Saturday, November 24, 2012

M-m-m-monster Chart

M-m-m-monster Kill

A phrase from Unreal Tournament and Unreal Tournament 2004 used as an award for getting 6 kills in a short amount of time. The effects in the sound are the letter M skipping 3 times (hence M-M-M-) and the word Kill echoing three times.

On that note I present the following unreal chart. This one is going to require some explanation. It's one of the most complicated charts yet.

Click to enlarge.

1. GDP represents the goods and services produced during a quarter. Total credit market debt owed is how much total debt there is at the end of a quarter. I made an adjustment to align the two series. For any given quarter's GDP, I averaged the debt at the end of the given quarter with the debt at the end of the previous quarter.

2. Using that data, I then created two series. The first was a 10-year average of GDP and the second was a 10-year average of total credit market debt owed.

3. I plotted that data on the scatter chart you see above. Note that using the long-term moving averages has virtually eliminated all short-term cyclical noise.

4. For the bulls, I offer a linear trend line in red based on the data since the start of the great recession. Note that the correlation of the trend line is an amazingly precise 0.999. Most bulls no doubt feel very confident that the path will continue.

5. For the bears, I offer a 2nd order polynomial in orange based on the data heading into the great recession. Note that the correlation of the trend line is an amazingly precise 0.997. Most bears no doubt feel very confident that the path will continue. The data's been rolling over for decades. It's a bit hard to believe that the great recession permanently put a stop to it. Right?

6. Clearly the bulls and/or bears must be wrong to be so confident. They both can't be right. It's not possible to follow both trend lines simultaneously. That's why I added the zone of uncertainty to the chart. In my opinion, that's probably where the truth lies. Think of it as a consensus of those who are neither overly bullish nor overly bearish.

7. I've also added a "You Are Here" point in purple to show where we are right now. It does not use 10-year moving averages. Think of it is an indication of where the 10-year moving averages are currently being pulled. We're being pulled above the red trend line but that makes sense. It's what we would expect to see in an economic expansion. It probably won't continue when the next recession hits.

Here's where it gets really interesting to me. I became a permabear in 2004. I'm still a permabear. I think that it is likely that we'll fall somewhere in the yellow zone in the distant future. That said, I'd be bearish even if we stuck to the bull's trend line in red. Why? It's all in the bull's equation. To put it bluntly, that equation sucks.

GDP = 0.171 x TCMDO + 5.622

Our current GDP is $15.8 trillion. In order to double our nominal GDP to $31.6 trillion then our total credit market debt owed would have to roughly triple from $55 trillion to $152 trillion?

That's the best case? Seriously? Good luck on that theory!

I think things are going to get really dicey during our next recession. I can't say when that will be with any certainty, but I'm a very patient permabear. Unless you think the Fed has permanently put a stop to recessions, at some point initial claims will bottom and start heading back up again. We might already be there. Sigh.

I consider this post to be a rebuttal to this article. Bill McBride of Calculated Risk is not a doomer. I clearly am. One of us is wrong. I really hope it is me. In any event, I'm not about to swing for the fences with my nest egg. I have yet to have a single regret about any "doomer" decision I've made since the party ended in 2000.

1. I started buying I-Bonds in 2000 and I've been buying them in every year since then. Any regrets? Not even close!
2. I bought gold and silver in 2004. Any regrets? The only regret I could possibly have is that I wasn't enough of a doomer. They went parabolic in 2006. I sold for a nice profit. In hindsight, I could have done even better.
3. Any regrets over building a TIPS ladder instead of a stock portfolio? Definitely not!
4. Any regrets over going all in on one TIPS bond for my IRA in 2011 ? Definitely not!

And yet, here I am being thought a fool for being a permadoomer? I just don't get it. How much more evidence of long-term economic structural issues does the world need to see? It's just not physically possible for us to grow like we once did. How many more long-term exponential trend failures must I post? Sigh.

Source Data:
St. Louis Fed: GDP
St. Louis Fed: Total Credit Market Debt Owed


Stagflationary Mark said...

Keep in mind that I'm using nominal GDP here.

Nominal GDP could double due to inflation alone. I can't say it would do much to change my permabearish outlook though, especially if debt tripled.

TJandTheBear said...

How much have you had to drink tonight???

Stagflationary Mark said...


Are you implying that I am CUI (charting under the influence)? Hahaha!

In all seriousness, it's been a long time. I never acquired the taste for alcohol, nor coffee for that matter.

As a side note, I believe the alcohol aversion stems from a wedding I attended as a child. There were two "punch" bowls. I filled my drink from the first. It was punch. Tasted good. I went back and tried the second bowl. I took a big gulp. It was champagne. It did not taste similarly good to me.

I was old enough to know that I couldn't just spray it out. That was my certainly my first instinct though. I chose instead to swallow it.

Aversion Therapy for the win!

I wonder how much aversion therapy rules my life? I'm certainly averse to drinking a big swig of this "Kool-Aid". Some drinks are not always what they seem. I'm not willing to take the risk.

Stagflationary Mark said...

