The Bond Market Hits A Tipping Point: What That Means For Stocks

When we earlier discussed the unwillingness of institutional investors to return to the market even as retail investors swing from one mood extreme to another, we showed a chart showing the historical and seemingly relentless selling by virtually every investor class in the past decade, which left just one question for traders: when do the stock buybacks finally stop and put an end to the party?

Answering that question would also require the response to another, far bigger question: when does the bond market stall out, or in other words, when does the endless demand for yield finally fizzle out?

For anyone to claim they have the definitive answer would be folly: after all there have been so many prior occasions in which analysts and pundits declared the end of the all consuming bond bid, only to be mocked by investors gorging on even more corporate debt.  And yet based on recent bond sales, it appears that finally investors may be getting full.

But how is that possible? Just two weeks ago there was an unprecedented $100 billion in bids for CVS's gargantuan  9-part $40 billion IG deal?

Well, as Bloomberg reported recently, in a first indication that the saturation point is approaching, there have been far fewer orders coming in for new bonds, relative to what's for sale. This has resulted in bond-selling companies paying more interest compared with their other debt, according to Bloomberg data, and once the securities start trading, prices have been falling on more than 50% of new issues, an indication that "flipping" bonds for a profit is now only profitable half the time. And flipping for a profit, or loss - as any bond trader knows - is a well-known leading indicator to the overall strength of the bond market.

This, as Bloomberg notes, is also the latest signal following weeks of declining inflows and even occasional fund outflows, that the IG debt market is losing steam and may be approaching its tipping point after years of torrid gains, amid concerns about rising rates and talk of tariffs weighing on corporate profits.

"Investors are starting to be a little more disciplined," said Neuberger Berman PM Bob Summers. "They aren't just waving in every deal now."

To be sure, investors' restraint amounts to more pain for companies. As we showed recently (see chart below) the average yield on corporate bonds is around its highest levels since January 2012, according to Bloomberg Barclays index data. Even with the previously discussed  CVS Health's $40 billion blockbuster issue last week, sales volume for new investment-grade corporate debt is at its lowest level so far this year since 2014.

Meanwhile, it has been a decidedly mixed picture in terms of fund flows, as reduced inflows and occasional outflows from mutual funds and exchange-traded funds have indicated that investors may need some time to digest the pipeline, or as Yuri Seliger, a credit strategist at Bank of America Corp, said "the negatives are winning out right now."

To demonstrate that credit finds itself at a sensitive junction, Bloomberg provides the example of Campbell Soup, which sold $5.3 billion of bonds this week to fund its planned acquisition of Snyder's-Lance Inc.

Typically, bankers start selling the deal to investors at a relatively high yield compared with Treasuries, which they decrease as demand increases. In this case for the biggest parts of the deal, they never did, and the bonds weakened relative to Treasuries after they were sold.

Then there is the oversubscription problem, or rather lack thereof: while companies - in credit boom times  - get orders for three or four times as many bonds as are for sale, at the beginning of the week order books were barely two times covered. As a result, borrowers paid yields that were an average of 0.11 percentage points higher on new deals compared with their existing securities last week, a new issue concession much higher than the 0.013 percentage point-average for the year. And - as shown above - yields relative to Treasuries weakened on more than half of new issues on Monday and Tuesday, a recent BofA analysis revealed.

To be sure, for now the credit weakness is issuer specific - one would have to look hard to find a problem with McDonald's sale of $1.5 billion of bonds last Wednesday, in a deal that was 4x oversubscribed, and then cut yields on all three tranches relative to price talk; post-break, spreads on all three parts narrowed as of Thursday's close in New York.

Meanwhile, as the increasingly tentative market waits to find out how this period of uncertainty ends, some investors are pitching the recent weakness as a buying opportunity largely thanks to ongoing strong cash flow, helped by tax cuts; investors such as Tom Murphy, head of investment-grade credit at Columbia Threadneedle Investments.

"If fundamentals are unchanged and spreads are wider, shame on us if we're not buying securities," Murphy said. "You're supposed to start taking some bites of the apple here."

