Is that the fat lady singing?

and what is it going to take to turn the economy around?

The Fed released the money stock report this morning and it does not look good.

According to my calculation of the 13-week annualized money supply, the current reading is at 2.89%. This is extremely dangerous territory. We are well below the previous 4 years here. The Fed has been claiming that they were tightening financial conditions and the 13-week annualized money supply report proves it. By increasing interest rates, the money spigot has been cranked down to a drip. Here is a close-up view:

I don’t think I can stress this enough. This is a VERY WEAK money supply growth figure. This level of growth WILL NOT be able to sustain a bull market. Keep in mind that in the face of this declining money supply growth, the Fed is likely to raise rates 50 basis points at each of the next two meeting in June and July. This is extremely concerning. Here is the last 10 weeks worth of numbers:

This is going to lead to a continuing down stock market, a weak real estate market, and a recession. We could also begin to see a collapse in the bond market. The OAS spread is beginning to climb.

This is what I use to analyze the health of the bond market. When times are good and the money spigot is flowing freely, the spread is very low. Since the end of April, we’ve begun to see this spread run higher. This tells me that investors are looking for a larger premium on their bond portfolios, especially the high-yielding kind. They are facing the dual threat of duration risk with high inflation and company solvency with a tighter money supply. They want that margin of safety and the spread is going to run higher because of it. Those companies that are not able to have positive earnings will become unsustainable. Lenders and bond holders will balk. This is where the unemployment will come from in the next recession.

Those companies without positive earnings will be unable to secure financing for continued “growth” and will begin cutting payroll in an attempt to stay solvent. I think we are already beginning to see this with Klarna cutting 10% of it’s workforce. On Amazon’s earnings call it was stated that the warehouses were “overstaffed”. Yahoo news’ headline was that we have now had three straight weeks of tech layoffs.

Employees from Section4, Carvana, DataRobot, Mural, Robinhood, On Deck, Thrasio, MainStreet and Netflix have been impacted by the workforce reductions. Some bigger companies are instituting hiring freezes, such as Twitter and Meta, or announcing a shift in strategy, such as Uber.

Hiring freezes are the first step in this dance. Freezes lead to hour cutting. After hour cutting are layoffs. Meanwhile, the marketing team of the Biden administration has stated that we are simply in a “period of transition”. Now that we’ve had the official denial of the economy being in a recession, I think we can all agree it has arrived. This is White House Economic Advisor Brian Deese doing his best Baghdad Bob impression.

This will not be a “transitory” recession. Action from the Fed and the administration will be required to right the ship. The Fed will need to cut interest rates and restart QE. The administration will need to end it’s green energy fantasy and open up the oil drilling permit process and the pipelines. I’m not confident that either of these will happen any time soon. The Fed traditionally gauges the health of the economy by looking backwards and currently, that view looks good. In addition, Powell has been adamant that inflation needs to be brought to heel. During the last rate hike cycle, the Fed was able to get the Fed Funds Rate up over 2.4%. This time, we’ve barely gotten off the ground floor.

This leads me to think that we’ve got a long ways to go before central bank capitulation happens. I’m continuing to work my way out of any of my holdings but I’m continuing to hold puts on unprofitable companies such as CVNA.