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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Sancho Ponzi's picture

BAC trading at $5.05. Danger, Will Robinson

SheepDog-One's picture

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

Jumbotron's picture

"quickly, they need money"

Would you like paper or plastic?

HungrySeagull's picture

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


William113's picture

But But But CNBC says we are growing.

Jumbotron's picture

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

Papasmurf's picture

That was just Kramer's nose.

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.......

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.

ElvisDog's picture

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

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! 

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.

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......


blueridgeviews's picture

Imitation is the greatest form of flattery.

Irish66's picture

sugar cookies for breakfast

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?

kalasend's picture

Then where's inflation?

Beam Me Up Scotty's picture

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

Caviar Emptor's picture

Crude is $5 above last year this time

tarsubil's picture

The helicopters have to come first.

natty light's picture

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

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.

kalasend's picture

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

MFL8240's picture

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

CoolClo's picture

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

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.

Sudden Debt's picture




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.

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..

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?   

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!

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.

ucsbcanuck's picture

BAC at 5.06 and dropping

jay28elle's picture

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

Jlmadyson's picture

BAC at 5.06. Here we go.

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.  

monopoly's picture

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

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

slaughterer's picture

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

WonderDawg's picture

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

GMadScientist's picture

You're just Freecycling for the planet.

Doing Gaia's work.

GMadScientist's picture

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

Good luck.

prains's picture

$4.985 time to squeeze your tits together slaughter

SheepDog-One's picture

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