Money supply, margin stats, yield curve
all the big keys to the market and what they are pointing towards
The money supply figures dropped today and Powell continues to do an excellent job making my graph look like crap.
The money supply has continued to be frozen. It has stayed in a very tight range since November of last year. The observation for 11/22/21 was $21.355T. The most recent observation was $21.346T. Now that is a flat supply.
This is continuing to drain the offshore dollar market better know as the eurodollar market. The past week there has been alot of talk about the failure of FTX. I think Karl Denninger had the best take on it until I listened to Tom Luongo’s podcast with Dexter White. I’m not going to wade into the deep-end here, Karl, Tom, and Dexter do well enough there but this is all a repercussion of higher interest rates. When there is no value for time (0% interest rates) all sorts of projects that shouldn’t be viable magically become so. We saw the peak when people where buying NFTs, Gamestop, and AMC. The fallout is now happening and it will continue. This is highly deflationary. We’ll see if that can balance out the massive amount of money printing that took place.
At the same time that the money supply is flat, margin use by traders has steadily declined.
Over this year we have witnessed a large drop in margin use. Margin use peaked in February at $835T. We are now down over $185T from that peak. It has begun to fall back into the previous pre-Covid level. This steady drip lower will not support a broad increase in the stock market. In fact, it is more likely to lead to choppy action that gravitates lower. Selling begets selling until we find the bottom. We also see this with the free credit balance numbers.
The cash on the sidelines is becoming less at the same time that margin use is on the decline. This makes any run higher for the stock market extremely challenging. A large quantity of money is needed to bid up broad swaths of stocks. That typically comes from increased M2 issuance and increasing margin use. Now we are seeing a third sign that bad things are coming for the market. The yield curve has gone fully inverted.
Above is the 30-year minus the 3-month. Previously I had watched the 10y-2y yield, then it went negative. Then the Fed watchers said it was all about the 10y-3mo curve. Then that went negative. Now the motherlode, the 30y-3mo has gone negative. In each case it appears more and more likely that a recession is just around the corner. However, the NBER is actually going to have to announce that we are in a recession to make it official.
I’ve vented my frustrations with the highly politicized NBER before and I’m not here to rehash that.
What I am here to posit is this, what does the Fed do. What does the Fed do when it becomes obvious that we are in one of the worst recessions in decades? Do they wait for the NBER to say something? Do they keep plowing forward with interest rate hikes because their real goal isn’t stopping inflation but stopping the destruction of the dollar and the NY banks?
They could also pause. They could take a wait and see approach. This would continue to put pressure on the oversea dollar market and keep the dollar strong. In time I think the market would find a new base.
The other option is total capitulation. A total reversal of the tightening policy. This would look like cutting interest rates until 0, flooding money into the economy.
So how does the market react to each situation? What are the odds of each of these events happening?
Onto oil… The end of November is usually a very volatile period for oil. There are many factors that make this so (ie, refinery bottle necks due to grade switching, Chinese demand [will they reopen?], Mexican seasonal hedging). In addition, this time of the year sees reduced liquidity due to reduced volume. Last year saw an -11% one day move in Brent on Omicron “news”. Now we have an anonymous source (these are the best kinds), that told the WSJ that the Saudi’s are looking to increase production.
This crushed the oil price big time. Then the Saudi’s made an official announcement that they had no plans what-so-ever to increase production. Magically the oil price levitated back to where it started the day. This event showed me two things. First someone is either desperate to get the oil price down or at least make oil “uninvestable” due to wild price swings. Second, it shows me that oil is very tight right now and the Saudi’s most definitely want a higher price.
This will be my only post for the week. Hope you all have a happy thanksgiving!
Next year should be real rough!