Breaking Below the Shelf

In our recent missive on junk bonds, we inter alia discussed the fact that the growth rate of the narrow money supply aggregate M1 had declined rather noticeably from its peak in 2011. Here is a link to the chart.

As we wrote:


“We also have confirmation of a tightening monetary backdrop from the narrow money supply aggregate M1, the annualized growth rate of which has been immersed in a relentless downtrend since peaking at nearly 25% in 2011. We expect that this trend will turn out to be a a leading indicator for the recently stagnant (but still high at around 8.3% y/y) growth rate in the broad true money supply TMS-2.”



Photo credit: Bari Goodman


In the meantime the data for TMS-2 have been updated to the end of October, and low and behold, its year-on-year growth rate has declined to the lowest level since November of 2008. At the time Bernankenstein had just begun to print like crazy, via all sorts of acronym-decorated programs (they could have just as well called them “print 1, print 2, print 3”, etc.). So we’re now back to the broad true money supply growth rate recorded at “echo bubble take-off time”.


1-TMS-2, annual rate of growthAnnual growth rate of US money TMS-2, breaking below the lower end of the range it has inhabited since late 2013 – click to enlarge.


This is the final piece of the puzzle if it keeps up (and why wouldn’t it keep up?). Stock market internals have become ever more atrocious in the course of this year, which we have regarded as a sign that not enough new money was being printed to keep all the pieces of the bubble in the air at once. Now there is even less support.

Lest we forget, this is the Greenspan-Bernanke legacy in terms of money supply inflation in toto:


2-TMS-2Money supply inflation in overdrive – the Greenspan-Bernanke (and now Yellen) era – click to enlarge.


Evidence of Malinvestment and Lunacy

Here is an updated look at the ratio between capital goods (business equipment) and consumer goods production. As you can see, this ratio tends to expand during booms egged on by credit expansion, as more and more factors of production are drawn toward the higher stages of the production structure.

It subsequently contracts sharply during busts as the capital structure is rearranged to conform better to actual consumer wishes. Interestingly, it lately seems to be on the verge of crumbling as well.


3-Capital vs. consumer goods productionThree giant booms caused by the expansion of money and credit. The economy’s pool of real funding has been thoroughly damaged by these booms, which is why we have just experienced the “weakest economic recovery of the post WW2 era” – click to enlarge.


We promised evidence of utter lunacy as well, which we hereby provide below. It is another small hint that the bubble in asset prices is likely close to its expiration date.


4-KBIOStock of de facto bankrupt company moves from a low of 44 cents to a high of 46 dollars within just 6 trading days – click to enlarge.


Apparently KBIO, a tiny wanna-be biotech outfit announced about a week ago that it had run out of money and ideas to raise any fresh funds (no new suckers were found) and was about to wind itself down. The stock cratered to 44 cents, but suddenly and mysteriously, it began to rise on strong volume. Were the shorts covering? Not quite. Six days after trading at 44 cents, it hit a peak level of $46. No, this is not a typo and it is a real chart.

It seems bio-tech enfant terrible Martin Shkreli is somehow involved in this madness. You can get the background information from Zerohedge (where we learn that at least some shorts did cover, and were ruined in the process). A recent additional update is here. The whole affair looks slightly scammy, although no-one can keep anyone from buying the stock of a company that’s worth nothing and make it worth something in the process – evidently solely based on name recognition, a small float and by now truly desperate short sellers.

This is the kind of thing one usually gets to see in a bubble’s very late stages, although we wouldn’t be overly surprised if the stock market managed to hang in there for a little while longer (once money supply growth declines below the 3% to 5% region, it will be time to consider selling it with both hands).



The decline in broad true money supply growth below the lower end of its 2 year long range is a major crack in the echo bubble edifice. Very likely it is the most important one yet.


Charts by: St Louis Federal Reserve Rsearch, StockCharts




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One Response to “US Money Supply Growth Finally Begins to Crack”

  • bart:

    My M3 money supply reconstruction has also been sending warning signals since late 2013 when it was growing at about 9% YoY. It’s now barely growing at about 3% YoY.

    For those who might wonder why my reconstruction is growing much slower than John Williams, my best guess is that he’s not correctly accounting for or even ignoring reverse repos. Note the huge spike and drop in the YoY rate in late September, which reflects a similar move in reverse repos and which does not show up in Williams’s M3 chart.

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