DUBLIN, IRELAND – Stocks went up on Tuesday and Wednesday – a total gain of 207 points for the Dow. Futures markets are predicting another up day today.

But the economy continues to sink. The longest expansion in U.S. history seems to be approaching its end. Here’s CNBC:

Job creation skidded to a near-halt in May in another sign that the U.S. economic momentum is slowing.

Companies added just 27,000 new positions during the month, according to a report Wednesday from payroll processing firm ADP and Moody’s Analytics that was well below Dow Jones estimates of 173,000.

The reading was the worst since around the time the economic expansion began and the jobs market bottomed in March 2010 with a loss of 113,000. Since then, the private payrolls count has increased by 21.3 million.

Another key indicator is the decline in bond yields (yields decline as demand drives bond prices higher). Economist Richard Duncan explains:

The flight to quality out of stocks and into bonds occurred because the outlook for corporate earnings is deteriorating rapidly due to the US-China trade war. The earnings outlook is deteriorating for two main reasons. First, there is a real possibility that China will take steps that sharply reduce the earnings of US corporations doing business in China. And second, the global economy is slowing quickly and may soon be in recession. […]

China’s economy would have slowed significantly even had there been no trade war. Now, facing 25% tariffs in its most important market, China’s economy may soon begin to contract. Its imports already have. The rest of the world will suffer as Chinese demand recedes.

Why, then, would investors buy stocks now? A recession will cut into sales and profits. Stocks should be worth less, not more.

Give a Man a Fish

But Wall Street and Main Street haven’t seen eye to eye for a long time. Now, they practically no longer talk to each other.

Remember the old saying: Give a man a fish and he’ll eat for a day. But give him a fishing rod and he’ll have food forever.

That is the difference between earnings and capital. The rod is a capital asset. With it, you can catch not just one fish, one time… but many fish, over a long period of time. Naturally, a rod is worth more than a fish. But its value goes down sharply when the fish disappear.

Taking the economy as a whole, we measure the rods (capital assets) by net household wealth. The fish are, very roughly, GDP.

Normally, household net assets are worth about 3.8 times GDP. This is not an arbitrary figure. It’s the natural relationship between rods and fish.

That was the ratio that prevailed in the U.S. from the end of World War II all the way up to about 1995. The Main Street economy grew. And Wall Street assets grew along with it. The ratio remained about the same.

But then, fake money and the Fed’s EZ money policies began to work their mischief. First, the ratio of household net worth to GDP went up to 4.5 in 1999, then to 4.8 in 2007… and now, it’s at 5.35.

“Financialization” it is called. It’s what happens when fish and rod part company. And now, pushing them further apart is the slimiest Fed the nation has ever seen.

Taking Away the Punchbowl

In the Eisenhower era, then-Fed head William McChesney Martin saw his job as being to prevent bankers and speculators from doing anything too dumb. He “took the punchbowl away” when the party started to get out of control.

Later, when the politicians did something dumb, spending more than they could afford on the War on Poverty at home and the War on Vietnam abroad, another Fed chief, Paul Volcker, took the punchbowl away again – putting interest rates up to 20% to stifle inflation.

Alan Greenspan brought the punchbowl back. He filled it with hard liquor in the heat of a crisis – first, in the Crash of 1987, and later, after the dotcom blowup of 2000. (He also let investors know that he had plenty more booze where that came from.)

His successor, Ben Bernanke, responded to the debt crisis of 2008-2009 more absurdly – with even more debt… a bigger bowl and far more alcohol. But even he was reacting to a perceived crisis.

And now, with no crisis in sight… with full employment and inflation almost right on the 2% target… the Fed has made it known that it will never, ever take the punchbowl away again.

That is, it is no longer going to even pretend to act as a responsible guardian of the nation’s money system.

Nor will it make any effort to pop bubbles… or to prevent politicians, bankers, and speculators from doing dumb things. On the contrary, it will goad them on with free money!

