Three charts and an alarming signal.

With today’s 25 basis point rate hike announced by the Fed at 2pm, rates are continuing to get goosed at the fastest pace since the late 1980s.

Today’s hike takes the Fed fund rate to 4.5%-4.75%. “What is the result of such rapid interest rate increases?” you ask…

On January 26, the Bureau of Labor Statistics (BLS) released the latest GDP numbers. “The most troubling information in the GDP report,” writes E.J. Antoni at Fox Business, “is the precipitous drop in real disposable income, which fell over $1 trillion in 2022.”

“For context,” Antoni continues, “this is the second-largest percentage drop in real disposable income ever, behind only 1932, the worst year of the Great Depression.”

Since March 31, 2021 outstanding consumer credit – that’s credit cards and loans – has jumped nearly 30%. At the same time, the personal savings rate has dropped from a pandemic high of almost 40% down to 3%. To keep up their spending as the economy has opened up, the average American family has blown through their savings and started accepting all those credit card offers still being sent out by the millions in snail mail.

Following the Pandemic lockdowns and nearly $5 trillion in stimulus checks sent directly to consumers and businesses the economy is, well, woozy from too many monetary lipo injections (if you will). In keeping with our econometric roots, we came up with this equation surely destined for college textbooks:

Exploding consumer credit + plummeting savings rates = ouch.

Translation: People continue to spend beyond their means, evidenced by a fluffy January market capitulation (of which we are no doubt beneficiaries… but we see the big picture, too). As people continue to spend and spend, inflation will persist and get “baked in” as Big Finance likes to say.

And if markets continue to “fight the Fed,” going up when they want people to stop spending, Powell will have to make a tough decision later in the year as to whether a tightening labor market and teetering housing market can survive another cycle of hikes without a financial day of reckoning.

Credit card users and bearers of Adjustable Rate Mortgages (ARMs) or large home equity loans (HLOCs) can expect to really feel the pinch in 2023.

So how are the Fed governors going to deal with a collapsing credit-driven economy without getting egg on their collective faces? They’re going to have to justify a “pivot”. How are they going to do that? With a little help from their friends across town.

We cover all this and more in our Wiggin Session this week with Adam Barrata, editor-in-chief at Brentwood Research, including some new sketchy sleight-of-hand being practiced by the data magicians at the Bureau of Labor Statistics. If you like what you see and you want to read more about sovereign debt and the markets, below is an essay titled “The Fed Skinny Mirror” by Mr Baratta.

Enjoy,
Addison Wiggin

A note from Adam Baratta

Dear Wiggin Sessions Reader,

Have you heard of the skinny mirror?

My wife (who looks amazing for the record) is convinced that there are mirrors at certain stores specifically designed to make us look skinnier. It’s why she doesn’t decide on whether an outfit is a keeper until she gets home and tries it on.

She doesn’t want to fall for the trap of the rigged mirror.

Have you ever found yourself trying on an outfit in a store and thought, “Wow, this looks great on me,” only to then find that when you get home it looks nowhere near as good in your bathroom mirror?

It’s precisely the idea of entrepreneur Belinda Jasmine. She is the founder of The Skinny Mirror who recently went on the television series Shark Tank seeking a $200,000 investment for her new invention, a mirror that helps people look 5-10 pounds lighter.

Her pitch was that the better people look when seeing themselves in the mirror, the better they will feel. The better they feel, the more likely they are to then make a purchase. Jasmine claimed the mirror helped you see your true self.¹

Ironically, Kevin O’Leary, the very same shark under fire for accepting $15MM in spokesperson fees to peddle FTX, the crypto exchange recently revealed to be a Ponzi scheme, was most vocally against the business proposal because “it was based on lies.”

In the end, no shark invested. Daymond John said that “the product was dangerous because it could mess with people’s physical and mental health.”

Are rigged mirrors dangerous?

If so, someone needs to tell the Bureau of Labor Statistics (“BLS”, or “The B.S. Agency” as I like to refer to them), who, once again, are changing the way that inflation gets reported.

Who is the BLS and what do they do?

The BLS serves as the principal fact finding agency for the U.S Government in the broad field of labor economics and statistics. It measures labor market activity, working conditions, price changes, and productivity in the U.S. economy to support public and private decision-making. The BLS has 2400 employees.

Half of these workers are economists and statisticians.

Are wages going up or down? Are more people being hired or fired? Are prices rising or falling?

These are the big questions that the data collected from the BLS are meant to help us answer. It’s the very same data that is then used by the Federal Reserve to adjust their monetary policies.

As we know, it’s the same data investors use to predict what the Federal Reserve will do next.

It also happens to be the same data which tells us if the economy is doing well, if the President’s policies are working, and if the Federal Reserve is doing a good or bad job.

This makes the data the BLS reports incredibly powerful and why everyone should pay attention to the newly rigged skinny mirror coming in two weeks from the BLS.

