One of the charts that most grabbed my attention recently was the one showing the rebound in China. They came out of it earlier than us, so it makes an interesting leading indicator.
I’ve always noted that if I were the Asians and wanted to send a blow to my western competitors: Just create a virus that requires discipline and conforming to government mandates. Asians handled the virus very quickly. North America and Europe did not. They are more conformist cultures…we are more individualistic. But that also makes us better innovators and entrepreneurs – our only advantage now that our demographics are fading faster than the emerging world and most of Asia outside of China.
CHINA'S V-SHAPED RECOVERY MAY BE STALLING: TELLING SIGN FOR US?
China’s industrial production is falling hard while retail sales may just be moving sideways. I’ll be tracking to see if this stall continues. The article this chart originated from was saying that the recovery was just a mirror image of the downturn and it may be short-lived and then back to very slow growth as in the whole recovery since 2009.
This chart makes you wonder how strong the recovery will really be. Yes, we are having a V-shaped recovery like China…but look at our Treasury bond market. If all of this rising inflation and growth are real, why aren’t 10-year T Bond rates continuing to rise? They are starting to stall just when everyone is talking about rising inflation and a super-strong recovery. Guess who is usually right about such things? The Fricking Bond Market…not the stock market!
CHART: INFLATION RISING, BUT TREASURY BOND YIELDS STALLING: RECOVERY REAL?
The last 4 months has seen the steepest rise in inflation since the recovery from the 2008/2009 recession, yet 10-year T bond yields peaked at 1.78% and have backed off to 1.59% currently. We will have to see if inflation stalls in its rise, or if the bond market catches up and we see one more spike in 10-year and 30-year Treasury bond rates. Such a spike would be the optimum time to buy, if it occurs.
This next chart is even more telling about why there has had to be so much stimulus over and over again to keep this feeble 1.6% average GDP growth recovery alive. There is money supply and there is money velocity. Dr. Lacy Hunt was one of our very best experts and conference speakers that taught me the importance of money velocity. He defined it in a way that no other economist has clearly. He says: Money velocity shows you how productively we are investing our money or capital as a nation. Oh, that would make money velocity very important and much more relevant!
MONEY VELOCITY HAS COLLAPSED AFTER CONSUMER BORROWING PEAKED IN 1998
When money velocity is above average and rising, it shows that consumers, government and businesses (in that order of magnitude) are borrowing and investing money, getting returns back from it and investing profitably again. When it is falling and at lower levels, it shows increasing speculative investment, like in the bubbles we have seen since 1994. Real estate and stocks go up far more than they should and people are investing in such bubbles, and not borrowing to invest in real assets that produce real, commensurate returns.
For money velocity to expand beyond more superficial money supply, we have to BORROW and invest it productively. We obviously haven’t been doing that since 1998 and that’s why we have had growing financial asset bubbles and weak economic growth.
This turns the stock market into a retard. Why should it keep going up at record rates when the economic recovery since 2009 has been the weakest in history at an average 1.6% GDP growth? Stocks are simply being goosed by all of the extra money being injected into the economy since late 2008 to pull us out of what was rapidly becoming the next great depression. This money has not been given to consumers and businesses until the recent fiscal stimulus. It goes into buying bonds which puts ever more money to bid all financial assets up – and stocks always benefit the most in the end, along with bonds and real estate.
This chart shows how money velocity peaked in 1998, just as the natural peak would have come in Baby Boom borrowing to buy their largest house demographically at age 41 back then. The Baby Boom births peaked and had a plateau between 1957 and 1961 and that would cause home buying to go up into 1998 and plateau into 2002 on a 41-year lag for peak home spending. Mortgages account for about 75% of consumer debt and that is when it peaks overall and people start slowly paying down their debt.
Since 1998, we have seen growing bubbles in stocks, bonds and real estate. When money velocity is falling because of this, it is never a good sign longer term. Central banks are having to print exponentially more money to create less and less results in the real economy. Those results only create higher stock, bond and real estate prices and we pay for that when such bubbles ALWAYS and inevitably crash! Note since late 2008 when massive QE and money printing started, that money supply has accelerated and money velocity has fallen even harder. Thank you Lacy, for explaining money velocity.
This is why central banks have had to print more and more money for such modest economic results. They are fighting crashing money velocity as people simply don’t need to borrow more money to keep money velocity growing, and that is the most important monetary factor and sign of success, not money supply which is now only growing from exponentially more money printing.
I have put out updates on the stock market in recent weeks using bitcoin as a leading indicator. It peaked 5.5 weeks before stocks in the first big bubble peak in January 2018. Stocks have been a in large megaphone pattern with slightly higher highs and lower lows ever since. Bitcoin peaked in December. And bitcoin has broken some very key support levels in its recent crash as I warned in my updates to you. The break out of its rising channel in this chart at $60,000 was key. Now we’ve already seen a fall to $46,930 breaking the first support level after it broke its bottom channel line at $50,874. The ultimate support is at $41,616. If that is broken, then $30,000 is the next target.
A clear break of the $41,616 level would very likely signal a top for bitcoin in this cycle, earlier than its normal 4-year cycle top, due near the end of 2021… and that would be a sign that stocks should top just ahead.
Since bitcoin is the epitome of this bubble and if it appears to have topped, then stocks should follow very soon. A 5.5-week lag would put that top for stocks in late May and one of my cycle guys has a turn point for around May 20. But there is also a turn point likely for April 28. So, we shall see here.
I AM LOOKING FOR A POTENTIAL MAJOR LONG TERM TOP BETWEEN APRIL 28TH AND JUNE 10TH
I can only start to verify when I see the strength of the crash to follow, as we know that every crash sees a bigger stimulus plan. But how do you top 55% of GDP in combined monetary and fiscal stimulus since late 2019 and most of that since Covid hit the markets into March 2020? The next move on the megaphone chart I have presented for a long time now would be a 50% crash in just 2-3 months or so. Hence, it should be very sharp from the beginning and very similar to the first leg of the infamous 1929-32 crash, which saw 49% in 2.3 months. I will be monitoring this next crash to see if it does look like “the big one.”
DOW 20-YR MEGAPHONE PATTERN PROJECTS A BOTTOM AROUND 5,000!
You know well that I do not want to see a continued rally into later this year, but you just can’t underestimate this bubble that never ends. But end it will, and I don’t see the rally surviving the end of this year and that will make 2022 the most dramatic crash year likely ever. The higher it goes, the more it will fall as the bottom targets on the long-term log chart and on my Dow megaphone do not change. If the downside is limited to 1,525 on the S&P 500 a 50% crash, or 78% of that 64% crash could come in the first few months on that S&P 500 megaphone pattern first drop to 2,100. That’s the fall that will catch these central bankers off guard.
This is obviously a critical time for the markets, so keep your eye out for updates in the days and weeks ahead through my free e-letter. EG