Friday, 24 March 2017

You've Been Warned: The Money Supply Growth Rate Continues to Slide, Drops Below 6%

The Austrian Theory of the Business Cycle shows us that the business cycle is a monetary phenomenon. That is why including changes in the money supply in (especially longer term) macro analysis is not only important, but actually crucial.

According to Federal Reserve figures reported last night, the money supply growth rate continued to decline this week, falling below 6% on a y/y basis for the first time since 2008 (black line).

These declines are due to sharp falls in bank lending growth, driven especially by declines in commercial and industrial lending.

On a shorter term basis, the money supply continued to fall and the growth rate has now been negative for five consecutive weeks. The last time this happened was in the immediate run-up to the 2008 banking crisis (September).

Though it is difficult to use declines in the money supply for timing economic busts and stock market crashes accurately (as it takes time for market participants to adjust to the new money relation), the current declines in the money supply do signal a potential increase in economic stress. Why? Because the economic distortions created by a previously inflated money supply will reveal themselves when the money supply growth rate later drops. The more frequent these drops and the bigger they are, the larger the economic reaction will necessarily be. As I recently explained,
Changes in the money supply growth rate are economically important for many reasons, the most prominent being how they affect interest rates and relative prices, and the misdirection of resources that follow.
That is, when interest rates and prices are disturbed, i.e. altered compared to what the level of interest rates and prices would be absent these changes in the money supply, economic imbalances build up as a portion of resources are allocated elsewhere compared to where they would have been allocated absent these disturbances. Essentially, these alterations to interest rates and prices create the business cycle. An expansion of the money supply growth rate fuels inflationary booms, while declines trigger very real busts. In this sense, the business cycle is a reflection of the money cycle.

Also see Ryan McMaken's view on the money supply here.

Thursday, 23 March 2017

U.S. TBTF Q4-16 Update: Fewer Banks, Larger Balance Sheets

As I correctly predicted almost three years ago (here), the number of commercial banks operating in the U.S. continued to decline throughout 2014, 2015, and 2016.

Since Q2 2008, the number of banks has now declined by a total of 2,054, a total reduction of almost 29%.

During the same period, total assets have surged more than $5 trillion (45.8%), leaving the average bank with more than twice the size of assets under management today than just prior to the eve of the 2008 banking crisis. "Too Big Too Fail" wasn't such a great concern after all, was it.

Wonder how I managed to foresee this development and why my current prediction of further consolidation in 2017 and beyond will prove correct? Then click the above link or read this article. Better yet, buy my book!

Charts of The Day: U.S. Industrial Production Growth - The Long View

As of February 2017

As of February 2017
As of February 2017

On the importance of production of goods (and not fiat money) see:

Say What, Production Opens a Demand for Products?

ECB 2016 Financial Accounts: The Ever-Inflating Direct Costs of Central Supervision

Source: European Parliament Approves the Single Supervisory Mechanism

Right, a bit late with the commentary this year, but on 16 February the European Central Bank (ECB) published its financial accounts for 2016.

As has by now become a tradition, the ECB spending spree continued despite eurozone debt problems growing larger every year, the latter of course facilitated by the former.

Due primarily to ECB money printing as QE related assets increased by €83 billion, the balance sheet inflated €92 billion during the year, an increase of 36%. Since 2012, the bank's assets have increased €142 billion, or 68.4%.

Headcount continued to increase due to, according to the ECB, the Single Supervisory Mechanism (SSM). The number of staff employed at year end increased by 300 (10.4%). There are today 1,381 more staff working for the ECB than in 2013, a total increase of 77.2%. At year end, total headcount stood at 3,171.

During 2016, total administrative expenses increased €90 million, or 10.4%, to €954 million. According to the ECB, "This increase was due to higher costs incurred in connection with the Single Supervisory Mechanism (SSM)." But not to worry as "The full SSM-related costs are recovered via fees charged to the supervised entities." Total administrative expenses have by now increased €490 million since 2012, a total increase of 105.6%.

Depreciation expenses for the year was €65 million, largely unchanged from previous year, but up €49 million (323%) compared to 2014. This increase was directly caused by the €1.4 billion new ivory tower housing ECB staff that was completed in 2014/15.

The largest contributor to the increase in total administrative expenses during the year was "administrative expenses" which increased €63 million, or 18.0%. Again, this was driven by costs related to the SSM according to the ECB.

Staff costs per head actually decreased to €147,127, down 4.2% on 2015, but was still 9.5% higher than in 2013.

Draghi's compensation, not including lavish high-living expenses fully paid for by the ordinary citizens from whom he with great effort every day confiscate purchasing power, was €389,760 - a "well-anchored" 1.0% increase way below his own inflation target.

The ECB 2016 accounts can be downloaded here.

Also see: The 2014 and 2015 EcPoFi articles on the ECB accounts.

Monday, 20 March 2017

Chart of The Day: Surely, This Development Cannot Continue To Eternity?

The Ratio of Money Supply to Industrial Production for the U.S.

Friday, 17 March 2017

Bank Lending Growth Continues To Tank Driven By Plummeting C&I Lending Growth

Following on from the article earlier this week and the money supply report this morning, bank lending growth tanked again this week.

The drop was driven by steep declines in the growth of Commercial and Industrial lending.

The four biggest components of bank lending (y/y % change)

As bank lending is by far the biggest of the two main components of bank credit (the other being securities owned by banks), the bank credit growth rate is being pulled down as well...

...which then drags the money supply growth rate down with it. 

Though there are lags involved, red flags should by now be flashing for Austrian Business Cycle practitioners. 

Money Supply Growth Rate Plummets, Interest Rates Up - The Stage Is Set For A Major Stock Market Correction


The declines in bank lending growth is now really starting to bite into the money supply growth rate (see here for more).

According to data released last evening by the Federal Reserve, the y/y growth rate in the money supply plummeted to 6.07%, the lowest since early November 2008.

Since 2013

Since 2000

On a shorter term basis (13 week annualised percentage change), the money supply is now actually contracting. In fact, it has now been declining for four consecutive weeks. The last time this happened Lehman went bust.

Now, the economy does not react instantly to a drop in the money supply growth rate. Nonetheless, such declines are often associated with increased risk of an economic correction so the recent drops should be viewed as important warning signs.

But though the shorter term growth rates have fallen sharply in recent weeks, the longer term growth rates have been declining for years. For example, the 5-year annualised growth rate has now been falling for almost 3.5 years since peaking in October 2013.

Though the current 5-year growth rate remains relatively high at 7.7%, it is the change in the growth rate that is the more important factor (see my book for why). It has now shred 4.6 percentage points since its previous peak in October 2013, a drop of more than 37%. Yes, still less than the drops leading up to the dotcom and mortgage crises, but still large enough for investors to take note.

Meanwhile, interest rates are up. And so are stocks. With stock market prices relative to a range of fundamentals at historical highs, many stock market investors may soon find themselves stuck with big losses, especially if the downward trend in the money supply growth rate continues.


Additional charts:

Treasury's deposits with Fed share of money supply growth rate has declined substantially and is now negative (here for more, h/t Russell Lamberti).

The longer term percentage point change in currency and demand deposits (most liquid part of the money supply) has been negative for 69 consecutive weeks - this has signaled increased risk of economic corrections a few times in the past, including the previous two busts.