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Guest Post: Three Charts That Blow The Doors Off Any Hope Of A 2012 Rally

Tyler Durden's picture


Submitted by Charles Hugh Smith from Of Two Minds

Three Charts That Blow The Doors Off Any Hope Of A 2012 Rally 

The centrally-managed rally of March 2009 is over; reality is finally intruding on the manipulation and propaganda.

A good way to generate hate mail is to question 1) Santa's "guaranteed year-end rally" and 2) the notion that market rallies always resume soon enough because of the Federal Reserve's backstop/intervention.

If we step back from the latest shuck-and-jive data from the Ministry of Propaganda, a.k.a. the Status Quo managing perceptions, and take a longer view of the economy, money, credit and the stock market, we get an extremely troubling set of insights.

Courtesy of this site's Chartist Friend from Pittsburgh, here are three charts that completely undermine the fantasy that central planning/intervention can "save the market" once again in 2012 and beyond.

The first chart depicts annual percentage of change of Total Credit Market Debt and GDP. The black line tracks the annual percentage expansion of debt and the purple line shows the annual percentage of change in the Gross Domestic Product.

The second chart shows the velocity of M2 Money Supply and the S&P 500 (SPX) stock market index divided by the PPI (Producer Price Index). Velocity of money can be illustrated with a simple example: if the Federal Reserve creates a dollar out of thin air and a bank parks that digital dollar in its reserves, the velocity of that money is very low. If that dollar is lent out and spent at a business that then uses it to buy goods and services at another business where it is paid out as a wage that is spent, and so on, then the velocity of that money is high.

Dividing the SPX by the PPI is a way of adjusting for base inflation. This gives us a more accurate snapshot of reality than a nominal or unadjusted number.

The third chart presents the MZM (money zero maturity) Money Stock, a measure of supply of financial assets, and the 3-month T-Bill (Treasury bond) which reflects interest rates.

Here is our Chartist Friend from Pittsburgh's summary of the charts' fundamental meaning:

I think these three charts together do a good job of showing the correlation between the dynamics of money/credit and the real economy as measured by GDP, stock prices and interest rates. They paint a very clear picture: the economic contractions that we are experiencing today began roughly twenty years ago, and soon a full blown deflationary depression will be delivered.

Thank you, CFFP for sharing these excellent charts. I am adding a bit of commentary after each chart.


Note that GDP more or less tracked credit expansion until around 1979, often exceeding debt as the expansion of credit sparked real growth via investment in productive assets. In the inflationary 1970s, both credit and GDP rose. In 1986-87, credit exploded, leaving the real economy in the dust. From 1991 on, credit tended to expand at a much higher rate than the real economy, a trend that accelerated in the 2003-07 housing/credit bubble. This reflects the saturation or exhaustion of debt as a driver of growth, i.e. mis-investment in unproductive assets such as McMansions in the middle of nowhere.

Since 2009, GDP hasn't recovered to ite previous annual rates of change, and credit fell to a negative number, i.e. credit contraction, for the first time in the postwar era. It has since regained positive territory but the expansion is weak; simply put, people either don't want to borrow more or they can't borrow more.


The velocity of money rose in the stagflationary 1970s, even as stocks yielded negative returns when adjusted for inflation, i.e. to real returns. Velocity declined in the mid-1980s and then exploded higher in 1990s, topping out several years before the stock market topped in 2000.

Velocity and stocks were highly correlated from 2000 to 2009, when the market staged a sharp rebound even as velocity continued down to a historic low. This suggests stocks have some catching up to do with velocity, that is, the S&P 500 should decline significantly.


Many people have noted the explosive rise in money supply (not shown) since the 2008 financial crisis; this chart shows that this "new money" isn't entering the real economy at all, as money velocity has plummeted to zero.

This third chart shows a rough but long-term correlation between T-Bill yields (interest rates) and the supply of financial assets (money stock). The stock of money fell off a cliff in 2000, and that marked the highs in both the S&P 500 and the T-Bill yield.

Maybe near-zero interest rates aren't the panacea the Federal Reserve thinks they are.

If we look at civilian participation in the workforce and other basic measures of employment, we find they topped out in 2000 as well.


If there is any evidence of a resurgence in the real economy just ahead, it isn't present in these charts. Any stock market rally in 2012 will not reflect the real economy, credit, money stock and velocity or employment visible in these charts. Until these charts shows positive fundamental improvement, a rally can only be smoke and mirrors, a trick of central planning manipulation that is unlikely to last longer than a sugar high.


