All Is Not Well

Corporate loan delinquencies and charge-offs at US commercial banks have recently been updated to the end of Q4 2015. As we suspected on occasion of our last update, the annual change rate in the sum of the two series has continued to accelerate.

 

imploding key bankPhoto credit: AP

 

It stands now at a level that exceeds the peak readings of both the 1990 and the 2001 recessions, and is only rivaled by the 2008 disaster. Evidently, everything is not awesome in the US economy. We have included the Federal Funds rate on the chart as well, to once again highlight the curious fact that this is happening with the FF rate still stuck at rock bottom levels.

 

1-Charge-offs and delinquenciesAnnual rate of change of corporate loans delinquencies & charge-offs at US commercial banks vs. the Federal Funds rate. The surge in dud loans continues unabated, and already exceeds the worst levels of the 1990 and 2001 recessions – click to enlarge.

 

Money Supply Growth Decelerates Further

In our last update on this data series we wrote:

 

“[T]his is a sign that inflationary US bank credit expansion to businesses will likely continue to stall and as a result US money supply growth should continue to decelerate.”

 

However, the annual growth rate of the broad true money supply TMS-2 has actually received a bump at the turn of the year, due to a large jump in funds held at the Treasury’s general account with the Fed, as well as (so we suspect, anyway) temporary repatriation of USD denominated funds held in accounts abroad, very likely for reasons of regulatory window-dressing.

Don’t hold us to this explanation, but the money has to have come from somewhere. With QE out of the picture and bank lending growth not accelerating further, the relatively high annual growth rates in deposit money recorded at year-end were very likely due to shifts in cross-border USD liquidity that temporarily boosted domestic money supply figures.

If we look at the narrow monetary aggregate M1 though, which is updated weekly rather than monthly (and very closely tracks the narrow true money supply gauge TMS-1), we can see that there has indeed been a quite sharp deceleration in US money supply growth. As we have pointed out previously, we expect that the significant downshift in narrow money supply growth rates will eventually impact the broader money measure TMS-2 as well. We will just have to wait a little longer for confirmation.

 

2-M1Annual growth rate of narrow money M1. As can be seen, the recent deceleration mimics what happened after the end of “QE1”. More important though is the sheer extent of the downshift. While M1 still grew at a near 25% annualized peak rate in 2011, this has recently declined to just 2.45%, after once again lurching lower in early 2016 – click to enlarge.

 

A Serious Warning Sign

This is quite a serious warning sign for an economy that has depended on huge amounts of credit and money supply expansion in recent years in order to merely show an abysmally weak pulse.

Obviously, bubble activities in the oil patch are already in the process of disintegration. This has resulted in a – so far mild – manufacturing recession, and we have little doubt that other areas of the economy will be on the menu next.

Probably high up on the list of sectors likely to be hit next is the car sector. Demand for cars has been driven by a sizable expansion in sub-prime lending, with all sorts of tricks employed to scrape the bottom of the barrel of eligible borrowers (such as e.g. extending loan maturities to never before seen terms).

Interestingly, industrial, transportation and commodity stocks have been the leading sectors in the recent stock market recovery. This may tempt people to think that things are getting better on the cyclical front. However, we actually believe it is mainly due to the market participants expecting that the recent huge expansion in bank credit in China and the associated jump in y/y money supply growth will have a positive effect on these sectors.

 

3-China money supplyChina: the annual growth rate of the money supply aggregates M1 and M2. Note the sharp spike in M1 growth since Q3 2015. Its lagged effects are likely exerting an effect on commodity prices, as the expectations of market participants are shifting. However, this is not the only relevant factor, see below – click to enlarge.

 

Commodity Prices

The not unimportant fact that many commodities have simply become way too cheap in nominal terms relative to the amount of money already outstanding should be mentioned as well. For instance, in in the US economy alone, the broad true domestic money supply has increased by more than 300% since the year 2000 – or putting it differently, there is now four times as much money in the US economy than 15-16 years ago.

One cannot reasonably expect commodity prices to just keep falling under such circumstances. While the effect of the money relation on specific prices is obviously in no way fixed or quantifiable, it should be clear that most commodity prices will never go back to their previous long term lows (just as prices never went back to their 1960s levels after the end of the 1970s commodity bull market).

Note here that indexes like the CRB are actually misrepresenting the situation due to the futures roll factor. In terms of cash prices, commodities are far from their year 2000 lows. The effect is illustrated by the chart below:

 

4-commoditiesTwo commodity indexes compared: it is not true, as suggested by the CRB index, that commodity prices have declined below their levels of 1999/2000. On the contrary, they are still more than 100% higher – click to enlarge.

 

In other words, a bump in commodity prices at this juncture does not necessarily tell us much about upcoming trends in the US economy. We will discuss recent US economic data releases in more detail in an upcoming article.

 

Conclusion

Based on the growth in corporate loan charge-offs/ delinquencies and recent money supply growth data, it remains highly likely that a recession will begin in the US sometime this year (it probably hasn’t yet, as not all the puzzle pieces are in place yet).

This would incidentally be perfectly in keeping with our longer term expectations for the stock market. Naturally, all these expectations could still turn out to be wrong – we will have to wait and see about that. However, so far the evidence continues to support our contentions.

