Authored by Charles Hugh Smith via OfTwoMinds blog,

As painful as this liquidation and repricing of risk is for borrowers and lenders, those without debt, those with cash and those with essential skills that are in demand regardless of boom or bust will all benefit.

Who would benefit from a severe global recession? The typical answer is “no one,” as a drop in economic activity is assumed to hurt everyone. But it’s not quite that simple; there are silver linings for some in all those dark clouds.

When demand for energy plummets, the price of oil tends to drop dramatically. There are several reasons for this:

1. Price is set on the margins so a modest decline in demand can trigger an outsized drop in price. In the 2008-09 timeframe, oil fell from $147/barrel to the $30s on a modest decline in demand.

2. While oil producers always announce production cuts to maintain high process, they are under pressure to offset plummeting income by pumping more oil, not less.

3. Speculative capital floods into oil when prices are rising and exits when prices are dropping. This financialization of the energy markets exacerbates price movements up and down.

Dramatic declines in oil hurt producers and benefit consumers. As demand for goods and services declines, suppliers and retailers must trim prices and profit margins to maintain market share. This deflationary pressure benefits consumers.

As marginal businesses close their doors and marginal renters move out of high-cost rentals, landlords must reduce rents to avoid the eventual result of mass vacancies, i.e. bankruptcy. Reductions in rents benefit consumers.

Marginal homeowners and absentee landlords slide into insolvency and are either forced to sell their homes and real estate or their lenders foreclose on their mortgages and sell the lender-owned properties to reduce their losses. These forced sales reduce the price of these assets, benefiting those with cash who can now afford to buy assets that were unaffordable in the pre-recession bubble.

A deep recession also shifts global capital flows. As a general rule, oil/gas exporters and manufacturing exporters pile up excess savings (trade surpluses) by selling energy and goods to importing nations running trade deficits which are funded by borrowing (debt).

The exporting nations need some place to invest or park their excess capital and buying the importers’ debt yields interest income. This excess capital can also be placed in reserves (gold or foreign currencies), invested in offshore real estate, stocks, enterprises, etc., low-utility “bridges to nowhere” in the domestic economy or malinvested in grandiose malls, stadiums, palaces, etc.

It can also be spent in social welfare or high-technology programs, etc.

A severe global recession upends these capital flows. As demand craters, exporters’ surpluses drop precipitously. Rather than having surplus capital to spend/invest, the exporting nations must sell assets or tap reserves to fund the programs that the domestic populace views as their birthright.

As demand craters, importing nations import less, reducing their borrowing needs. But since the surplus capital of exporters has plummeted, the debtor nations find there are fewer buyers of their debt. This supply-demand imbalance pushes interest rates / bond yields higher, as importing / debtor nations must compete for the shrinking pool of capital sloshing around the global economy.

As marginal private-sector and public-sector borrowers default, lenders tighten lending guidelines to reduce the risk of losing money on debt offered to potentially marginal borrowers. Those seeking loans find it more costly to borrow as credit tightens, and those with cash find their capital earns a higher return as capital becomes more scarce.

These dynamics typically generate self-reinforcing feedback loops. As defaults rise, forced selling then triggers additional defaults as prices continue dropping. Heavily indebted households, enterprises and nations that suffer declines in income default on their debt, forcing a repricing of risk throughout the global credit market.

Prices that the unwary reckon have hit bottom continue to drop as the self-reinforcing dynamic of liquidation and repricing of risk feeds on itself.

As painful as this liquidation and repricing of risk is for borrowers and lenders, those without debt, those with cash and those with essential skills that are in demand regardless of boom or bust will all benefit. Those burdened with high costs and promises that cannot be kept will be liquidated. Those with low costs and few promises have the means to adapt to changing conditions.

In terms of natural selection, a severe global recession puts tremendous selective pressure on every participant on every scale: households, small businesses, global corporations, nations, alliances and empires. The least resilient won’t have the means to adapt and they will default/dissolve. The more resilient will have the means to tighten their belts and survive. The most adaptable will not just survive, they will emerge stronger due to their capacity for rapid, successful adaptability.

What it takes to not just survive but emerge stronger is the topic of my two books Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States and Self-Reliance in the 21st Century.

*  *  *

My new book is now available at a 10% discount ($8.95 ebook, $18 print): Self-Reliance in the 21st Century. Read the first chapter for free (PDF)

Become a $1/month patron of my work via patreon.com.

Back in 2020, around the time Xi Jinping decided to burst the Chinese housing bubble, which as a reminder was estimated by Goldman at the time to be the world’s single largest asset class (and bubble) at over $62 trillion, larger than either the US equity and bond markets…

… China unveiled the so-called “three red lines” policy, which sought to reduce developers’ leverage, lower risk in the financial sector and make homes more affordable as part of President Xi Jinping’s common prosperity push and practically meant that only companies that have very little debt (which basically meant nobody) were allowed to grow their debt at a max of 15%, and since most Chinese developers were in the 2 or 3 red lines category, it prohibited them from growing debt (a full breakdown of the three criteria is shown below),

The measures, which imposed strict debt and cash-flow targets on real estate firms, choked off liquidity for the highest-leveraged developers, contributing to the avalanche of defaults and construction halts that sparked mortgage boycotts and plunging sales across the nation.

