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US Credit Growth – the First Cracks?
US Credit Growth – the First Cracks?
Inflationary Bank Lending and Money Supply Growth
Given that there is currently no “QE” program underway – with the exception of the reinvestment scheme designed to prevent the Fed’s balance sheet from shrinking (if it were to shrink, the money supply would decline as well) – money supply growth depends primarily on the amount of fiduciary media created ex nihilo by commercial banks.
Putting it differently, it depends on the growth in bank lending, since new uncovered deposit money comes into being by the extension of credit by banks. This deposit money is a money substitute that is only partially covered by standard money, or potential standard money (i.e., bank reserves). However, it has to be regarded as part of the money supply, given that it is used for the final payment of goods and services. From the perspective of its users, it is money.
Photo credit: .Kai
Since the crisis of 2008 and the collapse of the mortgage credit bubble, the following trends have been in evidence: lending to corporations has quickly reached growth rates usually associated with boom conditions. Consumer lending has by contrast been more subdued, with mortgage credit growth not surprisingly only very slowly moving back into positive territory. Most of the acceleration in bank lending could be observed once “QE” was tapered and ended – as a result, broad US money supply growth has remained brisk, even though it is far below its peak levels of recent years.
…click on the above link to read the rest of the article…
Fed’s “Doom Loop” Locks Us On Course for Another Crisis
Fed’s “Doom Loop” Locks Us On Course for Another Crisis
Too Much of a Good Thing
PARIS – We’ve seen at least three articles explaining why the Fed failed to increase interest rates last Thursday. One says Goldman Sachs is calling the shots now. Another says China has the Fed under its thumb. Still another claims the Fed is a victim of its own policies and is now stuck in a “doom loop”…
All of them are right. All of the powers that be – including the Fed – want the party to continue. All know that if the Fed starts going around and turning off the lights and unplugging the music, the party is over.
Partying in ancient Rome – against the wishes of the guests, this party ended too …
Painting by Thomas Couture
As we tried to understand in our recent book, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. Public policies create their own support. When they’re big enough, and go on for long enough, they become unstoppable.
On Monday, the Dow rose by 125 points, recovering just under half of Friday’s losses. But the bigger picture shows a stock market cut off from reality –pretending to “party on” while desperately trying to ignore that the rest of the revelers have gone home.
A report in the Financial Times on a conversation with hedge fund manager John Burbank of Passport Capital begins:
“The world economy is locked on a course toward an emerging markets crisis and a renewed slowdown in the U.S., despite the Federal Reserve’s decision last week to hold off on a rise in rates.”
The Brazilian real, weekly. The currency of the “B” in the famous “BRICS” acronym already appears to be in crisis. Only a few years ago, Brazil’s finance minister was still complaining about its strength… click to enlarge.
…click on the above link to read the rest of the article…
Confusion in Fantasy Land
Confusion in Fantasy Land
Triangle Breakout Failure?
The stock market’s initial reaction to the FOMC announcement was interesting, to say the least. After receiving the umpteenth excuse as to why rates can still not be raised, coupled with a promise that they eventually will be, the market initially rallied on Thursday. And why wouldn’t it? More free money is good for stocks, right?
The Eccles Building, home of the FOMC – Meetings
Photo credit: AgnosticPreachersKid
The rally only lasted for one hour though. In the final hour of trading, the market sold off and closed in negative territory. On Friday, the sell-off intensified somewhat. By Friday’s close, the SPX had lost more than 60 points from its Thursday intra-day high, a sizable chunk over such a brief time period. Below is a chart showing the triangle from which it initially broke out to the upside (ahead of the announcement) and a Fibonacci grid – resistance was encountered right between the traditional 50% and 61.8% retracement levels.
S&P 500 Index, daily: the breakout from the triangle seems to have failed – click to enlarge.