Tidal Forces

The present federal funds rate – the rate at which member banks lend to each other – is only 0.18 percent over the inflation rate. The first rate cut, widely expected before the end of the year, will push the rate into negative territory again, where it spent most of the last 10 years.

Will that be enough to stop the tidal forces of the business cycle? Will that (perhaps along with an announcement from the White House that the trade war is over) set off another big runup in stocks?

We don’t know. But when the 21st century began, GDP was about $10 trillion (in current U.S. dollars). Then, U.S. households had a net worth that was already way beyond the normal level… but still less than $50 trillion.

Today, total household net worth is about $105 trillion – in stocks, bonds, and real estate. And when the traditional relationship reasserts itself, household net worth will go back to about 3.8 times GDP, or about $75 trillion. That means that about $30 trillion in asset values will go “poof.”

If any of your money is counted in that $30 trillion of fake wealth, we suggest you move it while you still can.

Regards,

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Bill

MARKET INSIGHT: AMERICAN MANUFACTURERS ARE SUFFERING

By Joe Withrow, Head of Research, Bonner & Partners

The ISM Manufacturing Index, which measures the changes in U.S. production levels from month to month – is falling fast. That suggests the economy is slowing down…

The Institute for Supply Management (ISM) is a non-profit organization made up of 300 manufacturing firms. Each month, the ISM pulls data from these firms into an index. This gives us a big-picture view of America’s manufacturing sector.

Today’s chart maps the ISM Manufacturing Index – also often referred to as the Purchasing Managers’ Index – from the start of 2017 through today.

Chart

As you can see, the index has been trending lower for a year and a half now. It has plunged 21% in that time. This tells us that the production of real goods is stalling…

The trade war is partially to blame. According to the ISM, many firms are concerned about the trade war’s escalation.

“Ongoing tariffs are impacting costs…” said one firm.

“The threat of additional tariffs has forced a change in our supply chain… which will not increase U.S. jobs…” said another.

“Sales continue to decline. Volumes are off…” said a third.

Those quotes came directly from U.S. manufacturing executives… And they paint a troubling picture.

President Trump says his trade war will squeeze China. And maybe it will. As the Diary reported today, China’s economy is slowing.

But as Bill showed, it is also squeezing the American companies that still produce real goods. The data and the executive remarks confirm this.

Bill is right. Tariffs are win-lose.

And American manufacturers appear to be on the “lose” side of the equation.

Joe Withrow

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MAILBAG

Today, dear readers take a dig at President Trump and blame him for disrespecting Mr. Market

This disrespect starts with Trump. If he takes the right action, then Mr. Market would be on the right track. But since he has taken a majority of wrong steps compared to the right ones, he cannot resolve the issues with China. Now, he is starting a new tariff on Mexico. Someone has to teach him that when he adds tariffs and the prices go up, Americans would be paying the higher prices, whether they be on industrial goods or cars. This simple logic is far, far away from this self-disposing, criminal-minded character!

– Ali R.

What can Trump do to fix the border crises? Spend a minute and look at the cause, which, of course, Trump can’t do. The people are coming from Central American countries run by brutal dictators we support, especially Trump. Stop supporting the dictators, and the problem will go away. Our governor from California went there a few months ago to see the basic problem, since we are getting many of the refugees. Please look at the basic problem.

– Paul L.

Donald Trump was nuts before he was born. You got exactly what you voted for, so no one should be surprised. The only people more nuts are the people who can’t see that a booming economy should be able to stand small interest rate hikes and reductions in deficit spending.

– George E.

IN CASE YOU MISSED IT…

Bill’s go-to tech expert, Jeff Brown, has agreed to pull back the curtain on four early-stage technologies that could change the world…

On Wednesday, June 12 at 8 p.m. ET, Jeff will reveal all the details during his first-ever “Early-Stage Tech Summit.”

He’ll also reveal the four small-cap tech companies that have the potential to 10x your money over time. You can attend, for free, by reserving your spot here.

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