Breathing in the madness
Spitting out the lies
Searching for an answer
Keep your alibis
Don't know where we're goin'
Just know where we've been
Remember when the clock strikes twelve
The losers always win
- Mitchell, Stanley (Kiss), 1982
The Bell Tolls
Walking. I was where I was not supposed to be. The area was off-limits to U.S. personnel. Poverty stricken streets. Think you grew up tough? I thought so too, until this day. These people don't have four walls. Don't have a roof. They stare at me as I cross their streets. Obviously American. My two shoes, and my clean clothes give me away. Thinking I'll be lucky to get back to the other side of town wearing my blue jeans. Of course, of all days, today... I'm unarmed.
I have no choice. It's Sunday morning. The only church I can find on the map is off limits. So, off I go. Nobody else would go with me. Scared? Smart? Both. I can see the church. I can also see the crowd following me in curiosity. Act cool. Stay cool.
The church bell tolls. It tolls, fortunately for me. Mass is set to begin. Right into that church I go, along with everyone else. Thank you, Padre. Maybe they all weren't really following me after all. Maybe they were. There would be no incident. The poverty I witnessed that day stayed with me for a lifetime. Nothing like that back home. Those people had faith though.
Perhaps You Noticed...
While you rested that block of cement mounted between your shoulders, the U.S. national debt clock whirled past $30T for the first time in history. Don't imagine we'll see that number again, as the last five or six digits on the clock are really just a blur. A deficit-based spending spree brought on by the pandemic and the economic shut down of the entire U.S. (and global) economies in early 2020, as well as restricted conditions and constrained results ever since have exacerbated a fiscal situation long left in the care of the highly irresponsible.
Does $30T matter? Will the debt or the budget ever matter? To the average citizen doing something else occupationally, it might not appear to. To the average trader/investor, it might even appear a positive, as both demand and future standard of living have been brought forward. Truth is that at some point, there is no more tomorrow to steal from, or perhaps it is that after we rob tomorrow and the day after, as well as the day after that, we will one day find that the day we have to rob from in order to prevent calamity is so distant that a crisis of faith or confidence in the current system, or in the current fiat occurs.
When will this realization occur? Impossible to tell. As long as all major central banks and governments play the same tune, that keeps all of your favorite reserve (or not quite reserve) currencies in some kind of parity. One day, let's say a day where the Federal Reserve, Bank of England, and Bank of Canada enter into a new trajectory of tighter monetary policy, while the ECB knows it should but just can't pull the trigger, and the Bank of Japan (and throw in the PBOC) are just dead set against anything but ever looser policy. What then? Is that when the real currency wars start?
It won't be pretty. Then again, neither are we. The U.S. "debt to GDP" ratio now stands at 128%. That's if one only includes federal debt, which we have mentioned just whirled by the $30T mark. Now, toss in state debt, local debt, household debt (mortgages, student loans, autos, credit cards), business debt and the debt of financial institutions, and U.S. total debt stands just short of $86.4T. Kind of makes worrying about $30T seem anti-climactic doesn't it? All of these borrowers contribute to GDP, hence all this debt must be included in the debt to GDP ratio, no? The "more honest" debt to GDP ratio now stands at 369%. Just an FYI.
It was with a sigh of relief that equity markets moved higher on Tuesday, as in this column 24 hours ago, I had found confirmation in Monday's data that markets had indeed encountered a positive change in trend. When pundits make such calls publicly, it is natural to hope one does not look foolish, at least not immediately. When said pundit actually plays the game, with his own skin, that pundit worries about more than just reputational risk.
The action started off a little on the sluggish side, despite extremely positive results posted by United Parcel Services (UPS) and Exxon Mobil (XOM) . The Institute for Supply Management released their manufacturing survey for January. The headline print still showed expansion even if the pace of said expansion was slowing. New Orders and Backlog of Orders are decelerating, but prices? Still getting hotter.
Elsewhere we learned that the world's largest ETF (exchange traded fund), the SPDR S&P 500 Trust (SPY) , with more than $413.4B under management, had suffered a rough $30B in outflows for January, its worst month ever, and experienced $6.96B in outflows on just Monday, the last day of the month, alone. Still, equities marched on. FWIW, Bloomberg News reports that for the month of January, the broader universe of ETFs attracted $23B in inflows.
On Tuesday, with the exception of the Dow Utilities, literally every other index I can find, closed in the green, led by the Dow Transports, and then the small-caps before we get to our major large-cap indexes. Eight of the 11 S&P sector-select SPDR ETFS shaded green for the session, with Energy (XLE) easily up the most (+3.56%), and Materials (XLB) , Financials (XLF) , and Industrials (XLI) all up more than one full percent.
