Alan's Alert 7-29-2021

 

Today is part 2 of our saga, Adventures in Money Printing.  Yesterday I looked at a couple of the big whoppers of the last 20 years in the market.  These were instances where the yield curve had signaled something was wrong.  The money supply then told the tale of the tape when it came to the crash of the stock market.  Today I’m looking at instances where the money supply was weak but the yield curve never went negative and how the market reacted. 

 

Our return to our epic tale, Adventures in Money Printing, starts in 2003.  This was right on the heels of the 2001 recession.  The yield curve was in positive territory and things should have been humming along smoothly. 

The money supply figures coming into 2003 were strong.  The high plateau at the end of 2002 which pushed the market higher in 2003, continued its strength into the middle of the year.  You can see this with the navy-blue line in the chart below.

Something went haywire at week 34.  When we traditionally see a plateau, instead we see a spike higher, then a big drop which bottoms out on week 45.  This runs well below the trend for 7 weeks.  Money supply then made a feeble attempt to push higher to close out the year.  Starting in 2004 (green line), you can see that the money supply had a rough start to the year.  By week 16, the story had changed and it had a strong showing for the rest of 2004.

 

Looking at the S&P500, twelve weeks after the money supply bottomed in 2003, the stock market stalled.

It then proceeded to trade sideways in choppy fashion until the beginning of November.  This is when it started to pick up.

The S&P500 gained over 26% in 2003.  In 2004 it gained 8.6%.  This sounds like a pretty good return despite the choppy start to the year.  In 2005, however, it barely gained 5%.

 

2005 was the light-blue year in the above money supply chart.  You can see from its lackluster activity, that it was not a good year.  The money supply dragged along the bottom at the beginning of the year.  It then had a low peak, followed by another slow-paced effort, eventually bottoming out on week 30. 

 

From this period of 2003-2005, we can draw the conclusion that when there isn’t a signal from the yield curve that trouble lies ahead, it takes several weeks of below trend data to have an effect on the stock market.  However, the effect can play out over a long period of time unless the money supply numbers pick up and run above the trend.

 

 

 

 

 

The next era I want to highlight is the post financial crisis era of 2009-2012.  This was supposed to be the big recovery after the big crash.  However, 2010 and 2011 both struggled to keep steady upward momentum.  Some of this could be tied to investor’s nerves after such a spectacular crash in 07-08.  Another factor in play was how the Fed’s new tools were going to be utilized (QE, operation twist, etc.).

A quick peek at the yield curve showed that banks had the ability to make lots of money.

The market had a different story to tell.

In two instances in 2010 and one in 2011, investors were seeing choppy action.  Do you think this could have been predicted by the money supply figures?

 

At the end of 2009 (light blue with green circle), money supply was exhausted.  It hit the trough at week 25 then hung down there for 16 weeks.  From this lackluster action, we can figure that capital goods markets would see more sellers than buyers.  From the low negative print on week 36, it took 20 weeks before problems started to show in the S&P500.  You can see it as the first dip in the green box at the beginning of the year.  The S&P500 then had a rebound but it would not last.  My second green oval, this time in weeks 4-14 of 2010, came into play.  This time around, it took 12 weeks from when the money supply went negative before the stock market showed serious weakness.

 

I also took a look at 2011.  It had similar choppy action in the market in the 3^rd quarter that year.  The money supply ended 2010 high and then showed softness at the beginning of the year (blue circles), but I think this irregular stock market action is better explained by investor’s worries about the Fed and the Eurozone crisis.  This is why relying on the money supply alone is unwise.  There are always many factors in play at any one moment.  To think that one tool can save your capital is a fool’s errand.

 

 

 

 

Our grand finale in our epic saga of Adventures in Money Printing will conclude with the 2014-2019 era.  Some of you might have been subscribers of Robert Wenzel when he called both the slowdown in the money supply in 2015 and his call in 2018. 

First off, what did the yield curve have to tell us?

From 2013-2019, it looked like the banks would have no trouble borrowing short to lend long and make a tidy profit.

