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: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • How to Survive the Winter
      A Flawless Flock of Scoundrels One of the fringe benefits of living in a country that’s in dire need of a political, financial, and cultural reset, is the twisted amusement that comes with bearing witness to its unraveling.  Day by day we’re greeted with escalating madness.  Indeed, the great fiasco must be taken lightly, so as not to be demoralized by its enormity.   Symphony grotesque in Washington [PT]   Of particular note is the present cast of characters. ...
  • Credit Spreads: The Coming Resurrection of Polly
      Suspicion isn't Merely Asleep – It is in a Coma (or Dead) There is an old Monty Python skit about a parrot whose lack of movement and refusal to respond to prodding leads to an intense debate over what state it is in. Is it just sleeping, as the proprietor of the shop that sold it insists? A very tired parrot taking a really deep rest? Or is it actually dead, as the customer who bought it asserts, offering the fact that it was nailed to its perch as prima facie evidence that what...
  • The Strange Behavior of Gold Investors from Monday to Thursday
      Known and Unknown Anomalies Readers are undoubtedly aware of one or another stock market anomaly, such as e.g. the frequently observed weakness in stock markets in the summer months, which the well-known saying “sell in May and go away” refers to. Apart from such widely known anomalies, there are many others though, which most investors have never heard of. These anomalies can be particularly interesting and profitable for investors – and there are several in the precious metals...
  • Business Cycles and Inflation – Part I
      Incrementum Advisory Board Meeting Q4 2017 -  Special Guest Ben Hunt, Author and Editor of Epsilon Theory The quarterly meeting of the Incrementum Fund's Advisory Board took place on October 10 and we had the great pleasure to be joined by special guest Ben Hunt this time, who is probably known to many of our readers as the main author and editor of Epsilon Theory. He is also chief risk officer at investment management firm Salient Partners. As always, a transcript of the discussion is...
  • What President Trump and the West Can Learn from China
      Expensive Politics Instead of a demonstration of its overwhelming military might intended to intimidate tiny North Korea and pressure China to lean on its defiant communist neighbor, President Trump and the West should try to learn a few things from China.   President Trump meets President Xi. The POTUS reportedly had a very good time in China. [PT] Photo credit: AP   The President’s trip to the Far East came on the heels of the completion of China’s...
  • Business Cycles and Inflation, Part II
      Early Warning Signals in a Fragile System [ed note: here is Part 1; if you have missed it, best go there and start reading from the beginning] We recently received the following charts via email with a query whether they should worry stock market investors. They show two short term interest rates, namely the 2-year t-note yield and 3 month t-bill discount rate. Evidently the moves in short term rates over the past ~18 - 24 months were quite large, even if their absolute levels remain...
  • Is Fed Chair Nominee Jay Powell, Count Dracula?
      A Date with Dracula The gray hue of dawn quickly slipped to a bright clear sky as we set out last Saturday morning.  The season’s autumn tinge abounded around us as the distant mountain peaks, and their mighty rifts, grew closer.  The nighttime chill stubbornly lingered in the crisp air.   “Who lives in yonder castle?” Harker asked. “Pardon, Sire?” Up front in the driver's seat it was evidently hard to understand what was said over the racket made by the team of...
  • A Different Powelling - Precious Metals Supply and Demand Report
      New Chief Monetary Bureaucrat Goes from Good to Bad for Silver The prices of the metals ended all but unchanged last week, though they hit spike highs on Thursday. Particularly silver his $17.24 before falling back 43 cents, to close at $16.82.   Never drop silver carelessly, since it might land on your toes. If you are at loggerheads with gravity for some reason, only try to handle smaller-sized bars than the ones depicted above. The snapshot to the right shows the governor...
  • Heat Death of the Economic Universe
      Big Crunch or Big Chill Physicists say that the universe is expanding. However, they hotly debate (OK, pun intended as a foreshadowing device) if the rate of expansion is sufficient to overcome gravity—called escape velocity. It may seem like an arcane topic, but the consequences are dire either way.   OT – a little cosmology excursion from your editor: Observations so far suggest that the expansion of the universe is indeed accelerating – the “big crunch”, in...
  • Claudio Grass Interviews Mark Thornton
      Introduction Mark Thornton of the Mises Institute and our good friend Claudio Grass recently discussed a number of key issues, sharing their perspectives on important economic and geopolitical developments that are currently on the minds of many US and European citizens. A video of the interview can be found at the end of this post. Claudio provided us with a written summary of the interview which we present below – we have added a few remarks in brackets (we strongly recommend...
  • Inflation and Gold - Precious Metals Supply and Demand
      Reasons to Buy Gold The price of gold went up $19, and the price of silver 42 cents. The price action occurred on Monday, Wednesday and Friday though so far, only the first two price jumps reversed. We promise to take a look at the intraday action on Friday.   File under “reasons to buy gold”: A famous photograph by Henri Cartier-Bresson of a rather unruly queue in front of a bank in Shanghai in 1949 in the final days of Kuomintang rule. When it dawned on people that the...
  • Precious Metals Supply and Demand
      A Different Vantage Point The prices of the metals were up slightly this week. But in between, there was some exciting price action. Monday morning (as reckoned in Arizona), the prices of the metals spiked up, taking silver from under $16.90 to over $17.25. Then, in a series of waves, the price came back down to within pennies of last Friday’s close. The biggest occurred on Friday.   Silver ended slightly up on the week after a somewhat bigger rally was rudely interrupted...

Support Acting Man

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