Why The (Collapsing) Global Credit Impulse Is All That Matters: Citi Explains

One week ago, we reported that UBS has some "very bad news for the global economy", when we showed that according to the Swiss bank's calculations, the global credit impulse showed a historic collapse, one which matched the magnitude of the impulse plunge in the immediate aftermath of the financial crisis.

But why is the credit impulse so critical?

To answer this question Citi's Matt King has published a slideshow titled, appropriately enough, "Why buying on impulse is soon regretted", in which he explains why this largely ignored second derivative of global credit growth is really all that matters for the global economy (as well as markets, as we will explain in a follow up post).

King first focuses on the one thing that is "wrong" with this recovery: the pervasive lack of global inflation, so desired by DM central banks.

As he notes in the first slide below, "the inflation shortfall isn’t new" and yet the current "level of credit growth would traditionally have seen inflation >5%"

To be sure central banks always respond to this lack of inflation by injecting massive ammounts of liquidity, i.e., credit, in the system: according to Citi, the credit addiction started in 1982 in the UK, while in 2009 it was in China. However, there was a difference: while in the 1982 episode, it took 3 credit units to grow GDP by 1 unit, by 2009 this rate had grown to 6 to 1. Meanwhile, central bankers "simply stopped worrying about credit." That also explains the chronic collapse in interest rates starting in 1980 with the "Great Moderation" and their recent record lows: the world simply can not tolerate higher rates.

And while the central bank experiment had limited success in stimulating inflation, there was one obvious consequence: credit fuelled asset bubbles around the world.

This is where the credit impulse comes into play: it allows market participants to track the instantaneous change in central banks' credit creation, and more importantly,  The change in the flow of credit drives GDP growth.

The impulse is also important as it directs investor behavior as well, due to its correlation with asset prices.

Of note: courtesy of fungible money and equivalent, the effects of a credit impulse in one area promptly diffuse around the globe, as "Credit created in one place often drives prices elsewhere."

Which, simply said, means that instead of looking at central bank, or credit creation, in isolation, it has to be watched in a global context. And here is the important part: as Citi concludes, "we’ve just had the biggest surge in the post-crisis era"...

... and yet the central bankers' holy grail - inflation - remains low.

In a follow up post we will show momentarily what, according to Citi, happens when the credit impulse turns negative as it just did.


ebworthen Tue, 06/20/2017 - 10:30 Permalink

Equities inflated, housing prices inflated, % of people out of the workforce inflated, healthcare costs inflated, etc.What is this talk of "no inflation"?

Oldwood JRobby Tue, 06/20/2017 - 13:06 Permalink

Artificial stimulus always takes the same path, instant gratification that becomes an obsession (addiction) that hollows out any real purpose or even perception of happiness or satisfaction, ending in destruction and great pain.But if we could just get one more high, one more bubble, we would be happy at last....

In reply to by JRobby

Memedada ebworthen Tue, 06/20/2017 - 11:05 Permalink

Very true. And I will add tuition, war/the cost of Empire, luxury goods, expensive art, antiquities and bonds. The super rich are "enjoying" the inflation (the expanded money supply).

If you study the real/now dead economists (=or just economists not on the payroll) inflation was understood as "the expansion of the money supply". Rising prices is just (one of) the effects of an inflating money supply (and yes, I know - we don't have money but fiat, but the same argument goes).

In reply to by ebworthen

Doug Eberhardt Tue, 06/20/2017 - 10:32 Permalink

If you haven't studied Exter's Pyramid, now would be a good time. He is the guy who was asked by Volcker what to do circa 1980.Not alive today, but I did interview his son-in-law Barry Downs, who was also at that meeting. The bottom line is the Fed doesn't have the tools to fight the coming contraction. 

LawsofPhysics Doug Eberhardt Tue, 06/20/2017 - 11:09 Permalink

Correct!!!  Moreover, The Fed is in fact a criminal banking cartel, period.They have been creating "money" without real collateral requirements, without doing any real work, and without facing any real risk. End the Fed, restore sound money and claw back all their ill gotten gains.  Execute the perps in banking and finance and start the fuck over. It will come to this one way or another, that's just evolution...

In reply to by Doug Eberhardt

Cycle Doug Eberhardt Tue, 06/20/2017 - 11:14 Permalink

The ECB, SNB and others have been buying equities, and if my memory serves me right, Bernanke stated that if the Fed's buying of debt instruments did not work out, however that is defined, the next step would be to have the Fed buy equities and/or corporate paper. The Fed has at least one more mis-step before running out of tools to fight a depression.

In reply to by Doug Eberhardt

Doug Eberhardt Cycle Tue, 06/20/2017 - 11:37 Permalink

Cycle, agree, I do 100% think the Fed has the ability short term. The markets still believe in their every move. They have since the days of following the size of Greenspan's briefcase. I took a snapshot of Fed member Evans on CNBC being interviewed by pro-Fed Steve Liesman where the caption reads; "Evans: Fundamentas For Economy Are Good" and the DOW priced at 21,527.79 and S&P 500 2447.55. I hope to use it in a future article. :-)The Fed is only raising rates so they have some sort of tool (lowering rates) to fight the coming recession. They will go so far as negative rates if they have to. The day the market turns on the Fed though, the Fed won't have the tools necessary to fight and at that point it's game over. Pinpointing the timing of it isn't as important as preparing now by locking in some profits in tech stocks and/or other stocks and looking at some physical gold/silver. However all of those assets will get hit with the contraction, similar to 2009. During that contraction, money actually flowed to Treasuries. For now, gold is bottoming for another run up and we'll ride that, sell and get short again. But after that contraction, everyone should be all in. It will be here before we know it.   

