A Number of US Monetary Signals Are Flashing Red… Does it Matter?

By Gordon Johnson of Vertical Group

Is the US Economy as Strong as Equity Markets Suggest?

US equity markets have been on fire & some economic indicators point to more optimism yet ahead (i.e., PMI readings, durable goods orders, nominal wholesales, factory orders, & retail sales all suggest strong growth [Ex. 1-5]).


However, these are largely coincident or lagging indicators, as well as surveys influenced by mkt sentiment.  Meanwhile, when analyzing forward-looking monetary indicators, we note:

(1) US public debt rose to 105% of GDP (vs. just 31% of GDP when Reagan cut taxes), vs. 62% in 3Q07, & with fewer tax receipts + higher spending likely in the coming yrs. some pundits est. this ratio rising to ~125% by ’30,

Exhibit 6: US Public Debt to GDP


(2) as a result of (1), the relationship between GDP & debt has recently ventured into neg. territory (the correl. since 4Q09 is -68.2%, vs. +5.6% 3Q74-4Q08 & +38.2% 4Q66-2Q74)

Y/Y Growth in U.S. Real GDP versus Growth in Public Debt


(3) the reality that sharply rising debt levels, historically, lead to an asymmetric effect from incremental monetary policy (i.e., a lot of loosening is needed to spur even a muted impact on growth, whereas the slightest monetary tightening can disproportionately depress activity), which...

(4) implies tax cuts or infrastructure spending – likely to be financed with debt – would ultimately be a drag on growth – 2009’s $1 trillion dollar US debt- funded stimulus was supposed to boost inflation/growth, but instead led to lackluster GDP & a lower inflation rate.

(5) a recently dramatic flattening in the yield curve, which will likely erode banks’ profitability (banks make money by borrowing short & lending long)

Slope of Key Maturities on US Treasury Yield Curve


(6) C&I loans, a leading indicator of growth, are growing near the slowest rate since the financial crisis – YTD (thru 12/20), net new C&I loans were down 82% y/y

Net New US Bank Commercial & Industrial Loans & Leases YTD, SA



(7) M2 growth has decelerated to just below 4.5% over the past 12 months, vs. +7% in 2016  – & the velocity of money at 1.43% this year is the lowest since 1949 (a decline in velocity > M2 = lower real GDP).

Y/Y Growth in U.S. M2 Money Supply




U.S. Velocity of M2 Currency




We, thus, question: Is the US economy as strong as the equity markets & financial headlines suggest, or are investors willfully ignoring leading monetary indicators?


peddling-fiction Shed Boy Sat, 01/06/2018 - 13:49 Permalink

Since Nixon signed the EO "suspending" the U.S Dollar convertibilty to Gold back in 1971, the U.S. was a dead man walking (still with a big stick).


Retreat from the 800+ MIC bases and reduce defense spending to Chinese levels, plus bring back manufacturing, and you will be fine.

If not, get ready for some nasty consequences for the exceptionally deluded.

In reply to by Shed Boy

Snaffew peddling-fiction Sat, 01/06/2018 - 14:30 Permalink

yes, but military aircraft, equipment, arms, and weapons are the deep states greatest export.  Starting new and maintaining existing wars are the impetus to keep the US military regime going.  If you cut defense spending, then the illusion of growth disintegrates and the strong arm tactics of the US weakens to the point of impotence.  They will fight any defense spending cuts to the death----much to the chagrin of the global and domestic populations.

In reply to by peddling-fiction

Shed Boy peddling-fiction Sat, 01/06/2018 - 14:32 Permalink

The term "defense spending" is a misnomer. Lets call it what it REALLY is...Offense spending. Any country we might have to defend ourselves from is just as fucked as we are and just as incapable of fighting a real war. The countries that are prospering have no interest in starting a war and are happy to be just left alone to enjoy their prosperity.

We overthrow countries for their resources. There is nothing "defensive" about it.

