Gotta Pay the Debt Collector

This entire rally is being fueled by credit, not real gains in productivity. A tweet:

Screen Shot 2018-01-15 at 8.49.57 PM

Let’s investigate. See: Three body problem. Tl;dr Good companies make good stocks, and high quality, trustworthy governments issue to low yielding, safe bonds. There is correlation, but as an investment strategy the relationship seems to be working less and less. Ben Hunt doesn’t dismiss the corollary, he merely introduces a third party in the market. He believes the third body to be central banks and their whopping balance sheets. Hold that thought…

See: Economic Machine, Ray Dalio. In order for there to be growth in an economy, there must be more transactions. A transaction is exchange of cash or credit for goods or services. More cash and credit available in markets means more transactions. One (wo)man’s spending is another (wo)man’s income. FYI: American’s on average spend $97.10 of all every $100 earned.

Credit cards fuel spending; consumers borrow from their future selves to spend today, in the hopes of having a higher income in the future. If rates on credit are low, the cost (interest) to the consumer to borrow today is less than if rates are high. This encourages borrowing. More borrowing, more spending, more transactions, more “growth”.

Below is a graphical representation of the relationship between interest rates and outstanding credit:

Screen Shot 2018-01-15 at 9.50.15 PM.png

M2 is the amount of liquid money available in financial markets, it’s clear that the government is printing more, and at a faster rate, than they used to. The best fit line is polynomial, not linear (with an explainability of 98.7%). Also, note the trend of the yellow data set. That’s consumer debt (boat loans, car loans, RV loans, credit card debt) owned by the US Federal Government.

Here’s that same graph less M2 and the Fed Funds Rate since 2007:

Screen Shot 2018-01-15 at 9.58.01 PM.png


Here’s who owns all outstanding consumer debt:

Screen Shot 2018-01-15 at 10.02.22 PM.png

Check the rift in 2010. This is the government absorbing the blow from 2007-08, through foreclosures. Notice how the US Govt’s share of the pie gets exponentially bigger every year since 2008.

The Federal Reserve of the US, a government sponsored enterprise, has the power to print money and buy securities (bonds) in the open market. The Fed prints money and lends it to the US Government through the purchase of US Treasuries. The government then takes said cash and buys your debt from the banks who lend you money; the banks receive a lower rate of interest than they would from you, but they also receive a guarantee from the US Government they they’ll get their money back. Your payments pass through your bank and onto the US Government’s bottom line. Theres a quasi-governmental agency that does this with Mortgages called Freddie Mac. And we all know how that worked out.

I posit that the growth realized by the US Stock market is fueled by debt, not “…profitability and growth”. There’s a storm coming, and we best be ready when she does.

Best of luck. Thanks for reading,

– Tommander

What I’m reading: The Money Game – Adam Smith


  2. Economic Machine – Ray Dalio –
  8. FRED –

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