That may not last long though, as fundamentals are starting to shift with the Fed expected to lift rates three (or more) times this year, retail sales falling for third straight month, amid a near contraction in consumer credit growth.

Of course, any slowdown in corporate bond purchases would come after years of surging demand; as we have documented previously, the market value of investment-grade bonds has more than doubled over the last 10 years, as investors have snapped up new debt, while the economy has grown by about a third.

And, going back to the start of the article, this has also allowed companies to issue virtually unlimited amounts of bonds whose proceeds would be used for buybacks. However, should the IG bond market suffer an even moderate hangover, that may not last. For one thing, the incremental yield on equities relative to bonds has shrunk to the lowest level since 2010.

This in itself could put a significant damped on buybacks. But, more importantly, should the credit weakness spread from the IG sector to high yield, then from a blessing, buybacks may suddenly become a corporate curse as the market mood suddenly shifts, and starts viewing excess leverage as a potential source of instability in a time of rising rates, something we discussed extensively in "Day Of Reckoning" Nears As Goldman Projects A Record $650BN In Stock Buybacks."

To be sure, it is still early to declare the corporate bond market dead or even comatose, although the leading indicators certainly suggest that a hangover has arrived. For what happens next keep a close eye on the market reaction when the Fed hikes rates on Wednesday, and focus not on stocks but bonds - any further blow out in spread, and certainly yields, will mean that - for the time being at least - the bond issuance window is slamming shut; the (buyback) consequences for stocks may be severe.

Post-Trump-Tariff-Stress-Disorder: "The Level Of Insanity Everywhere Is Startling"

Whiskey Tango Toxtrot

The schizophrenia surrounding the tariff plan is really startling. But then I could just say, "the level of insanity everywhere is startling."

Self-avowed schmartz-guys are all "doesn't the U.S. know their empire is failing and everybody is cutting them off? What are they thinking starting trade wars with allies and raising prices???"

Stop.

So your argument is the U.S. is losing its influence, other nations are about to cut it off and end the trade deficit, and thereby basically halt imports? While the U.S. has no internal manufacturing? And your argument here is that, not if but when the world cuts us off we a) would like to have some steel and aluminum to build factories, washing machines and tanks or b) do NOT want to have access to the basic raw materials of society?

Whiskey Tango Foxtrot.

I'm sorry that this generation burned down the factory, then retreated to the mansion, sold off and burned all the furniture there too, then ran up the credit card with cocaine and heroin parties while yelling "I'm a rock star! I'm a Contender!", but they did. Now there are only bad decisions, like the ones real adults have.

And there's nothing but work to put that factory back up, and that's going to cost something, in this case, money and higher prices, using the thousand-year method of protective tariffs. Why not? Europe has 25% tariffs. China has a virtual lockout. If the U.S. machine then also has higher real wages for U.S. workers they can afford the tariffs. I mean, what's their counterargument? If it's better to not have steel and aluminum, perhaps we should shut down the few remaining foundries and have NO materials? I mean, if a little is bad, surely none is way better.

Mish for example thinks this way: if China is willing to give us cheap, under-market steel we should take it. No, not if you want to have a country, you don't. Isn't it a matter of national security to be able to make tanks, ships, railroads, and artillery? There's more to the world than money.

Nor is this arcane. You know that brewing Japanese scandal about approving sub-standard steel worldwide for going on 40 years? Well that sub-standard Chinese and Japanese steel was turned into, say, sub-standard U.S. Abrams Tanks, which may explain why they've been breaking and unexpectedly going up like roman candles. So how's your low-cost steel discount look now that the U.S. doesn't have an effective military? Come on, guys. Again, the world is not only money, to be measured in money. It's strategy, it's community, it's values. I'm surprised we're so lost I need to bring this up.

Don't get me started on how we don't own (and therefore don't really secure) our toll roads, ports, bridges, and utilities. They are also widely owned by foreigners now. Really? We (or they) sold every living thing out of the United States, and we're looking for Russians and Terrorists under the bed? For the love of Pete...

How do you prepare for an Argentina-like collapse and/or up to civil war we are so close to? People who have lived through it say, "you can't."