The outcome result was the biggest shock for China’s property sector, which quickly took down giant housing developer Evergrande and numerous of its undercapitalized peers, impoverished countless real estate billionaires (some say this was Xi’s plan all along), sent home prices sliding and hammered household consumption across China’s middle class, whose biggest asset – their home – was no longer appreciating at double digits every year and in fact was contracting for the first time in a decade.

So fast forward to today when just weeks after China’s shocked the world with the speed and magnitude of its “covid-zero” reversal, Beijing – in its pursuit of a powerful, and generously credit funded, economic rebound appears set to unleash the full power of the country’s real estate bubble because as Bloomberg reported overnight, “China is planning to relax restrictions on developer borrowing, dialing back the stringent “three red lines” policy that exacerbated one of the biggest real estate meltdowns in the country’s history.”

According to BBG sources, Beijing would allow “some property firms to add more leverage by easing borrowing caps”, and push back the grace period for meeting debt targets set by the policy. The deadline could be extended by at least six months from the original June 30 date.

Such easing could mark “the most dramatic shift in China’s real estate policy, adding to a clutch of measures issued since November to bolster the battered sector that accounts for about a quarter of the nation’s economy.” Indeed, within the span of just a few weeks, the government has softened its stance for sectors from chips and coal imports to internet platform businesses, underscoring Beijing’s resolve to refocus on economic growth.

“This is a signal from the top regulators in an attempt to help restore market confidence in the real estate sector and create a positive feedback loop between the homebuyers, developers, and the physical market,” said Zerlina Zeng, senior credit analyst at Creditsights Singapore LLC.

The news helped push China’s property index higher by 1.5% and nearly 100% above its late October low when Chinese assets saw a widespread global liquidation amid covid zero fears and Xi’s escalating crackdown on asset markets. Prices for China dollar high-yield notes, a sector dominated by property firms, have reached levels last seen in January 2022 at an average 75 cents on the dollar.

The offshore yuan surpassed its 200-day moving average for the first time since April after the news.

What does this policy reversal mean for China’s property markets, and economy in general? Well, consider that with access to credit markets largely closed since 2020, developers had defaulted on more than 140 bonds in 2022, according to data compiled by Bloomberg. Overall, developers missed payments on a combined $50 billion in domestic and global debt based on issuance amount.

All of that is about to go into reverse.

In the meantime, however, China Evergrande Group, once the country’s biggest developer and a poster child for the property crackdown, was labeled a defaulter in December 2021 after it missed payments on several bonds. Others followed suit, including Kaisa Group Holdings Ltd. and Sunac China Holdings. The defaults crushed what was once the most active and lucrative high-yield bond market in the world.

Fears of further contagion meantime weakened consumer confidence and roiled global investors who had long assumed the government would bail out the real estate titans. The crisis spooked buyers, driving home sales down by the most in at least two decades, while home prices declined for 15 straight months.

But now, very suddenly and unexpectedly, after almost two years of housing market pain Beijing is changing its stance. Under the new proposal, China will ease restrictions on debt growth for developers depending on how many red lines they meet. According to Bloomberg sources, companies that meet all three thresholds will no longer have borrowing caps and can use letter of guarantees from banks to pay land purchase deposits.

To be sure there had been vocal opposition to China’s credit crackdown: as recently as last month, the head of a leading Chinese think tank had signaled Beijing needed to rethink what he called the mistaken “three red lines.”

“Using such harsh policies toward the sector was a total mistake,” said Yao Yang, dean of the National School of Development at Peking University, in an interview. “We had companies whose business was more or less healthy, but because of the “three red lines,” their business became a problem.”

As Bloomberg also notes, the policy reversal comes on the heels of a slew of directives aimed at reviving the housing sector, which accounts for as much as 70% of household assets in some parts of the country. The recent measures include:

• Lower mortgage rates for first-home buyers if newly constructed house prices drop for three consecutive months
• A nationwide cap on real estate commissions to boost demand
• Allowing private equity funds to raise money for residential property developments
• Pledging 200 billion yuan ($29 billion) in special loans to ensure stalled housing projects are delivered
• A 16-point plan unveiled in November that ranged from addressing the liquidity crisis to loosening down-payment requirements for homebuyers

Officials have signaled further support. In an interview with Xinhua News Agency, China’s housing minister Ni Hong pledged further efforts to take a “sound approach” to address the risk of “capital chain breaks” among developers, and steer the industry onto a “high-quality development path” in 2023.

The various easing measures have sparked a sharp rally in property stocks and bonds, boosting confidence in the sector as some of the stronger firms like Country Garden Holdings Co. regain access to credit and equity markets to pay debt and resume construction.

