Money Supply and Credit Growth Continue to Falter

The decline in the growth rate of the broad US money supply measure TMS-2 that started last November continues, but the momentum of the decline has slowed last month (TMS = “true money supply”).  The data were recently updated to the end of April, as of which the year-on-year growth rate of TMS-2 is clocking in at 6.05%, a slight decrease from the 6.12% growth rate recorded at the end of March. It remains the slowest y/y growth since October of 2008, when the Fed had just begun to pump quite heavily.

 

US money supply and credit growth keep slowing.

 

The monthly y/y growth rate of M1 fell rather more sharply in April, from 8.76% to 7.07% (the most recent weekly annualized growth rate is lower at 6.80%). The composition of M1 is close to, but not quite equal to narrow money AMS (or TMS-1) – in particular, it does not contain the balances held at the Treasury’s general account with the Fed.

As a result, the growth rates of the two measures have drifted apart more sharply since 2016 than they usually do, as there were huge swings in the Treasury’s general account from mid 2016 to early 2017. These swings were very likely connected with money market funds moving large amounts of dollars from the euro-dollar market into treasury bills.

Reports by the Treasury Borrowing Advisory Committee suggest that the topic was on the agenda for a while. The surge in demand from MM funds may well have been accommodated by an increase in debt issuance, which the growing cash hoard mirrored.

 

Monthly y/y growth rates of TMS-2 and M1 – TMS-2 growth remains at the lowest level since October 2008 – click to enlarge.

 

One reason to look at M1 as well is that it shows a slowdown in growth even without taking the above mentioned fluctuations in Treasury deposits into account (these remained at odds with deposit money growth even when the treasury drew its balances down again in Q1 2017; we have yet to find out why, but the fact is that there was no commensurate increase in deposit money at US banks).

A continued slowdown in bank credit growth is undoubtedly the culprit. The next chart compares weekly y/y M1 growth with the y/y growth rate of commercial and industrial loans (which is also made available weekly) as of the first week of May.

C&I lending grew at 2.01% according to the latest reading, which represents a new post GFC recovery low. Total bank credit growth kept declining as well, but growth in business loans is in our opinion the most important component of bank lending growth.

 

Weekly y/y growth rate of M1 and commercial & industrial loans –  the latter has hit a new post GFC recovery low of 2.01% – click to enlarge.

 

The next chart shows the ratio of capital goods vs. consumer goods production, a rough measure of which parts of the production structure tend to be stronger magnets for investment (the usual caveats regarding the flaws of such statistical aggregates apply). The ratio remains elevated, but it has faltered after peaking in 2014, in line with the tapering/ end of QE3 and the subsequent collapse in oil prices – which evidently had a sizable effect on capital goods production.

 

Capital vs. consumer goods production. Recessions are characterized by sharp downturns in this ratio, as malinvestments are liquidated. As a rule, these are concentrated in the higher order stages of the production structure. The downtrend since 2014 was relatively mild, but the recent recovery seems to be faltering already – in spite of a big surge in oil drilling-related investment in Q1. If money supply growth keeps slowing down, an accelerated decline in the ratio will eventually take hold. These phases are usually associated with sharp declines in asset prices – click to enlarge.

 

A Really Good Reason for Concern

Normally the above data points would not give cause for a lot of concern regarding the timing of the next boom-bust tipping point just yet. There is one major reason though why they should, apart from the ominously sharp decline in federal tax receipts we have shown here.

The effect of the post GFC money supply expansion on asset prices was extreme (note: the cumulative increase in TMS-2 since early 2008 amounts to roughly 140%). That introduces a vulnerability that might otherwise not exist, mainly because economic confidence is very closely correlated with asset prices.

The following chart from John Hussman illustrates the situation. In terms of the median price/revenue ratio of S&P 500 components, the stock market is currently more overvalued than ever.

 

S&P 500 Index components, median price/revenue ratio. The extreme overvaluation at the peak in 2000 in terms of the P/E ratio was caused by a relatively small number of big cap tech stocks. The chart above inter alia suggests that overvaluation is far more widespread this time – there will hardly be anything worth “rotating” into once a decline in stock prices begins – click to enlarge.

 

The current S&P 500 trailing P/E ratio of roughly 24 is certainly not threatening the record high established at the peak of the tech mania in 2000, but in terms of the indicator shown above, valuations have moved well beyond good and evil. “Where precisely is that?”, we hear you ask. Before we get to that, we want to briefly comment on what else the above chart tells us.