As we are writing these words on Monday, the index is rallying again from the apex of the triangle to which it had returned as of Friday. So one cannot be certain yet that the breakout attempt will really turn out to be a failure – a clear break below the apex would however strongly indicate that a retest of the August lows was likely in the cards (at a minimum).
A Case of Cognitive Dissonance
Anyway, we have tried to come up with an explanation to the market’s sudden reassessment of the FOMC announcement. What is driving market psychology at the moment? One obvious point is technical: When major indexes return to the vicinity of a previously broken support level, some selling pressure will tend to emerge from traders/investors who were caught by surprise when the break below support originally occurred.
…click on the above link to read the rest of the article…
Demographics and Major Financial and Economic Trends
Demographics and Major Financial and Economic Trends
Demographics Driving Declines in Oil Consumption, Mounting Debt, & Central Bank Mismanagement
Sometimes, the simplest answer really is best. I contend the primary and simplest factor that need be watched to gauge present and future economic activity are the changes in core populations (15-64 year old segment of the larger population) for any nation or grouping.
The core’s declining growth and outright shrinkage appear to be the trigger for declining oil consumption*. In turn, this slowing activity drives central bank reactionary interest rate cuts intended to incentivize credit creation and leverage…all to get more (raise consumption) from less (a declining population set).
*Oil is generally irreplaceable by other sources and offers a good barometer of a nation’s general economic activity.
Photo credit: fmh
The chart below highlights the Bank of Japan’s (BOJ) interest rate reactions to the changing demographic nature of the Japanese population. As Japan’s core population began declining, the BOJ pushed rates lower to incentivize more credit (consumption) from a declining number of consumers.
Japan’s core population vs. BoJ interest rates
And the Fed, faced with similar though less dire US demographic circumstances, emulated the BOJ’s actions despite the BOJ’s utter lack of success (below).
US interest rates, federal debt and core population trend – click to enlarge.
Central banks around the world, at best, are blinded by their formulas and hubris to the inevitable and certain demographic and population headwinds now very much upon us. These central banks are reacting to the least surprising, most reliable, and most important data in existence. Central banks, entrusted with economic stewardship of nations, have acted out of greed or the stupidity only academics can talk themselves into.
They have sailed downwind with all sheets available to make the good times fantastically better, but left nothing for the entirely predictable changing conditions we now face…negative demographics and population trends coupled with exhausted interest rate policy, over-indebtedness, and massive overcapacity for declining core populations.
…click on the above link to read the rest of the article…
War is the Health of the State
War is the Health of the State
The Misfortune of Being Born Into a State
In an essay titled “The State”, Randolph Bourne, an American writer, made a distinction between a country and a state that I find crucial. He described one’s country as “an inescapable group into which we are born”. In his view, a country is “a concept of peace, tolerance, of living and letting live. But the State is essentially a concept of power, of competition; it signifies a group in its aggressive aspects. And we have the misfortune of being born not only into a country but into a State, and as we grow up we learn to mingle the two feelings into a hopeless confusion”.
Randolph Silliman Bourne: a lifelong enemy of the State and war. His great unfinished work “The State” was discovered after his death. Bourne’s odd physical appearance owed to tuberculosis of the spine, which he suffered in childhood. Jeffrey Riggenbach has published a great paean on the brilliance of Randolph Bourne at the Mises Institute.
Photo credit: Rare Book and Manuscript Library, Columbia University
Bourne continues to say:
“It cannot be too firmly realized that war is a function of States and not of nations. Indeed, that it is the chief function of States. War is a very artificial thing. It is not the naïve spontaneous outburst of herd pugnacity; it is no more primary than is formal religion. War cannot exist without a military establishment, and a military establishment cannot exist without a State organization. War has an immemorial tradition and heredity only because the State has a long tradition and heredity. But they are inseparably and functionally joined. We cannot crusade against war without crusading implicitly against the State. And we cannot expect, or take measures to ensure that this war is a war to end war, unless at the same time we take measures to end the State in its traditional form.”