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Mon, 12/19/2011 - 11:06 | 1993956 Sancho Ponzi
Sancho Ponzi's picture

BAC trading at $5.05. Danger, Will Robinson

Mon, 12/19/2011 - 11:08 | 1993964 Irish66
Irish66's picture

quickly, they need money

Mon, 12/19/2011 - 11:19 | 1994003 SheepDog-One
SheepDog-One's picture

One more injection of Super Strength Hopium should do the trick, or kill the junkie. Whatever.

Mon, 12/19/2011 - 11:51 | 1994129 Jumbotron
Jumbotron's picture

"quickly, they need money"

Would you like paper or plastic?

Mon, 12/19/2011 - 11:54 | 1994189 HungrySeagull
HungrySeagull's picture

Paper is too unweildy, Plastic is worn out and Binary requires a keyboard.


Mon, 12/19/2011 - 12:17 | 1994296 William113
William113's picture

But But But CNBC says we are growing.

Mon, 12/19/2011 - 12:21 | 1994306 Jumbotron
Jumbotron's picture

Mushrooms in shit grow nicely as well.....and provide just as much hallucinigenic hopium.

Mon, 12/19/2011 - 13:11 | 1994503 Grinder74
Grinder74's picture


Mon, 12/19/2011 - 19:36 | 1995983 Papasmurf
Papasmurf's picture

That was just Kramer's nose.

Mon, 12/19/2011 - 11:17 | 1993996 vast-dom
vast-dom's picture

No danger. No problems. Everything is just perfect and there will be a rally. Charts don't mean shit. Reality don't mean shit. Nothing means nothing. Let the global theft continue, until.......

Mon, 12/19/2011 - 11:28 | 1994023 DormRoom
DormRoom's picture

Did you know they are contructing a replica city of Manhanttan in Tianjin, China?


All this debt.  All this misallocation of capital. omfg.

Mon, 12/19/2011 - 11:44 | 1994119 ElvisDog
ElvisDog's picture

Is it next to that replica of Disneyland they were building but have since abandoned?

Mon, 12/19/2011 - 12:32 | 1994329 slewie the pi-rat
slewie the pi-rat's picture

it's hard to keep things straight under Central Planning

it seems the periphery suffers somehow..., we just opened an article about 3 charts and found:  4 charts! 

Mon, 12/19/2011 - 14:58 | 1994937 Sancho Ponzi
Mon, 12/19/2011 - 11:48 | 1994127 Winston Smith 2009
Winston Smith 2009's picture

Yep, if loan default rates approach anywhere near their historic norms in China, their often touted "huge cash reserves" will evaporate and the pending collapse of the EU and its effect on the US will make their export situation miserable.  The double whammy will be the subsequent default of Japan, what Kyle Bass has called one of the most obvious pending events he's ever seen.

So much for the Chinese saving the world.  Just go to Bloomberg and search on the word "China."  Nothing but BAD news that can only get worse.

Mon, 12/19/2011 - 11:50 | 1994149 Jumbotron
Jumbotron's picture

"Did you know they are contructing a replica city of Manhanttan in Tianjin, China"?

Actually it is pretty smart.  China knows that we have shipped all our manufacturing over there so why not ship its elties over there in due course.

Particularly when the SHTF and New York becomes this......


Mon, 12/19/2011 - 11:55 | 1994193 blueridgeviews
blueridgeviews's picture

Imitation is the greatest form of flattery.

Mon, 12/19/2011 - 11:07 | 1993958 Irish66
Irish66's picture

sugar cookies for breakfast

Mon, 12/19/2011 - 11:29 | 1994034 gdogus erectus
gdogus erectus's picture

So, wasn't it mom who used to make those cookies entering the workforce that caused the Civilian Participation rate to increase starting in the 60s?  And if so, what happens if we go back to a single income family?  I guess the difference is this time, one person working at Walmart can't quite keep food on the table, a roof over the little family's head and afford an occasional doctor's visit.  Other than the emergency room but I digress.  So, what's my point?  I forgot.  Where are those cookies?

Mon, 12/19/2011 - 11:09 | 1993965 kalasend
kalasend's picture

Then where's inflation?

Mon, 12/19/2011 - 11:16 | 1993995 Beam Me Up Scotty
Beam Me Up Scotty's picture

Was gas over $3 a gallon at this time last year? 