 

At the beginning of 2015, Robert had emphasized how strong the money supply growth was.  By the end of May, he began to warn that the money supply had dipped and was starting a steep decline.  In mid-June, Robert said, “I have pointed out before that there is a tendency for the money growth to decline this time of year for seasonal reason, but whatever the reason, a drop in money supply is a drop.  There is a very strong possibility money growth will rebound later in the year.  However, the decline in money supply growth is so dramatic that I am advising extreme caution with regard to the US stock market.” (Daily Alert 6-26-2015). 

Then on July 17, 2015, Robert recommended risk-oriented traders to go short. “Risk oriented traders should now switch and trade from the short side. However, I caution that the potential for whipsaw action is exists both in the stock market itself and in the trend in money supply growth. For most this is a time to keep high cash levels (50% cash) and remain on the sidelines until a direction is much clearer.” (Daily Alert 7-17-2015).

 

Here’s what the money supply chart looked like:

Robert had it pegged because 4 weeks later, the stock market dropped (blue box).

I included the weakness at the beginning of 2016 in my blue box but in truth, the Chinese market hit a down phase in the business cycle at that time.  This caused a big selloff in the US market because investors panicked.  Robert had called this as a buying opportunity and he was proven correct as the market rallied through 2017 ending with a dramatic spike in January of 2018.

 

By late 2018, a new story was developing.  The stock market suffered ups and downs through the first two quarters.  This is directly attributable to the dismal growth in the money supply at the beginning of the year (orange circle) and the lower peak than previous years.  After the trough, it began it’s plateau in line with prior data.  However, something went wrong.  It began to run below trend.  Robert captured this in his Daily Alert on 9-14-2018 with, “If money supply continues this sluggish, the economy could be in real trouble at some point in 2019.  And the general stock market could start a major break at any time between now and the first half of 2019.”  

Then on October 5^th, Robert’s Alert led with this headline:

He had nailed it again.  Over the next three months, the market searched for support.  It didn’t find it until Christmas Eve, when the plunge protection team was called in to get to work, causing the market to rally through the next quarter.

 

 

 

Reflecting back to our current money supply situation, we are in a different era.  The spectacular increase in the money supply in 2020 and the hot start to the year in 2021 have turned up the heat on the stock market, the housing market, and the bond market.  This has also led to increases in all the inflation indicators such as the CPI, PPI, and PCE.  Once the market gets adjusted to the increase in the supply, it becomes dependent on it to reach new highs.  We have run above trend for a long time.  At some point, we’ll need to come back into the fold or the Fed will risk running much too hot on the inflation front.  

Some disclaimers; I’m not currently predicting a crash.  I’m not trading on the short side.  I am keeping a close eye on the money supply, the yield curve, and margin debt.  These will be signaling, in advance, of a change in the market.  Right now, I’m neutral on the general market and have no positions in the S&P500.  I’m continuing to hold positions that would benefit from price inflation.

Alan's Alert 7-28-2021

 

After yesterday’s money stock report, I thought I should take some time to review previous money stock reports in a hope that it would shed a little light on the current situation.

 

The reason that the money supply report is so important is that it signifies whether money is plentiful or scarce.  When money is plentiful, it is able to bid up the prices of goods in the capital goods sectors.  The most liquid capital goods sector is the stock market, followed closely by the bond market.  Housing is also a capital goods sector but is less susceptible to fluctuations in the money supply reports.  This is due to the fact that when people buy a house, they tend to stay in that house for a long period of time.  Also, when you go to sell a house, it typically takes many weeks.  Once a buyer and seller come together on an agreed upon price, the banks get involved.  Most people require a mortgage; hence a bank has to be brought in on the transaction.  Once the bank gets onboard, a real estate closing can run up to 60 days before it gets finalized.  This makes housing much less liquid.  When people (or corporations, hedge funds, pension funds, etc.) own stock, they can quickly and easily sell it.  Prices can quickly fluctuate to find an equilibrium between buyers and sellers.  This makes owning stock more liquid.  The same goes for the bond market.  Since there is a large pool of buyers and sellers, equilibriums are found quickly.  When money becomes scarce, there are fewer buyers.  When there are more sellers than buyers, the price must come down to find the equilibrium. 

