On Economy

     

 

 

A Loose Relationship

The Dow Jones Industrial Average made another concerted run at the elusive 27,000 milestone over the last several weeks.  But, as of this writing, the index has stalled out short of this psychosomatic barrier.  By our estimation, this is for the best.

 

Since early 2018 the DJIA has gone nowhere, albeit in interesting ways… [PT]

 

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A Plan for Everything!

The run-up to the presidential primaries offers a funhouse reflection of American life.  Presidential hopefuls, hacks, and has-beens turn to focus groups to discover what they think the American electorate wants. Then they distill it down to hollow bumper stickers. After that, they pump their fists and reflect it back with mindless repetition.

 

A plea for clemency from Mr. 1/1024th crow. [PT]

 

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Money Supply Growth Continues to Decelerate

Here is a brief update of recent developments in US true money supply growth as well as the trend in the ratio of industrial production of capital goods versus consumer goods (we use the latter as a proxy for the effects of credit expansion on the economy’s production structure). First, a chart of the y/y growth rate of the broad US money supply TMS-2 vs. y/y growth in industrial & commercial loans extended by US banks.

 

At the end of April, growth in US TMS-2 (black line) stood at a measly 2% y/y, which is well below the threshold traditionally required to maintain bubble conditions. The red line depicts y/y growth in C&I loans – and the recent slowdown may be significant.

 

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A Jolly Little War

The dawn of war is a time of simple clarity and purpose.  Good guys vs. bad guys.  Cowboys vs. Indians.  Confederates vs. Yankees.  Coppers vs. robbers.  It’s a time when lines are drawn, songs are sung, and drums are beaten with gaiety and confidence.

 

A jolly little trade war – easy to win, according to the CiC [PT]

 

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The Seeds of the Next Bust Are Closer to Sprouting

The price of gold was up this week, by $10 and that of silver by ¢6. Something is brewing in the fundamentals that we haven’t seen since… last year. We will show a picture of this, below.

There are many problems with assuming a rising stock market means a growing economy. We’ve written many times about the much-greater growth of debt, i.e., borrowing to consume, which adds to GDP.

 

S&P 500 Index, monthly – the huge rally since 2009 was accompanied by the weakest economic recovery of the post-WW2 era. Evidently, the stock market does not necessarily reflect economic growth. Very often numerous other factors prove to be far more important drivers of stock prices. A pertinent example is Venezuela’s soaring stock market, which is up by 88,500% in the past year alone (this is not a typo). Meanwhile, the country’s economy is contracting since 2014, with the slump accelerating to a stunning -16.5% y/y in both 2017 and 2018. The S&P 500 Index is an island of sanity by comparison, at least superficially (the ceteris are of course not paribus). [PT]

 

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Why a Chernobyl-like Financial Disaster is Inescapable

In the early morning hours of April 26, 1986 – roughly 33 years ago – things went horribly wrong in the town of Pripyat, in northern Soviet Ukraine.  Reactor No. 4 at the V. I. Lenin Nuclear Power Plant, also known as the Chernobyl Nuclear Power Plant, was overwhelmed by an uncontrolled reaction.  There was no stopping it.

 

Chernobyl after the explosion (left) and today (right), encased in a steel sarcophagus. [PT]

 

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Learning From Other People’s Mistakes is Cheaper

One benefit of hindsight is that it imparts a cheap superiority over the past blunders of others.  We certainly make more mistakes than we’d care to admit.  Why not look down our nose and acquire some lessons learned from the mistakes of others?

 

Bitcoin, weekly. The late 2017 peak is completely obvious in hindsight… [PT]

 

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Money Supply Growth Continues to Falter

Ostensibly the stock market has rallied because the Fed promised to maintain an easy monetary policy. To be sure, interest rate hikes have been put on hold for the time being and the balance sheet contraction (a.k.a.“quantitative tightening”) will be terminated much earlier than originally envisaged. And yet, the year-on-year growth rate of the true broad money supply keeps declining noticeably.

 

The year-on-year growth rates of US TMS-2 (broad true money supply) and the narrow money aggregate M1. Y/y growth of TMS-2 has declined to a new 12-year low as of March 2019. For some background on the calculation of TMS-2 see Michael Pollaro’s excellent summary at Forbes.

 

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Unsolicited Advice to Fed Chair Powell

American businesses over the past decade have taken a most unsettling turn.  According to research from the Securities Industry and Financial Markets Association, as of November 2018, non-financial corporate debt has grown to more than $9.1 trillion [ed note: this number refers to securitized debt and business loans, other corporate liabilities would add an additional $11 trillion for a total of $20.5 trillion].

 

US non-financial corporate debt takes flight – the post 2008 crisis trajectory is breath-taking, to say the least [PT]

 

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Boom Times Compared

It has become abundantly clear by now that the late 2018 swoon was not yet the beginning of the end of the stock market bubble – at least not right away. While money supply growth continues to decelerate, the technical underpinnings of the rally from the late December low were actually quite strong – in particular, new highs in the cumulative NYSE A/D line indicate that it was broad-based.

 

Cumulative NYSE A/D line vs. SPX – normally the A/D line tends to deteriorate before the market peaks, as the advance narrows and fewer and fewer stocks participate in the rally. This did in fact happen shortly before the early October top.

 

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A Growing Gap

The first quarter of 2019 is over and done.  But before we say good riddance.  Some reflection is in order.  To this we offer two discrete metrics.  Gross domestic product and government debt.

 

US nominal GDP vs total federal debt (in millions of USD) – government debt has exceeded  total economic output for the first time in Q4 2012 and since then its relative growth trajectory has increased – and it seems the gap is set to widen further. [PT]

 

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Maurice Jackson of Proven and Probable Interviews Jayant Bhandari

Maurice Jackson of Proven & Probable has just conducted another interview with Jayant Bhandari, who is known to long-time readers as a frequent guest author on this site.

 

Jayant Bhandari

 

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