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Text of the page (random words):
n t fall it was only during the great recession of 2008 where we had a sustained decline in home prices i m not predicting such an event again but the excess number of new homes for sale will need to return to equilibrium somehow either through reduced prices or a reduction in new home production either one or both will stress the economy via a reduction in homeowner s equity or additional layoffs in the new home construction complex we are already starting to see a slowdown in total construction spending not just homes again we are in recession territory with these sorts of numbers construction spending yoy percent change source federal reserve you may notice a theme with the tone of this post several construction indices are well within recession territory already despite us not being in a recession right now why the disconnect is it labor hording post covid are we still seeing aftershocks from the massive money dump during covid i m scratching my head at the disconnect i have a client who is in the new home construction sector and this one data source tells of increasing discounts and layoffs if home prices do decline their impact will ripple through the economy and inflation rates shelter accounts for more than 35 of the cpi index right now the markets are very worried about an increase in inflation due to tariffs and the new spending bill just signed into law edit 08 12 25 i misread the information housing is actually 44 of the cpi calculation source bls gov i m not implying or predicting a direction for inflation over the near term but a trend downwards for inflation instead of the anticipated market upward bias could be a shock to the markets keep an eye on the housing market it may surprise us posted by greg merrill at 1 38 pm no comments email this blogthis share to x share to facebook share to pinterest labels housing monday november 20 2023 money bonds and a mea culpa executive summary tl dr a huge amount of cash was dumped into the economy with the 2020 covid relief bill which caused the burst in inflation we have not yet returned to equilibrium and lower inflation but may by the end of 2024 an interesting recession we are having isn t it earlier this year i stated a recession is coming fortunately ignoring to tell you when it would happen more than six months later there is no recession the treasury bond market is not signaling a recession either as the entire yield curve continues marching higher thirty year mortgage rates continue rising now over 7 5 with no let up source federal reserve the most recent gdp numbers came out and still no recession with a real growth gdp above 2 5 source federal reserve so what happened i think i found the reason or perhaps a reason the us economy is an incredibly complex entity and there is not just one factor which pushes it around i will be discussing just a few parts of it so please keep that in mind now take yourself back to the early parts of the covid lockdown and hysteria i know a bad place to visit but sometimes finance blogging can be a scary place in order to mitigate the lockdown the covid relief bill passed in early 2020 which dumped a massive amount of money into the economy and when i mean massive i mean unprecedented just look at this graph source federal reserve on a year over year basis m2 expanded around 17 the largest spike in the entire data series to define for those who may not know m2 is cash you have access to immediately quoting the federal reserve m2 is a measure of the u s money stock that includes m1 currency and coins held by the non bank public checkable deposits and travelers checks plus savings deposits including money market deposit accounts small time deposits under 100 000 and shares in retail money market mutual funds source federal reserve addendum added 11 20 23 i should have included the massive increase in the federal reserve s balance sheet as another possible reason for the jump in m2 the relative importance of each federal government or federal reserve is not important for for the scope of this post just that both had a factor in the spike looking at the graph below one can see just how massive the federal reserve expanded its balance sheet roughly triple their response to the financial crisis of 2008 09 currently the federal reserve is contracting their balance sheet and this is most likely the cause of the current reduction in m2 source federal reserve someone with more specialized knowledge regarding federal reserve balance sheet expansion and m2 wrote a detailed article regarding the interplay end addenum now let us look at m2 as it compares to the us economy as a whole expressed as gdp as the real economy grows over time a slow increase in m2 is also needed as it is how one facilitates the transactions which make up our economy observe the ratio of m2 to gdp gross domestic product the sum of goods and services consumed domestically economist call the inverse of this monetary velocity notice the massive spike in this fraction again unprecedented source federal reserve the increase in m2 gdp is even more dramatic when looking at the annual change in this fraction yes that is a greater than 7 standard deviation move something that hasn t ever happened in modern us history so where did all that excess money go everywhere remember the amc and gamestop rip higher money from the sky and bored people at home created that frenzy rolex prices yeah that too inflation hit soon after the highest in decades source federal reserve what gives me confidence to claim the rapid rise in m2 facilitated a rapid rise in inflation well the federal reserve looked at this 30 years ago and noticed the causation https www richmondfed org media richmondfedorg publications research economic_review 1992 pdf er780502 pdf quoting from the above paper over the three periods shown 30 years the trend rate of growth of nominal gdp matches fairly closely the trend rate of growth of m2 if velocity is stable the rate of inflation will correspond over long periods of time to the excess of the rate of growth of money over output to illustrate over the three decades from 1960 through 1990 the excess of the annualized rate of growth of m2 8 1 percent over the annualized rate of growth of real gdp 3 0 percent was 5 1 percent while annualized inflation measured by the implicit gdp price deflator was 4 9 percent in short the helicopter money shower in early 2020 resulted in a lot of the inflation we are seeing today long term interest rates responded gradually and then suddenly source stockcharts this is where i plead mea culpa to my clients the standard signs where there inverted yield curve rising continuing claims prices appeared to have bottomed in late 2022 etc so i started buying long duration treasuries i didn t think to look at the m2 growth because it never changes too much until 2020 whoops fortunately i only started nibbling on long term treasuries in late 2022 so the pain does not compare to someone who held them as a permanent part of their portfolio even now i am underweight my target bond allocation so what now considering my irrational desire to predict the future i posit the following we are almost through this m2 money spike we just don t know it yet before the helicopter money drop the m2 gdp ratio was at 0 70 and as of q32023 ratio is at 0 75 the median absolute annual change in the ratio is 0 012 so as of today we are close 0 736 vs 0 75 to being