Mon, 12/19/2011 - 11:53 | 1994180 Caviar Emptor
Caviar Emptor's picture

Crude is $5 above last year this time

Mon, 12/19/2011 - 11:17 | 1993997 tarsubil
tarsubil's picture

The helicopters have to come first.

Mon, 12/19/2011 - 11:21 | 1994009 natty light
natty light's picture

It is embedded in "the money-ness of credit."

Mon, 12/19/2011 - 11:52 | 1994169 Winston Smith 2009
Winston Smith 2009's picture

See the velocity of money chart.  As he clearly explained, it isn't in circulation because it hasn't been loaned out.

Mon, 12/19/2011 - 12:28 | 1994322 kalasend
kalasend's picture

SO what money drives up commodity prices then? "Expectation dollars"?

Mon, 12/19/2011 - 11:09 | 1993969 MFL8240
MFL8240's picture

And with this the Obama media is suguesting the US recovery is doing better.  lol!

Mon, 12/19/2011 - 11:37 | 1994081 CoolClo
CoolClo's picture

It is for the 1%. Its good for those on top....

Mon, 12/19/2011 - 11:09 | 1993970 homer8043
homer8043's picture

I'm sticking to my guns. January 2 will be a glorious new year, for bears. Unless it get front run by everyone that comes to the same conclusion.

Mon, 12/19/2011 - 11:09 | 1993973 Sudden Debt
Sudden Debt's picture




Mon, 12/19/2011 - 11:56 | 1994200 HungrySeagull
HungrySeagull's picture

Santa does not have much to haul this year, The Tooth Fairy is wrestling with a mountain of Dental Insurance via Obamacare and the Easter Bunny has not risen yet. Nothing more than a hole in the ground.

Mon, 12/19/2011 - 11:15 | 1993989 Iconoclast
Iconoclast's picture

It's the unemployment stats that always freak me, the participation chart is particularly nasty, I also wonder if the food stamps numbers will reach fifty mill by end of February? That single metric IS the USA IMHO, all it's brilliance and cruelty morphed into one devastating number revealing its 'one step from the gutter' philosophy..

Mon, 12/19/2011 - 11:16 | 1993991 slaughterer
slaughterer's picture

I do not see an $800 billion LSAP QE3 marked on any of those charts in the article.  Would that change the conclusions?   

Mon, 12/19/2011 - 11:52 | 1994174 Winston Smith 2009
Winston Smith 2009's picture

Because QE1 & 2 worked so well?

Mon, 12/19/2011 - 11:16 | 1993992 TradingJoe
TradingJoe's picture

The stockmarket "rallies" did not reflect the real economy for the last three yeas, why should it now?! Or in the near future?!?! They will print and that's all folks!

Mon, 12/19/2011 - 11:16 | 1993994 San Diego Gold Bug
San Diego Gold Bug's picture

Screw wall Street....keep buying physical gold and take your money off of the digital radar.  Found this site on TF yesterday.

It is a great way to check the live prices of the biggest dealers.

Mon, 12/19/2011 - 11:18 | 1993999 ucsbcanuck
ucsbcanuck's picture

BAC at 5.06 and dropping

Mon, 12/19/2011 - 11:27 | 1994031 jay28elle
jay28elle's picture

drop baby drop.  if ever there was a business with no business being in business....  IMO, of course.

Mon, 12/19/2011 - 11:19 | 1994002 Jlmadyson
Jlmadyson's picture

BAC at 5.06. Here we go.

Mon, 12/19/2011 - 11:20 | 1994004 GMadScientist
GMadScientist's picture

Flame out!

Mon, 12/19/2011 - 11:22 | 1994006 slaughterer
slaughterer's picture

BAC at $5.04 is a BUY.  I just bought 200k shares.   We go up from here.  The big block dumps are over for the day.  $5 is the line in the sand for Brian Sack.  

Mon, 12/19/2011 - 11:24 | 1994016 monopoly
monopoly's picture

And that is what is called "investing" these days.

BAC, just cannot even phantom buying 2 shares of BAC.

Mon, 12/19/2011 - 11:27 | 1994030 slaughterer
slaughterer's picture

Not investing, trading.   Double bottom.  Look at L2/L3: BAC is well-supported.  

Mon, 12/19/2011 - 11:29 | 1994039 WonderDawg
WonderDawg's picture

Aaaaaaand... my Citi puts are now in the money!