In reply to by Cycle

Doug Eberhardt heyjay Tue, 06/20/2017 - 12:07 Permalink

heyjay, the interesting thing about the helicopters dropping money is it's just pushing on a string and money velocity keeps falling. Unfortunately, as many will find out, the credit contraction will swallow up the small M2 money drops because of the sheer size of the credit extended. Ned Davis research does some good work on tracking the size if you can find their latest charts on Total Credit Market Debt as a % of GDP.I think Bernanke's 2002 speech saying deflation can't happen here by referencing Milton Friedman's money drop is off base, but don't tell the Fed that.   

In reply to by heyjay

heyjay Doug Eberhardt Tue, 06/20/2017 - 13:26 Permalink

maybe you're right but maybe these will be virtual helicopters dropping $20k on every bank account. Anyways, I think there will be a massive deflation first due to contraction and defaults but I'm quite sure that after that there will be inflation like there's no tomorrow.But let's imagine there won't be inflation, what will that mean for us? mass layoffs, hunger, shortage of goods and cash is king? Hopefully the possession of pm will attenuate the fallout.

In reply to by Doug Eberhardt

Doug Eberhardt heyjay Tue, 06/20/2017 - 14:18 Permalink

heyjay, first they have to force people to spend the 20k and not hoard it. If you are deciding between purchasing fun stuff or eating/living your daily life, then it would lead to more hoarding. There will always be that segment that will live for the day. Same people who play the gazillion to one odds lotto.   

In reply to by heyjay

Cycle Doug Eberhardt Tue, 06/20/2017 - 12:38 Permalink

Thank you for the thoughtful reply, Doug. Yes, the critical issue is the market's belief in the Fed as you point out, for now at least. The irreparable damage the Fed has wrought with its ZIRP policy on holders of Fed/state/municipal debt - namely pension funds, insurance cos etc. may be what eventually breaks the spell of complacency. Meredith Whitney was wrong in timing, but right on the eventual effects of such a policy and perhaps Illinois is the first of many dying canaries in the debts mine.I agree that gold has been bottoming for a while for a run up.  Before a dip and then higher again. At least that is what a historical cycle model suggests, but it has been frustrating watching the timing of the rise shift forward over the past couple of years. 

In reply to by Doug Eberhardt

Doug Eberhardt Cycle Tue, 06/20/2017 - 14:14 Permalink

Cycle, agree on the states issues as well. Having lived in Illinois, I am glad my family is all out. Not that California is any better, but we all like the weather. Real estate hasn't been too bad either. Most every state will have issues. But not just states paying bills; police, firemen, etc. will have issues with their pensions. So will mom and pop that have relied on define benefit plans their whole life. Cuts will have to be made and unions will have to give in or die off. Wn't be fun for anyone. I think my paretns lived the best generation. They are 81 and 82 and have had good pensions from their jobs, social security that has been there for them, and health care coverage that hasn't hurt their pockets. It is these future generations that can't see what's coming that need to be pro-active in their retirement and maintaining their wealth. They really need to be hands on. This includes the Alyssa Milano's of the world as more shady dealings will occur.The one part about my interview with Exter's son-in-law that stood out the most was his saying there won't be a bid for some assets. if there is no bid, then the only way for one to get out is to lower their price to sell. This means they lose profit made or lose more than they put in or worse, as many who own muni-bonds in Illinois may find out, you get nothing back.Probably no better time to be in cash than now. Nothing wrong with preserving wealth. I would at a minimum dollar cost average out of assets and if the assets are not very liquid, I would do all I could to sell now before things get worse.I sell gold for a living and even though I think we get one more push higher over 1300 to 1400+, I think it gets hit harde during the contraction.Not too many people will get this right. I will just go with where the market takes me as I trade both sides with leveraged ETFs.Nice chatting with someone who gets it. Like the name "Cycle."   

In reply to by Cycle

OpenThePodBayDoorHAL Doug Eberhardt Tue, 06/20/2017 - 15:25 Permalink

Not many people understand the link between money and energy, money that requires no work (energy) to create produces all sorts of second-order effects that devalue work. As Stockman points out, the progression goes like this: Productivity>Profit>Savings>Investment. Of course they try to skip straight to Step 4, then you get "investment" with no relation to productivity. Gold of course requires energy (work) to produce so always wins in the end. Problem is of course that "in the end" can take decades.

In reply to by Doug Eberhardt

Doug Eberhardt OpenThePodBayDoorHAL Tue, 06/20/2017 - 15:48 Permalink

Open, I do view gold as insurance more than anything else. But i trade the miners up and down for profit (currently long JNUG). Most people have insurance they hope to never use and pay a lot for it: home, auto, health, etc. At least with gold it won't be worthless and odds are, if your timing is good, you bought lower than you sold as it over time keeps pace with purchasing power (see a 1964 quarter value versus a 1965 quarter for purchaing power comparisons).  

In reply to by OpenThePodBayDoorHAL