…click on the above link to read the rest of the article…
Crude Oil – a “Ray of Hope”
Crude Oil – a “Ray of Hope”
Why Technical Developments Shouldn’t be Ignored
This is a little addendum to our recent comments on the crude oil market (which you can see here, here andhere, in chronological order). Apparently Goldman Sachs just published a research report calling for $20 oil – which strikes us as a bookend to their infamous $200 call in 2008, which preceded the ultimate peak at $149 by just one or two weeks if memory serves (readers may remember this call by GS – it did get a lot of press at the time).
Photo credit: fmh
The recent sharp reversal after a seeming break of support definitely deserves attention, especially as everybody seems certain that after having declined some 75% from its peak, the price of oil can only go down further. Obviously, no such certainties were in evidence anywhere near the peak or when WTI crude was still trading near $100 a year ago (even though the supply-demand situation had quite obviously deteriorated gravely already).
WTIC crude, weekly – a lateral support level was broken amid a price/RSI divergence, and then prices reversed back up. There hasn’t been any follow-through buying since then, so this reversal may yet fail, but it seems to us that the market is ripe for an upward correction even if the longer term bear market isn’t over yet – click to enlarge.
Anyway, we wanted to briefly come back to the reasons why we think such technical signals shouldn’t be ignored. For one thing, experience shows that price lows are put in long before the “fundamentals” indicate they should. In fact, price lows are routinely put in while the fundamental backdrop is seemingly still at its very worst. This is so because market prices are discounting negative fundamentals in advance to some extent; so even though the fundamental backdrop may still get worse, it offers no guarantee that prices will go even lower.
…click on the above link to read the rest of the article…
It Wasn’t a Crash – But it Could Become One
It Wasn’t a Crash – But it Could Become One
A Reminder by John Hussman
In light of the Nikkei Index soaring by more than 1,300 points (!) overnight – a single day gain of 7.7% – it is time to briefly review the current market situation. As to the Nikkei, we would note two things: 1. it was “catching up” to what other markets have been doing, after having been the only stock market index that was significantly down the previous day (whereas all other markets soared after the close of trading in Japan) and 2. such enormous volatility – regardless of its direction – is usually not a bullish sign. Quite the contrary, in fact.
The Nikkei jumps by 1,343 points overnight – click to enlarge.
In his weekly market comment, John Hussman tries to defuse the hysteria surrounding the recent market break a bit, by reminding everybody that a 10% correction is not a “crash”, but actually a quite normal occurrence. The only reason why it felt abnormal was that there hasn’t been any market volatility for such a long time. It is this long absence of market volatility that was abnormal, not the 10% decline. He writes:
“The market decline of recent weeks was not a crash. It was merely an air-pocket. It was probably just a start. Such air pockets are typical when overvalued, overbought, overbullish conditions are joined by deterioration in market internals, as we’ve observed in recent months. They are the downside of the “unpleasant skew” that typically results from that combination – a series of small but persistent marginal new highs, followed by an abrupt vertical decline that erases weeks or months of gains within a handful of sessions (see Air Pockets, Free-Falls, and Crashes).
…click on the above link to read the rest of the article…
Institutional Aggression, Superfluous Planners and Predictions
Institutional Aggression, Superfluous Planners and Predictions
Pretense of Knowledge
Wall Street breathlessly awaits the newest payrolls report, which is widely held to contain the information needed for the FOMC to decide whether or not it should raise the overnight interbank lending rate from zilch to zilch plus a few basis points later this month.
photo via plantsbrookschool.co.uk
The payrolls report is going to be revised umpteen times after its initial release, is in many ways driven by statistical artifacts (such as the “birth-death” model) and concerns a lagging economic indicator – in other words, its “signal to noise” ratio makes it utterly useless, even if one erroneously ascribes a lot of meaning to economic statistics describing the past.
Change in monthly non-farm payrolls in 1000ds, via Saint Louis Federal Reserve Research, click to enlarge.
