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Money Supply and Credit Growth Continue to Falter

The decline in the growth rate of the broad US money supply measure TMS-2 that started last November continues, but the momentum of the decline has slowed last month (TMS = “true money supply”). The data were recently updated to the end of April, as of which the year-on-year growth rate of TMS-2 is clocking in at 6.05%, a slight decrease from the 6.12% growth rate recorded at the end of March. It remains the slowest y/y growth since October of 2008, when the Fed had just begun to pump quite heavily.

US money supply and credit growth keep slowing.

The monthly y/y growth rate of M1 fell rather more sharply in April, from 8.76% to 7.07% (the most recent weekly annualized growth rate is lower at 6.80%). The composition of M1 is close to, but not quite equal to narrow money AMS (or TMS-1) – in particular, it does not contain the balances held at the Treasury’s general account with the Fed.

As a result, the growth rates of the two measures have drifted apart more sharply since 2016 than they usually do, as there were huge swings in the Treasury’s general account from mid 2016 to early 2017. These swings were very likely connected with money market funds moving large amounts of dollars from the euro-dollar market into treasury bills.

Reports by the Treasury Borrowing Advisory Committee suggest that the topic was on the agenda for a while. The surge in demand from MM funds may well have been accommodated by an increase in debt issuance, which the growing cash hoard mirrored.

Monthly y/y growth rates of TMS-2 and M1 – TMS-2 growth remains at the lowest level since October 2008 – click to enlarge.

…click on the above link to read the rest of the article…

India: Why its Attempt to Go Digital Will Fail

May 22, 2017

India: Why its Attempt to Go Digital Will Fail

India Reverts to its Irrational, Tribal Normal (Part XIII)

Over the three years in which Narendra Modi has been in power, his support base has continued to increase. Indian institutions — including the courts and the media — now toe his line.

The President, otherwise a ceremonial rubber-stamp post, but the last obstacle keeping Modi from implementing a police state, comes up for re-election by a vote of the legislative houses in July 2017. No one should be surprised if a Hindu fanatic is made the next President. India is rapidly entering a new phase.

Indian Prime Minister, Narendra Modi on the cover of an Indian magazine in 2002, when he was the Chief Minister of the Indian province of Gujarat. During his reign in Gujarat, a civil-war like situation erupted, which seriously segregated the province’s society. It brought Hindus into a state of trance and excitement and provided them with the fake-security of the collective. Alas, wealth and civilization are created by an intense focus on value-addition, not from the short-term escapist excitement of mobs expressed through riots and rape. Destructive endeavors are a major vulnerability of poor societies, given their irrationality and lack of foresight and planning, and their short-sighted focus on high time-preference, pleasure-centered activities.

Modi, a major world-traveler, who has run around quite a bit to please foreign governments and win the support of identity-lacking non-resident Indians, is no longer going abroad with the same abandon. Historically and even today, whatever gained approval in the West is what Indians have looked up to.

But Modi has matured. Modi has directed the attention of Indians to nationalism, Hindutava (fanatic Hinduism), the army, the flag, the anthem, and other superficial collective “causes” not underpinned any values or wealth-creating, civilization-producing objectives.

…click on the above link to read the rest of the article…

How to Stick It to Your Banker, the Federal Reserve, and the Whole Doggone Fiat Money System

May 13, 2017

How to Stick It to Your Banker, the Federal Reserve, and the Whole Doggone Fiat Money System

Bernanke Redux

Somehow, former Federal Reserve Chairman Ben Bernanke found time from his busy hedge fund advisory duties last week to tell his ex-employer how to do its job. Namely, he recommended to his former cohorts at the Fed how much they should reduce the Fed’s balance sheet by. In other words, he told them how to go about cleaning up his mess.

Praise the Lord! The Hero is back to tell us what to do! Why, oh why have you ever left, oh greatest central planner of all time. We are not worthy.