 

This brings me to Alan’s trading rule #1; for every buyer, there must be a seller.  When you are buying a stock, option contract, futures contract, or bond, someone is on the other side of that trade selling it to you.  I think this idea gets forgotten in our world of online brokers and market maker liquidity.  Do you think that person selling you that stock made money before they sold it to you?  Do they expect the price to go down, is that why they sold?  What makes you think that you know more than they do?

 

Our first foray into the adventures of money printing, is a look back to the 07-08 financial crisis.  One of the first clues that signified there would be an issue was that the yield curve had gone negative.

After the yield curve goes negative, banks struggle to make money.  When banks issue loans, they borrow money on a short-term basis and lend it out on a long-term basis.  When the yield curve goes negative, banks lose money on new loans.  Since the US operates on a fractional reserve system, banks only need a fraction of the funds necessary to create new loans.  This means that the banks can loan out money they don’t have.  This expands the money supply.  Once new loans aren’t issued, the banks stop expanding the money supply. 

 

This is what the money supply looked like from 2004-2008.  You can see that there is a seasonality to the flow.  It looks like a series of waves.  It starts high at the beginning of the year, drops slightly, rises, drops further, then rises, plateaus, then rises again to end the year.  2008 is in yellow with the blue boxes.  You can see that year looks quite different than the rest.  It started similarly to other years but then rose much higher.  It peaked at 16% on week 17.  After this high rise, it then plummeted lower than any other year.  My calculation of the money supply actually put it at a negative amount for 5 straight weeks, bottoming at -3% on week 30.

This caused havoc in the S&P500.

I’ve pointed out the specific weeks that were highlighted in the money supply chart with the high (week 17) and lows (week 27 and 30) on the S&P500 chart.

On week 17, the S&P closed at $138.55.

On week 27, the S&P closed at $128.04.

On week 30, the S&P closed at $126.13.

At the beginning of Sept, the S&P closed at $127.99, but then the plunge began. By the beginning of Oct, $115.99 (down 9% month-over-month).  By the beginning of November, $96.83 (down 17% month/month).  By the beginning of Dec, $82.11 (down 15% month/month).

There were many other factors that fueled the 07/08 financial crisis but the money supply data told the tale of the tape for the S&P500.  There was about an eight-week lag between the low of the money supply data and the beginning of the stock market crash.

 

 

 

Our next adventure in money printing takes us back to 2000-2002.  Again, the first clue that something was going wrong was spotted in the yield curve.

The curve had been dragging bottom for a long time, but once it went negative, the stage was set.

 

 

The money supply curve looks similar to the earlier example.  We have a wave to start the year, then a lull, a peak, then a trough, it then climbs to a plateau before it ramps up at the end of the year.  I put a red box around weeks 36-47 in 1999.  This was a lower plateau than previous years.  It also lasted longer.  This was a hint that choppy action for the market was dead ahead.  We then moved into the year 2000.  I’ve used orange arrows to highlight the peak and trough.  The peak in 2000 was achieved on week 18 and was higher than the previous two years.  It then plunged below the trough trendline and went negative by week 27.  Its plateau was similar to the previous year which was not enough to push the market higher.  By 2001 the Fed tried to juice the money supply.  It started off the year hot, rising to a peak on week 16 of 17.5%.  It then dropped off to a low of -1.7% in week 29.  The entire year of 2002 was sluggish.  The money supply was below the trendline by week 11 but the trough was shallow.  It then plateaued higher than 1999 & 2000.  This helped to stabilize the market.

 

Approximately 8 weeks after the red box in 1999, we had choppy action in the stock market.  There was a push to a higher range.  Then, 8-10 weeks after the negative money supply data on week 27 in the year 2000, the crash began.  The market never stabilized until 10 weeks after the money supply's high plateau in 2002.

 

 

While our current situation is similar to both of these instances.  There is one glaring difference.  That is the yield curve signal. 

 

While it did run negative in the summer of 2019, it was not nearly as long or deep as the previous two instances.  Tomorrow I’ll expand our adventures in money printing to look at instances where the yield curve didn’t go negative and we had a slow down in the money supply.  I believe that the current phase of the economy will be more in line with those instances and give us a better look into what we are dealing with.

 

 

 

Alan's Alert 7-27-2021

 

We are looking at a rough road ahead.  The Federal Reserve posted the H.6 Money Stock Measures this morning and it looks downright frightful.

