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Rosenberg says “Keep an eye on M1”, others watch Cyclicals, and still others have an eye on junk bonds.

An Eye on M1

All of the monetary aggregates have slowed substantially, and real M1 growth is flagging a 1% stall-speed growth economy once we get passed all the pre-tariff buying activity and fiscal sugar-high that skewed Q2 GDP.

1:50 PM – Aug 14, 2018

The problem with this story is that it does not match the hype. Nor does M2.

Real M1 and M2

Watching M1 is Useless

If we are supposed to keep an eye on M1, it sure is not clear why. The dashed lines above so instances in which M1 growth turned negative and nothing happened for years.

I also added M2. It’s equally useless.

Watching these monetary aggregates seems downright silly.

Cyclicals vs. Defensives

Seeking Alpha says Cyclicals Vs. Defensives (Aka The Market’s Achilles’ Heel).

The chart shows the cyclicals vs. defensives relative performance line against the S&P500. The key point is that cyclicals drove the last leg of the bull market, hence why I say this is basically the market’s Achilles’ heel.

The cyclicals vs. defensives line takes the ratio of the equal weighted performance of cyclicals (materials, industrials, technology) vs. defensives (telecoms, utilities, healthcare). As this line seems to trend during the study period, I have added a linear trend line for analytical purposes (the indicator is stretched vs. trend also).

As you can see on the chart, it’s been the solid performance of cyclicals relative to defensives that drove the last leg of the bull market. The extreme runup in the cyclicals vs. defensives relative performance line can unwind in one of two ways: 1. A bullish rotation: where the S&P 500 heads higher but defensive sectors take the lead; or 2. A bearish rotation: where the S&P 500 undergoes a correction/bear market, and defensives simply fall less than cyclicals.

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

This Isn’t Your Grandfather’s (1960s) Inflation Scare

March 14, 2018

This Isn’t Your Grandfather’s (1960s) Inflation Scare

“This reminds me of the late 1960s when we experimented with low rates and fiscal stimulus to keep the economy at full employment and fund the Vietnam War. Today we don’t have a recession, let alone a war. We are setting the stage for accelerating inflation, just as we did in the late ‘60s.”
—Paul Tudor Jones

As soon as the GOP followed its long-promised tax cuts with damn-the-deficit spending increases (who cares about the kids, right?), you knew to be ready for the Lyndon B. Johnson reminders.

And it’s worth remembering that LBJ pushed federal spending higher, pushed his central bank chairman against the wall (figuratively and, by several accounts, also literally) and eventually pushed inflation to post–Korean War highs.

Inflation kept climbing into Richard Nixon’s presidency, pausing for breath only during a brief 1970 recession (although without falling as Keynesian economists predicted) and then again during an attempt at wage and price controls that ended badly. Nixon’s controls disrupted commerce, angered businesses and consumers, and helped clear a path for the spiraling inflation of the mid- and late-1970s.

So naturally, when Donald Trump and the Republicans pulled off the biggest stimulus years into an expansion since LBJ’s guns, butter and batter the Fed chief, it should make us think twice about inflation risks—I’m not saying we shouldn’t do that.

But do the 1960s really tell us much about the inflation outlook today, or should that outlook reflect a different world, different economy and different conclusions?

I would say it’s more the latter, and I’ll give five reasons why.

1—Technology

I’ll make my first reason brief, because the deflationary effects of technology are both transparent and widely discussed, even if model-wielding economists often ignore them. When some of your country’s largest and most impactful companies are set up to help consumers pay lower prices, that should help to, well, contain prices.

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

An Inflation Indicator to Watch, Part 3

March 10, 2018

An Inflation Indicator to Watch, Part 3

“During the 1980s and 1990s, most industrial-country central banks were able to cage, if not entirely tame, the inflation dragon.”
—Ben Bernanke

Ben Bernanke began his oft-cited “helicopter speech” in 2002 with a few kind words about his peers, including the excerpt above. Speaking for central bankers, he took a large share of the credit for the low inflation of the 1980s and 1990s. Central bankers had gained a “heightened understanding” of inflation, he said, and he expected the future to bring even more inflation-taming success.

