$100 Trillion in International Derivatives
What do you think? Can you even get a grip on this huge number? Back in 2010, a Midwestern investment firm initiated a wave of sell orders that ended with the now infamous flash crash. High frequency and algorithmic trading fired up what would ultimately lead to a Dow crash of nearly 1,000 points in under 30 minutes. Since 2010, the high-frequency, algorithmic environment has become even more scary.
And while the $100 trillion international derivatives market noted above is a monster number, it is sadly outdated. Since 2000, the international derivatives market has grown exponentially at a compound growth rate of nearly 20% per year and now stands in excess of $700 trillion.
Moreover, only the 10 largest banks in America control nearly 80% of total banking assets today. Talk about monumental risk concentrated in a small playing field. I am unsure how to even quantify such a risky environment for you. And you know what? Deteriorating financial conditions at home and around the world intensify the risk.
America is badly overdue for a massive overhaul in Washington. The entrenched members of the Senate, in collaboration with a sadly over-matched administration, have piloted America’s ship of state onto the shoals. Most Americans are aware of the deficit/debt charade and how we have been head-faked by lousy leadership in Washington. The media, however, continues to hide the true state of the economy from the public.
GDP Growth Revised Downward
Look, economic momentum peaked even before 2012 began. My sensitive leading economic indicators composite peaked last December and has declined in each of the last two months. Today, jobless claims stand ahead of where they were in December, and the latest non-farm employment report was a horror-thon. The administration was looking for an increase of 158,000 jobs, a rotten number in its own right. Instead, we got a 69,000 mini gain—wide of the mark by over 50%.
In the last two months, the month-to-month change numbers were only half the rate of the prior two months. All four are stinkers. The last of what I would call a decent monthly gain occurred in May of 2010 (that’s not 2011). A month ago, it was announced that GDP had advanced by a none-too-hot 2.2% for the first quarter of 2012. Now, we have an Oops revision downward of 1.9%.
Massive Job Losses Continue
Although my index of coincident indicators chart shows that America has not yet sunk back into recession, you’ll note the real downshifting in the final half of last year and the unpleasant foul stagnancy since. The big elephant in the room is the lack of job creation.
I keep a log of major job gains or cuts, and here’s how it looks. Job losses: Recently, Hewlett-Packard (NYSE:HPQ)announced that it would hack nearly 30,000 jobs. At the end of ’08, Citigroup (NYSE:C) chopped 50,000 workers. In early ’09, GM (NYSE:GM) passed out 47,000 pink slips, and the now defunct Circuit City bid adieu to 34,000 loyal employees. In September 2011, Bank of America (NYSE:BAC) thinned its ranks by 30,000 poor souls. And so on and so on. I left out the big gainers, right? No. Not one on my list.
I have worked with all the economic data mentioned above for over four decades, and there is no way I would fail to spot a shift in the economic weather pattern. And there is also no way my current conclusion on the economy is wrong. I used the word stinker, and it fits here as well. And you know what? The unsettling cherry on the American economic cake is that the p-poor economic momentum has occurred in the face of pedal-to-the-metal money supply growth courtesy of the Fed and borrowing, debt accumulation, and monster bailouts from the Washington folk.
Interest rates are at a secular low and, in the future, will be a thorn in the side of economic expansion. After-tax corporate profits as a percent of GDP are at a level well beyond any expected cyclical peak. The coming cyclical downdraft will result in a 50% decline.
Federal Regulatory Agency Job Growth Outruns Private Sector Job Growth
A final note on the troubling employment front is that horrible overall job growth masks the fact that the only real pocket of strength is government hiring. Over the last couple of years, federal job growth has run at a 2.15% rate, almost double the puny private-sector job growth rate. And most troubling of all for America’s small-business job creators is the enormous growth in federal regulatory agency jobs. Government regulators need to be a declining sector, not a frontrunner. If you can imagine it, in the last two years, federal regulator agency jobs have increased at a growth rate nearly four times private-sector job growth. Sure has the look of socialist France to me.
In less than two years, Debbie and I have been to France four times as our new international base of research. We love France and the French, but its government and France’s competitive position in international trade are another matter. We were in Paris for the recent presidential election. Election Day pronouncements by the incoming socialist leader had a most concerning ring. I analyze the current administration in Washington to be every bit as dangerous as the crowd that was just voted in by the French.