'Screwflation' and the Two-Headed Market
You can’t beat a bit of Roman mythology on a Tuesday morning, so an article by Doug Kass, the president of Seabreeze Partners Management caught my attention.
“In Roman mythology, Janus is the god of beginnings and endings. He is depicted as having two heads, facing opposite directions. So it is with the two-headed U.S. economy” Kass said.
Despite companies having loads of cash and near-record operating margins, the average American is still haunted by the economic crisis of 2007-2009, he said.
Kass describes the situation facing the American middle classes as "screwflation" and warns that the schism between the haves (large corporations), and have-nots (the middle classes) is widening and could jeopardize economic expansion if it is to continue.
“Mega trends of globalization, technological advances and the growing presence of temporary hiring as a permanent feature of the workplace form the basis of a secular rise in structural unemployment,” he said.
“Further depressing job creation is the fact that there are few growth engines to replace residential real estate, a sector that was such a prominent contributor to GDP and labor in the last cycle,” Kass added.
Friday’s jobs number showed evidence of this with average hours worked declining with no change in hourly earnings, he said.
“The employment participation, back down to 27-year lows, casts a long shadow on the domestic economy, which, despite normal population growth, currently employs only the same number of people as in 2003.”
Screwflation and the Bulls
“The cost of necessities like energy continues an uninterrupted rise, serving to obviously pressure not only the unemployed but the average Joe that has a job,” Kass said.
He dismissed the bulls who claim that a pick-up in hiring is around the corner when economic activity picks up and said inflation and the possibility of higher interest rates should not be seen as to far in the future to worry about.
The bulls, who have ridden the market higher since March 2009, have correctly dismissed fears over the Middle East, food price inflation, higher gold and silver prices, fiscal imbalances at state and local level, the euro zone and the “still moribund housing market,” he said.
“Mr. Market has ignored and rejected the shadows, instead focusing on the positives - the most significant positive being, for now, the confidence in a smooth and self-sustaining recovery buoyed by every ISM and by a market-friendly Fed,” Kass said.
“So, for now, investors face two heads, like Janus, the mythological god of beginnings and endings," he said.
"One head is the strengthened and strong - the large corporation. The other head stares in the opposite the direction - it's the wobbly head of the middle-class consumer.”
“Investors worship today, as they did during the Roman Empire, to Janus. As to the market's advanced recovery, it seems more likely we are far closer to the latter (the ending) than the former (the beginning),” he warned.