If the whole country is mad, which it is, there is nowhere to turn for sense or even allies, to say nothing of dry goods. Co-Americans are now so immoral, so self-serving, so rapacious, so badly thinking, so ill-positioned and ill-prepared that they themselves are the largest single liability, to me, but mostly to themselves. Without basic morality — you know, like do your job, don't lie about everyone around you, don't sleep with other people and/or kids at the local high school — there is no "community" as Ilargi discusses. My place may be here, but I can only say: "stay exiled."

Think the 30% uptick in opioid overdoses is bad? In my small county there are now 3 support groups of 30 each for pedophiles. These are mostly court-directed, meaning these are only the ones we know about. That's in ADDITION to the self-help groups for alcohol and drug addition. Hey, where did we get those volunteers for Oxfam, UNICEF, and Haiti? And are the police, judges, Congressmen and FBI not also from this same population? Or are they going to arrest themselves and stop it? Maybe I should go arrest the police and see how that goes. It ain't good.

Only Morality can fix it, where the nation cries out to God and says, "we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the return of justice and order, even if it means paying for my own crimes." You see that happening yet?My biggest fear is the present turn will patch it over enough to limp on a little further with no reform, and yet that seems the most likely.

Adams said, "Our Constitution was made only for a moral and religious people. It is wholly inadequate to the government of any other." Benjamin Franklin said, "only a virtuous people are capable of freedom." This is just Tytler's cycle of history:

We've done it all but bondage. When China cuts off the imports and calls the loans, the cycle of bondage will be complete. Until we find faith, we'll be peasants in our own land, as planned.

Are Bitcoin Bubbles Predictable?

A Fundamental Valuation of Bitcoin and a Diagnostic for Bitcoin Bubbles

Visualization of the bitcoin price

Spencer Wheatley, Didier Sornette, Tobias A. Huber, Max Reppen, Robert N. Gantner  -  based on a recently published paper.

Since its release in 2008 by Satoshi Nakamoto, Bitcoin has grown tremendously, and cryptocurrencies have become an emerging asset class. At the end of 2017, the price of bitcoin peaked at almost 20'000 USD, but now sits at around 8'500 USD. The explosive growth and volatility of bitcoin has intensified debates about the cryptocurrency's intrinsic or fundamental value.

While many have claimed that bitcoin is a scam and its value will eventually fall to zero, others believe that further enormous growth and adoption await, often comparing it to the market capitalization of stores of value, such as gold. By comparing bitcoin to gold — an analogy that is based on the digital scarcity that is built into the Bitcoin protocol — some market analysts predicted bitcoin prices as a high as 10 million USD per bitcoin. Given bitcoin's wild trajectory, many are wondering where it will go next.

While there is an emerging academic literature on cryptocurrency valuations, which, for example, attributes some technical feature of the Bitcoin protocol, such as the "proof-of-work" system, as bitcoin's source of value, an alternative valuation can be based on its network of users — the more users/nodes it has, the more valuable the network becomes. In the 1980s, Metcalfe proposed that the value of a network is proportional to the square of the number of nodes.

Now, if Metcalfe's law holds here, fundamental valuation of bitcoin may in fact be easier than valuation of equities  - which relies on various multiples, such as price-to-earnings, price-to-book, or price-to-cash-flow ratios  -  and might, therefore, be indicative of bubbles.

Here, we develop a diagnostic for bubbles and crashes in bitcoin that combines Metcalfe's law  -  which will provide a fundamental value for bitcoin — and the Log-Periodic Power Law Singularity (LPPLS) model, which has been developed to detect bubbles. When both measures coincide, this provides a convincing indication of a bubble and impending correction. For more details, see our paper.

A Fundamental Valuation of Bitcoin

Metcalfe's law states that the value, in this case market capitalization (cap) of a network is proportional to the number of users squared  - i.e., relating to the number of connections when all users are connected to each other. To visualize this, Figure 1 shows the bitcoin market cap versus the number of users in logarithmic scales, where a linear relationship with slope 2 would qualify Metcalfe's Law. Fitting by linear regression provides an estimate of 1.7 — being significantly smaller than Metcalfe's value of 2. This would mean that, for instance, for 1 million users, a typical user would be connected to "only'' 10'000 other users, rather than 1 million.

