Did the Economy Just Stumble Off
a Cliff?
By Charles Hugh Smith
August
24, 2017 "Information
Clearing House"
- This
is more intuitive than quantitative, but my gut
feeling is that the economy just stumbled off a
cliff. Neither the
cliff edge nor the fatal misstep are visible
yet; both remain in the shadows of the
intangible foundation of the economy: trust,
animal spirits, faith in authorities'
management, etc.
Since credit expansion is the
lifeblood of the global economy, let's look at
credit expansion. Courtesy
of Market
Daily Briefing,
here is a chart of total credit in the U.S. and
a chart of the percentage increase of credit.
Notice the difference between
credit expansion in 1990 - 2008 and the
expansion of 2009 - 2017. Credit
expanded by a monumental $40+ trillion in 1990 -
2008 without any monetary easing (QE) or
zero-interest rate policy (ZIRP). The expansion
of 2009 - 2017 required 8 long years of massive
monetary/fiscal stimulus and ZIRP.
This chart of credit change (%)
reveal just how lackluster the current expansion
of credit has been, despite
unprecedented trillions of stimulus pumped into
the financial sector.
Here are two other snapshots of
debt: margin debt and private credit. Both
have hit new highs.
Note the
tight correlation of margin debt to the S&P 500
stock index: when punters borrow more on margin
to buy more stock, stocks keep rising.
When
credit stops expanding, the economy stumbles
into recession.
Back in the real world, have you
noticed a slowing of animal
spirits borrowing and spending? Have
you tightened up your household budget recently,
or witnessed cutbacks in the spending habits of
friends and family? Have you noticed retail
parking lots aren't very full nowadays, and
once-full cafes now have empty tables?
According to the conventional
economic statistics, everything's going great:there
are millions of job openings, unemployment is
near historic lows, GDP is expanding nicely and
of course, everyone's
favorite signifier of wonderfulness, the
stock market, is hovering near all-time highs.
The possibility that the real
economy just stumbled off a cliff creates
instantcognitive
dissonance, as the
official narrative is the economy is expanding
slowly but surely and everything is nominal:
there's plenty of everything, from oil/gas to
consumer credit to jobs to student loans.
Nonetheless, I feel a disturbance
in the Force: once
credit expansion slows or ceases, the economy
will roll over into recession, as wages have
been stagnant for the past 17 years, and the
bottom 95% of households can only spend more if
they borrow more.
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Recessions are not mechanical
processes; they are ultimately measures
of human emotions and assessments: greed/complacency
gives way to fear and caution, and denial
/magical thinking is brought to Earth by
reluctant acceptance of less-than-ideal
realities (for example, we really can't afford
to borrow more, it makes no sense to buy
negative-interest rate bonds, etc.)
Though
it's bad form to mention it, everyone's
favorite signifier of wonderfulness, the
stock market, is by most measures overvalued and
priced to perfection.
Meanwhile,
after failing to normalize interest rates and
its balance sheet years ago when the economy had
already recovered some stability, the Federal
Reserve (and a few other central banks) are
hurrying to make a grand show of ticking rates a
bit higher before the next recession reveals the
systemic failure of their 8-year long campaign
of permanent monetary stimulus and near-zero
rates.
Everything that could rescue the
stock market from swooning has already been
done: buy hundreds of
billions of dollars of stocks via index funds?
Done. Constantly communicate the god-like powers
of central banks to fix anything and everything
in global equity and bond markets? Done, to the
point of boredom.
How can anyone trust a market
that has been massaged and manipulated for 8
long years? What sort
of price discovery is possible if central banks
have been major buyers for years?
Beneath the surface of complacent
tranquility and absolute faith in the god-like
powers of central banks, a skittish awareness of
risk and fragility is rising.I
would contend that this is true not just in
moneyed circles with access to the best private
research, but in households that are sensitive
to the first tremors of the coming earthquake,
and alert to the note of alarm in the canary's
warblings down in the coal mines of the economy.
I suspect all those who have
placed their trust in everyone's
favorite signifier of wonderfulness, the
stock market, have forgotten that signifiers can
work both ways: nothing
signals recession and a panicky urgency to sell
everything that isn't nailed down like a sharp
swoon in stocks that fails to respond to a "buy
the dip" buying frenzy.
The faith in "buy the dips" (i.e.
"the Fed has our backs") is not based on an
immutable law of Nature; stocks can (gasp!)
actually succumb to gravity. And
when they finally do feel the tug of gravity,
the belief that "buy the dips" is a permanent
strategy will be revealed for what it is: a
long, heavily-juiced run that eventually ends.
The signs
are everywhere for those willing to look:
beneath the surface of complacent faith in
debt-fueled permanent growth, the economy is
stumbling. Recessions are typically identified
after months of squinting in the rearview
mirror, but we don't need an official
declaration to sense that something has changed.
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