That said, the sweeping measures have yet to arrest the slump in China’s housing sector, which has also been slowed by Covid lockdowns and more recently, a surge in virus cases. New home sales dropped 31% in December from a year earlier. Citigroup Inc. analysts including Griffin Chan expect sales to fall another 25% in 2023, as recovery will be constrained by reduced supply, and buyers’ expectations will take time to turn around.

Finally, what China’s reversal means for the rest of the world is that a tidal wave of new credit is about to be unleashed, and as a recent report in Economic Information Daily said, the amount of new credit China issues is likely to reach another record high this year, while interest rates for longer-term loans could decline further. In other words, prepare for a surge in Chinese Total Social Financing as Beijing finally ends its latest experiment with austerity and is finally set to unleash the biggest credit expansion in history.

And yes, it will be inflationary, which means that China – just like Putin before it – is about to control what happens in US capital markets because the last thing the Fed can do is stop hiking just as China is about to go into credit-funded overdrive.

Authored by Tom Ozimek via The Epoch Times,

Former President Donald Trump said on Jan. 5 that if he’s successful in his bid for the presidency in 2024, he will order the U.S. military to crush Mexican drug cartels and show them “no mercy.”

Trump made the announcement as President Joe Biden was preparing to make his first visit to the U.S.–Mexico border since taking office.

In a video statement on Thursday, Trump blamed “Biden’s open border policies,” which he called a “deadly betrayal of our nation,” for fueling drug-related deaths among Americans.

Illegal immigration has soared under Biden’s watch, with unauthorized crossings exceeding 2.3 million in fiscal year 2022, according to Customs and Border Protection data. That figure topped the previous record by around 1 million and was more than twice the highest level recorded under Trump.

Trump, who previously suggested using U.S. military force against drug cartels operating south of the border, including by reportedly launching missiles into Mexico to destroy drug labs, said in Thursday’s video that deadly narcotics like fentanyl are pouring “across our wide open border” and are “stealing hundreds of thousands of beautiful American lives.”

Since Biden took office, 200,000 Americans have died on drug overdoses, Trump said.

Drug cartels are “waging war on America,” Trump continued, adding that the time has now come “for America to wage war on cartels.”

Trump claimed he would designate cartels as foreign terrorist organisations and block their access to the global financial system, while asking Congress to pass laws that would punish drug smugglers and human traffickers with the death penalty.

“When I am president, it will be the policy of the United States to take down the cartels, just as we took down ISIS and the ISIS caliphate—and just as, unlike the situation we are in today, we had a very, very strong border,” Trump said.

The former president said he would deploy all necessary military assets, including the U.S. Navy, to impose a naval embargo on cartels and make sure they can’t use regional waters to smuggle drugs into the country.

Further, he would “order the Department of Defense to make appropriate use of special forces, cyber warfare, and other overt and covert actions to inflict maximum damage on cartel leadership, infrastructure, and operations.”

“Millions and millions of families and people are being destroyed. When I am back in the White House, the drug kingpins and vicious traffickers will never sleep soundly again,” Trump said.

“We did it once, and we did it better than anybody else.”

Trump says he will use the full force of the military to crush the drug cartels: pic.twitter.com/7tFrmHmMES

— American Firebrand (@AmFirebrand) January 5, 2023

Trump’s remarks came as Biden announced steps that he said would improve border security and help stem the flow of illegal immigration while expanding a parole program that opens a legal pathway for tens of thousands of people a month to enter the United States lawfully.

‘Do Not Just Show Up at the Border’

Biden said at a White House press briefing Thursday that the United States would start turning away Cubans, Haitians, and Nicaraguans who cross the U.S.–Mexico border illegally. That move builds on an existing effort to stop Venezuelans from trying to enter the United States without authorization.

“Do not just show up at the border,” Biden said.

 “Stay where you are and apply legally from there.”

While seeking to block illegal crossings by Cubans, Haitians, Nicaraguans, and Venezuelans, the Biden administration is also expanding a parole program that allows 30,000 people from those four countries per month to enter the United States legally for two years and work.

Most of the people crossing the U.S.–Mexico border illegally in recent times are from those four countries.

“We anticipate this action is going to substantially reduce the number of people attempting to cross our southwest border without going through a legal process,” Biden said, adding that Mexico has agreed to take back up to 30,000 people a month who get caught trying to cross the border illegally.

People gather near a crossing into El Paso, Texas, as seen from Ciudad Juarez, Mexico, on Dec. 20, 2022. (Christian Chavez)

Another part of the new effort is letting people who are seeking to enter the United States schedule an appointment at a port of entry to start a claim for asylum.

Most asylum claims are ultimately rejected, but a major backlog in the courts leaves most illegal aliens living in the country for years before their case is adjudicated. Some people aren’t deported even if their claims are denied.

The Biden administration is also sending more asylum officers and judges to the border to try to adjudicate the cases more quickly. The aim is to reduce the initial processing time from months to days.

“We can’t stop people from making the journey, but we can require that they come here in an orderly way under U.S. law,” Biden said.

The administration also plans to increase funding for border communities impacted by the surge in illegal immigration.