back within the range of a normal ratio source at federal reserve a combination of m2 reduction economic growth and inflation will most likely bring the ratio to within the normal range of variation by year end 2024 so we are mostly through the money storm now right well maybe markets and economies have a tendency to swing well past their equilibrium points as they veer from one extreme to another considering just how much else is going on with the world i m hesitant to make too many predictions with confidence for now i ve been building up my position in 90 day treasury bills instead of the long part of the bond market when to buy more well i don t quite know yet ours is still a highly leveraged economy and the massive rise in funding costs for everyone in america as well as the inverted yield curve will eventually bite into economic growth right now we have two powerful forces pulling us in opposite directions an excessive amount of money m2 still sloshing around the economy versus a decelerating economy due to a massive increase in funding costs additionally i believe this spike in m2 gdp may have caused multiple active allocation strategies to fail as well some of these switch between equity market and treasury bonds but with the relentless inflation and subsequent bond market thrashing they have performed poorly the m2 spike we ve recently experienced hasn t ever happened before so how do you model it this is a facet of current finance the impossible seems to keep happening with disturbing regularity additional reading https www stlouisfed org publications regional economist 2022 jul was paycheck protection program effective https twitter com steveanastasiou status 1651059292089499649 posted by greg merrill at 9 00 am 1 comment email this blogthis share to x share to facebook share to pinterest labels economics inflation m2 thursday september 28 2023 so when will the chinese debt bubble burst so when will the chinese debt bubble burst i ve yammered on about this for a long long time highlighting empty cities to nowhere excessive debt buildup etc obviously the chinese government s ability to extend this bubble is greater than my fintwit credibility are we hitting another decision point will the next us recession finally detonate the bubble honestly i don t know but now ever peter zeihan is commenting on this https www youtube com watch v pvmleiewyt4 the more china blows the debt bubble the larger the explosion when it pops and right now they are working on exceeding the japanese bubble from decades ago source federal reserve no one wants to be blamed for ending the party but eventually it does i can t tell you when it will go off but be careful when it does posted by greg merrill at 1 42 pm no comments email this blogthis share to x share to facebook share to pinterest labels bubble china debt japan wednesday april 26 2023 recession is coming recession is coming no one likes to hear it but a storm is brewing the federal reserve wants inflation below 2 and it s going to get it by forcing the us economy into a recession how we got here that s for another email by consistently raising short term interest rates in an attempt to bring down inflation the fed has inverted the yield curve where short term rates are above longer term rates if you notice below a 2 year rate higher than the 10 year has preceded every recession throughout the entire data series source federal reserve it can take a while for pressure from an inverted yield curve to work its way through the economy but there are already a few signs temporary help is already negative on a year over year basis and it leads full time employment source federal reserve continuing claims for unemployment have also turned up on a year over year basis like the employment data it s not screaming r ecession just yet but the direction higher coupled with continued yield inversion will send more people to the unemployment office the covid lockdowns broke the graph so here is the data before after and with covid source federal reserve so how can you prepare yourself for the upcoming financial storm raise cash i ve been slowly reducing the risk of client portfolios i suggest you do the same in both your investment accounts and personal financial profile liquidity this is not the same as cash do you have excess buying power on your credit cards lines of credit etc untapped debt you can access during a recession can help one get through the rough patches or capitalize on the dislocation shopping list i m already building one for assets to purchase during the upcoming financial storm this doesn t have to be stocks bonds or market related items are you planning on a vacation consider deferring the decision until prices drop counterparty risk how will a recession affect those you do business with this could be an employer or a business partner do you have any loans or financial commitments coming up in the next two years now would be the time to consider how a recession would affect those relationships opportunities arise during the chaos of a recession which can counterbalance the inevitable disruption which occurs during an economic downdraft don your metaphorical financial rain coat and get ready posted by greg merrill at 3 46 pm no comments email this blogthis share to x share to facebook share to pinterest wednesday september 28 2022 i m buying tips again in my last post lamenting the paucity of options available to low risk investors i highlighted the guaranteed negative return one would receive investing in inflation protected bonds from the us treasury oh my how the world can change in a few short months source federal reserve what was once guaranteed punishment has flipped dramatically my mental buy price was a real 1 on the 10 year tip rate we recently passed that and thus i will started buying these once again at auction for my clients in certain situations for those of you who don t wish to purchase individual bonds or deal with the tax headaches i do this for some clients as well you can mimic the return by buying the etf tips considering the parabolic move in yield and converse decline in price be careful remember i m holding these individual bonds to maturity so i would prefer it at least for this part of the portfolio mix if the yield continues to rise how high the yield may rise is something i cannot answer but at least one is no longer punished for saving right now posted by greg merrill at 1 57 pm no comments email this blogthis share to x share to facebook share to pinterest tuesday february 8 2022 the lament of a low risk investor the lament of a low risk investor 10 year tips rate source federal reserve one of the challenges in managing a portfolio during the distribution phase is balancing the conflicting desires of certainty and return this is the classic risk versus return debate higher risk should be rewarded by higher return with the opposite also true when you accept a lower risk your return will be lower as well when a portfolio shifts to one providing income for the owner return of principal becomes more important than return on principal one of the ways i used to provide certainty was the purchase of inflation protected securities from the us government they provide a guaranteed return over the inflation rate well they used to but please read on some of you are already considering not reading further i m a stock jockey greg i only care and invest in stocks equities risky stuff why should i care about the ramblings of a manager tryi...