The following chart shows the 10-year moving average of the natural log of M2 money stock times the 10-year treasury yield. I'm using the natural log so exponential growth is seen as a straight line.
Click to enlarge.
Note that there are two long-term trends in the chart and they are both straight lines. Technically speaking, the transition between the two represents an exponential trend failure.
Here is a chart of the data before the natural log is applied to more clearly show that failed exponential growth trend.
As seen in the chart, this "new and improved" modern economy can apparently only tolerate a continually expanding money supply *and* a continually declining 10-year treasury yield.
On the one hand, it was a therefore a mistake to enter the no-fly zone during the last 10 years. The attempt was shot down in flames as we entered the Great Recession. On the other hand, it was also a mistake to let the
price of oil rise so much. It helped us attain a Great Recession too. Can you say caught between Iraq and a hard place? Pun intended. Two mistakes can't make a right here, especially since both mistakes cannot be made at the same time! The Fed must choose one or the other.
M2 is currently $10,790 billion. It would therefore currently take a 10-year treasury yield of just 2.29% to hit the median of 5.51.
LN(10,790 x 2.29%) = 5.51
On that first hand again, any rate above 2.29% on the 10-year treasury risks making a similar mistake. And on the other hand,
there goes oil again. Is it any wonder that the Fed is
running scared today? Two mistakes! Must choose one!
“This FOMC edition feels less dovish than it does outright scared,” Mr. Green says.
I would suggest that the 10-year treasury could easily yield under 2.29% again in the not too distant future, or we'll die trying (recession). And if the price of oil rises more, we'll die trying anyway. It's only a matter of time.
The vast majority of
"financial experts" felt that
3% and higher was a sure thing. In sharp contrast, I was and am a long-term believer in
The Long-Term Death of Real Yields theory. It's just going to get harder and harder to make money off of money.
This economy continues to suffer under the illusion of prosperity. This is one of the weakest recoveries we've ever had and yet all I hear about on the TV is how resilient we are. It reminds me so much of the 2003 to 2007 era. Pardon my language, but
three more years of Goldilocks my @$$.
What will the next recovery look like if/when we enter the next recession during ZIRP? I'd say the odds definitely favor it so perhaps it is best to think up answers now rather than when it is happening. As they say, if one must panic at least panic first. And when might hindsight show was a great time to panic?
Hard to say. Nothing brings more illusionary confidence than a Fed running scared.
Once again, just opinions. This is not investment advice.
See Also:
The Inflationary No-Fly Zone
Source Data:
St. Louis Fed: Custom Chart
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