We couldn’t recall the last time we’d seen or heard from Bernanke. But soon it all came back to us. There he was, in the flesh, babbling on Bloomberg and Squawk Box, pushing the new paperback version of his mis-titled memoir “The Courage to Act.” Incidentally, the last time we’d heard much out of the guy was when the hard copy was released in late 2015.

With respect to the Fed’s balance sheet, Bernanke remarked that the Fed should cut it from $4.5 trillion to “something in the vicinity of $2.3 to $2.8 trillion.” What exactly this would achieve Bernanke didn’t say. As far as we can tell, a balance sheet of $2.8 trillion would still be about 300 percent higher than it was prior to the 2008 financial crisis.

Bernanke, by all measures, is an absolute lunatic. He, more than anyone else, is responsible for the utter mess that radical monetary policies have made of the U.S. economy. He’s the one who dropped the federal funds rate to near zero and inflated the Federal Reserve’s balance sheet by over 450 percent.

…click on the above link to read the rest of the article…

The Triumph of Hope over Experience

May 5, 2017

The Triumph of Hope over Experience

The Guessers Convocation

On Wednesday the socialist central planning agency that has bedeviled the market economy for more than a century held one of its regular meetings. Thereafter it informed us about its reading of the bird entrails via statement (one could call this a verbose form of groping in the dark).

Modern economic forecasting rituals.

A number of people have wondered why the Fed seems so uncommonly eager all of a sudden to keep hiking rates in spite of economic data in Q1 indicating surprising weakness in economic output (of course they once again didn’t hike rates, this time).

We have long suspected that the real reason for the urge to hike is to accumulate “ammunition” for the next downturn. After all, it really shouldn’t make much of a difference where the federal funds rate is; the federal funds market is basically dead anyway, and the Fed continues to refrain from shrinking its balance sheet (i.e., bank reserves will remain elevated, and the Fed won’t actively exert pressure on money supply growth).

Then again, the statement is actually in keeping with the orthodox (largely Keynesian) view of the economy and the central bank’s presumed tasks. There is actually no need to take it at anything but face value. The complete statement can be seen here, but we want to focus on one particular excerpt – which follows an enumeration of various data points in paragraph one:

…click on the above link to read the rest of the article…

Ludwig von Mises’ Century of Validation

April 30, 2017

Ludwig von Mises’ Century of Validation

Seeing the Light

It has been said that “the definition of insanity is doing the same thing over and over again and expecting different results.” No one quite knows who first uttered this remark; it has been attributed to Albert Einstein, Mark Twain, Benjamin Franklin, and has even been said to be an Ancient Chinese Proverb. What is known is that this cliché has been repeated over and over again so often that its mere mention substantiates its own definition.

Several of the ladies and gentlemen above wanted to let us know that they’re merely eccentric, and if they want to do things all over again and again and again, we should let them…

Nonetheless, we repeat it again because it’s particularly fitting to today’s deliberations. Here we begin with a look back to the past in search of edification. For the miscalculations of the past continue to dictate the insanity of the present.

Many years ago, a bright minded and well intentioned Italian pursued a devious undertaking. His efforts aimed to conceive a pure theory of a socialist economy. His objective was to take the sordid teachings of Marx and pencil out the mechanics of how a centrally planned economy could bring a life of security and abundance for all. What follows is an approximation of how the dirty deed went down.

In 1908, Italian economist Enrico Barone suffered an abstraction. One late night he skipped a bite of his meatballs and marinara, and gazed into the outer frontiers of deep space. Looking around, he couldn’t believe his eyes. For in this far corner of absolute darkness, he saw something truly amazing. Out in the distant reaches of nothingness, peering into a black hole, he saw not the dark. Rather, he thought he saw the light.

…click on the above link to read the rest of the article…

The Fed Will Blink

April 25, 2017

The Fed Will Blink

Honest Profession

GUALFIN, ARGENTINA – The Dow rose 174 points on Thursday. And Treasury Secretary Steve Mnuchin said we’d have a new tax system by the end of the year.

