The Folly Of The ECI « The Burning Platform

The Folly Of The ECI « The Burning Platform

Guest Post by Karl Denninger

You have to chuckle at the roughly 10-point ramp in the S&P, commensurate with a roughly 1% dump in the dollar and more than 3% move south in 10 year Treasury yields that corresponded with this release today.

Compensation costs for civilian workers was little changed at 0.2 percent, seasonally adjusted, for the 3-month period ending June 2015, the U.S. Bureau of Labor Statistics reported today. Wages and salaries (which make up about 70 percent of compensation costs) was also little changed at 0.2 percent, and benefits (which make up the remaining 30 percent of compensation) was little changed at 0.1 percent. (See chart 1 and tables 1, 2, and 3.)

That’s the weakest increase in a long time, beating even the low points reached in 2008 and early 2009!

The reason for the rampjob was that the market seems to think this means The Fed won’t raise rates in September.

However, I believe they’re wrong for several reasons, the most-important of which being that The Fed’s actions have almost-nothing to do with trying to “prevent or control inflation.”  Instead they have to do with the fact that they have and are blowing a monstrous credit bubble that is filtering through to both higher-end housing (but leaving middle-class and lower-income housing untouched!) and corporate buybacks and M&A activity.

It is not going into productive investment.

Further, The Fed has effectively no tools available if and when the inevitable business downturn comes.

The most-destructive component of what has occurred is in fact in the corporate action / buyback arena along with the outrageous amount of federal borrowing that has taken place.  The States, for their part, appear to be cognizant of what’s going on — or they’re (properly) frightened out of their wits by the impending detonation of all of their pension and health care obligations for retirees as a direct consequence of these low rates.

In short Bernanke’s thesis has been disproved; you can’t lift the economy with these monetary actions.  At best you can blow a bigger bubble, which may give the illusion of prosperity for some but the broader public doesn’t get any of the participation from it, and they get all of the downside.

Look out below.