There is no inflation... there is no inflation... there is no inflation

[jspiers]

Re: There is no inflation... there is no inflation... there is no inflation

Actually, what I get from that chart is that the Dow is highly correlated to the Margin Debt-to-GDP ratio. The chart is not simply saying that the Dow is a function of GDP alone, because if GDP rises but margin debt rises less than GDP, then the Dow would be expected to fall, not rise. Also, a correlation that so evidently holds over 60 years seems far more compelling to me than a correlation that holds over a few months/years. The question I'm left with is the degree to which Fed credit expansion translates into margin debt expansion.

[c1ue]

Re: There is no inflation... there is no inflation... there is no inflation

Actually, what I get from that chart is that the Dow is highly correlated to the Margin Debt-to-GDP ratio. The chart is not simply saying that the Dow is a function of GDP alone, because if GDP rises but margin debt rises less than GDP, then the Dow would be expected to fall, not rise. Also, a correlation that so evidently holds over 60 years seems far more compelling to me than a correlation that holds over a few months/years. The question I'm left with is the degree to which Fed credit expansion translates into margin debt expansion.

If the Dow is highly correlated to margin debt - the questions arises to what degree margin debt is dependent (or independent) of the Dow.

For example: I could correlate tire sales with car sales. They should show a high degree of correlation, but that's because it isn't a correlation, it is a causation.

Margin debt - which includes short sales outstanding - is it a correlation or a causation of Dow?

[bart]

Re: There is no inflation... there is no inflation... there is no inflation

The Fed is making no attempt to hide asset price inflation. To the Fed the above chart is a Mission Accomplished chart.

Bernanke has repeatedly explained in press conferences that the point of QE is to inflate asset prices.

The economic theory behind this, as I've explained in several articles, is that aggregate demand is partly a function of household balance sheets. If household balance sheets are growing then so is aggregate demand. As household balance sheets in the U.S. are predominantly stocks and bonds, if the prices of stocks and bonds can be inflated then household balance sheets will grow and aggregate demand will increase.

You chart shows that the strategy is working. The chart below shows the causation in more detail up to the point of "showing" an increase in aggregate demand -- not shown, for obvious reasons.

Indeed it is very much working, and being quite "well managed" too. I think it's one of the clearest charts that I've ever created, especially in showing asset inflation. Asset inflation is sadly completely ignored in the BLS calculation of inflation.

And the chart makes it pretty obvious who is in charge and how it's being created, in spite of the "creativity" of "economists" like Krugman.

Also per the Fed's Z1 report, deleveraging is virtually dead as the heavy black line in the chart below shows, so at least it's not something that the Fed can easily use to defend the incipient but false & temporary deflation meme dead ahead.







Here's the actual dollar totals, the black line grand total being level for more than a quarter or two.







And a similar chart to your household one, showing long term household net worth (not inflation adjusted, in order to show the "sentiment" effects) from Z1.

By the way, anyone notice what the Fed has been doing with excess reserves lately? The Fed will be whining about deflation presently as cover for the next QE or other monetary trick from the bottomless bag.

Future inflation wise, my own work on velocity roughly tracks the Fed' MULT ( http://research.stlouisfed.org/fred2/series/MULT ), which is showing that velocity has bottomed, although the more recent Fed MULT data shows the developing deflation scare:

And even excluding last week's very wild and very unusual spike up in M3, it has been growing quite substantially since about last October and is foreshadowing higher inflation ahead. But that will occur after the likely stock and housing correction also ahead which, as you noted and with which I agree, will allow more monetary tricks from their bag.



As an aside, IOR (Interest On [excess] Reserves) is one of the more clever ways that the Fed has of helping to support so many of the TBTF banks that are technically not solvent once everything (like off balance sheet assets) are included - almost +$14 billion so far.
Even just 1/4% interest on trillions adds up to "real money" quickly.

[bart]

Re: There is no inflation... there is no inflation... there is no inflation

Actually, what I get from that chart is that the Dow is highly correlated to the Margin Debt-to-GDP ratio. The chart is not simply saying that the Dow is a function of GDP alone, because if GDP rises but margin debt rises less than GDP, then the Dow would be expected to fall, not rise. Also, a correlation that so evidently holds over 60 years seems far more compelling to me than a correlation that holds over a few months/years. The question I'm left with is the degree to which Fed credit expansion translates into margin debt expansion.

It is indeed correlated and useful, although it usually has a lag as one would expect, since investors only react to drops or increases in the Dow in hindsight. Here's a slightly different picture, just tracking the credit portion of margin against the S&P 500.







But margin debt is not as causative as something like massive money creation from the Fed. Margin debt is more of an effect than a cause in my opinion, while still being useful to help in confirmation etc.


As far as your point about long term history, you're of course correct. But I submit that it has been quite key for years, roughly since the start of the financial crisis. The effect can easily be seen as starting in mid/late 2008 in this one off chart, so it has been going on for over 4 years. It also has a small lag lately, since the Fed is far from prescient.






There are also other Fed charts that I have that show the Fed's effects on stocks etc. over the decades, since the Fed does change their tools and emphasis over time, especially since the financial crisis and again since the 2000 stock market peak.

