Juggling Dynamite

US lubricant consumption has fallen to the lowest level in at least 42 years, according to Bloomberg Opinion calculations based on data from the Energy Information Administration and reflects a cyclical slowdown globally. See The Lube that Greases the World Economy Says Beware 2024:

Wherever one looks, from Europe to the US to China to India, the message is uniform: The machines that power economic growth aren’t running as fast as they did in previous years. That echoes other indicators of industrial activity. JPMorgan Chase % Co.’s global manufacturing index has notched 14 consecutive months below the 50 level, which indicates a contraction. Diesel consumption has also weakened in many countries, another sign of factories slowing down.

Also, despite an ongoing war in the Middle East and an extension of Saudi/Russian production cuts, oil has fallen from $95 at the end of September to $76 this morning see Oil slips below $80 amid economic concerns, sufficient supply. US gasoline consumption per capita is also weakening (shown below since 1990).

This discussion offers insight into the origins of QE and what follows as fund flows reverse (QT).

Richard Werner, Professor of Banking and Economics at the University of Oxford, regarded as the “Father of Quantitative Easing”, discusses the future of monetary policy. Here is a direct video link.

Of course, it is not just quantitative tapering reversing cash out of the global financial system today. Central banks have also tightened overnight interest rates the most abruptly in decades.

The chart below (courtesy of Barcharts) plots the historical percentage change in the S&P 500 (left axis) from the first Fed rate cut to the market low with the duration in days (bottom axis). Here, we can see that the average stock market decline after the Fed started cutting its policy rate has been 23.5% over 195 days. Moreover, when stock valuations started the cutting cycle near historic highs (like now, 1974, 2001, 2007 and 2020), the stock market declines were in the 30 to 55% range while the Fed was aggressively easing.

More than a decade of near-zero interest rates spawned a generation of bonkers financial decisions. Now, we are in the reveal and clean-up phase.

Unlike fixed-term mortgages, other forms of credit quickly change with overnight policy rates set by central banks.  As shown below, since 1960, courtesy of the Daily Shot, non-mortgage interest payments now suddenly consume 4.5% of employment income–the highest share in 15 years. Inventory for sale is spiking across most assets as available credit and able buyers contract.

Home sales (in blue below) in the Greater Toronto and Montreal areas outright contracted year-over-year in October, while new listings (in yellow) have leapt in all major cities. See more in Fall housing market stuck in a low gear across Canada.

Prices are naturally moving lower as initial denial by owners and lenders shifts to terror and liquidation mode.

🚨🇨🇦 Have we hit the bottom?

🤯 Toronto sales have dropped for 5 consecutive months..

🏠 Inventory continues to grow… but where are the buyers? Scared, and many unable to qualify.

💰As we see prices come back to 2020 levels, how much lower can we go?

🙏 Let me know your… pic.twitter.com/jKrBwWkiEM

— Jason G. (@jasongofficial) November 7, 2023

Used vehicle prices in October were 18% below their 2021 peak (Manheim US Used Vehicle Value Index in red below since 1997). This is the largest drawdown on record, but prices are still 33% higher than in 2020.  Mean reversion is only started here.

Delinquencies and bad debts are mounting. It is hard to imagine the madness that has been. The segment below offers a taste.

Here is a direct video link.