Money supply growth has plummeted.  The last three readings are as follows;

6/21 – 6.36%

6/28 – 3.91%

7/5 – 3.26%

 

We have swiftly gone from a high in the 17-20% range to a low at 3%.  3% might not even be the low!  Typically, the low is around mid-July but we won’t see that data until August 24^th.  These low readings do not bode well for the capital goods sector.  The housing market and the stock market are in for choppy action at best.  I am very tempted to go short here.  In my mind, there is no way that back-to-back weeks of 3% money growth can keep this train on the tracks.  I’m afraid that the stock market will soon be looking for support and at its current dizzying level, support is a long way down.

The S&P/Case-Shiller Home Price Index was also posted today.  The S&P/Case-Shiller Index pushed itself to a new record.  It increased 2.1% over the prior month and 16.6% on a year-over-year comparison.  This is the highest year-over-year climb the index has ever seen.

 

Prior peaks happened in September 2005 at 14.5% and October 2013 at 10.8%.  The increase is housing prices has been dramatic. 

 

I’m a big believer in Robert Shiller’s theory on home prices and how they track inflation.  He spelled this out really well in his book, “Irrational Exuberance”.  Something to keep in mind while viewing this data, the Case-Shiller Home Price Index is a month behind.  We are looking at data from May when the housing market was really on fire.

 

 

 

Finally, I want to touch on the Conference Board’s Consumer Confidence Index which was posted this morning.  The index, which measures consumers’ assessments of current conditions of business and labor, rose to 129.1.  This is up from 128.9 in June.

This is the fifth consecutive month of gains in the index.  Lynn Franco, the senior director of Economic Indicators at The Conference Board stated,

“Short-term inflation expectations eased slightly but remained elevated. Spending intentions picked up in July, with a larger percentage of consumers saying they planned to purchase homes, automobiles, and major appliances in the coming months. Thus, consumer spending should continue to support robust economic growth in the second half of 2021.”

More confidence means more willingness of consumers to spend.  This is stated plainly by Franco.  Consumers are still sitting on a large amount of cash when you look at the deposits sitting at commercial banks.  I touched on this briefly in yesterday’s alert.  Bank of America was quick to use the data and run a trend line.  I covered that in a previous alert.  The bank had anticipated that these funds would be spent when a “sunny day” arrived.  It seems consumers are happy with a cushion in their bank account.  That or they are having trouble securing the products they want to buy due to logistical issues related to port slowdowns and train congestion.  To sweeten their bank accounts further, the Biden administration is now sending out advances on the child tax credits on a monthly basis.  We’ll see if consumers get motivated to spend and still feel confident when the next report is released August 31^st.  I have a feeling we’ll be looking at a completely different picture at that point.

 

Alan's Alert 6-22-2021

 

I wanted to wait until the H.6 money stock numbers were released before I put out today’s alert. Below is the money supply growth data.

We have an early peak this year at 20%, which occurred on week 14. The money supply then hung at 17-18% for weeks 15-20, we have since declined to 13% and now 12%. Below is a close-up.

You can see that we typically have a decrease in the supply from weeks 16 through 30. This is the “sell in May and go away” adage on Wall Street. Week 16 lands in the middle of April and week 30 is the end of July. The doldrums don’t truly stop until week 41 which is the first week of October.

Here’s a chart, courtesy of LPL financial, that illustrates the point nicely.

The S&P struggles during the summer months. The elephant in the room is that giant spike in July in the past ten years. Do traders come back from vacation and bid up the S&P for a month or does that small spike in money supply do the trick to keep the markets going until the fall?

The Fed is on tour this week and the fireworks have already started. 

 Robert Kaplan the Dallas Fed President started with a bang saying, “If you wait too long to taper and your imbalances worsen, you may find yourself needing to take extra steps down the line.”; “It’s unrealistic to expect the US dollar to be the world’s reserve currency permanently.”; “It would be significantly healthier to make a change to asset purchases sooner rather than later”; and “The Fed’s overnight repo rate adjustment is mostly a technical problem.” 