Of course, Bernanke’s cohorts took a few knocks in the boom–bust cycle that followed his speech, but their reputations as masters of inflation (and deflation) only grew. Today, the picture he painted seems even more firmly planted in the public mind than it was in 2002, notwithstanding recent data showing inflation creeping higher.

Public perceptions aren’t always accurate, though, and public figures aren’t the most reliable arbiters of credit and blame. In this 3-part article, I’m proposing a theory that challenges Bernanke’s narrative, and I’ll back the theory with data in Part 3. I’ll show that it leads to an inflation indicator with an excellent historical record.

But first, let’s recap a few points I’ve already discussed.

The Endless Tug-of-War

In Part 2, I said inflation depends on a tug-of-war between purchasing power (on the demand side) and capacity (on the supply side), and the war takes place within the circular flow, in which spending flows into income and income flows back to spending. Two circular-flow patterns and their causes demand particular attention:

When banks inject money into the circular flow in the process of making loans, they can boost spending above the prior period’s income, thereby fattening the flow (or the opposite in the case of a deleveraging).

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

An Inflation Indicator to Watch, Part 1

February 18, 2018

An Inflation Indicator to Watch, Part 1

“Inflation is always and everywhere a monetary phenomenon.”
—Milton Friedman

Have you ever questioned Milton Friedman’s famous claim about inflation?

Ever heard anyone else question it?

Unless you read obscure stuff written for the academic community, you’re probably not used to Friedman’s quote being challenged. And that’s despite a lousy forecasting record by economists who bought into his Monetarist methods.

Consider the following:

When Friedman’s strict Monetarism fizzled in the 1980s, it was doomed partly by his own forecasts. Instead of the disinflation the decade delivered, he expected inflation to reach 1970s levels, publicizingthat prediction in 1983 and then again in 1984, 1985 and 1986. Of course, years earlier he foresaw the 1970s jump in inflation, but the errant forecasts that came later left him wide open to a “clock twice a day” dismissal.
Monetarists suffered an even harsher blow in 2012, when the Conference Board finally threw in the towel on Friedman’s favorite indicator, removing M2 from its Leading Economic Index (LEI). Generally speaking, forecasters who put M2 in their models are like bachelors who put “live with mom” in their dating profiles—they haven’t been successful.
The many economists who expected quantitative easing (QE) to wreak havoc on inflation are, of course, on the defensive. Nine years after QE began, core inflation remains below the Fed’s 2% target, defying their Monetarist beliefs.

When it comes to explaining inflation, Monetarism hasn’t exactly nailed it. Then again, neither has Keynesianism, whose Phillips Curve confounds those who rely on it. You can toss inflation onto the bonfire of major events that mainstream theories fail to explain.

But I’ll argue there might be a better way.

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

Venezuela’s Money Supply Soars By A Record 200%

April 3, 2017

Venezuela’s Money Supply Soars By A Record 200%

Two weeks ago, Reuters reported that due to “unexplained” reasons, the Venezuela central bank had stopped publishing its M2, or money supply, data. The M2 money supply was up by nearly 180% in mid-February from a year earlier, according to the central bank before it halted the release of the weekly data without explanation in February.

“If they are not publishing, you know it must be skyrocketing,” Aurelio Concheso, director of the Caracas-based business consultancy Aspen Consulting, stated the obvious. The central bank and ministry of communications did not respond to a request for comment, Reuters adds.

Fast forward to today when following the international outcry over last Wednesday’s failed coup-attempt by Maduro, in which the Supreme Court first withdrew the power of Venezuela’s opposition-controlled Congress, and then promptly reversed itself following loud international outcry and after it appeared that Maduro’s precarious grip on Venezuela society was about to be lost, when Venezuela’s M2 has once again mysteriously reappeared. According to the latest data, the money supply in the crisis-stricken country has surged over 200% in a year, up from 180% as of February, and the fastest rise since records began in 1940, putting it on track for the world’s highest inflation.

According to Reuters which first spotted the return of the data, soon after a month-long hiatus from publication, the central bank said late on Friday the total amount of local currency in circulation, M2, as of March 24 was 13.3 trillion bolivars, up 202.9% from a year earlier. By comparison, in the US, M2 rose by 6.4% in the same period.

