly inflationary; every dollar the government spends must either be borrowed or taxed and the rate of change from last year to this year was about 7.5%.  Thus anyone trying to claim that "inflation was 2%" is full of it; the government is in fact deliberately imposing a roughly 7.5% inflation rate on you and again Congress is the source of every single dollar of it and thus personally and individually responsible.

Politicians love to claim that Social Security is "bankrupting" things or will be "protected" at all costs, especially when in a political campaign.  But in point of fact FICA, the tax in question, though it has two parts if you look at it carefully enough funds both Social Security and CMS -- Medicare and Medicaid.  Medicaid is not funded at all technically but is in the same department and thus it is only fair to count it as part of that which is not paid for since that too is a voluntary matter on the part of Congress.

The MTS does not make breaking these out part of its remit due to the split (on/off budget) nature but the data is trivially dissected, so let's do that.

The total Social Insurance and Retirement receipts less unemployment and "other retirement" (e.g. Railroads) was $1,652,998 million.  We know the FICA tax rate is 15.3%; if you are a W2 employee you have half of that deducted (the rest is paid by the employer and legally cannot be shown on your check stub, however you in fact pay it because otherwise you'd get it in cash.)  If you're self-employed you have to pay both pieces.  We also know that the Medicare rate is 2.9%.  Social Security caps off but Medicare does not, and the good news is that we can take these from the MTS and add them.

Social Security receipts were $1,265,154 million.  The rest of the $1,652,998 is Medicare tax, more or less (there is a bit of cross-year adjustment that takes place) but this means that CMS gets $386,858 million in funding.  You'll see why this matters in a minute -- yes, that's all the money taken in for CMS via taxes.

So what gets spent?  Well, Social Security retirement is $1,304,397 billion (including $5,860 million to railroaders) and disability payments were $156,511 million (including administrative costs) for a total of $1,460,908 million.

Social Security, on a cash deficit basis, was 86.6% funded.

In other words it ran a roughly 13% cash operating deficit.  If we raised the 6.2% tax to 7% that would entirely close the gap.  That's right, if we did that the program would be cash-neutral with no other changes.  We could also lift the cap somewhat and do the same thing, or some blend of the two.  Those who say we cannot protect Social Security are lying, and further, as the Boomers die the benefit payments will fall off; I'm on the tail end of it and I'm 61 so that fall-off will be beginning soon and within the next 20 or so years it will be basically complete since as an actuarial matter most Boomers will be dead.

SOCIAL SECURITY IS NOT THE PROBLEM; IT IS QUITE-TRIVIALLY ADDRESSED AND IN FACT IT IS ENTIRELY POSSIBLE THAT THE "KNEE" POINT WILL BE REACHED AND THUS SAID PAYMENTS WILL START TO DECLINE BEFORE THE EXISTING BOND PORTFOLIO IT HOLDS IS EXHAUSTED.

So why all the screaming?

Because nobody wants to take on CMS, which is where the problem is.

Centers for Medicare and Medicaid Services spent a staggering $2,222,161 million last year.  Remember, they only took in $386,858 million in offsetting tax receipts so on a cash basis they are only 17.1% funded!

In fact $1,835,303 million of the Federal Deficit came directly out of CMS.  

Wait a second.... the total deficit was $1,833,816!

In other words literally all of the deficit is in this one program.

All of it.

The entire problem resides here and its even worse than the MTS propounds because Medicaid, which is part of CMS, is a federal/state program and only part of the expense is captured in the MTS; the rest is in State spending and again there is no tax against which said spending resides at the State level either.

Plenty of people are hollering about interest expense and yes, on a gross basis that crossed $1 trillion this year.  There is an offset in that some of it is against the bonds held by Medicare and Social Security, that is equivalent to taking a $20 from one pocket and putting it in the other and thus is properly accounted for that way, since the funds are owed within the government itself.  Nonetheless the reason that interest expense keeps going up is the operating deficit which has to be financed, that financing is immediately and directly inflationary and all of it is in CMS.

I've been raising a stink about the progression of this problem all the way back to the 1990s when I first identified it while running MCSNet.  The only way to reverse it is to neuter the medical monopolies and radically drop costs.  Leverage included  an entire section on this and this article, which expands on that greatly (along with the follow-up on what implementation could look like which is a link at the bottom) would cut said expenditures by roughly 80%.

A commensurate cut in spending would occur in the private economy.  This would be very disruptive in the short term but it would also work through and resolve the budget problem and debt issues over the intermediate term.  Doing so would, after the adjustment took place (and yes, asset prices would reset downward -- by quite a lot in some cases) result in a flood back into the US of both manufacturing and service jobs because the imputed tax from both inflation and this insane cost, which every person in the US bears along with every employer, would be dramatically reduced.

Roughly a decade ago I had the opportunity to present the forward projection -- which has been nearly 100% accurate now for the last 30 years and continues to be, to Senate staffers for a few minutes.  They all knew already; I was not breaking news to them.  The implication of course was that due to the pressure groups and lobbying with no effective pushback by the citizens in the other direction they were not going to act as they feared losing their jobs in the next election.

It would have been easier and less-disruptive to deal with this 30 years ago -- then 20, and then 10.

We didn't.

Obamacare was an attempt to paper over this but it was doomed to fail because the underlying issue was not "insurance" (in quotes because medical "insurance" isn't; you can't insure a house against fire if it is already on fire) it is cost and without taking a chainsaw to that, and the only sane way to do that is to enforce 100+ year old anti-monopoly laws across the board with criminal penalties, not fines, you cannot control cost.  Small incremental changes will do nothing because of the magnitude of the problem and how long it has been permitted to continue, never mind that all the "claimed" changes by every Administration back to Obamacare and then forward have done nothing to change the trajectory no matter who is in office.  Biden and Harris' game-playing with Medicaid is making it worse but that is not the root of the issue either; it is literally everywhere within the medical system.

If this is not stopped on an immediate basis, not with empty promises to be "enacted over 10 years" as has always been the case up until now, the collapse of hospital systems and medical care generally is assured.

Time's up.