Mon, 12/19/2011 - 11:32 | 1994058 GMadScientist
GMadScientist's picture

Dumpster diver. ;)

Mon, 12/19/2011 - 11:34 | 1994071 WonderDawg
WonderDawg's picture

We all have our vices ;-)

Mon, 12/19/2011 - 11:36 | 1994079 GMadScientist
GMadScientist's picture

You're just Freecycling for the planet.

Doing Gaia's work.

Mon, 12/19/2011 - 11:32 | 1994055 GMadScientist
GMadScientist's picture

Hahaha...a $1M bet that they aren't the sacrificial lamb for this round.

Good luck.

Tue, 12/20/2011 - 02:08 | 1996852 prains
prains's picture

$4.985 time to squeeze your tits together slaughter

Mon, 12/19/2011 - 11:22 | 1994012 SheepDog-One
SheepDog-One's picture

Thats the problem with ultra high altitude jet flying...its all good until the flame-out and free fall.

Mon, 12/19/2011 - 11:33 | 1994065 GMadScientist
GMadScientist's picture

Chuck Yeagher == Honeybadger.

Mon, 12/19/2011 - 11:21 | 1994007 vegas
vegas's picture

I don't think the HFT's care about these charts. And to tell you the truth, I haven't made any money trading off the velocity of money either.

Mon, 12/19/2011 - 11:54 | 1994184 Winston Smith 2009
Winston Smith 2009's picture

Since their event horizon is milliseconds away, of course they don't.

Mon, 12/19/2011 - 11:21 | 1994008 monopoly
monopoly's picture

"Where is inflation". Well, just go shopping, pay your medical premiums, buy a new car or put gas in it. Head to WalMart, Kohls, and check the prices from a year ago. 

DO NOT look at govt. figures. They just bullshit us day in and day out.

Christmas just not the same. We are slowly moving down into the abyss. But it takes time for our govt. to completely destroy an economy and country as large as ours.

Mon, 12/19/2011 - 11:32 | 1994057 Tsar Pointless
Tsar Pointless's picture


Verizon Fios is raising its rates by $10 starting in February. Our municipal water/sewage public-private partnership is raising its rates by 5% in Q1 of 2012. Our county's real estate taxes - going up, too. And mortgage premium with insurer - going up, too.

Nope - no inflation here.

Don't believe your eyes; believe the lies.

Mon, 12/19/2011 - 11:52 | 1994171 Caviar Emptor
Caviar Emptor's picture

Yup. Cost of home ownership, cost of operating a business, cost of going to work are all up in a very down economy. Worse, real wages and net worths are actually contracting along with profit margins. BIflation as in Bi Bi Miss American Pie

Mon, 12/19/2011 - 11:25 | 1994018 machineh
machineh's picture

Utter garbage:

Chart 1 -- shows that several major bull markets started when nominal GDP growth was in the sub-5% range, as it is now.

Chart 2 -- seems to show an uncorrelated, or even slightly negatively correlated, relation of S&P to velocity over its full period.

Chart 3 -- drops in T-bill rates (as at present) shown in the chart have consistently coincided with stock rallies.

CONCLUSION: the stock market does not give a good damn about GDP growth. EVERY major bull market has begun in a context of weak GDP growth. 

Today I went long, just to pick this pedantic poseur's pocket.

Mon, 12/19/2011 - 11:35 | 1994061 Sancho Ponzi
Sancho Ponzi's picture

"Chart 3 -- drops in T-bill rates (as at present) shown in the chart have consistently coincided with stock rallies."

Not in the long-term, weedhopper. From Shanky's charts: ([s207206957]&disp=P

Mon, 12/19/2011 - 12:40 | 1994364 JPM Hater001
JPM Hater001's picture

Tell you what.  You let me know how that works out for you and instead of minus 1 I will just let your losses speak for themselves.

Mon, 12/19/2011 - 11:24 | 1994019 Potemkin Villag...
Potemkin Village Idiot's picture

"Maybe near-zero interest rates aren't the panacea the Federal Reserve thinks they are..."

Frankly... Nobody even believes anymore that ZIRP was put into effect to help anyone out but the bankers... Maybe in the beginning there were some dupes, but the onion has been peeled back...

So now it seems, you get 50-50 on people saying that the Feds hands are tied on more QE, anymore because taxpayers won't stand for it... I have no idea, but I have a sneaky feeling that when SNAP cards no longer function, social security checks stop coming, pink slips get issued, and the S&P dives to 400, then we'll get a bunch of wussies BEGGING for more free money whether the bankers benefit or not...