But while M2 may have returned, official inflation data is still missing, which is probably for the best: Venezuela is in a major economic crisis, with millions struggling with food shortages and hyperinflation inflation in triple digits, if not higher.

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

Venezuela Stops Publishing Money Supply Data For Obvious Reasons

March 21, 2017

Venezuela Stops Publishing Money Supply Data For Obvious Reasons

More than a year after hyperinflating banana republic Venezuela stopped reporting official inflation data, Venezuela has stopped publishing money supply data, depriving the general public of the last, and best, available tool to ascertain soaring inflation in what has become the world’s worst-performing economy. Then again, one hardly needs official data to confirm the blistering wave of hyperinflation sweeping through the nation which has seen the value of the bolivar disintegrate under the Maduro regime.

The money supply indicator suddenly stopped appearing on the central bank’s website on Feb. 24. The data in question, which will no longer be updated, looked as follows most recently.

Despite the halt of CPI data, consumer price rises are widely seen to be in triple digits, driven by an unraveling socialist system in which many people struggle to obtain meals and medicines. The M2 money supply was up by nearly 180% in mid-February from a year earlier, according to the central bank before it halted the release of the weekly data without explanation last month Reuters reports. In contrast, Reuters reports that neighboring Colombia’s M2 was up 7 percent in the same period and the United States’ was up 6 percent.

“If they are not publishing, you know it must be skyrocketing,” Aurelio Concheso, director of the Caracas-based business consultancy Aspen Consulting, stated the obvious. The central bank and ministry of communications did not respond to a request for comment, Reuters adds.

An increase in M2, the sum of cash together with checking, savings and other deposits, means more currency is circulating. That can accelerate inflation when coupled with a decline in the output of goods and services – such as in Venezuela, which is in the fourth year of a recession. When money supply is growing exponentially, as it has been in Venezuela, academics usually point to the infamous example of the Weimar Republic and leave it at that.

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

Why I Think there Will Be a “Dollar Panic”

May 5, 2016

Why I Think there Will Be a “Dollar Panic”

The Great American Credit Collapse

Please remember this warning when you go to the ATM to get cash — and there is none.

While we were thinking about what was really going on with today’s strange new money system, a startling thought occurred to us. Our financial system could take a surprising and catastrophic twist that almost nobody imagines, let alone anticipates.

Do you remember when a lethal tsunami hit the beaches of Southeast Asia, killing thousands of people and causing billions of dollars of damage? Well, just before the 80-foot wall of water slammed into the coast an odd thing happened: The water disappeared.

The tide went out farther than anyone had ever seen before. Local fishermen headed for high ground immediately. They knew what it meant. But the tourists went out onto the beach looking for shells!

The same thing could happen to the money supply…

There’s Not Enough Physical Money

Here’s how… and why:

It’s almost seems impossible. Hard to imagine. Difficult to understand. But if you look at M2 money supply – which measures coins and notes in circulation as well as bank deposits and money market accounts – America’s money stock amounted to $12.6 trillion as of last month.

But there was just $1.4 trillion of physical currency in circulation – about only half of which is in the US. (Nobody knows for sure.)

What we use as money today is mostly credit. It exists as zeros and ones in electronic bank accounts. We never see it. Touch it. Feel it. Count it out. Or lose it behind seat cushions.

Banks profit – handsomely – by creating this credit. And as long as banks have sufficient capital, they are happy to create as much credit as we are willing to pay for. After all, it costs the banks almost nothing to create new credit. That’s why we have so much of it.

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

Downtrend In the Growth Rate of Money Supply Poses a Threat to Bubble Activities

March 7, 2016

DOWNTREND IN THE GROWTH RATE OF MONEY SUPPLY POSES A THREAT TO BUBBLE ACTIVITIES

The yearly growth rate of real gross domestic product eased to 1.9% in Q4 from 2% in the previous quarter.

Using our large scale econometric model we can suggest that the yearly growth rate of GDP could fall to 1.7% by Q3 before bouncing to 2.4% by Q4. By Q4 next year we forecast also a figure of 2.4%.

