Gray Swans and Black Swans
By Monday’s close, the S&P 500 Index was closing in on the low established in the August swoon – such a retest was essentially our minimum expectation, as V-shaped rebounds are very rare. The question is now whether it will only be a retest, or if something worse is in the offing. No-one knows for sure of course, but we’ll briefly discuss what we are looking at in this context.
Image via NYTimes
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
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
Not Enough Rebound Oomph
Yesterday we wrote about the fact that last week’s rebound had brought the market (in the form of the S&P 500) back to a first zone of resistance (former support). We actually suspected the market may try for the second resistance level above, but it was not to be. Here is the situation at the time of writing (obviously, high intra-day volatility means that today’s candle can change relatively quickly):
Regulators are “Worried”- but it is way too Late
We have discussed the immense credit bubbles in Scandinavian countries in these pages several times in recent years. As it turns out, they have now become even bigger. The euro area debt crisis has had a number of side effects. One of them is that not only Switzerland, but also other countries in Europe outside of the euro zone have tried their best to keep their currencies from appreciating. This is based on the erroneous mercantilist notion that having a strong currency is somehow “bad”.
In Denmark the central bank’s benchmark lending rate has been stuck at minus 0.75 percent since February. Denmark’s households are incidentally the most leveraged in the world, with household debt amounting to over 530 percent of the country’s economic output.
An Interesting Background Noise Amid Increasing Bubble Talk
As we have previously pointed out, a sharp increase in “bubble talk” is often a danger sign (see “Circular Bubble Logic” for details). There is some anecdotal, as well as some quantifiable evidence for this (such as Google search statistics). There has certainly been quite a bit of talk about certain bonds having reached unsustainable levels, but generally our impression was that there was actually a lot of complacency as well. This is especially true with regard to low or even negative yielding European government bonds, which reflected one of the most egregious central bank-directed market distortions yet (more on this further below).
More Ominous Charts
We have decided to expand a bit on our recent post about “ominous charts” and show a few more charts that should at least give one pause. We hasten to add that none of them should be seen as timing indicators. It must be stressed that we continue to be in unprecedented situation, with central banks worldwide cutting interest rates to the bone with policy rates in the major currency areas having been kept at or near zero for an unusually long time period.
Party on dudes!
Painting by Vasily Alexandrovich Kotarbinsky
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