As autumn descends upon California, the landscape transforms into a brown panorama after enduring the scorching summer sun. The dense sage and chaparral blanketing the coastal hills and canyons dries out, leaving behind parched terrain. However, before any signs of relief, conditions are expected to worsen.
As each fall approaches, high-pressure systems develop over the high-desert regions of the Great Basin, positioned between the Sierra Nevada and Rocky Mountains. This pressure compels the warm, dry Santa Ana winds to surge into Southern California, igniting the ground into flames.
The winds billow from the east, sweeping across the inland deserts before funneling through mountain passes and racing across the LA Basin to the Pacific Ocean. As the air descends from high to low elevation, it compresses and heats up rapidly—almost 30 degrees Fahrenheit for every mile it falls. Concurrently, its relative humidity drops below 10 percent.
This already depleted vegetative cover becomes even drier due to the Santa Ana winds, resulting in an enormous tinderbox. Just one spark—from a shattered power line or a backfiring truck—can ignite a massive wildfire. As of the latest count, thirteen active wildfires were blazing across the state.
From our vantage point in Long Beach, nestled safely on bluffs near San Pedro Bay and shielded by miles of concrete, the temperature soared to 94 degrees Fahrenheit yesterday, with humidity plunging to a mere 7 percent. Yet amidst these extremes, a unique energy has emerged, and this year more than ever, the state is hoping this energy will spur much-needed economic growth. Here’s why…
Tapped Out
California’s hillsides might be hot and brown, but its consumers are feeling cold, damp, and disheartened. Data from Yelp highlights this, as brought to the public’s attention by Tyler Durden at Zero Hedge, indicating that consumers in California’s urban areas are running out of steam. Here are the worrying details…
“California holds a robust position in both national and global economies, being home to one in eight Americans and recently recognized as the fifth-largest economy worldwide. However, local economic activity in major metro areas is faltering, according to Yelp data.”
“Cities like San Jose and San Francisco are experiencing the most significant declines in local economic activity among the 50 major U.S. metros tracked since Q4 2016, per the Yelp Economic Average (YEA), which monitors U.S. local economies and consumer demand in these major cities. Other California cities, like San Diego, are also ranking in the bottom five, while Los Angeles and Sacramento are hovering below average.”
“Retail businesses in California are facing the most significant setbacks, with shopping ranking last in all five California metros we track, among six major local economic sectors included in YEA (the other sectors being automotive, restaurants and nightlife, professional services, home services, and local services).”
It’s noteworthy that consumer spending makes up 70 percent of the U.S. gross domestic product (GDP). Therefore, as California consumers lose faith, the state may be steering the nation toward a bleak holiday shopping season. Additionally, the U.S. economy could be stagnating as we head into the 2020 presidential election year…
How to Prepare as the Fed Scorches the Earth
The U.S. economy is nearing the end of a remarkable 125-month stretch of uninterrupted expansion, marking it the longest growth period in the post-WWII era. The earlier record lasted 120 months, from March 1991 to March 2001. But what kind of recovery has this truly been?
Overall, this economic expansion has proven to be lackluster for workers and wage earners. The Federal Reserve’s interventions—employing zero interest rate policies and quantitative easing—have inflated the stock, bond, and real estate portfolios of the wealthy, disregarding the majority of citizens.
In reality, approximately 52 percent of total household income growth from 2009-15 was concentrated in the top 1 percent of earners. Furthermore, according to the Fed’s own data, the top 1 percent increased their total net worth by $21 trillion from 1989 to 2018, while the bottom 50 percent saw a decrease of $900 billion during the same timeframe. In short, wealth inequality has escalated to alarming levels.
Unequivocally, without the Fed’s interventions, financial asset prices would have plummeted long ago, creating a balance within the economy. However, the Fed remains committed to propping up markets indefinitely. Just recently, it disclosed plans to ramp up its temporary overnight repo operations to $120 billion per day. It’s best not to inquire about where this money comes from, as it is deemed impolite in today’s context.
The essential point is this…
The U.S. economy is decelerating, with California’s consumer spending serving as just one indicator. Manufacturing output, as reported by the Fed, has contracted for two consecutive quarters, indicating an official recession in manufacturing. Auto sales also took a hit in September.
Like California’s drought-stricken hillsides, the U.S. economy is turning brown. Meanwhile, the Fed continues to inject hot monetary gas into financial markets. As the economy slows, the divide between financial markets and Main Street will only grow more pronounced and perilous.
The Fed is effectively converting financial markets into a colossal tinderbox. A single spark—be it a blowup in leveraged loans, a crisis at a foreign bank, or various geopolitical tensions—could ignite chaos akin to a ferocious wildfire sweeping through California.
Our recommendation? Prepare yourself with marshmallows and graham crackers. When the Fed’s scorched earth policies obliterate the economy and reduce your savings to ash, you’ll be thankful for the comfort of s’mores while navigating these tumultuous times.
Sincerely,
MN Gordon
for Economic Prism
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