 

Mean and Reversion-Prone

The fact that the SPX trailing P/E ratio is historically extremely elevated, but still a good sight below its year 2000 record high of ~46, while price/ revenue ratios have streaked to a comparatively much higher level, indicates that profit margins are at an extremely high level as well.

Profit margins tend to fluctuate, i.e., they are the kind of datum that mean-reverts with unwavering regularity. Reportedly there is growing belief in a “new era” bereft of the mean-reversion concept, which we think can be safely dismissed. As John Hussman notes in this context:

 

Because profit margins are systematically elevated at cyclical economic peaks, raw earnings-based measures invariably reassure investors that extreme stock market levels are really not as dangerous as they seem. As Ben Graham warned decades ago, “The purchasers view the good current earnings as equivalent to ‘earning power’ and assume that prosperity is equivalent to safety.”

 

This has of course happened many times in the course of market history, and every time someone came forward to explain to the investoriat why higher profit margins (and by implication significantly overvalued stock prices) would be permanent this time. Usually these explanations were provided shortly before it turned out they were not permanent after all.

Assuming that this historical tendency remains operative – and there is no good reason to expect otherwise – feeling “comfortable” with a trailing P/E ratio of 24 and a Shiller P/E ratio of ~29 strikes us as quite audacious.  The latter by the way represents a new high for the move, exceeded only by the feverish readings taken at the 1929 and 2000 peaks (~32 and 44). In fact, very high profit margins make an overvalued market even more dangerous, precisely because they won’t stay where they are.

So where is the realm that is “beyond good and evil”? Much of our understanding of higher dimensional environments was unfortunately lost when we slipped on an Enrique surface in spite of its Ricci flatness. An entire canonical bundle of it – trivial, but useful – fell into a six-dimensional Calabi-Yau manifold, where it is busy conjecturing ever since. Sadly, it is fated to eventually decompose.

But here is a wild guess anyway. Stock market valuations have reached the dimension in which this guy lives:

 

Some of our readers surely remember the clown with the hard to pronounce name, who reportedly lives in a higher-dimensional space beyond human ken. That is where the stock market’s median price/revenue ratio now lives as well. It is to be feared that it will one day return to Earth with thud.

 

Conclusion

Slowing money supply and credit growth and historically extremely high stock market valuations far more often than not turn out to be uneasy bedfellows. In fact, usually the latter will eventually fall out of bed. Circumspection remains advisable.

 

Charts by: St. Louis Fed, John Hussman

 

 
 

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

   
 

2 Responses to “Moving Closer to the Precipice”

  • zerobs:

    I don’t think the Fed’s job is to ensure that P/E ratio stays dangerously inflated – the Fed CAUSED the inflation after all. A 33% correction puts the P/E ratio back at a healthier 16.

    I expect a hike in September, followed by a market correction which will be erroneously blamed on the Fed.

    The Fed of course is oblivious whether they tighten or loosen. The central bank’s mere existence makes rational economic planning by individuals and companies much much harder that it would be without such a corrupting force.

  • No6:

    Will the Fed push on with tightening in light of the above or are they oblivious?