Other latest data portrays a mixed picture of economic activity. The yearly growth rate of durable goods orders jumped to 1.8% in January from minus 0.1 in the month before.

Meanwhile the Kansas Fed manufacturing index fell to minus 12 in February from minus 9 in January.

Also, in the housing market there are mixed signals with the yearly growth rate of existing home sales climbing to 11% in January from 7.5% in December while the yearly growth rate of new home sales plunged to minus 5.2% in January from 9.9% in the month before.

Furthermore, Conference Board’s consumer confidence index has weakened in February from January with the index falling to 92.2 from 97.8.

Changes in various indicators by themselves do not provide the information about the underlying reason for these changes. In our writing we have suggested that the key is the state of the pool of real wealth.

We suggest that strong increases in the yearly growth rate of money supply prior to its major peak in October 2011, when the yearly growth rate closed at 14.8%, were instrumental in undermining the pace of real wealth generation.

Since October 2011 the yearly growth rate of our measure of money AMS has been following a choppy declining trend. We hold that this is undermining various bubble activities, which sprang up on the back of past strong monetary rises.

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

The Global Run On Physical Cash Has Begun: Why It Pays To Panic First

February 28, 2016

The Global Run On Physical Cash Has Begun: Why It Pays To Panic First

Back in August 2012, when negative interest rates were still merely viewed as sheer monetary lunacy instead of pervasive global monetary reality that has pushed over $6 trillion in global bonds into negative yield territory, the NY Fed mused hypothetically about negative rates and wrote “Be Careful What You Wish For” saying that “if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.”

Well, maybe not… especially if physical currency is gradually phased out in favor of some digital currency “equivalent” as so many “erudite economists” and corporate media have suggested recently, for the simple reason that in a world of negative rates, physical currency – just like physical gold – provides a convenient loophole to the financial repression of keeping one’s savings in digital form in a bank where said savings are taxed at -0.1%, or -1% or -10% or more per year by a central bank and government both hoping to force consumers to spend instead of save.

For now cash is still legal, and NIRP – while a reality for the banks – has yet to be fully passed on to depositors.

The bigger problem is that in all countries that have launched NIRP, instead of forcing spending precisely the opposite has happened: as we showed last October, when Bank of America looked at savings patterns in European nations with NIRP, instead of facilitating spending, what has happened is precisely the opposite: “as the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain.”

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

What A Cashless Society Would Look Like

January 31, 2016

What A Cashless Society Would Look Like

Calls by various mainstream economists to ban cash transactions seem to be getting ever louder, while central bankers have unleashed negative interest rates on economies accounting for 25% of global GDP, with $5.5 trillion in government bonds yielding less than zero. The two policies are rapidly converging.

Bills and coins account for about 10% of M2 monetary aggregates (currency plus very liquid bank deposits) in the US and the Eurozone. Presumably the goal of this policy is to bring this percentage down to zero. In other words, eliminate your right to keep your purchasing power in paper currency.

By forcing people and companies to convert their paper money into bank deposits, the hope is that they can be persuaded (coerced?) to spend that money rather than save it because those deposits will carry considerable costs (negative interest rates and/or fees).

This in turn could boost consumption, GDP and inflation to pay for the massive debts we have accumulated (leaving aside the very controversial idea that citizens should now have to pay for the privilege of holding their hard earned money in a more liquid form, after it has already been taxed). So at long last we can finally get out of the current economic funk.

The US adopted a policy with similar goals in the 1930s, eliminating its citizens’ right to own gold so they could no longer “hoard” it. At that time the US was in the gold standard so the goal was to restrict gold. Now that we are all in a “paper” standard the goal is to restrict paper.

However, while some economic benefits may arguably accrue in the short-run, this needs to be balanced in relation to some serious distortions that could rapidly develop beyond that.

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

The Yield Curve and GDP – a causal relationship?

October 31, 2015

The Yield Curve and GDP – a causal relationship?

One of the most reliable indicators of an imminent recession through recent history has been the yield curve. Whenever longer dated rates falls below shorter dated ones, a recession is not far off. Some would even say that yield curve inversion, or backwardation, help cause the economic contraction.

