by Pater Tenebrarum via Acting-Man.com,
US Money Supply and Credit Growth Continue to Slow Down
Not to belabor the obvious too much, but in light of the recent sharp rebound, the stock market “panic window” is almost certainly closed for this year.* It was interesting that an admission by Mr. Powell that the central planners have not the foggiest idea about the future which their policy is aiming to influence was taken as an “excuse” to drive up stock prices. Powell’s speech was regarded as dovish. If it actually was, then it was a really bad idea to buy stocks because of it.
Jerome Powell: a new species of US central banker – a seemingly normal human being in public that transforms into the dollar-dissolving vampire bat Ptenochirus Iagori Powelli when it believes it is unobserved.
We say this for two reasons: for one thing, the Fed is reactive and when it moves from a tightening to a neutral or an easing bias, it usually indicates that the economy has deteriorated to the point where it can be expected to fall off a cliff shortly.
In this case it seems more likely that Mr. Powell has tempered his views on tightening after contemplating the complaints piling up in his inbox and looking at a recent chart of 5-year inflation breakevens. After all, there is no evidence of an imminent recession yet, even though a few noteworthy pockets of economic weakness have recently emerged (weakness in the housing sector is particularly glaring).
Recall that the last easing cycle began with a rate cut in August 2007. This first rate cut was book-ended by a double top in the SPX in July and October. Thereafter the stock market collapsed in the second-worst bear market of the past century – while the Fed concurrently cut rates all the way to zero (and eventually beyond, in the form of QE).
For another thing, regardless of what Mr. Powell says, quantitative tightening continues at full blast for now. There is little to offset it, as growth in inflationary bank credit remains anemic. Mind, we do not see this as a negative development, on the contrary. It will hasten structural improvement of the economy by discouraging further malinvestment of scarce capital. Nevertheless, it is definitely bad news for overvalued “risk assets” and existing malinvestments.
Our friend Michael Pollaro has provided us with the table shown below, which tracks outstanding Fed credit and the components contributing to changes in the total. It shows that QT has really grown some teeth in recent months; as expected, the year-on-year decline in net Fed credit is accelerating of late. It is bound to accelerate even further in coming months, as several difficult y/y comparisons are directly ahead.