On February 14th, The BLS will celebrate what they are calling “an improvement” in the way they calculate the Consumer Price Index (CPI). Beginning with the January 2023 index, scheduled for publication on February 14, 2023, BLS plans to update the spending weights in the calculation of the CPI every year instead of every 2 years.

“Transitioning from biennial spending weights to annual spending weights is another milestone towards our goal to improve the accuracy and timeliness of the CPI. This is not the end, as BLS continues to research methods to improve our data products. In the meantime, celebrate this milestone with us and show the CPI extra love on February 14, 2023, when BLS releases the January 2023 CPI using annual spending weights for the first time.”
– BLS Website

Fun times! Let’s all do as the BLS asks and “celebrate this milestone and show the CPI extra love!”

Happy Valentine’s Day Federal Reserve! Thanks to the BLS new skinny mirror, inflation is going to look 5-10 pounds lighter!

Last year witnessed the highest levels of inflation in 41 years. But let’s keep in mind that inflation is a relative measure. Now, because we will be comparing pricing levels only to the last 12 months as opposed to the last 24 months, we can expect inflation prints that are comparatively that much lower, and could even go negative throughout the year.

The simple rigging of the BLS skinny mirror will make inflation look better compared to last year.

Can’t you just see the headlines? The Federal Reserve Has Tamed Inflation!

The result will be inflation prints that are almost certain to be lower, particularly because the BLS just rigged the scale. The new weighting scheme of the BLS will help the Federal Reserve regain their credibility. “See honey, they knew what they were doing all along.”

It’s not hard to imagine what comes after that. Once it looks like inflation has been destroyed, the Federal Reserve will then justify cutting interest rates because, “Look, CPI is coming down, hooray!”

The entire farce reminds us of the story of Snow White and the Seven Dwarfs and the evil stepmother who continually asks her beloved mirror, “Mirror, mirror on the wall, who is the fairest of them all?” The reply is always the same, “Thou, O Queen, art the fairest in the land.”

“Thou O’ Federal Reserve, art the fairest in the land!”

Except it’s all based on the lies of the BLS Skinny-Mirror.

If you are wondering, “how can they do this?” don’t worry. The good people at the BLS have adjusted the weights and measures used to calculate inflation regularly for the past 40 years. Each new weighting is sold as “an improvement” but is actually designed to knock another 5-10 pounds off the real inflation reflection.

The BLS skinny mirror is a miracle of modern science. It helps make the Federal Reserve look fantastic. Except for one thing. As Kevin O’Leary highlighted about The Skinny Mirror as seen on Shark Tank from Belinda Jasmine, “it’s based on lies.”

What does forty years of rigging the mirror look like?

Last year, Former Treasury Secretary Larry Summers, along with a group of economists, recalculated historical readings for the consumer price index to apply modern-day spending patterns, especially for housing. After adjustments, the figures showed that core inflation ran at almost 5% higher than what the BLS reports. The white paper indicated that had the BLS applied the same weights they did in 1980, rather than 9% inflation high officially reported in June, inflation would have been closer to 14%.

We have been eating that extra bowl of ice cream every night as a country for the last forty years all the while thinking we weren’t gaining any weight. The skinny mirror makes us feel skinny. The problem is that we are actually morbidly obese.

Will the markets continue overlooking the truth and keep believing the skinny mirror?

It’s one thing to rig the mirror to reflect what we want it to say. It’s another thing altogether for the BLS to report wildly inaccurate numbers. Last year the BLS reported that over one million jobs were created between the months of March through June.

The Federal Reserve then used this information to double down on their hawkishness because “they saw no signs of weakness in the labor market.” Investors saw this data and then sold stocks and bonds because the data meant the Federal Reserve would follow through on more rate hikes.

Except, it was all built on a lie.

In December, the Philadelphia Federal Reserve revised the employment numbers from that same period and revealed jobs numbers were dramatically lower. Instead of the 1,121,500 new jobs the BLS estimated, the Philly Fed found that only 10,500 new jobs were added during the period.

Did the error help the Democrats win the midterm elections? Florida Senator Rick Scott sure seems to think so.

Scott sent a scathing letter to the BLS to say that the discrepancy “appears to be a massive and incredibly consequential failure that has misled the American people and covered up the damage done to the American economy by President Biden’s radical anti-business, pro-government agenda.”

So when inflation comes down in the next several months, rather than jump for joy that the Fed are geniuses and have engineered a soft landing, you may want to recognize that the mirror is a liar and what appears like a healthy economy could keel over dead without warning.

Best regards,

Adam Barrata
Editor-in-Chief
Brentwood Research

P.S. I sat down with the excellent Addison Wiggin to discuss the skinny mirror, why equity markets don’t bottom until after the Federal Reserve pivots, and how to position for the upcoming Federal Reserve policy decision released tomorrow. You can see the full interview here.