Saturday, 1 November 2014

The U.S. Stock Market Risk Indicator, October 2014

The U.S. stock market risk indicator climbed 2.1% during October to reach the highest level of risk ever recorded based on data starting in 1986. The index currently signals the probability of poor future stock market returns have never been higher during the period covered.

Following a choppy slide during the first couple of weeks of October, the U.S. stock market turned around and ended the month with a gain of just under 2.3% taking the S&P 500 to a new record high. Higher stock prices leading to a yet higher P/E ratio for stocks combined with a declining money supply growth were major contributors to the increased risk added during the month.

Friday, 31 October 2014

In A Holding Pattern While Waiting for More Deflationary Pressures to Arrive

But still nothing like the months leading up to September 2008. 

One Thing is Clear, the Stock Market Boom has Not Been Fueled by Savings...

...but then again, whenever an elastic money supply rules, it does not need to.

In fact, with an inelastic money supply, the current and previous stock market booms simply could not have taken place at all. This explains why it is a very unhealthy sign, the sign of a sick economy, when the stock market surges to ever new highs over an extended period of time. 

See No Evil, Hear No Evil, but Someone Always Ends up Having to Pay for the Fun

Boom, Bust, Boom, Bust, Boom....Welcome to Norway

The Short Version of the "Austrian" True Money Supply (TMS), as of 20 October 2014

The short version of the Austrian True Money Supply for the U.S., the measure of the money supply applied in this weekly report, increased 0.16% on last week for the week ending 20 October 2014. At $10.3689 trillion, a new high, the money supply is now up $485.6 billion, or 4.91%, year to date.

As the Fed has been reducing (tapering) its asset purchases all year (followed by announcing two days ago that QE3 will end this month) combined with U.S. government debt growing more slowly... is increasingly becoming apparent that the money supply growth as a result is slowing as well.

The 1-year growth rate fell again from last week. At 6.64%, the growth rate remains the lowest recorded since the final week of 2013. Furthermore, the current growth rate is 2.71 percentage points lower than it was at this time last year, the sharpest drop in the growth rate since week ending 20 January this year.

Though the 5-year annualised growth rate increased this week compared to previous week, it shred 1.98 percentage points compared to one year ago which remains the biggest drop since the week Lehman Brothers went bust (15 September 2008). The growth rate also continues to decline much quicker than it did during the period leading up the previous banking crisis which culminated with the Lehman collapse.

All the various growth rates depicted in the table below, with the exceptions of the 7-, 20- and 30-year annualised growth rates, are now lower than they were one year ago.

Meanwhile, the S&P 500 has rallied again, adding 5.71% during the last five days. With equity market valuations well-established in bubble territory (to mention just one of the many bubbles Bernanke and Yellen have inflated) ...

...and the money supply growth rate declining rapidly, this could very well be the final move in the greater fool game where the smart money makes one last push to leave the game with their heads held high. Until Yellen re-inflates again perhaps. But she will likely arrive late and in the end, the Fed can print itself into problems but never out of them.


This report usually focuses on the medium to longer term growth rates for the simple reason that it takes some time for the money relation (the relation between the demand for money and the supply of money) in an economy to adjust and adapt to ongoing and never ending changes in the money supply. Here's however what one of the shorter term growth rates currently looks like.

Wednesday, 29 October 2014

QE3 Has Ended: FOMC Minutes 29 Oct-14

FOMC minutes 29 October 2014 (my bold),

Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.

The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Narayana Kocherlakota, who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level.

Aggregate Money Supply Growth for the U.S., Euro Area and the UK Falls to 22 Month Low (as of Sep-14)

UK Monetary Base Flat on Last Year, Money Supply Continues to Decline YoY (as of Sep-14)

Euro Area Monetary Base Continues to Drop, Money Supply Growth Increases (as of Sep-14)

Tuesday, 28 October 2014

Update: Overall "Monetary Stimuli" and The Reserve Ratio

Following on from the short note posted a couple of weeks ago, the growth rate in the overall monetary "stimuli", measured as the combined growth rate of Fed assets and the money supply, has now fallen below the 10.4% long term average since December 2003 to 9.6%.

Meanwhile, the reserve ratio for U.S. banks declined from 99.2% previous week to 97.8% this week. 

The Drive Towards Riskier Assets is Subsiding

Monday, 27 October 2014

Declining Price Inflation Expectations in the U.S. Hint at QE4.

Compared to one year ago, the break even price inflation rate in the U.S. has dropped from 2.18% to 1.90%...

...a decline of 12.8%. 

This decline in price inflation expectations is one development the Fed could use to "justify" a possible implementation of QE4: the lower it gets the bigger the chance the Fed will intervene and once again step on the monetary accelerator.