Figure 1: Scatterplot of the bitcoin market cap versus the number of active users, with logarithmic scales

It is however more interesting to directly compare the market cap predicted by Metcalfe's Law with the true market cap, as visualized in Figure 2. In particular, we interpret the blue and orange dashed lines as fundamental support levels, whereas the rough red and green lines, with parameters given by the regression in Figure 1, fall between the fundamental level and bubble levels.

Figure 2: Comparing bitcoin market cap (black line) with predicted market cap based on various generalized Metcalfe regressions of active users.

In any case, the predicted values for the market cap indicate a current (as of the first week of March, 2018) over-valuation of at least four times. Further, assuming continued user growth (whose growth rate is in fact decreasing), the Metcalfe-based predictions for the market cap at the end of 2018 are 77, 39, and 64 billion USD respectively, still well below the current level. On this basis alone, the current market looks similar to that of early 2014, which was followed by a year of sideways and downward movement. In other words, some separate fundamental development would need to exist to justify such high valuation, which we are unaware of.

Bitcoin Bubbles: Universal Unsustainable Growth?

As is well known, bitcoin's history has been punctuated by spectacular bubbles and crashes. We were able to identify four main bubbles, corresponding to massive upward deviations of the market cap from its estimated fundamental value. These four bubbles are highlighted in Figures 3 and 4  -  in some cases exhibiting a 20 fold increase in less than 6 months! In all cases, the burst of the bubble is attributed to fundamental events: In 2011, for example, the bitcoin exchange Mt. Gox was hacked, which resulted in a 88% decrease in the cryptocurrency's price. In 2013, China banned financial institutions from using bitcoin, which caused bitcoin's market cap to drop by 50%, and two weeks later Mt. Gox shut down. Similarly, in the end of 2017, South Korean regulators threatened to close local cryptocurrency exchanges, which triggered a steep decline in prices. However, the fourth and most recent bubble was much longer, and it is plausible that the triggering factor, which resulted in the bubble's bursting, was bitcoin's all-time high price of 20'000 USD. In other words, bitcoin collapsed under its own weight.

Figure 3: The upper triangle represents the market cap of bitcoin with four major bubbles indicated by bold colored lines, numbered, and with bursting dates given. The lower triangle shows the four bubbles scaled to have same log-height and length with the same color coding, and with pure hyperbolic power law and LPPLS models fitted to the average of the four bubbles, given in dashed and solid black, respectively.

What is interesting is that, although the height and length of these bubbles vary considerably, when scaled to the same log-height, a near-universal super-exponential growth is evident. And in this sense, like a sandpile, once the scaled bubble becomes steep enough (the so-called angle of repose), it will avalanche. In other words, what causes the collapse is the instability of the system itself; the instantaneous cause of collapse is secondary. This key insight is built into the Log-Periodic Power Law Singularity (LPPLS) model, which has been developed by Didier Sornette and collaborators.

In sharp contrast to the deeply entrenched view in finance and economics that financial bubbles can be characterized as unpredictable phenomena, as asset prices are assumed to follow random walks, the LPPLS model captures the radically different insight that financial markets have predictable components. Based on Sornette's hypothesis that the underlying causes of crashes should be identified in the preceding period, the LPPLS model captures the unsustainable super-exponential price acceleration, which means that the growth rate of the price grows itself. As the speculative frenzy intensifies and the bubble matures, the market approaches a critical point, being driven by positive feedbacks in herding and imitation behavior, at which time any small disturbance can trigger a crash.

Formally, the model looks like this:

where p_i is the price of the asset, t_c corresponds to the bubble, and ε(t) is noise. When applied to bitcoin, the LPPLS allows one to detect the signatures of bubbles, which are represented in Figure 3.

Now, given the proposed fundamental value of bitcoin based on the generalized Metcalfe regression presented above, we define the Market-to-Metcalfe value (MMV) ratio as the actual market cap divided by the market cap predicted by the Metcalfe support. As shown in Figure 4, bubbles are persistent deviations of the MMV above support level 1. In our paper, we show that these bubbles are not only well modeled by the LPPLS model, but that the model offered useful advance warning information for the 2017 correction, producing a confidence interval bracketing the true crash time, when back-tested.