The actions “will make things better but will not fix the border problem completely,” Biden added, blaming Congress for not approving a plan he proposed to reform the immigration system.

“This new process is orderly,” Biden said. “It’s safe and humane, and it works.”

Biden made the remarks ahead of a planned visit to El Paso, Texas, a border town that has been at the forefront of the illegal immigration surge, having become the busiest corridor for illegal crossings.

Over the past week, border agents have encountered an average of 1,731 illegal aliens a day in a 268-mile stretch of the border known as the El Paso Sector, according to figures published by the city.

At the same time, there was an average of 3,410 people daily in Border Patrol custody over the past seven days.

The world’s largest memory chipmaker recorded an operating profit decline of 69% for the three months that ended in December — the worst drop in nearly a decade — as the semiconductor supply glut worsens. 

Preliminary numbers released by Samsung showed the company’s operating profit declined to 4.3 trillion won ($3.4 billion) last quarter, missing the average analyst estimate of 6.7 trillion won ($5.3 billion). Sales fell to 70 trillion won ($55 billion) in the quarter, down 8.6% over the same period a year ago. The company is expected to publish a full financial statement with net income and updates on divisional performance at the end of the month. 

“Amid continued external uncertainties, including a potential global economic downturn, overall earnings decreased sharply quarter on quarter as we saw a significant drop in the memory business results due to lackluster demand and weaker sales of smartphones,” the company said in a statement.

Readers have been well informed about South Korea’s largest company grappling with dismal memory chip demand. We cited the Korea Economic Daily in September that warned about Samsung’s troubles and how the “semiconductor industry has entered a full-fledged ice age.”

“The decline in 4Q demand was greater than expected as customers adjusted inventories in their effort to further tighten finances,” Samsung said in its statement, adding significant price declines in memory chips and slumping smartphone sales were due to “weak demand resulting from prolonged macro issues.” 

And those macroeconomic headwinds Samsung might be talking about could be the global economy sliding into recession. Earlier this week, International Monetary Fund Managing Director Kristalina Georgieva warned about global recession risks on CBS’s ‘Face the Nation.’ 

South Korea’s exports of memory chips are in a down-cycle, indicating a worsening slump in tech demand critical to global economic growth.

Despite the bad news, though mostly known, shares of Samsung Electronics trading on Korean exchanges rose 1.4% Friday — holding above the 100-day moving average. 

Here’s what Wall Street analysts had to say about Samsung (list courtesy of Bloomberg):

CLSA Securities Korea (Sanjeev Rana) 

• “Shares are rising because really bad numbers from Samsung raise the likelihood of the company taking some action to control memory supply in the form of capex or production cut” 
• “Samsung has been adamant that it has no plans to cut capex or supply but a fast deterioration in the demand and its deteriorating profitability means that the management might be forced to consider the unthinkable, i.e. memory production cuts” 
•  Other memory chip suppliers from Micron to Kioxia and SK Hynix have already announced reduction in either capex or output; if Samsung joins, it will become clear that the industry supply growth will tighten, leading to a better demand supply balance later this year

Midas International Asset Management (Shin Jin-Ho) 

• In the past when earnings were bad, the shares began to rebound after Samsung’s comments on output adjustment 
• So investors are buying on the earnings shock, as expectations for output cut increase after earnings miss 
• Bullish on Samsung stock price in the short term

Bloomberg Intelligence (Masahiro Wakasugi) 

• Samsung’s 1Q profit could stay low after its 4Q preliminary results came in 35% below consensus
• The NAND chip division may have posted a loss in 4Q due to severe price erosion while DRAM generated profit
• Earnings recovery might be slow in 2023 on declining chip prices despite demand recovery in 2Q or 3Q

Authored by BTCCasey via BitcoinMagazine.com,

A recent report by CoinKickoff demonstrates the failures of various altcoin projects throughout the years, and how bitcoin is the standout survivor. 

According to their data, 91% of the coins that were present for the 2014 cryptocurrency market crash are now entirely abandoned. A large portion of coins that are now dead were created in 2017, with 704 now-dead coins being created that year. The crown for the single most deadly year in cryptocurrency history goes to 2018, during which 751 coins became defunct.

A visualization created by CoinKickoff illustrates just how many of these projects came and went, along with their respective reasoning for failure. Reasons include being a scam or other related issues, being a joke or having no purpose, being an ICO or short-lived scheme, or simply running entirely out of volume. 

Source: CoinKickoff

Source: CoinKickoff

Bitcoin, in the midst of all this, has remained strong. Hash rate has continued a steady climb, now up to 270 EH/s according to Hashrate Index.

In addition, more than 1 million addresses now hold one bitcoin or greater, although it should be noted that Bitcoiners may use multiple addresses. Beyond that, over $14 trillion in annual transaction volume was carried over the Bitcoin network the past year, a 13,900% increase from 2015’s transaction volume.

And just as those metrics grew, the amount of bitcoin held on exchanges reached new lows, indicating that more Bitcoiners than ever are holding their coins in a sovereign way.

