How to Prepare as the Fed Scorches the Earth

The hillsides are always brown in the land of fruits and nuts come autumn.  After baking away all summer long in the hot sun, the dense sage and chaparral covering the coastal hillsides and canyons are dry and toasty.  Though, before conditions get better, they must first get worse.

High pressure systems form over the high-elevation deserts of the Great Basin, between the Sierra Nevada Mountains and the Rocky Mountains, each fall like clockwork.  The pressure builds and forces the air to the south and west.  The warm, dry winds of Santa Ana then race towards Southern California where they scorch the earth.

The winds howl from the east, across the inland deserts, where they funnel through the mountain passes and then blast across the LA Basin and out to the Pacific Ocean.  As the winds conduit from high to low elevation they compress and rise in temperature at a rate of almost 30 degrees per mile of descent.  What’s more, as the air’s temperature spikes upward, its relative humidity plunges downward below 10 percent.

The already brown and parched vegetative cover is further convection dried by the Santa Ana winds to form a giant tinderbox.  Just one spark – from a downed powerline or a backfiring semi-truck – and the whole thing conflagrates into a blistering windblown wildfire.  At last count, there were 13 active wildfires blazing across the state.

From our perch in Long Beach, up on the bluffs near San Pedro Bay, and safely buffered by miles of concrete, yesterday’s [Thursday’s] temperature hit 94 degrees Fahrenheit…with a humidity of just 7 percent.  Yet out of these extremes a unique energy emanates.  And this year, more than others, the state’s hoping this unique energy delivers a much needed boost.  Here’s why…

Tapped Out

California’s hillsides are hot, dry, and brown.  Yet California’s consumers are cold, wet, and blue.  Yelp data, brought to our attention via Tyler Durden at Zero Hedge, is showing that consumers across California’s urban areas are tapped out.  Here are the grim particulars…

“California’s position in the national and global economies is strong, as home to one in eight Americans and recently reported as the fifth biggest economy in the world.  But the local economies in its major metro areas have been faltering, according to Yelp data.

“San Jose and San Francisco have seen the biggest decline in local economic activity among the 50 major U.S. metros we’ve been tracking since the fourth quarter of 2016, according to the Yelp Economic Average [YEA], an economic indicator that uses Yelp data to track the U.S. local economy and 50 top metros around the country in consumer demand and business growth.  Among the other California cities we track, San Diego also ranks in the bottom five, while Los Angeles is in the bottom 10 and Sacramento places below average.

“California’s shopping businesses have been hit the hardest.  Shopping ranks at the bottom in each of the five Golden State metros we track, among the six major sectors of the local economy included in YEA (the other sectors are auto; restaurants, food, and nightlife; professional services; home services; and local services).”

Remember, consumer spending accounts for 70 percent of U.S. gross domestic product (GDP). Thus, with California consumers throwing in the towel, the Golden State could be leading the country into a dismal holiday shopping season.  On top of that, the U.S. economy could be flat lining into the 2020 presidential election year…

How to Prepare as the Fed Scorches the Earth

The U.S. economy has nearly completed its 125th month of uninterrupted expansion.  This marks the longest growth period in the post-WWII era.  The second longest was the 120 month run between March 1991 and March 2001.  But what type of recovery has this been, really?

By and large, this economic expansion has been an absolute dud for workers and wage earners.  Fed intervention into credit markets – including ZIRP and QE – inflated the stock, bond, and real estate holdings of the wealthy.  Everyone else was left behind.

In fact, roughly 52 percent of total real income growth per family from 2009-15 went to the top 1 percent of families.  And according to the Fed’s own data, the top 1 percent increased its total net worth by $21 trillion between 1989 and 2018, while the net worth of the bottom 50 percent decreased by $900 billion over the same period.  In short, wealth inequality has widened to the extreme.

Without question, financial asset prices would have collapsed long ago, and delivered market adjusted balance to the economy, without Fed intervention.  Yet the Fed is determined to levitate markets indefinitely.  Just this week, for example, the Fed announced it is increasing its temporary overnight repo operations to $120 billion a day.  Don’t ask where the Fed gets this $120 billion to lend to the big banks each day; in the year 2019, such a question is considered impolite.

Here’s the point…

The U.S. economy’s slowing.  Consumer spending in California is but one indicator.  Manufacturing output, as measured by the Fed, has declined over two straight quarters, signaling manufacturing is officially in a recession.  Auto sales also declined in September.

Like California’s hillsides, the U.S. economy’s turning brown.  At the same time, the Fed is blowing hot monetary gas into financial markets.  Hence, as the economy slows the extremes between financial markets and main street will become ever more exaggerated and hazardous.

The Fed, in effect, is turning financial markets into a giant tinderbox.  Just one spark – in the form of a blowup in leveraged loans, a run on a foreign bank, or any number of geopolitical pressure points, among other knowns – and the whole thing conflagrates like a blistering windblown California wildfire.

Our advice: queue the marshmallows and graham crackers.  When the Fed’s scorched earth policies burn up the economy and transform your life savings to ash, you’ll be glad you have them.  Nothing beats a s’more when going to hell in a handbasket.

Sincerely,

MN Gordon
for Economic Prism

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