Animal spirits were restless. But which animals? Dumb oxes? Or wily foxes? Probably both.

Since Thursday there have been two additional very spirited up days with large gaps – this is very rare in the DJIA, particularly from such a high level after a ~240% rally since the lows made 8 years ago… it continues to feel like a blow-off (and it happens against the backdrop of a sharp slowdown in money supply growth) – click to enlarge.

But what caught our attention were the central bankers strutting across the yard and crowing with such numbskull cackles that even barnyard animals would be embarrassed by them. There was a time when central banking was an honest profession.

Central bankers provided financing for the government. They backed the banking system, too, by holding savings as reserves, which they lent to solvent member banks in emergencies. They were tight-lipped, tight-laced, and tightwads. Their role was to say “no” more often than “yes.”

When the king wanted money to fight in a war… or build a bridge… the banker would give the terse reply: “Sire, we don’t have any.” Real money was backed by gold. And credit had to be backed by real money, which meant it had to be saved. Savings were limited, as was money.

Cackling central planners – this reminds us of the “FOMC meeting laughtrack” of 2003-2007 – the more Fed members laughed at their meetings, the closer the economy and financial system came to the near fatal implosion of 2007-2009. Do today’s monetary bureaucrats have more of a clue than their predecessors just before the GFC? The answer is an emphatic no – they have simply doubled down and blown an even bigger credit and asset bubble.

…click on the above link to read the rest of the article…

Cracks in Ponzi-Finance Land

April 22, 2017

Cracks in Ponzi-Finance Land

Retail Debt Debacles

The retail sector has replaced the oil sector in a sense, and not in a good way. It is the sector that is most likely to see a large surge in bankruptcies this year. Junk bonds issued by retailers are performing dismally, and within the group the bonds of companies that were subject to leveraged buyouts by private equity firms seem to be doing the worst (a function of their outsized debt loads). Here is a chart showing the y-t-d performance of a number of these bonds as of the end of March:

Returns of several of the worst performing junk bonds issued by retailers in Q1 2017. This is rather impressive value destruction for a single quarter – click to enlarge.

Note the stand-out Neiman Marcus, a luxury apparel retailer, the bonds of which have been in free-fall this year. The company was bought out in an LBO and was saddled with a mountain of debt in the process. Investors buying this debt have now come to regret their purchases, particularly as it is debt of the “creative” kind.

Investor demand for junk bonds continues to be brisk, with inflows from retail investors said to be particularly strong. As we have pointed out on previous occasions, this surge in demand has resulted in creditors accepting ever softer loan covenants.

A long period of extremely low interest rates not only leads to a pronounced distortion of relative prices and the associated malinvestment of capital, it also tends to make a growing number of debtors increasingly vulnerable to rising rates and other disruptions. Over time, the number of companies forced to regularly roll over debt if they want to remain among the quick will inevitably increase.

These companies then depend on high investor confidence, which is now faltering in the retail sector. The out look seems appropriately grim: Fitch expects the default rate in the sector to spike to 9% this year.

…click on the above link to read the rest of the article…

Hell To Pay

April 17, 2017

Hell To Pay

Behind the Curve

Economic nonsense comes a dime a dozen. For example, Federal Reserve Chair Janet Yellen “think(s) we have a healthy economy now.” She even told the University of Michigan’s Ford School of Public Policy so earlier this week. Does she know what she’s talking about?

Somehow, this cartoon never gets old…

If you go by a partial subset of the ‘official’ government statistics, perhaps, it appears she does. The unemployment rate is at 4.5 percent, which is considered full employment. What’s more, inflation is ‘reasonably close’ to the Fed’s 2-percent inflation target. But what does this mean, really?

According to Fed Chair Yellen, it means that now’s the time to tighten up the nation’s monetary policy.

Behold this display of awesomeness, citizen. Doesn’t it prove that central planning “works” after all? Unfortunately the ointment is never entirely fly-free, especially when one is pondering statistical aggregates – click to enlarge.