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • What Do “Think Tanks” Think About?
      “Russiagate” WEST RIVER, MARYLAND – We’re back at our post – watching... reading... trying to connect the dots. And we begin by asking: What do “think tanks” think about? The answer in a minute. First, there is a dust-up in the Washington, D.C., area. “Russiagate,” it is called. As near as we can make out, some people think the Trump team had or has illegal or inappropriate contacts with the Russian government.   It's all very obvious, if one looks...
  • Parabolic Coin
      The Crypto-Bubble - A Speculator's Dream in Cyberspace When writing an article about the recent move in bitcoin, one should probably not begin by preparing the chart images. Chances are one will have to do it all over again. It is a bit like ordering a cup of coffee in Weimar Germany in early November 1923. One had to pay for it right away, as a cup costing one wheelbarrow of Reichsmark may well end up costing two wheelbarrows of Reichsmark half an hour later. These days the question is...
  • Quantitative Easing Explained
      [Ed. note: This article was originally posted in November of 2010 - we have decided to republish it with updated charts, as it has proved to be very useful as a reference - the mechanics of QE are less well understood than they should be, and this article explains them in detail.]   Printing Money We have noticed that lately, numerous attempts have been made to explain the mechanics of quantitative easing.  They range from the truly funny as in this by now 'viral' You Tube...
  • In Gold We Trust, 2017
      The 11th Annual In Gold We Trust Report This year's Incrementum In Gold We Trust report by our good friends Ronald Stoeferle and Mark Valek appears about one month earlier than usual (we already mentioned in our most recent gold update that it would become available soon). As always, the report is extremely comprehensive, discussing everything from fundamentals pertaining to gold, to technical analysis to statistical studies on the behavior of gold under different economic...
  • The Three Headed Debt Monster That’s Going to Ravage the Economy
      Mass Infusions of New Credit   “The bank is something more than men, I tell you.  It’s the monster.  Men made it, but they can’t control it.” – John Steinbeck, The Grapes of Wrath   Something strange and somewhat senseless happened this week. On Tuesday, the price of gold jumped over $13 per ounce.  This, in itself, is nothing too remarkable.  However, at precisely the same time gold was jumping, the yield on the 10-Year Treasury note was slip sliding down...
  • Recession Watch Fall 2017
      One Ear to the Ground, One Eye to the Future Treasury yields are attempting to say something.  But what it is exactly is open to interpretation.  What’s more, only the most curious care to ponder it. Like Southern California’s obligatory June Gloom, what Treasury yields may appear to be foreshadowing can be somewhat misleading.   Behold, the risk-free tide...   Are investors anticipating deflation or inflation?  Are yields adjusting to some other market or...
  • Stocks, Bonds, Euro, and Gold Go Up – Precious Metals Supply and Demand
      Driven by Credit The jobs report was disappointing. The prices of gold, and even more so silver, took off. In three hours, they gained $18 and 39 cents. Before we try to read into the connection, it is worth pausing to consider how another market responded. We don’t often discuss the stock market (and we have not been calling for an imminent stock market collapse as many others have).   NYSE margin debt has reached new record highs this year, dwarfing previous peak...
  • Jayant Bhandari on Gold, Submerging Markets and Arbitrage
      Maurice Jackson Interviews Jayant Bhandari We are happy to present another interview conducted by Maurice Jackson of Proven and Probable with our friend and frequent contributor Jayant Bhandari, a specialist on gold mining investment, the world's most outspoken emerging market contrarian, host of the highly regarded annual Capitalism and Morality conference in London and consultant to institutional investors.   As soon as Jayant touches down in London, he is accosted by...
  • Monetary Madness and Rabbit Consumption
      Down the Rabbit Hole “The hurrier I go, the behinder I get,” is oft attributed to the White Rabbit from Lewis Carroll’s, Alice in Wonderland.  Where this axiom appears within the text of the story is a mystery.  But we suspect the White Rabbit must utter it about the time Alice follows him down the rabbit hole.   Pick a rabbit to follow...   No doubt, today’s wage earner knows what it means to work harder, faster, and better, while slip sliding behind. ...
  • The Anatomy of Brown’s Gold Bottom – Precious Metals Supply and Demand
      The Socialist Politician-Bureaucrat with the Worst Timing Ever As most in the gold community know, the UK Chancellor of the Exchequer Gordon Brown announced on 7 May, 1999 that HM Treasury planned to sell gold. The dollar began to rise, from about 110mg gold to 120mg on 6 July, the day of the first sale. This translates into dollarish as: gold went down, from $282 to $258. It makes sense, as the UK was selling a lot of gold... or does it?   Former UK chancellor of the...
  • Mexicans and Chinese Aren’t “Stealing Our Jobs”
      Tremendous Flop GUALFIN, ARGENTINA – Now comes a report from the Financial Times that tells us the nation’s No. 1 industry – home building – has been backing up for a quarter of a century. According to the newspaper, U.S. home builders “started work on the same number of houses in the past year as they did a quarter of a century ago, even though there are 36% more people working as residential builders now than then.”   Moat contractors have been particularly bad....
  • The Valium Era
      Don’t Be Fooled by These Calm Markets What is happening in the world of money? Well - the most striking thing is: nothing. It doesn’t seem to matter what happens. Dysfunction in Washington. Meltdown of the techs. No matter how rough the seas get, the markets glide along... scarcely noticing the storm-tossed waves below.   Thankfully the world's central planners are so well-versed in egging on the creation of an ever greater mountain of debt and seemingly limitless asset...

Support Acting Man

Austrian Theory and Investment

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

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]

 

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

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com