[charliebrown]

Re: There is no inflation... there is no inflation... there is no inflation

Thanks EJ. If we get any more "deflation", I'm going to have to find a weekend job to make ends meet.

And btw how does asset inflation work long term?? As long as everbody is a net buyer and holder of say a stock, the price can stay the same or rise as the
"desirability index of stocks to cash rises" but once I say "hey, I need a new garage door", and have to sell some stock what happens. What happens when
my neighbor does this and his neighbor and so on, and so on ... do this? Seems to me stocks down, real stuff up.

[Forrest]

Re: There is no inflation... there is no inflation... there is no inflation

Hum, this looks interesting..... but who are these 25 non-guests lurking in the forums.

Why not just sign up?

I also question the hundreds of people who read the articles here and never comment. I assume some can be explained by not wanting to post due to being in "learn" mode over "contribution" mode but that leaves a large percentage of people that I still wonder who they are......

Are there hundreds? I mostly see the same names when I'm on, and I don't say all that much...I have very little to teach, and oh, so much to learn!

[ProdigyofZen]

Re: There is no inflation... there is no inflation... there is no inflation

Are there hundreds? I mostly see the same names when I'm on, and I don't say all that much...I have very little to teach, and oh, so much to learn!

Well right now there are 57 people viewing this thread and 27 of them are "guests" and yes there are hundreds.

[jspiers]

Re: There is no inflation... there is no inflation... there is no inflation

If the Dow is highly correlated to margin debt - the questions arises to what degree margin debt is dependent (or independent) of the Dow.

For example: I could correlate tire sales with car sales. They should show a high degree of correlation, but that's because it isn't a correlation, it is a causation.

Margin debt - which includes short sales outstanding - is it a correlation or a causation of Dow?

Yes I agree, correlation is not causation. But it seems kind of obvious, at least to my mind, that borrowing money to buy stocks (and as you point out, to short stocks, though surely to a much lesser extent - I don't have the numbers to prove it of course) would naturally lead to a rise in stock prices.

[jspiers]

Re: There is no inflation... there is no inflation... there is no inflation

But margin debt is not as causative as something like massive money creation from the Fed. Margin debt is more of an effect than a cause in my opinion, while still being useful to help in confirmation etc.

I am perplexed by the above statement, mostly because I consider taking out margin debt as money creation. I know this may be controversial in these parts, but in terms of their impact on demand, money creation by the Fed and "money"/credit creation through lending/borrowing from a financial institution are one and the same. I'm pretty sure this is the argument that Steve Keen (among others) would make. The few trillion of fresh dollars created by the Fed since 2008 are all for nought if credit is contracting at the same pace (or faster). On a related point, it is my understanding than the primary (and unstated, of course) function of QE is not so much to expand the money supply as it is to supply collateral to TBTF banks knee-deep in bad derivative exposures. But I only half know what I am talking about when I delve that deep into the plumbing. ;)

[vt]

Re: There is no inflation... there is no inflation... there is no inflation

Financial assets are inflating.

Global economies already in recession (much of Europe), starting into recession (Germany, China?), or may start to tip into recession (U.S.)

Commodities acting like a depression is imminent.

Something has to give:

Commodities go back up

Stocks correct some to reflect commodity drop

Currencies? Rolling depreciation would seem to cause commoditiy prices to start to go up, but global demand too weak for now.

Looks like we're in long term KA doldrums.

[bart]

Re: There is no inflation... there is no inflation... there is no inflation

I am perplexed by the above statement, mostly because I consider taking out margin debt as money creation. I know this may be controversial in these parts, but in terms of their impact on demand, money creation by the Fed and "money"/credit creation through lending/borrowing from a financial institution are one and the same. I'm pretty sure this is the argument that Steve Keen (among others) would make. The few trillion of fresh dollars created by the Fed since 2008 are all for nought if credit is contracting at the same pace (or faster). On a related point, it is my understanding than the primary (and unstated, of course) function of QE is not so much to expand the money supply as it is to supply collateral to TBTF banks knee-deep in bad derivative exposures. But I only half know what I am talking about when I delve that deep into the plumbing. ;)

Fair enough. Margin debt sure can be "money creation" in my opinion. It's just another variety of credit.

But the amounts are quite small when compared to M2 growth, which has gone up about $3 trillion since January 2008. Total Z1 credit has gone from $49.5 trillion in 2008 to about $55 trillion now, another $5.5 trillion. Federal debt has also grown about about $7.7 trillion during the same period. All three of them are at all time record highs.

NYSE margin debt is up about $40 billion since 2008, not even close to 1/10% of the others, but still valid credit/money creation.



Part of the overall purposes of QE in my opinion is indeed to "save the banks", but it can't avoid expanding the money supply too. Complex area and lots of room for "large nuances"... aka different viewpoints. ;-)

Originally Posted by bart But margin debt is not as causative as something like massive money creation from the Fed. Margin debt is more of an effect than a cause in my opinion, while still being useful to help in confirmation etc.

Hope that helps to clarify my views on why M2, Z1 credit and Federal debt are much more of causative elements than margin debt, especially give the deleveraging charts from earlier in the thread.