And yet, this utterly devoid of informational content data point is what the central planning bureaucrats are held to need to decide on their next steps in terms of interest rate manipulation! We are continually surprised by the fact that people can discuss this obvious nonsense with a straight face.
In this context we have recently come across an interesting article at Forbes, by sound money and free market advocate Ralph Benko. It is entitled “If The Fed Is Always Wrong How Can Its Policies Ever Be Right?” and is well worth the read. As Mr. Benko points out, the Fed’s economic forecasts leave a lot to be desired, primarily because they tend to be dead wrong with unwavering regularity.
He proceeds to ask how a bureaucracy that couldn’t forecast its way out of a paper bag can possibly know what policies it should implement. It seems totally absurd to expect it to be able to ever get it right, except perhaps by sheer accident.
…click on the above link to read the rest of the article…
Ayn Rand & Murray Rothbard: Diverse Champions of Liberty
Ayn Rand & Murray Rothbard: Diverse Champions of Liberty
Differences and Similarities
No one should attempt to treat Ayn Rand and Murray N. Rothbard as uncomplicated and rather similar defenders of the free society although they have more in common than many believe. As just one example, neither was a hawk when it comes to deploying military power abroad.* There is evidence, too, that both considered it imprudent for the US government to be entangled in international affairs, such as fighting dictators who were no threat to America. Even their lack of enthusiasm for entering WW II could be seen as quite similar.
Ayn Rand, famed writer and founder of the Objectivist movement
Photo credit: Cornell Capa / Magnum
And so far as their underlying philosophical positions are concerned, they both can be regarded as Aristotelians. In matters of economics they were unwavering supporters of the fully free market capitalist system, although while Rand didn’t find corporations per se objectionable, arguably Rothbard had some problems with corporate commerce, especially as it manifest itself in the 20th century. One sphere in which they took very different positions, at least at first glance, is whether government is a bona fide feature of a genuinely free country. Rand thought it is, Rothbard thought it wasn’t. Yet the reason Rothbard opposed government was that it depended on taxation, something Rand also opposed, so even here where the difference between them appears to be quite stark, they were closer than one might think.
Murray Rothbard, introducing his students to French economist Anne-Robert-Jacques Turgot (widely regarded as a “proto-Austrian” today)
Photo credit: Roberto Losada Maestre
When intellectuals such as Rand and Rothbard have roughly the same political-economic position, it isn’t that surprising that they and their followers would stress the difference between them instead of the similarities. Moreover, in this case both had a similar explosive personality, with powerful likes and dislikes not just in fundamentals but also in what may legitimately be considered incidentals–music, poetry, novels, movies and so forth.
…click on the above link to read the rest of the article…
The Most Astounding Credit Binge in History
The Most Astounding Credit Binge in History
Stripped Gears
DELRAY BEACH, Florida – “The Donald” breathed a sigh of relief yesterday. He and other rich people got a break from the beating they’ve been taking: Stocks bounced, with the Dow ending yesterday’s session up more than 600 points.
The gears have been stripped, and they look rusty…
Photo credit: Jonathon Cianfrani
Yesterday’s bump confirms the mainstream view: There is nothing to worry about. The recent sell-off is just a case of nerves, not a sign of an epizootic.
DJIA: don’t worry, be happy? – click to enlarge.
Here is U.S. Trust, a private bank for the ultra-wealthy, reassuring its customers:
“The action in the past few days has been based on fears that we will revisit the market environment from 1997 to 1998, in which the Asian currency crisis led to a sizable correction in world equity markets. A second breakdown in energy, a continued fall to record‐low prices in many commodities, and a deep drop in emerging market currencies and equities are sparking fears that a global growth recession is coming our way. And add to that the fact that investors are worried that the Federal Reserve may tighten into a large-scale slowdown is increasing the flight to safety.”