In reply to by peddling-fiction

coast1 Sat, 01/06/2018 - 13:47 Permalink

I read several years back, that the stock market will go up, and when you think it cant go up any higher it will go higher...During which time, the euro will also go up..when the euro begins to noticeably crash, is when time is up, they are ready to crash the system..the euro will crash, bringing the stock market crash, then afterwards, the dollar will crash. I have no clue how long it will take, its just what I decided to watch for..I also believe an SDR crypto will be used for banks and corporations, and another crypto currency will be uesd for common folks..Not sure it will be bitcoin, havnt decided yet which crypto I will use yet to control the world monetary policy..I will let my friends here at ZH know first k?  In the mean time, diversify, gold and silver are number one, if you know how to invest in stock market, there is still money to be made, and it would be good to own whatever you can afford in crypto. Coast has spoken, so be it and let it be. :-)

Not My Real Name coast1 Sat, 01/06/2018 - 14:02 Permalink

When confidence in the current dollar-based international monetary system collapses, I don't see how an SDR (crypto or otherwise) will change things. If the banksters are lucky, using the SDR as a "new" fiat currency that is based upon a basket of existing worthless fiat currencies may restore confidence and extend the game for a very short period -- but I doubt it.




In reply to by coast1

J J Pettigrew Sat, 01/06/2018 - 13:52 Permalink

Good Charts!!

Now put up the stock market chart super imposed over the rising national debt.....

Or better still, a chart of the stock market going up, and the national debt going straight down, as in negative...

and then wonder how much longer that can go on....

It looks like money is being shoved from the national government to the stock market.......or is it just a coincidence....?  Or is/ was it the Federal Reserve pushing $4 Trillion into an economy where they keep rates below inflation?

The Velocity of money topic never came up with Yellen or Bernanke..one more thing the central planners got wrong.....if that ever turns the inflation will be tough to handle. Perhaps all the repatriation of monies back over here will spur something.....

Let it Go Sat, 01/06/2018 - 14:01 Permalink

 When it comes down to the economy and how it impacts the average American in middle America little has changed during the last year but what we are seeing is an extension by many investors into very speculative investments. In reality not only are we and nations around the world continuing to run huge deficits central banks are still printing money and keeping interest rates artificially low.

A recent note from only added to the enthusiasm by informing us that well-respected investor Jeremy Grantham, who is credited with calling the 2000 and 2008 downturns warned investors on Wednesday to be prepared for the possibility of a near-term “melt-up” but that is only part of the story, more below.


DeathMerchant Sat, 01/06/2018 - 14:04 Permalink

As long as everyone agrees that fiat is worth what everyone says it is, nothing will happen. But then that is the basic premise that makes money what it is, isn't it ??

CRM114 DjangoCat Sat, 01/06/2018 - 17:09 Permalink

The USAF is short 1,000 fighter pilots


The Air Force Chief of Staff is calling it a crisis.

These are not the only top warriors shortages.

No shortage of blanket stackers who want to stay in Kansas.

Same problem in other NATO forces, e.g. UK.

Go look at the collapse of the Roman Empire; same problem.

In reply to by DjangoCat

Easyp Sat, 01/06/2018 - 14:42 Permalink

Relax once US debt gets to 130% of GDP the Whitehouse will find an excuse to fight a war.  Alternatively the US could default and tell the chinese to go f@ck themselves?

buzzsaw99 Sat, 01/06/2018 - 16:01 Permalink

(5) a recently dramatic flattening in the yield curve, which will likely erode banks’ profitability (banks make money by borrowing short & lending long)...


can anyone point out the multiple fallacies in this theory?


never mind, i'll do it.


1)  banks haven't raised rates they pay depositors at all.

2)  the big banks lend to needier smaller banks at the (higher) overnight rate, thus increasing profit.

3)  the big banks get interest on excess reserves (ioer) since 2008 from yellen's sweet juicy titties which is also set at a rate matching the overnight.

4)  the big banks just got a huge tax cut thanks to trump and da boyz, which, perversely, will cause them to take a charge, but nevertheless, they got another big bonus.

5)  the big banks never lose.

6)  anyone else?

Clowns on Acid Sat, 01/06/2018 - 16:18 Permalink

Its all a product of Glass Steagal repeal (Robert Rubin, Sandy Weill, Larry Summers and Bill Clinton), only took 8 years after repeal for the newly created Bank Holding companies to destroy Western banking system. QE policies by corrupted Fed under the socialist Obama, to put the final nail in.

Its going to take a lot to return to fiscal sanity. Maybe never.

GoldHermit Sat, 01/06/2018 - 17:47 Permalink

It doesn’t matter as long as we can print ever more money and the world’s confidence in it remains.  Should this falter - it’s every man for himself!!!!

Harry Lightning Sat, 01/06/2018 - 20:12 Permalink

Notice that monetary velocity has been sinking steadily ever since the advent of the internet and the commerce performed through it. Seems to indicate that monetary velocity is an anachronism in a world where actual dollars pass electronically and not by hand.