 

Charts by: St. Louis Federal Reserve Research, StockCharts

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Too Much Bubble-Love, Likely to Bring Regret
      Unprecedented Extremes in Overbought Readings Readers may recall our recent articles on the blow-off move in the stock market, entitled Punch-Drunk Investors and Extinct Bears (see Part 1 & Part 2 for the details). Bears remained firmly extinct as of last week – in fact, some of the sentiment indicators we are keeping tabs on have become even more stretched, as incredible as that may sound. For instance, assets in bullish Rydex funds exceeded bear assets by a factor of more than 37...
  • How to Buy Low When Everyone Else is Buying High
      When to Sell? The common thread running through the collective minds of present U.S. stock market investors goes something like this: A great crash is coming.  But first there will be an epic run-up climaxing with a massive parabolic blow off top.  Hence, to capitalize on the final blow off, investors must let their stock market holdings ride until the precise moment the market peaks – and not a moment more.  That’s when investors should sell their stocks and go to...
  • What Kind of Stock Market Purge Is This?
      Actions and Reactions Down markets, like up markets, are both dazzling and delightful. The shock and awe of near back-to-back 1,000 point Dow Jones Industrial Average (DJIA) free-falls is indeed spectacular. There are many reasons to revel in it.  Today we shall share a few. To begin, losing money in a multi-day stock market dump is no fun at all.  We'd rather get our teeth drilled by a dentist.  Still, a rapid selloff has many positive qualities.   Memorable moments from...
  • Monetary Metals Brief 2018
      Short and Long Term Forecasts Predicting the likely path of the prices of the metals in the near term is easy. Just look at the fundamentals. We have invested many man-years in developing the theory, model, and software to calculate it. Every week we publish charts and our calculated fundamental prices.   A selection of 1 and ½ ounce gold bars – definitely more fondle-friendly than bitcoin, but a bit more cumbersome to send around. [PT]   However, predicting the...
  • The Donald Saves the Dollar
      Something for Nothing The world is full of bad ideas.  Just look around.  One can hardly blink without a multitude of bad ideas coming into view.  What’s more, the worse an idea is, the more popular it becomes. Take Mickey’s Fine Malt Liquor.  It’s nearly as destructive as prescription pain killers.  Yet people chug it down with reckless abandon.   Looking at the expression of this Mickey's Malt Liquor tester one might initially get the impression that he is...
  • US Stocks - Minor Dip With Potential, Much Consternation
      It's Just a Flesh Wound – But a Sad Day for Vol Sellers On January 31 we wrote about the unprecedented levels - for a stock market index that is - the weekly and monthly RSI of the DJIA had reached (see: “Too Much Bubble Love, Likely to Bring Regret” for the astonishing details – provided you still have some capacity for stock market-related astonishment). We will take the opportunity to toot our horn by reminding readers that we highlighted VIX calls of all things as a worthwhile...
  • Why I Own Gold and Gold Mining Companies – An Interview With Jayant Bandari
      Opportunities in the Junior Mining Sector Maurice Jackson of Proven and Probable has recently interviewed Jayant Bandari, the publisher of Capitalism and Morality and a frequent contributor to this site. The topics discussed include currencies, bitcoin, gold and above all junior gold stocks (i.e., small producers and explorers). Jayant shares some of his best ideas in the segment, including arbitrage opportunities currently offered by pending takeovers – which is an area that generally...
  • “Strong Dollar”, “Weak Dollar” - What About a Gold-Backed Dollar?
      Contradictory Palaver The recent hullabaloo among President Trump’s top monetary officials about the Administration’s “dollar policy” is just the start of what will likely be the first of many contradictory pronouncements and reversals which will take place in the coming months and years as the world’s reserve currency continues to be compromised.  So far, the Greenback has had its worst start since 1987, the year of a major stock market reset.   A modern-day...
  • Seasonality of Individual Stocks – an Update
      Well Known Seasonal Trends Readers are very likely aware of the “Halloween effect” or the Santa Claus rally. The former term refers to the fact that stocks on average tend to perform significantly worse in the summer months than in the winter months, the latter term describes the typically very strong advance in stocks just before the turn of the year. Both phenomena apply to the broad stock market, this is to say, to benchmark indexes such as the S&P 500 or the...
  • The FOMC Meeting Strategy: Why It May Be Particularly Promising Right Now
      FOMC Strategy Revisited As readers know, investment and trading decisions can be optimized with the help of statistics. One way of doing so is offered by the FOMC meeting strategy.   The rate hikes are actually leading somewhere – after the Wile E. Coyote moment, the FOMC meeting strategy is especially useful [PT]   A study published by the Federal Reserve Bank of New York in 2011 examined the effect of FOMC meetings on stock prices.  The study concluded that these...
  • The Future of Copper – Incrementum Advisory Board Meeting Q1 2018
      Copper vs. Oil The Q1 2018 meeting of the Incrementum Fund's Advisory Board took place on January 24, about one week before the recent market turmoil began. In a way it is funny that this group of contrarians who are well known for their skeptical stance on the risk asset bubble, didn't really discuss the stock market much on this occasion. Of course there was little to add to what was already talked about extensively at previous meetings. Moreover, the main focus was on the topic...
  • When Budget Deficits Will Really Go Vertical
      Mnuchin Gets It United States Secretary of Treasury Steven Mnuchin has a sweet gig.  He writes rubber checks to pay the nation’s bills.  Yet, somehow, the rubber checks don’t bounce.  Instead, like magic, they clear. How this all works, considering the nation’s technically insolvent, we don’t quite understand.  But Mnuchin gets it.  He knows exactly how full faith and credit works – and he knows plenty more.   Master of the Mint and economy wizard Steven Mnuchin and...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com