A False Economy Of Fraud Will Usher In A Hard Landing

A New Hospital On Every Corner A Sign Of Fraud

A false economy of fraud is created by seizing on a few positive numbers that can be spun and hyped to convince people all is well. Whether it is intentional misdirection and a case of economic fraud or people simply getting caught up in wishful thinking does not matter as much as the fact it is the forerunner of disappointment and generally results in a hard landing. recently when I was driving on a long trip I could not help but notice all the new hospitals and healthcare-related buildings lining the interstate in every city along the route, they speak volumes as to the economic revival of America post-2008 and Americans have the healthcare bills to prove it.

Healthcare with the expansion and the construction of huge facilities as well as fracking and drilling for oil reserves with a very short life that temporarily lower energy prices has massively added to Americas GDP quarter after quarter. We may be wowed by these huge expensive new building but on the flip side, it has resulted in the shuttering of many smaller local and rural hospitals and clinic that were adequate to care for patients at a much lower cost. Today many of these massive new hospitals that stand as monuments to Obamacare run far below capacity again confirming that planners with little skin in the game love to overspend the money of others but this extends well past healthcare and into housing, the auto sector, Wall Street, and most sectors or our economy.

An Ugly Chart Of National Debt

When the stock market started to wobble two months ago President Trump increasingly ratcheted up his attacks on Fed Chairman Jerome Powell for"ruining the party" by insisting on raising interest rates. Trump has painted the soaring stock market as proof of his skill in growing the economy and leading us forward. In truth, a flawed tax reform package that benefited the rich by fostering massive stock buybacks coupled with massive deficit spending has created the false illusion of prosperity.  Because of his polarizing political style and claims of economic acumen, Trump more than most Presidents will most likely be judged a success or failure based on his administration's economic results.

From Trump's point of view, there's no good reason why the central bank should not wait another 2-6 years before taking away the punch bowl but the fact is a great number of market participants have already allowed cheap money go to their heads and are cruising for a bruising when reality hits the fan. It is important to remember a false economy lacks sustainability but at the same time generates skewed data which often can be used to foster the feeling that something very positive is really occurring. We saw this in Europe last year when optimism was in full boom but today find the area again struggling and mired in slow growth.

The Infallibility Of The Titanic Was Proven Wrong

Some of how people have interpreted what we have seen happening in the markets remind me of the infamous line that some attribute to a porter in Southampton just before the maiden voyage of the Titanic who stated that "even God couldn't sink this ship." The degree of complacency built into this market from years of investors adopting the mentality that buying any dip would yield huge profits flies in the face of how markets really work. It has been pointed out many times that the economy constructed since the 2008 economic crisis has been built on debt, deficit government spending, and credit expansion based on low-interest rates that bring future consumption forward and increase speculation.

While government spending has proven to supplement the economy, history shows that over the long run government spending is a poor substitute for the free market in allocating capital to where it is most effective. A large part our perception of a booming economy flows from the low unemployment rate issued by the Bureau of Labor statistics which is based on employees "who did any work for pay or profit" during the week being surveyed, this includes part-time workers who are employed for just one hour a week. The unemployment rate also fails to include a large number of Americans who have given up looking or simply chosen not to work in recent years. The speed at which companies such as GM and GE have seemed to pullback should act as a reminder of how rapidly "Now Hiring" signs can be pulled from a window.