Metrics continue to demonstrate that, aside from the price of bitcoin, the network itself is continually growing, while altcoins which hope to ride on its coattails simply have no longevity. Bitcoin has proven its resilience by continuing on in the face of existential attacks like the Blocksize Wars, political challenges like the story of Silk Road and major exchange collapses like that of Mt. Gox or more recently, FTX. Even major hits to the network such as the drop in hash rate after China’s mining ban have proven to be simply speed bumps on Bitcoin’s path to dominance. These events only strengthen the narrative of Bitcoin as sovereign monetary policy built upon a network that is resistant to collapse.

Update (1135ET): Bonds and stocks extended gains after the weaker than expected ISM Services data building on the weak wage growth data in the BLS report. However, while short-dated yields are extending their collapse (2Y Yields -25bps post-Payrolls), the S&P has stalled at critical resistance.

The 2y Yield just crashed…

As rate-hike odds plunge…

Stocks soared but have stalled at around 3900 (S&P)…

As SpotGamma notes, a breakout of 3900 is really needed to lift and extend any gains into something sustainable (3850-3860 remains a key pivot region)…

However, SpotGamma notes that as we are now nearing the heavily-watched 1/12 CPI number, the rally scenario is likely on hold until then.

We would imagine Mr.Powell and his pals are displeased by this “unwarranted” easing.

*  *  *

Forget the good news in the jobs report – record unemployment and underemployment rates – let’s focus on the weakness in wage growth (all thank to revisions)…

Revisions to average hourly earnings data paint a marginally less worrisome picture for the Fed on wages than the Nov report

The upturn in wage growth in Nov (originally reported as +0.6%) was revised (to +0.4%)

The 4.6% annual wage growth in Dec was the lowest since Aug ’21 pic.twitter.com/1lCjoDjcMe

— Nick Timiraos (@NickTimiraos) January 6, 2023

And that ‘bad’ news is just what stocks wanted…

Bond yields plunged led by the short-end…

Gold also spiked, back above $1850…

And the dollar was dumped…

And most importantly, Fed rate trajectory expectations shifted dovishly lower (lower terminal rate and more rate-cuts)…

These easing financial conditions are not what The Fed wants to see.

Reading the mainstream media’s reaction to today’s payrolls report, one would be left with the impression that it was generally on the goldilocks side and indicative of a possible soft-landing – consider this from Bloomberg: “the US labor market stayed resilient last month while wage gains cooled, raising hopes that the economy may dodge a recession and the Federal Reserve will further slow its aggressive campaign of interest-rate hikes.”

Which is accurate: wage growth indeed slowed down following a major revision to the data (remember that 0.6% M/M jump in average hourly earnings that freaked out the market last month? Well, it was quietly revised to 0.4% today), and as a result – as even Fed mouthpiece Nick Timiraos pointed out earlier – “Revisions to average hourly earnings data paint a marginally less worrisome picture for the Fed on wages than the Nov report. The upturn in wage growth in Nov (originally reported as +0.6%) was revised (to +0.4%). The 4.6% annual wage growth in Dec was the lowest since Aug ’21.“

The drop in wage growth was consistent with the warning from the ADP earlier this week, which found that December ushered in “the largest decline in pay growth for job stayers in the three-year series history” (and even job-changers saw a modest drop in wage growth).

There was more: not only did average hourly earnings drop, but so did average hours worked, which has a major impact on the average wages, and had hours been flat, the decline in average wages would have been even more pronounced.

Ok, so wages are finally starting to reflect reality – and indicating that inflation pressures are clearly easing, which is to be expected for any economy sliding into a recession.

But what about the underlying issues with the jobs data? What about that massive divergence between the employment number (from the Household Survey) and the monthly payrolls change (from the Establishment survey). Recall that it was just last month that we reported that divergence between these two data sets hit a record 2.7 million, a difference which got added focus just a few days later after the Philadelphia Fed reported that its own calculations found that in Q2 the US added just 10,000 jobs, not the 1.1 million reported by the BLS.

The answer is that today, the BLS decided to finally shrink the record difference between the Household and Establishment surveys, and while 223K payrolls were added (a number which was actually down 244K on an seasonally unadjusted basis), the Household survey outdid itself, and its matching Employment number soared by a whopping 717K.

There is a reason for that: we have entered the BLS’s annual revisions season, and to start the year the Bureau revises all of its historical series, starting with the Household Survey, as follows:

Seasonally adjusted household survey data have been revised using updated seasonal adjustment factors, a procedure done at the end of each calendar year. Seasonally, adjusted estimates back to January 2018 were subject to revision. The unemployment rates for January 2022 through November 2022 (as originally published and as revised), appear in table A at the end of this news release, along with additional information |about the revisions.   

Whatever the specific reason behind the historical adjustment, however, the cumulative record difference between Payrolls and Employment shrank from the all time high 2.7 million hit last month to “only” 2.1 million.

Luckily, unlike the Establishment survey which gives us shotgun job estimates with little to no granularity, the Household survey provides several layers of detail and we can find just how the BLS managed to trim this gaping difference.