To understand how this can be we first need to understand what GDP really is. Contrary to popular belief, GDP only has an indirect relation to material prosperity. Broken down to its core component, GDP is simply a measure of money spent on goods and services during a specified period, usually a year or a quarter.

However, since money itself is a very fleeting concept we need to dig deeper to fully understand the relation between the slope of the yield curve and GDP. The core of money is its function as the generally accepted medium of exchange, but today that is much more than the cash in your wallet. For example, the base money, provided by the central bank, consist of currency in circulation and banks reserves held at the central bank.

From these central bank reserves the commercial banking system can leverage up, through fractional reserve lending practice, several times over. It is important to note that broader money supply measures, such as M2, is merely a reflection of banks leverage on top of base money. As a bank makes a loan to a borrower the bank creates fund which can be used as means of payments to whatever the borrower wants to spend the newly acquired money on. Obviously, these money claims will in turn create new deposits, which can be used to create new loanable funds and so on ad infinitum.

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

Can the Fed Print Money?

October 28, 2015

Can the Fed Print Money?

Every morning is the dawn of a new error – Anonymous

It Can and it Does

In light of the upcoming October Fed (non-)decision, we want to briefly revisit a subject that still appears to be causing some confusion. We most recently encountered this confusion again in a quarterly update by the Hoisington Investment Management Company. To be sure, we very often, if not to say almost always, have tended to agree with the economic conclusions of Lacy Hunt and Van Hoisington since we have first come across their work (we may arrive at these conclusions in a somewhat different manner, but the conclusions as such are usually not much different).

2015-10-27_213416 Money from nothing and chicks for free – how the Fed does it.
Image credit: dreamstime

US true money supply TMS-2: this broad aggregate contains all the items that can be properly defined as money – click to enlarge.

In their third quarter update we have come across one sentence that we believe requires comment, as we have seen similar things asserted elsewhere and we believe it is important to be 100% clear on the topic. In addition to the assertion we want to challenge, which is highlighted below, we also quote the preceding paragraph, because it serves to elucidate a few additional conceptual problems.

“Despite the unprecedented increase in the Federal Reserve’s balance sheet, growth in M2 over the first nine months of this year fell below its average rate of growth over the past 115 years, a time when the growth in the monetary base was stable and quite modest. In addition, velocity of money, which is an equal partner to money in determining nominal GDP, has moved even further outside the Fed’s control. The drop in velocity to a six decade low is consistent with a misallocation of capital and an increase in debt used for either unproductive or counterproductive purposes.

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

Canadian Economics: Charts Galore

August 22, 2015

How money creation threatens hyperinflation

March 30, 2015

How money creation threatens hyperinflation

In order to understand the relationship between money creation and the price level, we first need to get some definitions straight.

To Austrians the terms inflation and deflation refer to money and not prices. There is no doubt that money has experienced unprecedented inflation. In February of 2010 base money was $2.1 trillion. Four years later it was $3.8 trillion. In the same time frame, M1 has increased from $1.7 trillion to $2.9 trillion. M2 has gone from $8.5 trillion to $11.7 trillion. Excess reserves have doubled from $1.2 trillion to $2.4 trillion. (Please keep in mind that prior to 2008 excess reserves seldom were more than a few BILLION dollars, which is effectively zero and represented mostly the aggregate of excess reserve cash in thousands of community bank vaults.)

To Austrians changes to the price level, what the public incorrectly calls inflation and deflation, are the result of changes to the aggregate demand for consumers’ goods and the aggregate supply of consumers’ goods. Think of a simple ratio with the numerator representing demand and the denominator representing supply. Notice that an increase in supply will cause the price level to fall. Aren’t we all happy with this? I am. Or a decrease in demand will cause the price level to fall. There can be many causes of a decrease in demand–a fall in the money supply due to bank failures, a change in subjective time preference to save more, or a rational desire to hold more cash during times of uncertainty. None of these are bad for the economy per se. Whatever the cause, the antidote to a fall in demand is falling prices. The relationship between supply and demand must be re-established.

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

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