By now you’ve likely seen this upcoming – choice – quote from Yellen. Nonetheless, we can’t resist repeating its remarkable idiocy. For Yellen, who was in the greater Detroit metropolitan area, was kind enough to humor us all with a nifty automotive analogy to explain how to go about normalizing monetary policy. Here Yellen elaborates with a variety of technical terms:

“Whereas before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now allowing the economy to kind of coast and remain on an even keel – to give it some gas but not so much that we are pressing down hard on the accelerator – that’s a better stance of monetary policy. We want to be ahead of the curve and not behind it.”

…click on the above link to read the rest of the article…

Doomsday Device

April 10, 2017

Doomsday Device

Disappearing Credit

All across the banking world – from commercial loans to leases and real estate – credit is collapsing. Ambrose Evans-Pritchard writing for British newspaper The Telegraph:

Credit strategists are increasingly disturbed by a sudden and rare contraction of U.S. bank lending, fearing a synchronized slowdown in the U.S. and China this year that could catch euphoric markets badly off guard. Data from the U.S. Federal Reserve shows that the $2 trillion market for commercial and industrial loans peaked in December.

The sector has weakened abruptly as lenders tighten credit, especially for non-residential property. Over the last three months it has dropped at a rate of 5.4% on annual basis, a pace of decline not seen since December 2008.

C & I loans, y/y growth. Readers may recall that we recently showed this chart in “Libor Pains”, in which we discussed corporate debt. Actually, y/y commercial & industrial loan growth peaked in early 2015 already, not just “last December”… but lettuce not quibble (Pritchard likely meant to refer to total commercial bank credit, the growth rate of which reached an interim peak in late 2016 – shown further below). The point remains that credit growth is falling fast – click to enlarge.

If new loans aren’t made, the supply of credit money will contract. That’s the “doomsday device” embedded in our credit money system: It is subject to sharp and disastrous drawdowns in the money supply.

When loans are paid or written off, the outstanding credit (money) ceases to exist. This reduces the money supply and triggers corrections, recessions, or market crashes.

Real money doesn’t disappear in a credit contraction. But our fake “credit money” does. This makes the entire system vulnerable to the credit cycle. Credit increases. Then it decreases. And as credit money vanishes, the recession deepens… causing the credit market to tighten further and causing more money to disappear.

…click on the above link to read the rest of the article…

March to Default

March 27, 2017

March to Default

Style Over Substance

“May you live in interesting times,” says the ancient Chinese curse. No doubt about it, we live in interesting times. Hardly a day goes by that we’re not aghast and astounded by a series of grotesque caricatures of the world as at devolves towards vulgarity. Just this week, for instance, U.S. Representative Maxine Waters tweeted, “Get ready for impeachment.”

Well, Maxine Waters is obviously right – impeaching the president is an urgent task of the utmost importance. As everybody knows, he is best friends with Vladimir Putin, the shirtless barbarian who rules the Evil Russian Empire (they were seen drinking kompromat together in Moscow, a vile Russian liquor that reportedly tastes a bit like urine. Senator McCain has the details on that story). And as Maxine Waters has just disclosed, Putin’s armies are recently advancing into Korea! We cannot let this stand, or he’ll invade Kekistan next (note that he already controls Limpopo and Gabon). Who knows where it will end?

We assume this was directed at President Trump. But what Waters meant by this was sufficiently vague. There was no guidance as to how President Trump should be getting ready.

Should he pack his bags? Should he double knot his shoelaces? Should he say a prayer? Naturally, the specifics don’t matter in the darnedest. Rather, these days, it’s style over substance in just about everything. This is why Waters – a committed moron – rises to the top of class in the lost republic of the early 21st century.

At the same time, the individual has been displaced by the almighty aggregate. Economists pencil out the unemployment rate, with certain omissions, as if it represents something meaningful. Then lunkheads like Waters repeat it as if it’s the gospel truth.

Somehow, through all of this, our representatives are oblivious to what’s really going on; that the U.S. government is just months away from a possible default.