Figure 4: Market-to-Metcalfe value ratio (MMV) over time. The apparent bubbles, which radically depart from the fundamental level 1, are colored.

To sum up, by combining a generalized Metcalfe's law, which provides a fundamental value based on network characteristics, with the Log-Periodic Power law Singularity (LPPLS) model, we were able to develop a rich diagnostic of bubbles and their crashesthat have punctuated the cryptocurrency's history.

In doing so, we were able to diagnose four distinct bubbles, being periods of high overvaluation and LPPLS-like trajectories, which were followed by crashes or strong corrections. This is in radical contrast to the view that crypto-markets follow a random walk and are essentially unpredictable. Further, in addition to being able to identify bubbles in hindsight, given the consistent LPPLS bubble characteristics and demonstrated advance warning potential, the LPPLS can be used to provide ex-ante predictions.

Our Metcalfe-based analysis indicates current support levels for the bitcoin market in the range of 22–44 billion USD, at least three times less than the current level. Given the high correlation of cryptocurrencies, the short-term movements of other cryptocurrencies are likely to be affected by corrections in bitcoin (and vice-versa), regardless of their own relative valuations.

Morgan Stanley: "Something's Different This Year"

Sunday Start: When You Have Your Dessert Before Your Vegetables…

Investors had it good over the past year when it came to the influence of US public policy on the markets. Even if the US government had not delivered the tax cut fiscal stimulus in our base case, legislative gridlock would have preserved a status quo that was already featuring some economic momentum. Meanwhile, concerns about a trade conflict could be safely deferred to another day, as the trade investigations that could lead to tariffs and the NAFTA negotiations required time to play out. Not surprisingly, our colleague Mike Wilson's bullish call on US equities was spot on as the S&P 500 rallied 20% in 2017.

But something's different this year. As our cross-asset team has pointed out, volatility is back across a variety of markets. UST yields have climbed, as one would expect in anticipation of better growth and coincident Fed hikes, but the curve has flattened considerably, reflecting longer-term economic anxiety. And while we certainly can't blame this all on public policy, we think it's played a meaningful role. Yes, stimulus has been delivered, and deregulation has started, but the time has come for some of the tougher realities of these policies, and the challenges of the broader policy agenda, to be accounted for. Said differently, we had our dessert, now it's time for our vegetables.

The elevation of risks from US trade policy is the most obvious example of this dynamic, but not the only one. For investors hoping that deregulation will deliver benefits in the near term, we'd note that risks are very much to the long side, given that, based on the historical average, rule rewriting takes four years. Fiscal policy is another area that could disappoint as time marches on. In the near term, we don't have high hopes for more fiscal expansion from infrastructure, given the limits of the midterm campaign calendar, key issue disagreements within Congress, and our own questions about whether the size and incentives of the current proposal would actually increase spending. And while tax reform's near-term benefits are clear, looking a bit further out, it also introduced some meaningful 'cliffs' in the economy, like the expiration of full capex expensing in 2023 and the switch to more stringent corporate interest deduction limits in 2022.

When considering what that means for markets, it feels less like 'morning in America' than 'happy hour in America'. In that sense, we're pushing back on the notion that US policy actions have meaningfully extended the market cycle, instead arguing that markets have already largely reflected, and are currently pricing in, the benefits they delivered. Hence, we see more volatility to navigate as we work through the other side of the policy agenda. In US equities, for example, tax benefits are clear in their scale, but their use is murky. The nearly 8% move in 2018e EPS following the passage of tax reform aligns with our US equity colleagues' estimate for full potential earnings benefit for the S&P from tax reform (~7.6%), leading us to believe that estimates are baking in a full flow-through of tax reform.

But with our finding that 44% of companies plan to reinvest tax savings, it is possible that spending on capex and wage growth will prevent a full pass-through, meaning 2018 earnings expectations may be too high. Ultimately our strategy team expects a range-bound market multiple as there are few growth accelerants on the horizon in the near term.The silver lining here is a better opportunity for alpha as the effects of tax reform and late-cycle dynamics should create more performance differentiation among US corporates.

