Last week I wrote about the differences that I saw in reported “greatest economy of all time” numbers and the actual numbers that contradicted the “greatest” story. In it I noticed that even though all the numbers were surprising to the upside the reality didn’t quite match. As a matter of fact, a few prominent economists- in an unusual move for them- actually commented that the economic reports “made no sense”.

Unemployment was reported to be the lowest in decades- but 500,000 fewer people had jobs than they had just 3 months ago and the labor participation rate was also lower. Economic activity was supposedly rising while companies are laying off employees, ditching expansion plans because of increased labor and material costs and warning of a major slowdown in economic activity going forward. Let’s not also forget that President Trump, Vice-President Pence and many at the Fed have let us know that there is NO inflation even though companies are citing inflation as a major problem in the supply chain.  This was all BEFORE the China trade deal was a problem again.

This week we find out from Schwab’s Jeff Kleintop that global PMI (gauge of global manufacturing is at its lowest since 2016 and is on the longest losing streak in 20 years.

Let’s just say that things may not be as they are being presented to us. I think most of us know these numbers are bogus and meant to keep as many as blissfully unaware that we are approaching a cliff as possible. Maybe that is a good thing- until we get there anyway.

Today I wanted to write about something that may be just as important as knowing the real story about our current economic situation. That is how our situation today is mirroring the situations that we have seen play out twice in the last 20 years and I expect we are in the midst of seeing play out for a third time in 20 years as we speak.

It never ceases to amaze me that our memories are so short. Even after two booms and busts from 1995-2002 and again from 2003-2009 most everyone is again convinced that this time it will be different.

My guess is that they may be right but not in the way they are thinking.

Since the 1995-2002 boom and bust was heavily influenced by the Tech bubble and then ended with all markets pulling back I will just say that there was irrational exuberance (Alan Greenspan) for tech which never made any sense to me and we see the same thing playing out again as companies with little to no earnings have greater valuations than mature companies that have viable, growing businesses. Think about TESLA having a greater market cap than many mature car manufacturers like Mercedes, BMW, Honda, GM, Ford and Nissan. (Zachary Shahan of Clean Technica 12-2018). Does that make ANY sense?

My guess is that TESLA ends up like and many other over-hyped tech names that cease to exist once reality rears its ugly head. The latest rounds of capital raising (going deeper into debt and diluting existing shares) is a sure sign of a rough road ahead. There are MANY other stories from today that are similar (Netflix, Lyft, etc.) but you get the picture. Basically, there was a speculative frenzy that led to a blow-off top and a crash in the tech sector and caused enough fallout to pull all of the major stock averages down. Of course, at that time our bond market was still a bond market where central bankers were not “the market” as they are today and the bond market offered a welcome respite from falling stock prices with falling yields and higher bond prices. (Things still worked the way they were meant to).

Since the stock markets needed a boost the Fed reduced rates and caused the mortgage bubble that was the major cause of the next boom and bust. In the meantime, however, the Fed started “managing” the interest rates and started to cause distortions in all asset prices.

Home and real estate values climbed far higher than would have been possible if interest rates were left alone. Stocks were bid up far higher than they likely would have been if many were not searching for yield or income.  Because of this ALL assets rose together. Stocks, bonds, and commodities all rallied between 2003-2008 because of cheap money and the recklessness of Wall Street in packaging loans that were, at best questionable, into products that appeared to be rated AAA.

The sad fact is that, as the mortgage bubble burst, the other assets that were being propped up collapsed all together. The illusion of diversification should have been exposed to all at that time.

Today, we find ourselves again deluded by the idea that “the fed has our backs” -a mantra repeated MANY times in the last two meltdowns and the assurance that “all is well” from Fed talking heads, politicians, bankers, paid hacks on financial game shows, etc.

It will all APPEAR ok until it’s not- just like in October of 2008 when the “contained” crisis hit critical mass and tens of trillions of dollars were needed to bail out the financial system in no time. Since we have fixed NOTHING and have just enlarged the problem in the last 10 years the next problem may be insurmountable.

On November 15, 2005 Ben Bernanke said “With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and use them properly.” Those “sophisticated” financial institutions needed over $16 trillion to paper over their mess. Good call Ben! Today it may take $100 trillion or more.

On May 17, 2007 Ben Bernanke said “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” Of course, the subprime market was the catalyst for the financial crisis of 2008- another gem from Ben! Today, all the politicians, Fed members, etc. see only CLEAR skies ahead! Forget trade wars, slowing economies, choking debt, income inequality.

October 31, 2007 Ben Bernanke said “It is not the responsibility of the Federal Reserve- nor would it be appropriate- to protect lenders and investors from the consequences of their financial decisions”. Just one year before starting an over $16 trillion bailout for his bosses at the banks. That number is now over $24 trillion as of 2018- probably higher now. So much for honesty.

January 10, 2008- as the economy was already likely in recession (as I believe we are also in now) “The Federal Reserve is not forecasting a recession”. Of course, they never do. They do act surprised each time one happens though- so get ready for some startled faces soon!

January 18, 2008- two months before Fannie Mae and Freddie Mac collapsed Mr. Bernanke said “They will make it through the storm”.  What forecasting! They were nationalized so I guess they “made it”.

June 9, 2008 Mr. Bernanke said “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so- just 3 months before the biggest collapse in history- so far. Remember, each of these crises have grown exponentially.

September 23, 2008- one month before the real collapse “The financial crisis appears to be mostly behind us, and the economy seems to have stabilized and is expanding again”. This was the Fed chairman at the time. Should we believe he was this clueless or that he was flat-out lying?

The reason I am writing this now is to show how you can say anything you want but it doesn’t make it so.  Since 95 million plus are not counted in our “greatest unemployment numbers” of all time the numbers are meaningless. Since, according to Zerohedge 70% of the country cannot afford the real estate that they need to live in appears to suggest that home prices going up isn’t always a good thing- especially when incomes don’t follow.

This reminds me of the old Honeymooners TV show when Ralph, after another boondoggle says to Alice “Listen Alice- nobody is 100% all the time” In typical Alice fashion she answered “you are- you are wrong 100% of the time”.

Of course, I am picking out some whoppers here and just making a point that up until the rug was pulled out from all of us the narrative was “all is well” just as we are hearing today. After watching this soap opera play out twice now in my career I am pretty sure I see all of the makings of the greatest economic challenge of our lifetimes nearly at the door. The fact that it has taken so long to arrive (only because of drastic interventions by central banks- trillions in currencies “printed up”, negative interest rates, buying assets creating faux demand, etc) has made far too many far too complacent in my opinion.

Be Prepared!