…click on the above link to read the rest of the article…

India: The next Pakistan?

March 24, 2017

India: The next Pakistan?

India’s Rapid Degradation

This is Part XI of a series of articles (the most recent of which is linked here) in which I have provided regular updates on what started as the demonetization of 86% of India’s currency. The story of demonetization and the ensuing developments were merely a vehicle for me to explore Indian institutions, culture and society.

The Modimobile is making the rounds amid a flower shower. [PT] Photo credit: PTI Photo

Tribal cultures face an inherent contradiction. They create poison from within to grow more collectivist, controlling and tyrannical — members of the populace looks for nannies, and they readily find sociopaths to exploit that need. Their lack of organizational skills, their inability to engage in economic calculation and their irrationality lead to massive internal stresses and the ultimate devolution of such an unnatural society.

India finds itself in a situation where it is grasping for more totalitarianism to solve the problems that totalitarianism created. The demonetization exercise was an assertion of India’s underlying tribal and collectivist culture.

Demonetization Pain Continues

Cashless ATMs continue to be the new normal in India. In a recent conversation, economist Professor Madhusudan Raj mentioned that as many as 70% of the ATMs in his city are still not operational. The situation in villages and small towns is much worse. Banks are often clogged with people.

Eventually most people who must have cash will get it, but businesses need easy access to large amounts of their own cash without incurring transaction costs. They continue to face horrendous problems, which are translating into closures, retrenchment of staff, and bankruptcies. The tax authorities are getting increasingly rapacious. According to Professor Madhusudan Raj:

…click on the above link to read the rest of the article…

The Long Run Economics of Debt Based Stimulus

March 19, 2017

The Long Run Economics of Debt Based Stimulus

Onward vs. Upward

Something both unwanted and unexpected has tormented western economies in the 21st century. Gross domestic product (GDP) has moderated onward while government debt has spiked upward. Orthodox economists continue to be flummoxed by what has transpired.

What happened to the miracle? The Keynesian wet dream of an unfettered fiat debt money system has been realized, and debt has been duly expanded at every opportunity. Although the fat lady has so far only cleared her throat (if quite audibly, in 2008) and hasn’t really sung yet, it is already clear that calling this system careening toward a catastrophic failure.

Here is the United States, since the turn of the new millennium (starting January 1, 2001) real GDP has increased from roughly $10.5 trillion to $18.6 trillion, or 77 percent. Over this same time government debt has spiked nearly 250 percent from about $5.7 trillion to $19.9 trillion. Obviously, some sort of reckoning’s in order to bring the books back into balance.

Throughout this extended episode of economic and financial discontinuity, the government’s solution to jump-starting the economy has been to borrow money and spend it. Thus far, these efforts have succeeded in digging a massive hole that the economy will somehow have to climb out of. We’re doubtful such a feat will ever be attained.

In short, additions of government debt over this time have been at a diminishing return. Specifically, at the start of the new millennium the debt to GDP ratio was about 54 percent. Today, it’s well over 100 percent.

US GDP and US federal debt, indexed (1984 = 100). Mises noted back in the late 1940s already that “it is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract.”

…click on the above link to read the rest of the article…

Welcome to Totalitarian America, President Trump!

March 12, 2017

Welcome to Totalitarian America, President Trump!

Trump vs. the Deep State

If there had been any doubt that the land of the free and home of the brave is now a totalitarian society, the revelations that its Chief Executive Officer has been spied upon while campaigning for that office and during his brief tenure as president should now be allayed.

Image adapted from the cover of “Deep State #5” – depicting an assassin from the future

President Trump joins the very crowded list of opponents of the American State which includes the Tea Party, tax resistors, non-interventionists, immigration opponents, traditional family advocates, and a host of others who have been spied upon, persecuted and badgered by federal “intelligence” authorities.

While Congress conducted some feeble hearings and investigations of the shenanigans of the US spy agencies during the interminable Obummer Administration, no real action or reform was taken to reign in the eavesdropping and spying by the national security state on American citizens.