Winners beat losers by slightly less than three to one at both of New York's primary equity exchanges. Advancing volume took 77.8% of the composite for NYSE listed stocks, and 77.2% of the composite for names listed at the Nasdaq. However, and we know that this can be important, at least it was on Monday... aggregate trading volume ebbed somewhat on Tuesday from Monday... for NYSE & Nasdaq listed names, as well as for stocks constituent to either the S&P 500 or Nasdaq Composite.
Does that mean that traders/buyers are becoming exhausted? Oh, it could. In this case, it may have meant that traders kept some powder dry going into the overnight, which would prove prudent as Alphabet (GOOGL) announced a 20 for 1 stock split, and Advanced Micro Devices (AMD) simply ripped the cover off of the ball. Treasury markets more or less stabilized (Our two focus spreads stopped flattening), while the index only put/call ratio relaxed a bit (closed below its key moving averages).
Trader's Note: Readers might notice that the author is long GOOGL in the disclaimer down below. Readers well know that I have been a long time investor in both UPS and AMD. The position in GOOGL may come as a surprise. That position is the result of overnight trading. I wasn't in the name at the time of the announcement, but shortly thereafter. Hence, while the position is certainly up this morning, the win is not of the magnitude that one might perceive if left unexplained.
Final Sign of the Apocalypse?
Perhaps I am just an ornery old man. Perhaps I was just far better when you could still hide in the dark and nobody could see your heat signature. Ahh, the good old days. According to MetaMetric Solutions, sales across the four top players in the virtual real estate world (you read that right) reached $501M in 2021, topped $85M in January alone, and could come close to $1B in 2022.
Virtual real estate, as Rob Lenihan explains at TheStreet, is made up of designated pieces of code partitioned to create individual plots within certain metaverse platforms, and are made available for purchase on the blockchain (as NFTs). The top players in the space, if interested, are Sandbox, Decentraland, Cryptovoxels, and Somnium.
I don't doubt that these are real assets. I am not a virtual asset skeptic. I am interested to see what extremely rich folks will pay for virtual real estate. I imagine that this will be their market and their market alone. Can not imagine anyone with middle to lower class problems showing any interest. They have mouths to feed, and families to shelter. In a real place, with four walls and a roof.
Question & Answer
As readers have become accustomed to, occasionally, I will answer a question publicly as a teaching/learning tool instead of privately through email. This morning we have one such question.
Hi Stephen: I've been reading your daily articles in Real Money for several months and really enjoy your insights. In those articles, you often refer to "velocity of money" as an indicator, but I don't think I've seen anything explaining why you think that one is important. Any chance you could drop a line about that into one of your articles sometime?
Excellent question. Sometimes I forget that we all did not grow up in economics and that most folks do something else occupationally. "Velocity of Money" is a reference to the average number of times that any single unit of currency changes hands in any given economy during a finite period of time. If velocity is rising, that means that transactions between entities (individuals, businesses, etc.) are occurring more frequently. Higher velocity is a sign that the same money is being turned over more often and is or has been seen as a key ingredient in higher consumer prices (inflation) at least since I've been around.
When velocity declines as it has pretty much since the cows came home, even during an expansionary period of both monetary and fiscal policy, the slowdown can (and will) offset the increase in money supply, possibly leading to disinflation, or worse... deflation. This is one big reason why developed economies have "gotten away with" the irresponsible policies in place almost relentlessly since the 1990's.
The Velocity of Money in equation form is quite simple... Velocity = Nominal GDP/Money Supply. It becomes confusing when one realizes that there are different definitions for money supply. To put it briefly, M1 money supply includes liquid money such as cash, and checkable money on demand. M2 includes M1 plus savings accounts, certificates of deposit, and money market funds. Today, when most folks refer to money supply, they (or at least I) mean M2.
Velocity as a seasonally adjusted ratio relative to M2 increased slightly (not enough to get excited about), from 1.115 for Q3 2021 to 1.12 in Q4 2021. Velocity relative to M1 did not increase for the fourth quarter. Here is what M2 velocity looks like since the turn of the century/millennium, taken from the St. Louis Fed's website. The shaded areas represent recessionary periods for the U.S. economy.
Economics (All Times Eastern)
08:15 - ADP Employment Report (Jan): Expecting 214K, Last 807K.
10:30 - Oil Inventories (Weekly): Last +2.377M.
10:30 - Gasoline Stocks (Weekly): Last +1.297M.
The Fed (All Times Eastern)
No public appearances scheduled.