U.S. Trust, like Donald Trump and much of the media, blames the Chinese for the recent sell-off. Emerging market economies are slowing, they say, as the U.S. and developed economies are moving into “higher gear.” Higher gear? As near as we can determine, the gears have been stripped.
…click on the above link to read the rest of the article…
Real Wealth and Phantom Wealth – Secular Boom and Bust
Real Wealth and Phantom Wealth – Secular Boom and Bust
The Things that Produce Real Wealth vs. Phantom Wealth
Our friend Michael Pollaro, the keeper of long-term data on the true money supply and author at Forbes as well as occasionally a guest author on this site, recently sent us the following chart of a relationship he keeps a close eye on. It depicts the annual change rate in new orders for non-defense capital goods and compares this series to the Wilshire total market index.
Photo via thedailysheeple.com
Annual change rate in new orders for non-defense capital goods and the Wilshire total market index – click to enlarge.
As you can see, there are slight leads and lags discernible near turning points, but there is no regularity to those that would allow us to make any definitive pronouncements on which trend is likely to lead the other. It is however clear that the two series are often directionally aligned (or to put it more simple: economic expansions and contractions often coincide with rising and falling stock prices).
What is interesting about the current situation is that the stock market is usually supposed to be forward-looking (it isn’t, at least not anymore, but this is still widely assumed – see our previous missive on this topic), but evidently, people are buying fewer of the things that are actually needed for future real wealth generation. Further below you will see that things are a bit more complicated than they look at first glance though – what is at work here is that in some industries, businessmen have just realized that they have malinvested their capital. Anyway, a noticeable gap has opened up between these two series, and it will likely be closed one way or the other. Note by the way the eerie similarity in the recent behavior of new orders and the stock market to what happened near the end of the 1990s stock market mania.
…click on the above link to read the rest of the article…
The Stock Market’s Panic Potential
The Stock Market’s Panic Potential
The Odds Favor a “Warning Shot” Scenario – but there is a “But”
As regular readers have probably noticed, we have upped the frequency of our “caution is advised” posts on the stock market in recent weeks in light of the market’s increasingly deteriorating internals. Although one never knows when exactly such warning signs may begin to matter, it is always a good bet that they eventually will. Last week the market delivered a little wake-up call to the hitherto rather complacent majority of market participants, by essentially wiping out 9 months worth of gains in more or less just four trading days.
The S&P 500, daily – obviously, this chart doesn’t look good – click to enlarge.
The sheer speed of this decline masks the fact that the S&P 500 is actually only 163.83 points or 7.67% below its all time high made in May. In other words, this decline doesn’t even amount to a routine 10% correction yet. And yet, as Zerohedge reports, cries for intervention by the Fed are amusingly already going up. We actually don’t believe that the federal purveyors of Anglo-Saxon central banking socialism will jump into the breach thatquickly.
Last week’s sudden “1-800-get-me-out” moment certainly wasn’t widely expected, not least because it was an options expiration week, and expiration weeks normally tend to follow certain patterns. Either there is little net volatility, or if the market has a weak close on Wednesday, it tends to rise on Thursday and Friday. This even happened in the October 2014 sell-off, which ended on a Wednesday in an expiration week (with the SPX gaining 80 points between the Wednesday intraday low and the Friday intraday high, rendering a great many puts, VIX calls, etc. that were bought earlier in the week worthless).
…click on the above link to read the rest of the article…
Brain-Drained
Brain-Drained
Venezuela: Real Wages Collapse amid Continuing Crack-Up Boom
While the crack-up boom in Venezuela continues, real wages in the country have have utterly collapsed. The bolivar is still trading close to 700 to the US dollar on the black market, and the Caracas stock index keeps making new all time highs in nominal terms almost every day. Ironically, Venezuela’s currency is called the “bolivar fuerte” (VEF), i.e. “the strong bolivar” ever since it has been “reverse split” 1 for 1,000 in January 2008.