The answer, it will come as little surprise to anyone, is that once again the surge in employment was entirely a function of part-time workers and multiple job-holders.

Here are the facts: in December, the number of full-time workers was 132.299 million, down exactly one 1K workers from the month before; at the same time, the number of part-time workers exploded by 679K, from 26.115 million to 26.794 million (source). Finally, adding insult to injury, the number of multiple jobholders, or those workers who need to hold more than 1 job to make ends meet yet who are double-counted for Payroll (establishment survey) purposes, surged by 370K (which means that the 223K payrolls number is really negative if adjusted for how many people actually got new jobs).

What does this mean on a longer-term basis, i.e., going back to that infamous month of March which we first flagged as the moment when something broke in the jobs data, and extending through Dec 31? Here too we find something striking: the total number of full-time jobs has declined by 288K in the past ten months, which however has been more than offset by the 886K increase in part-time jobs.

And the punchline: multiple jobholders have increased by a massive 684K over this period.

This means that contrary to conventional wisdom, some 684K jobs added in the past 10 months were not the equivalent of 684K workers finding a job, but 684K workers finding more than one job to afford life during this latest episode of soaring inflation.

What does this mean in the grand scheme of things? Well, the Philadelphia Fed’s observations still stand, and while the BLS may claim that payroll prints were accurate (at least until next month’s wholesale Establishment survey revision), digging deeper reveals once again that the quality composition of these jobs was far more dubious. In fact, we know that in December, the entire employment increase was thanks to part-time workers, and we don’t have to tell readers that part-time jobs pay far less, have zero benefits and generally are far worse quality than full-time. It also means that the bulk of job growth since March has been in the multiple jobholder category, and that instead of 684K jobs having been given, what really happened is that 684K workers found more than one job to be able to afford living under the Biden administration.

Authored by MN Gordon via EconomicPrism.com,

The New Year brings both optimism and hope.  A chance to start fresh.  To turn over a new leaf.

The sentiment is welcome.  The outcome, however, can be a grave disappointment.

If you recall, 2022 was supposed to be a year of redemption and prosperity.  After the ugly coronavirus fiasco, the economy was finally reopening.  The general belief was that the resurgence of economic activity was going to bring a new boom and a new cycle of prosperity.

But then something unexpected happened.  On the first day of market trading, January 3, 2022, the S&P 500 hit a closing peak of 4,796.  Yesterday, just over a year later, the S&P 500 closed at 3,808.  Down over 20 percent.

Over this duration, the yield on the 10-Year Treasury note spiked from 1.66 percent to 3.70 percent.  In other words, Uncle Sam’s borrowing costs have more than doubled.

At the same time, transitory inflation proved to be enduring.  And gross domestic product (GDP) went negative for the first two quarters of 2022.

What happened?

The calendar year may have started anew.  But past actions remained.  And there was plenty of wreckage from the past to be reconciled.

Much of this wreckage was created by the central planners at the U.S. Treasury Department and the Federal Reserve.  Decades of money printing are not without consequences.  And, unfortunately, the consequences dramatically impact your life and your livelihood.

The wreckage doesn’t magically disappear when the calendar hits January 1.  Rather, it piles up from one year to the next like rotting refuse at a municipal landfill.

How will the central planners manipulate your livelihood in 2023?  How will Federal Reserve monetary policy influence your job, investments, and discretionary income?

Here we scratch for answers…

Foolish Ideas

Ultra-mega money printing in 2020-21 to counter the effects of government ordered lockdowns resulted in a supply of dollars that was far too great for the economy to absorb.  This, along with the shortage of goods and services, also a consequence of government lockdowns, resulted in a situation where too many dollars were chasing too few goods.

Paying people not to work with printing press money was a foolish idea.  Everyone knew it – or should have known it.  Nonetheless, wild theories were concocted to provide the rationale for doing more of it.

People that should have known better swallowed the bait hook, line, and sinker.  For example, gangsta rap pioneer, Ice Cube, upon discovering Modern Monetary Theory in 2020, proclaimed:

“America loves to cry broke.  But in America money does grow on trees.”

The wreckage of ultra-mega money printing caught up with Americans in 2022.  Consumer price inflation raged all year.  And while the rate of consumer price inflation has slowed, it is still much, much higher than any honest economy can tolerate.

The latest consumer price index (CPI) report, which was released on December 13, shows consumer prices increased at an annual rate of 7.1 percent in November – down from 9.1 percent in June.  The December CPI will be reported next week.

At this point, even if the rate of consumer price inflation continues to slow, the Fed has some work to do.  If it really wants to contain inflation it must hike rates further to increase borrowing costs.  Over time, this should make dollars dearer, in relation to goods and services, and reduce the rate of consumer price inflation.

Will it work?

Wrecking the Future

We believe it eventually will.  But the consequence will be severe.  Remember, economics is not an exact science.  Monetary policy is even less exact.

How does the Fed know what the supply of dollars should be when it doesn’t know what the demand for dollars will be?