In fixed income, our interest rate strategists see opportunity in yield curve flatteners as we onboard both Fed hikes and increased macro uncertainty. Against this backdrop, we prefer munis over US credit. Whereas munis benefit from lagged fundamental deterioration and positive return effects, given a longer duration profile, in US credit our team still sees downside that's been augmented by the pro-cyclical effects of interest-deduction limits and the limited stated intention of companies to use their tax benefits to reduce historically high leverage.

Goldilocks R.I.P. Part 2

Goldilocks is a conceit of monetary central planning and its erroneous predicate that falsifying financial asset prices is the route to prosperity.

In fact, it only leads to immense and unstable financial bubbles which eventually crash - monkey-hammering the purported Goldilocks Economy as they do.

It also leads to a complete corruption of the economic and financial narrative on both ends of the Acela Corridor.

To wit, the Fed's serial financial bubbles on Wall Street are falsely celebrated as arising from a booming main street economy. In fact, they are an economic dagger that bleeds it of investment and cash and exposes it to "restructuring" mayhem from the C-suites when the egregious inflation of share prices and stock option values finally gets crushed by another financial meltdown.

In this context, the Washington Post (WaPo) is out this morning with brutal takedown of our friend Larry Kudlow for his ebullient whistling past the graveyard on the eve of the financial crisis and Great Recession. It would be an understatement to say he didn't see it coming, but it's also completely unfair not to acknowledge that 95% of Wall Street and 100% of the FOMC were equally bubble-blind.

In fact, when Larry Kudlow waxed eloquently in a piece in the National Review about the awesome economy the George Bush Administration had produced in December 2007, he was just delivering the Wall Street consensus forecast for the coming year:

 There's no recession coming. The pessimistas were wrong. It's not going to happen. At a bare minimum, we are looking at Goldilocks 2.0.(And that's a minimum). Goldilocks is alive and well. The Bush boom is alive and well. It's finishing up its sixth consecutive year with more to come. Yes, it's still the greatest story never told.......In fact, we are about to enter the seventh consecutive year of the Bush boom.

Well, not exactly. The worst recession since the 1930s actually incepted that very month and 10 months latter came Washington's hair-on-fire moment when the monetary and fiscal spigots were opened far wider than ever before--- bailing out everything that was collapsing, tottering, moving or even standing still.

Still, Kudlow (like most of Wall Street) was not about to give up on his love affair with Goldilocks until she positively betrayed him. Thus, by February 2008 when the economic clouds were gathering, Kudlow insisted that,

Maybe we are going to have a mild correction. Maybe not," adding: "I'm going to bet that the economy will be rebounding sometime this summer, if not sooner. We are in a slow patch. That's all. It's nothing to get up in arms about."

By summer, of course, there was no economic rebound and the housing market was going down for the count. But Larry was not about to give up on Goldilocks, and, in fact, espied the bottom of the housing crunch and better times for the economy straight ahead:

Media reports painted a pessimistic picture of today's release on existing home sales, which fell 15 percent from a year ago and recorded higher inventories. But inside the report was an awful lot of very good new news, which appear to be pointing to a bottom in the housing problem; in fact, maybe the tiniest beginnings of a recovery.....For example, the median existing home price has increased four consecutive months and is up 10 percent since February. 

The point here, however, is not to make Larry Kudlow look especially foolish; he was just a more colorful and cogent consensus peddler than most of his bubblevision compatriots. Instead, what is powerfully enlightening about Kudlow's National Review piece and his subsequent Goldilocks swooning is the reasons he gave for his ebullient outlook on the future.

To wit, he kept doing a perfect Janet Yellen imitation, reciting all the flashing green indicators on the main street economy that were showing up on his dashboard. What he had to say back then, in fact, is nearly identical to what the Wall Street and Fed economists are saying today.