Just a guess

Mon, 12/19/2011 - 11:25 | 1994020 Blindweb
Blindweb's picture

Bernanke will break the dollar rally.  Stocks will rally 25% temporarily, gold 50%+


Can we put Charles Hugh Smith with Duchinger...writes excellent exposes but fails at market analysis. 

Mon, 12/19/2011 - 11:28 | 1994037 Odin
Odin's picture

Bear Calvary Bitchez!!!  

Mon, 12/19/2011 - 11:32 | 1994059 Ancona
Ancona's picture

Not to break your balls, but Calvary was where Christ was crucified. I think you mean cavalry.....yes?

Mon, 12/19/2011 - 11:32 | 1994056 Ponzi Unit
Ponzi Unit's picture

Tyler, I wonder what these macro-bearish charts would look like had they been derived from John Williams' figures for output, unemployment and inflation.

Would you please ask your friend in Pittsburgh to run these numbers using shadowstats data?

Mon, 12/19/2011 - 11:52 | 1994170 Mr. Fix
Mr. Fix's picture


Great idea! If the real numbers were put in,  these charts would look even more ominous.

Mon, 12/19/2011 - 11:33 | 1994066 Ayn Rand
Ayn Rand's picture

This is in total contradiction to what Steve Liesman just said.

I guess you'll never get invited on CNBC.

Mon, 12/19/2011 - 11:43 | 1994112 monopoly
monopoly's picture

LIESman, LOLOL That was great.

Mon, 12/19/2011 - 11:45 | 1994131 Caviar Emptor
Caviar Emptor's picture

The 3 charts above perfectly illustrate a point I've been stressing: the 1970s stagflation is very different than what's happening today. Look at GDP growth in the first chart: the 1970s inflation was a growth story for GDP, credit and money stock. So were wages and house prices. As opposed to today where GDP barely grows and real incomes, net worth and house prices are dropping. I agree that deflation is not only coming but is here. And the last 2 months have shown it in spades (hence the gold price plunge). But unfortunately raw material costs and consumer staples remain stubbornly high, in part because of the Fed's reflation policy (of which the best evidence is the stock market 90% rebound since 09). When you reflate a bubble, prices go up with it. So we're stuck in biflation. I've always said: you won't get a deflationary collapse nor hyperinflation. You'll just get a moderate amount of  BOTH which is worse

Mon, 12/19/2011 - 11:55 | 1994192 Winston Smith 2009
Winston Smith 2009's picture

"But unfortunately raw material costs and consumer staples remain stubbornly high"

Just wait until China crashes, and it will.

Mon, 12/19/2011 - 12:01 | 1994229 Caviar Emptor
Caviar Emptor's picture

Don't hold your breath. Trade policy over the last 30 years has put fistfulls of dollars in the hands of credtitor nations like China so we could maintain our chronic trade deficit. And undfortunately for our country, the Fed's "reflation policy" has caused a major misallignment of prices with what the economy can actually afford. The cost of living, of doing business and working has risen sharply since 09 and keeps rising despite the depression in incomes, net worth, and profit margins

Mon, 12/19/2011 - 12:02 | 1994231 blueridgeviews
blueridgeviews's picture

I hope you are correct. That's the drop in prices we need to reatart the American manufacturing sector.

Mon, 12/19/2011 - 11:45 | 1994132 Caviar Emptor
Caviar Emptor's picture


Mon, 12/19/2011 - 11:50 | 1994158 sbenard
sbenard's picture

Dr. John Hussman is Hussman Funds shows similarly sobering charts for the global economy in his weekly market analysis here:

Mon, 12/19/2011 - 11:56 | 1994198 Caviar Emptor
Caviar Emptor's picture

Guess it bears repeating: with the Fed actively making it policy to reflate the stock market, you could have 100% unemployment, civil war and still see a rising S&P 500. It's that simple as long as Uncle Sugar pays for it (with your money)

Mon, 12/19/2011 - 11:57 | 1994203 Winston Smith 2009
Winston Smith 2009's picture

Yep, basically we're on the edge of a glacier cliff that's about to collapse into ice cold water.  The EU will probably trigger it followed by China and Japan.

Mon, 12/19/2011 - 12:07 | 1994247 jrpuffnstuff
jrpuffnstuff's picture

Santa gave me the gift of sodomy for Christmas courtesy of James Dines.  Ho ho f'n ho. 

Mon, 12/19/2011 - 17:23 | 1995577 sasebo
sasebo's picture

Too much digital money ---- the system is choking on digital money. Imagine Harah's crammed with chips. Thank delusional Bernenke.

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