It’s a question the Fed can’t answer.  For the Fed doesn’t know if consumers will continue to chase the price of goods and services higher or if they will start stuffing dollars in their mattresses.  No one does.

A recession in 2023 is appearing more and more likely.  Thus, what if 2023 turns out to be a year of deflation rather than inflation?

Under this scenario, additional rate hikes would be a mistake.  Still, what can the Fed really do?

It can guess about the future, and what the demand for dollars will be.  Or it can continue to do what it always does.  That is, the Fed will look to the past for guidance on how to influence the future.

Minutes from the December Federal Open Market Committee (FOMC) meeting were released this week.  Per the minutes:

“No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.  Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time.”

Given the current CPI reading, this means there will be additional rate hikes…and associated consequences.  The Fed must wreck the future to save it.

Are You Prepared for a Hard Landing?

How will the economy react to interest rates that remain relatively higher for longer?

By this, the idea that there will be a soft landing seems highly unlikely.  The economy, after decades of ultra-low interest rates, is not equipped to easily accommodate a sustained period of relatively higher interest rates.

There’s simply too much debt outstanding.  Government debt (federal, state, and local).  Corporate debt.  Individual consumer debt.  We anticipate there will be significant challenges making debt payments in 2023.

The effect of higher interest rates will be twofold. 

1. Less borrowing and spending will result in less economic activity, which will lead to higher unemployment. 

2. Slower (or declining) economic growth will make servicing debt more difficult, which will be further exacerbated by relatively higher interest rates.

In fact, it’s already happening.  Amazon CEO, Andy Jassy, announced this week that the company plans to RIF (reduction in force) 18,000 workers.  This is in addition to the nearly 125,000 employees from large U.S. companies that were RIFed in 2022, according to the Forbes layoff tracker.

Many of these workers will land on their feet and will continue paying their debts without a hitch.  But many won’t.

Past mistakes and misallocated capital are being grossly exposed by relatively higher interest rates.  Soon, this will all rollup into a massive financial panic.

Perhaps a big corporate or municipal government default will be the triggering event.  Maybe a giant investment fund will suspend withdrawals.

Then the reality that a Fed bailout is not available for the first time since the ‘Fed put’ was instituted in 1987 will set in.

As the debt market and stock market simultaneously melt down, what assets will capital panic into?  Will it rush into the dollar?  Will it stampede into gold?  What about oil or something else?

Without question, a hard landing is coming.  Are you prepared?

*  *  *

Anticipating and positioning your capital ahead of the panic stampede is an opportunity to obtain life-changing wealth.  Click Here if you’re interested in learning more about this unique opportunity, and how to exploit it!

Authored by Lance Roberts via RealInvestmentAdvice.com,

Just recently, James Bullard, President of the St. Louis Federal Reserve, suggested the central bank might need to employ the “7% solution” to ensure the complete destruction of inflation. As we have discussed previously, the fear is repeating the policy errors of the late 1970s that led to entrenched inflation.

While the “7% solution” is supported by the likes of Larry Summers and others, there are vast differences between the economy today versus then. Trying to increase the Fed funds rate to 7%, 2.5% higher than they are currently, risks triggering a catastrophically deep recession.

The reason is the 2020 inflation was the result of one-time artificial influences versus the 1970s. As we noted previously in“That 70s Show:”

“The buildup of inflation was in the works long before the Arab Oil Embargo. Economic growth, wages, and savings rates catalyzed ‘demand push’ inflation. In other words, as economic growth increased, economic demand led to higher prices and wages.”

“Furthermore, the Government ran no deficit, and household debt to net worth was about 60%. So, while inflation was increasing and interest rates rose in tandem, the average household could sustain their living standard. The chart shows the difference between household debt versus incomes in the pre-and post-financialization eras.”

What was most notable is the Fed’s inflation fight didn’t start in 1980 but persisted through the entirety of the 60s and 70s. As shown, as economic growth expanded, increasing wages and savings, the entire period was marked by inflation surges. Repeatedly, the Fed took action to slow inflationary pressures, which resulted in the repeated market and economic downturns.

The enormous debt load is the most crucial difference between applying the “7% solution” today and in the 70s. Today, consumers, businesses, and even the Government depend on low-interest debt to sustain an ongoing spending spree.

A “7% solution” could pop the massive “debt bubble,” leading to severe economic consequences.

The Debt Problem

The massive debt levels provide the single most significant risk and challenge to the Federal Reserve. It is also why the Fed is desperate to return inflation to low levels, even if it means weaker economic growth. Jerome Powell recently stated the same.

“We need to act now, forthrightly, strongly as we have been doing. It is very important that inflation expectations remain anchored. What we hope to achieve is a period of growth below trend.”

That last sentence is the most important.

There are some important financial implications for below-trend economic growth. As we discussed in “The Coming Reversion To The Mean Of Economic Growth:”

“After the ‘Financial Crisis,’ the media buzzword became the ‘New Normal’ for what the post-crisis economy would like. It was a period of slower economic growth, weaker wages, and a decade of monetary interventions to keep the economy from slipping back into a recession.