In the original National Review piece he argued that the "in-coming data" couldn't be more upbeat, meaning that the few stray voices of pessimism beginning to emerge at year-end 2007 were dead wrong:

The pessimistas are a persistent bunch. In 2006, they were certain a recession was just around the corner. They were wrong. Instead, the economy posted two consecutive quarters of near or above four-percent growth.

Earlier today, a doom and gloom economic forecast from Macro Economic Advisors was released predicting zero percent growth in the fourth quarter. This report is off by at least two percentage points.These guys are going to wind up with egg on their faces.

As it happened, Q4 2007 GDP came in slightly positive, but it was all downhill from there. It was Kudlow who got the egg---along with nearly the entirety of mainstream Keynesian economists.

For example, the Bush Administration's hapless chief economist and freshwater Keynesian, Ed Lazear, insisted as late as May 2008 that no recession was insight; and the FOMC spent the whole summer of 2008 debating whether or not the unexpected economic "slowdown" then materializing was only a temporary blip.

Still, Larry Kudlow was just getting started with his egg-in-your face bluster in December 2007. Here's the gravamen of his confidence, and it was all about the swell numbers pouring in from main street:

Here are the facts: Americans are working. The 4.7 percentunemployment number remains at an historical low. On a three-month rolling basis, the U.S. economy has added over 100,000 jobs. Meanwhile, the household job count shows that an average of 303,000jobs have been added in the last three months. This is noteworthy because it suggests that the job market is turning around.

Hours worked are growing more than 1-percent annually, while workers' wages are running 3.8 percent, a full percentage point ahead of inflation. As for this week's productivity report, it was nothing short of spectacular: the 6.3 percent productivity gain was the best in four years. A rise in productivity is good for growth. It's good for profits. And it's good for low inflation.

Speaking of inflation, business inflation is down from 3.5 percent just over a year ago to 1.5 percent today. Meanwhile, oil prices have retreated to $88. And, to top it all off, last night we received a tremendous new number showing household net wealth has headed even higher. It stands at a record $59 trillion dollars. That's more thanseven percent above a year ago.

Well, let's see. Relative to the 303,000 monthly average gain on the household (HH) survey that Kudlow was hyping back then, it turns out that the HH survey rose by an average of 430,000 jobs during the three months ending in February 2018---so maybe we are now ahead of the game.

Then again, maybe not. If you average the last six months the number drops to 277,000; and over any reasonable period of recent time it's been all over the lot, and in fact has averaged just 204,000 new jobs per month since the eve of the 2016 election.

We wouldn't call the above February surge anything but another random oscillation in a survey that is virtually junk from a statistical integrity viewpoint, and, in any case, doesn't even measure employed people. That is, second, third, and fourth part time jobs all count as another point on the BLS scoreboard.

That said, our more essential point is that the BLS numbers are generated by a trend-cycle statistical model, not an honest-to-goodness body count, or even sample extrapolation, from the actual main street economy. So these goal-seeked numbers (i.e. the Fed is stimulating, so full-employment must happen) are notoriously unreliable at cyclical turning points like late 2007 and early 2018, as well.

Accordingly, such times become a cherry-picker's delight, and Larry Kudlow was no slouch as a cherry-picker----even by Wall Street standards. In fact, here is the same 16-month trailing chart for the HH survey at the time Kudlow espied the 303,000 monthly job gain back in December 2007.

Can you say, Larry, I'll have another bowl of them cherries!

Turns out that the 16-month average was even weaker than today. Job gains averaged just133,000 per month. That was just one-third of the monthly rate cited by Kudlow, and like the above 16-month chart for the current period, the monthly changes were flopping all around the deck.

Well, that's until they started cliff-diving---thereby putting in mind Ronald Reagan's famous story about the little boy, who upon being shown into a room full of horse manure, began to frolic around joyfully. Said he, "there's got to be a pony in there somewhere!"

Needless to say, Kudlow picked the cherries and found the pony, too. And he was by no means alone----either back then or once again, now.

As shown below, the big November surge that got Kudlow his 303,000 per month job gain was the last hurrah. The main street economy would soon be taken down by a collapsing housing/mortgage bubble; and then be plastered by the Wall Street meltdown when its own financial meth labs---which had concocted the subprime securitizations that fueled the housing mania---blew up in its face.