Drinking the Kool-Aid

"Drinking the Kool-Aid" is a metaphor commonly used in the United States and Canada that refers to a person or group holding an unquestioned belief, argument, or philosophy without critical examination.

If I am drinking the Kool-Aid then that would mean that I am wrong to be a doomster. It's certainly possible.

If I am wrong to be a doomster, then the odds I will be financially ruined will greatly diminish. Even as a bear, the better the economy does the better I will do.

I therefore honestly hope that I am wrong to think that the economy will continue to struggle over the long-term.

In sharp contrast, how many bulls can honestly hope that they are wrong about the economy's long-term future? Any?

Just opinions.

TJandTheBear said...

No kidding? Neither I nor my better half are coffee drinkers, too. Regarding alcohol, I average about one beer a day and a mixed drink maybe every few months; she doesn't do beer but maybe has a mixed drink once a week.

p.s.: I love CR but he's wrong.

Stagflationary Mark said...


Seriously? My best friends don't drink coffee either. I thought we were the last holdouts in all of Starbucks land.

What's your fluid of choice? By volume, mine would definitely be water. Go figure.

My girlfriend does her part to keep the average coffee drinking per capita high. MaxedOutMama does her part too.

Go for it, baby! Just slurp the precious, life-giving fluid down.

I was very amused by that comment!

I'm told that coffee tastes better with added ingredients like sugar and cream, but wouldn't that also improve the taste of filtered gym sock? Hahaha! ;)

To each his own. I have a few acquired tastes of my own. There was a time when I didn't like fish. I love fish now though. Perhaps there will come a time when I think the same way about coffee. I doubt it, but it's possible. Never say never?

P.S. I respect Bill McBride of Calculated Risk. His blog inspired me to start my own blog in 2007. I also think he's wrong about future prosperity, but I really hope that he isn't.

TJandTheBear said...

I used to be a serious Classic Coke guy, but now I'm all about the Dew -- Diet Mountain Dew. Water's second (although should be first).

TJandTheBear said...
This comment has been removed by the author.
Stagflationary Mark said...


That's interesting. I had a Classic Coke phase and a Mountain Dew phase as well (although not the diet version).

I also had a serious root beer phase, but my ex-wife pretty much cured me of that. She complained when I drank it. Aversion therapy!

I've been in a Dr. Pepper phase lately, but perhaps mostly because there was a coupon sale at Costco. That said, the Pepper phase is only about 2 cans per week I'd guess.

My big weakness is milkshakes. That's the #1 reason why I drink Ensure. It satisfies that craving without driving my weight up into the stratosphere, lol.

I generally drink many glasses of water per day, one 8 ounce bottle of Ensure (most days blended with frozen fruits to make a milkshake alternative), and a can of soda once every few days.

Every now and then I get into a Gatorade phase as well, but that's mostly if I do a lot of indoor stair climbing. Water just isn't all that satisfying if I'm really sweating.

And then there is hot chocolate. We're coming up on that season. I keep the house a "balmy" 67 degrees in the winter. I'll probably have a cup of that most days once it gets a bit colder outside.

Is it the best plan? Probably not. Am I going to change it? Nope. :)

Rob Dawg said...

Those of us on the lower curve look at debt and debt service as a permanent drag on the economy. The team of "the economy can be managed" and "we dodged a bullet" expect the upper trend. CR and Krugman are both wrong for the simple reason that their economic models do not account for bias drift in the reported data.

Stagflationary Mark said...

Rob Dawg,

I suggest that team "we dodged a bullet" should change its name to team "pinned down".

Often, a suppressed unit will lose organizational efficiency and morale if kept in that state for an extended period of time.

Welcome to The Great Suppression. Counting the dotcom bubble, we're 12 years in so far. Sigh.

Rob Dawg said...

The dot com bubble was the flashing neon sign "AMBUSH AHEAD!"

Fiat denominated debt is the danger. We cannot trust that money supply and value will be held in any relationship. Even a regularly diverging relationship. Makes me want to own more physical assets. The question is income assets that can be taxed or stores of value that don't produce returns but don't get taxed either.

oji said...

RD, like so many investment decisions, a bit of mix would likely be best (for risk management). I try, for example, using my limited resources to reduce my input needs by investing in things like fruit and nut producing trees/bushes, a vegetable/herb garden, good tools, a short-term treasury fund, paying down the house ASAP (our last debt), living close to work, developing handyman skills, dividend-paying stocks, a few good bicycles, some junk silver, etc...

Should be debt-free within 3-5 years, with modest income needs. We live on less than 40K as it is-- counting the mortgage as a cost-- but will be down to 20K within 5 years, if all goes well.

Oh, and I don't drink coffee or alcohol either.

Stagflationary Mark said...

Rob Dawg,

We all pick our poisons. Sigh.

Stagflationary Mark said...


Oh, and I don't drink coffee or alcohol either.

Starbucks must be very pleased to know we're the exception and not the rule! ;)

Scott said...

Ecellent analysis Mark! I'm with you on this one.

Stagflationary Mark said...


Let's hope we're wrong!