Post the ‘Covid Crisis,’ we will begin to discuss the ‘New New Normal’ of continued stagnant wage growth, a weaker economy, and an ever-widening wealth gap. Social unrest is a direct byproduct of this “New New Normal,” as injustices between the rich and poor become increasingly evident.

If we are correct in assuming that PCE will revert to the mean as stimulus fades from the economy, then the ‘New New Normal’ of economic growth will be a new lower trend that fails to create widespread prosperity.”

As shown, economic growth trends are already falling short of both previous long-term growth trends. The Fed is now talking about slowing economic activity further in its inflation fight.

The reason that slowing economic growth, and killing inflation, is critical for the Fed is due to the massive amount of leverage in the economy. The chart below shows the total economic system leverage versus GDP. It currently requires $4.82 of debt for each dollar of inflation-adjusted economic growth.

The problem comes if inflation remains elevated and interest rates adjust to higher levels. Such would trigger a debt crisis as servicing requirements increase and defaults rise. Historically, such events led to a recession at best and a financial crisis at worst.

As Ron Insana recently stated;

“[Bullard’s] ‘7% solution’ is, in my view, completely and utterly absurd. Raising rates by up to three full percentage points from the Fed’s current target range of 3.75% to 4% would ensure a very deep recession. It would ensure that something somewhere breaks, risking a systemic market or economic event that will shake the financial markets or the economy to their very core.”

History suggests that such would indeed be the case.

Wash, Rinse & Repeat

The rise and fall of stock prices have little to do with the average American and their participation in the domestic economy. Interest rates are an entirely different matter. Since interest rates affect “payments,” increases in rates quickly negatively impact consumption, housing, and investment, which ultimately deters economic growth. 

Given the already massive levels of outstanding debt and consumers now piling into credit card debt to offset spikes in living costs, the surge in rates will cause a reversion in consumption. Such will inevitably lead to a reversal of monetary policy, as seen repeatedly over the last decade, to offset the deflation of asset markets.

Of course, such leads to the repetitive cycle of Federal Reserve interventions.

1. Monetary policy drags forward future consumption leaving a void in the future.

2. Since monetary policy does not create self-sustaining economic growth, ever-larger amounts of liquidity are needed to maintain the same activity level.

3. The filling of the “gap” between fundamentals and reality leads to economic contraction.

4. Job losses rise, the wealth effect diminishes, and real wealth reduces. 

5. The middle class shrinks further.

6. Central banks act to provide more liquidity to offset recessionary drag and restart economic growth by dragging forward future consumption. 

7. Wash, Rinse, Repeat.

If you don’t believe me, here is the evidence.

“Through the end of Q3-2022, using quarterly data, the stock market has returned almost 184% from the 2007 peak. Such is more than 6x GDP growth and 2.4x the increase in corporate revenue. (I have used SALES growth in the chart below as it is what happens at the top line of income statements and is not AS subject to manipulation.)“

The critical takeaway is that while the Fed’s policy of low-interest rates pushed capital into the financial markets, it did so at the expense of economic growth. The debt accumulation needed to sustain a “living standard” has left the masses dependent on low rates to support economic activity.

Most likely, the Fed’s “7% solution” will solve the inflation problem caused by the massive stimulus injections following the pandemic. Unfortunately, the medicine will most likely kill the patient in the process.

There was a general sense of foreboding ahead of today’s jobs report, because as we wrote in our payrolls preview, several strategists noted that there was virtually no number that would be good for risk assets. As Goldman trader John Flood said, “whispers into December’s jobs print are creeping higher as we have already gotten 4 strong labor data points this week… We are still in a good data is bad for stocks set up but the new spin is that really bad data is also bad for stocks. AKA risk is skewed to the downside.” Meanwhile Bloomberg’s Heather Burke writes that the “median estimate for the change in non-farm payrolls is 202k versus a prior 263k and for the unemployment rate to stay steady at 3.7%. But the Fed’s own estimate is for the unemployment rate to shoot up to 4.6% this year. Until we get there, there is not going to be an alignment of demand with supply, which will compel the Fed to stay hawkish with no chance of a pivot.“

So with that in mind, here is what the BLS reported moments ago:

In December, payrolls rose 223K, which was down from last month’s downward revised 256K and also the lowest since the negative December 2020 print, but was above the consensus estimate of 202K.

If payrolls were stronger than expected, the unemployment was especially hot, sliding from a downward revised 3.6% (was 3.7% previously) to 3.5%, the lowest since September, even as the unemployment rate for Blacks and Hispanics did not drop, even as white unemployment hit a record low.

The underemployment rate was also notably, sliding from 6.7% to 6.5%, a record low.

But the big outlier in today’s report was not in jobs but in wages, as the average hourly earnings rose just 0.3% M/M in December, down from 0.6% previously (revised to 0.4%) and below the 0.4% expected. On an annual basis, hourly earnings rose just 4.6%, down from last month’s 5.1%, which was also revised sharply lower to 4.8%. This was the slowest wage growth since August 21.

Developing