All told, 8 million jobs disappeared over the next two years. Indeed, the high water mark of146.6 million HH jobs that Kudlow hung his hat on was not regained until  September 2014-----nearly seven full years later!

Likewise, the 1% growth rate of labor hours didn't foretell anything, either. After Q4 2007, the US economy shed more than 15 billion labor hours during the next six quarters.

The long and short of it is that the incoming data from the Washington statistical mills is overwhelmingly and inherently a lagging indicator---meaning that economists and Wall Street cheerleaders, as the case may be, can always dig up enough favorable monthly and quarterly deltas to keep the Goldilocks narrative going.

The danger of lagging indicators, in fact, could not be better illustrated than by the cherry that capped off Kudlow's December 2007 encomium to Goldilocks. To wit, the fact that household net worth had been reported at an all-time high the previous quarter (Q3 2007) and was up 7% from the prior year.

Needless to say, September 2007 was about as close as you please to the tippy-top of the Greenspan housing/Wall Street bubble, and those twin bubbles were dully reflected in the Fed's quarterly net worth calculations (flow-of-funds report).

So by Q1 2009 the household net worth number was down by the tidy sum of $12 trillion or nearly 20%. And it took four years of madcap money printing at the Fed to reflate housing and the stock markets sufficiently to regain the Q3 2007 level that Kudlow had sighted as evidence that Goldilocks was headed for near eternal life, world without end.

We dwell on Kudlow's 2007-2008 Goldilocks affair because it's exceedingly timely, and in more than one way.

That is, it's a reminder that the leading indicators are embedded in the Wall Street bubbles, not the main street labor, business and GDP data; and that the next recession will arrive as a great shock and surprise when the bubble finally splatters. Besides that, Larry Kudlow is now in a great position to help accelerate the latter's arrival.

That's because his newly appointed task will be to dig through Ronald Reagan's proverbial room full of horse manure to reassure the Donald that there is a pony in there somewhere. In fact, as we said on bubblevision yesterday, Larry Kudlow is one of the most talented and persistent data miners around.

 

In a word, Larry Kudlow can be counted upon to reassure the Donald that a boom is just around the corner, and that the nation's skyrocketing budget deficits are nothing to worry about.

As he told CNBC yesterday, we are on the very cusp of it----meaning that economic growth will make it all go away:

LOOK, THE ECONOMY IS STARTING TO BOOM THE TAX CUTS ARE WORKING, THE DEREGULATION IS WORKING......WE ARE ALREADY, I BELIEVE, ON THE FRONT END OF A TREMENDOUS INVESTMENT BOOM.

Au contraire. At 105 months of age, the current business expansion is already running out of steam, and is in no position to absorb another thundering bubble collapse in the casino without again buckling like it did in 2008.

At the same time, the current third and greatest central bank bubble of this century absolutely cannot endure the "yield shock" that is baked into the cake for next fall. That's when the rock of $1.2 trillion in new government borrowing smashes into the hard place of the Fed's $600 billion annual bond dumping program.

Not unsurprisingly, the Donald is so oblivious to the fiscal calamity he is charging into that he has now even started tweeting about a second tax cut.

That's utter madness, of course, but Larry Kudlow----Goldilocks in hand---is just the man to sleepwalk him into the fiscal inferno.

In the interim, there is this. Even as Larry Kudlow was headed to Washington vainly hoping to fill some of the economic darkness lurking under the Orange Combover, the latter was off to celebrate the Trumpian economic boom at Boeing's (BA) plant in St. Louis.

Now there's a canary in the wind tunnel, if there ever was one!

The Donald is on the verge of unleashing a bloody trade conflagration with China. But given the immense operating leverage embedded in Boeing's huge commercial aircraft manufacturing business, it cannot afford to miss a beat in terms of sales and shipments to it biggest customer.

Especially not after its market cap has soared from $75 billion to $200 billion in the last two years and it is being valued at a nosebleed 20X operating free cash flow.

Stated differently, Boeing is not fixing to make the American economy great again. Its hideously inflated stock price is a crash waiting to happen---just like the rest of the casino's endless sea of bubbles.