Jim Bullard the St. Louis Fed President followed up the act with, ““This is a volatile environment, and there is upside risk to inflation.”; “We’re in a scenario where bubbles could form, which is part of a larger debate”; “The Fed should set up a taper that may be altered if necessary.”; “Markets are assuming the Fed won’t lift rates with tapering.”; “I don’t see how interest rates in the US could get substantially higher than they are in Europe and Japan”. 

NY Fed President John Williams then stated, ““The Fed reverse repo rate facility is operating perfectly.”; “It wouldn’t be a problem if reverse repo usage grew much more.”; “Following the FOMC meeting, there was no minor taper tantrum.”; “The average inflation target is not based on any methodology.”; “The economy has not sufficiently recovered for stimulus to be removed.”; “The economy is improving at a rapid pace and has rebounded faster than expected, with a very positive medium-term outlook.”

Wow. So far, the Fed has threated the reserve currency status of the dollar, admitted that bubbles could be forming in the economy, indicated that tapering the asset purchases may not stop even if interest rates get raised, and that the Fed doesn’t have a true inflation target or a method to their madness.

What could we possibly have for an encore? How about this:

“The Fed will do everything possible to help the economy recover for as long as it takes.” -Jerome Powell

Now we know that the Fed only has one tool in its arsenal, so let’s help decode what Mr. Powell was really saying.

“The Fed will do everything possible to help the economy recover print money for as long as it takes.”

For the Fed, money truly does grow on trees. I feel bad for the Fed speakers that chose to close out the week. They have a tough act to follow.

Alan's Alert 6-1-2021

 

By Alan Baerlocher

 

Wow, so much to get to in the first alert.  First let’s take a look at the M2NSA data that was released last week.

 

13-week Annualized M2NSA Money Supply Growth

 

Money supply came in hot at 16.93%.  It is still showing as being highly elevated.  This growth in the money supply is fueled by stimulus payments, CARES act giveaways, Federal unemployment money, the US Treasury drawing down its reserves, and soon, an infrastructure bill, as well as, Biden’s $6T budget.  It’s not unusual for it to begin a dip here through the end of July.  We’ll see how this plays out when the M2NSA is released at the end of June.  Classically a dip plays into the idiom, “sell in May and go away”.  I’m not so sure that will be the case this year.

 

 

Federal Unemployment Benefits

The federal unemployment benefits are putting a real wrench in the unemployment rate.  When the government pays you more than you would make working, there is real incentive to stay on the couch.  24 GOP-led states have figured this out and are ending the federal unemployment benefits early.

 

·  June 12: Alaska, Iowa, Mississippi, Missouri

·  June 19: Alabama, Idaho, Indiana, Nebraska, New Hampshire, North Dakota, West Virginia, Wyoming

·  June 26: Arkansas, Florida, Georgia, Ohio, South Carolina, South Dakota, Texas

·  June 27: Montana, Oklahoma, Utah

·  July 3: Tennessee

·  July 10: Arizona

Ending these benefits will encourage workers to get back to work.  Many of the bottlenecks in the economy could begin to be resolved.  However, the D-led states will holdout until the Feds end the benefits. 

 

In addition to the unemployment benefits, soon money will rain down on those that have kids.  Earlier this year, the Child Tax Credit was enhanced.  Payments will begin to be sent in mid-July.  It will be $250 per child per month for kids aged 6-17 and $300 per child per month for kids less than the age of 6.  This will add pressure to the M2NSA.

 

 

 

Personal Consumption Expenditures comes in hot

 

More signs that the inflation wave is on, personal expenditures rose to 3.1% Y/Y.  You have to go back to June and July of 1992 to find a comparable reading.  This summer is going to be hot, but inflation will be hotter.

 

 

Economic Policy Uncertainty Index

 

The EPU index continues to resolve to the pre-covid baseline.  This indicates to me that the news is starting to move on and this will cause consumers to be ready to get back to normal.  When inflation begins to become prevalent, I expect this index to begin to rise.

 

 

Important and Potential Market Moving Events This Week

Tuesday, June 2

10am Construction Spending

10am ISM Manufacturing Index

 

Thursday, June 3

8.15am ADP Employment Report

10am ISM Services

 

Friday, June 4

8.30am Employment Survey

10am Factory Orders