Hopefully, the surveillance of President Trump will change his outlook on the US “intelligence community” especially in regard to those courageous souls who have spoken out and risked life and limb to alert the public about their rulers’ nefarious activities.

Edward Snowden should be among the first to receive a pardon while the person who provided him sanctuary from his American persecutors, the reviled Vladimir Putin, should be commended for his noble act, a rarity among world leaders in this democratic age.

NSA whistleblower Edward Snowden has become a disembodied robotic video image now and then beamed onto conference stages from his hideout in Moscow. That should be remedied as soon as possible. Photo credit: Steven Rosenbaum / Getty Images

…click on the above link to read the rest of the article…

Speculative Blow-Offs in Stock Markets – Part 2

March 6, 2017

Speculative Blow-Offs in Stock Markets – Part 2

Blow-Off Pattern Recognition

As noted in Part 1, historically, blow-patterns in stock markets share many characteristics. One of them is a shifting monetary backdrop, which becomes more hostile just as prices begin to rise at an accelerated pace, the other is the psychological backdrop to the move, which entails growing pressure on the remaining skeptics and helps investors to rationalize their exposure to overvalued markets. In addition to this, the chart patterns of stock indexes before and after blow-off moves are displaying noteworthy similarities as well.

“On Margin” – a late 1929 cartoon illustrating the widespread obsession with the stock market at the time. There was just a 10% margin requirement, i.e., investors could leverage their capital at a ratio of 10:1. The demand for margin credit was so strong, that it pushed call money lending rates in New York up quite noticeably. This in turn made it increasingly difficult to maintain extremely leveraged positions.

Why do we assume the current move is a speculative blow-off and not just another “normal” up-leg? The main reasons are the speed and size of the move, the fact that it happens at the tail end of a very sizable advance that has already lasted a full eight years, the chart pattern, and above all, valuations.

The chart below was recently posted by John Hussman – it shows the evolution of five different valuation parameters over the entire post WW2 era. As an aside to this: he estimates that another 12% advance would push SPX valuations to the extremes recorded in 2000. We already seem to have passed the 1929 threshold recently, so this is the only record that remains to be aimed for (that does not mean one should expect it to be reached).

…click on the above link to read the rest of the article…

A Mess 30 Years in the Making

March 5, 2017

A Mess 30 Years in the Making

Promises of Slop

“We have assembled a best-in-class team of policy advisors to drive President Trump’s bold plan for job creation and economic growth.”

– Gary Cohn, Chief Economic Advisor to President Trump

The art and science of spending other people’s money is not an occupation suited to just anyone. Rather, it’s a skill reserved for the professional world-improver. To be successful, one must act with a zealous devotion to uplifting the down and out, no matter the cost.

Donald Trump’s chief economic advisor Gary Cohn – as some observers have noted, he represents one of the factions in the wider circle of economic advisors (there are many advisors who are not members of an official body such as the Council of Economic Advisors, but reportedly have the president’s ear). This is considered problematic, or rather confusing, on the grounds that in some cases the views of these advisors appear to be diametrically opposed. The question is whose views will eventually prevail. Photo credit: Kena Betancur / AFP / APA

Lawyers, bankers, economists, and government philosophers with fancy resumes, who attended fancy schools. These are the devoted fellows who comprise President Trump’s team of economic policy advisors. Moreover, these are the chosen associates who are charged with bringing Trump’s economic vision to fruition. Are they up to the task?

Only time will tell. But, already, it is quite evident that Trump’s economic policy advisors have their work cut out for them. During Trump’s speech to Congress on Tuesday night, he called for more jobs, more education, more military, and more affordable health insurance.

By all accounts the speech sounded delightful. Promises were made to spread the government’s slop far and wide. Trump pledged offerings that just about anyone and everyone – with the exception of grumpy face Bernie Sanders – could stand behind and applaud.

…click on the above link to read the rest of the article…

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