Image via designlimbo.com
As an aside, the stock market has likewise been subject to a reverse split of 1 for 1,000 about a year ago – pre-split the index would now be trading at a cool 15.5 million points.
The black market rate of the “strong” bolivar (VEF) – 1 USD now buys nearly 700 VEF – click to enlarge.
Meanwhile, Venezuela has the highest sovereign CDS spreads in the world. Below is a chart of Venezuela’s annual default probabilities based on 5 yr. CDS spreads at a 40% recovery assumption:
Venezuela: annual sovereign default probability from 5 year CDS spreads at an assumed recovery rate of 40% (which may prove to be a generous assumption) – click to enlarge.
Venezuela’s Economy Loses its Best People
The great successes of socialism in Venezuela aren’t confined to increasing shortages of basic goods, a collapsing currency and extremely high sovereign CDS spreads.
Businesses are confronted with a mixture of sharply rising input costs and price controls and as a result are unable to pay their employees wages that can even remotely balance the sharp losses in the bolivar’s purchasing power. As Reuters reports, skilled workers have been hit the worst:
…click on the above link to read the rest of the article…
Gold and the Grave Dancers
Gold and the Grave Dancers
The Asset They Love to Hate …
Back in the 1960s, Alan Greenspan wrote a well-known essay that to this day is an essential read for anyone who wants to understand the present-day monetary and economic system (which is a kind of “fascism lite” type of statism, masquerading as capitalism) and especially the almost visceral hate etatistes harbor toward gold. Greenspan’s essay is entitled “Gold and Economic Freedom”, and as the title already suggests, the two are intimately connected.
Alan Greenspan in the mid 1970s – although he later turned out to be a sell-out, his understanding of economics undoubtedly dwarfed that of his successors at the Fed (and we are not just saying this based on the essay discussed here).
Photo credit: Charles Kelly / AP Photo
What makes Greenspan’s essay especially noteworthy is that it manages to present both theory and history in a concise, easy to understand manner. There isn’t a word in it we would change. At one point, Greenspan provides a brief history lesson. Yes, the (relatively) free banking era in the United States in the 19th century involved fractional reserve banking and as a result, there were frequent boom and bust cycles. However, since there was no “lender of last resort” with an unlimited money printing capacity, these business cycles were sharp and brief, and the market economy quickly righted itself every time:
“A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled.
…click on the above link to read the rest of the article…
Cronies, Polluters and Funny Money
Cronies, Polluters and Funny Money
What’s Really Killing Capitalism
VANCOUVER, Canada – Hillary is taking the bull by the horns… and putting the knife between her teeth. She is a “take-charge” candidate and aims to let us know.
Yes, earlier his week, she promised to improve capitalism. Now, it’s the climate of planet Earth that has her attention. She’s going to make it better by decreasing carbon emissions – by force, of course.
Saints preserve us! Now she wants to “save the planet” too. Ironically not even the reds and professional scaremongers are happy with her “climate change” contortions (as seen in the Guardian, a hotbed of climate alarmism and a preferred medium of assorted limousine socialists).
Photo credit: Pablo Martinez Monsivais / AP
Next week, presumably, she will vanquish death itself.
But let us turn to the markets. On Tuesday night as the sun set, things were looking up. From Bloomberg:
U.S. stocks rose, ending their longest losing streak since January, amid better-than-forecast earnings and as Chinese equities pulled back from a selloff.
Whether the rebound continues… or collapses altogether… we wait to find out. Unlike Ms. Clinton, we are a slave to God and to the markets; we are not their master.
As we reported on Tuesday, Hillary also wants to punish investors who don’t hold on to their positions for long enough. She never mentioned that meddlers like herself largely caused the problem of “short-termism” in the stock market.
In a free economy, people choose how long to hold on to their stocks, according to what suits them. Some are investing for generations. Some are retiring soon. Some are traders, looking to profit from short-term moves in the market.
…click on the above link to read the rest of the article…
