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.
Photo 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.
Annual 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.
Annual 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.
China: 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.
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:
Two 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.
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
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- Ganging Up on Gold
So Far a Normal Correction In last week's update on the gold sector, we mentioned that there was a lot of negative sentiment detectable on an anecdotal basis. From a positioning perspective only the commitments of traders still appeared a bit stretched though, while from a technical perspective we felt that a pullback to the 200-day moving average in both gold and gold stocks shouldn't be regarded as anything but a normal - and in this case actually long overdue -...
- Gold Sector Correction – Where Do Things Stand?
Sentiment and Positioning When we last discussed the gold sector correction (which had only just begun at the time), we mentioned we would update sentiment and positioning data on occasion. For a while, not much changed in these indicators, but as one would expect, last week's sharp sell-off did in fact move the needle a bit. Gold - just as nice to look at as it always is, but slightly cheaper since last week. Photo via The Times Of India The commitments of...
- Australian property bubble on a scale like no other
Australian property bubble on a scale like no other Yesterday Citi produced a new index which pinned the Australian property bubble at 16 year highs: Bubble trouble. Whether we label them bubbles, the Australian economy has experienced a series of developments that potentially could have the economy lurching from boom to bust and back. In recent years these have included: the record run up in commodity prices and subsequent correction; the associated...
- Prepare for the Unthinkable
Red Ink Growth and profits mask a variety of problems. They hide business inefficiencies and the money suck of corporate adminis-trivia. They also conceal unproductive staff. The final career leap But most of all growth and profits obscure the extreme value subtracting forces of bloated management teams. During good times it is unclear what these smug fellows do. During bad times it is lucidly clear that most of them ain’t worth a darn. When the...
- A Looming Banking Crisis – Is a Perfect Storm About to Hit?
Andy Duncan Interviews Claudio Grass Andy Duncan of FinLingo.com has interviewed our friend Claudio Grass, managing director of Global Gold in Switzerland. Below is a transcript excerpting the main parts of the first section of the interview on the problems in the European banking system and what measures might be taken if push were to come to shove. Andy Duncan of FinLingo.com (left) and Claudio Grass of Global Gold (right) Andy Duncan: How do you see the...
- Pope Francis: Traitor to Western Civilization
Disqualified There has been no greater advocate of mass Muslim migration into Europe than the purported head of the Catholic Church, Pope Francis. At a recent conference, he urged that “asylum seekers” be accepted, “through the acts of mercy that promote their integration into the European context and beyond.”* Before we let Antonius continue with his refreshingly politically incorrect disquisition, we want to remind readers of two previous articles that have...
- US Stock Market - a Spanking May be on its Way
Iffy Looking Charts The stock market has held up quite well this year in the face of numerous developments that are usually regarded as negative (from declining earnings, to the Brexit, to a US presidential election that leaves a lot to be desired, to put it mildly). Of course, the market is never driven by the news – it is exactly the other way around. It is the market that actually writes the news. It may finally be time for a spanking though. Time for some old-fashioned...
- Doomed to Failure
Larded Up and Larded Over We’ve been waiting for the U.S. economy to reach escape velocity for the last six years. What we mean is we’ve been waiting for the economy to finally become self-stimulating and no longer require monetary or fiscal stimulus to keep it from stalling out. Unfortunately, this may not be possible the way things are going. As Milton Jones once revealed: “A month before he died, my grandfather covered his back in lard. After that, he went...
- Meet Your New Stimulus Allocation Czar
March Towards Midnight The march towards midnight is both stirring and foreboding. Like a death row inmate sitting down to savor his last meal, a grim excitement greets the reality of impending doom. Thoughts of imminent mortality haunt each bite. Tic-toc, tic-toc... As far as the economy’s concerned, there’s no stopping its march towards midnight. The witching hour’s rapidly approaching. We intend to savor each moment and make the best of...
- Are the Deep State’s Drones Coming for You?
What’s Aleppo? Look out kid Don’t matter what you did Walk on your tip toes Don’t try "No Doz" Better stay away from those That carry around a fire hose Keep a clean nose Watch the plain clothes You don’t need a weather man To know which way the wind blows – “Subterranean Homesick Blues,” Bob Dylan The entrance to Baghdad's “Green Zone”. Photo credit: Karim Kadim / AP DELRAY BEACH, Florida – Biggest foreign policy blunder...
- Interview with Doug Casey
Natalie Vein of BFI speaks with Doug Casey Our friend Natalie Vein recently had the opportunity to conduct an extensive interview with Doug Casey for BFI, the parent company of Global Gold. Based on his decades-long experience in investing and his many travels, he shares his views on the state of the world economy, his outlook on critical political developments in the US and in Europe, as well as his investment insights and his approach to gold, as part of a viable strategy for...
- The Bamboozled Middle Class
Gassy and Bloated BALTIMORE – What a great time for an observer with a sense of mischief! This year’s presidential campaign is the most absurd and remarkable we have ever witnessed. After more than two centuries, Americans are finally getting the democracy they deserve – one that is grotesque... slimy... and immensely entertaining, albeit in the mud-wrasslin’ genre. The mud-wrestlers – well, we did promise you in these pages it would be entertaining like never...