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The following article was originally published on 23 November 2018.
It’s Thanksgiving in the US, so stock markets were closed overnight. However, European markets endured a nasty session, which will translate into falls for the local market today, especially mining stocks.
The ASX looks fragile here. I’ll explain why in a moment. In short, money supply growth is drying up…fast.
But first, let’s have a quick look at some other ‘money’ markets…
The bitcoin bust
The historic bitcoin bubble continued its deflation trajectory last week. As you can see in the chart below, it broke sharply below long-term support. It’s a very bearish move. Our best guess is that bitcoin will trade closer to US$3,000 by the end of the year…and hit bottom around US$1,000 by the end of next year.
That’s not to say bitcoin isn’t useful or that it’s worthless. In fact, it’s a brilliant innovation. The decentralisation of money is absolutely crucial in wrestling economic power away from the banking elite.
Centralisation concentrates power, decentralisation diffuses it.
But it’s still early days in the bitcoin experiment. Last year was the mania phase. For the next couple of years, it will be the reality phase. The bubble will deflate back to where it started.
This is the key to understanding it right now. It’s not about ‘the fundamentals’. It’s about the psychology of the market. And all those investors who bought on the way up, are now hurting on the way down.
The 20-something crypto millionaires’ audiences are dwindling.
Last week’s break below long-term support was a crushing psychological blow. It dashed investor hopes. Those who thought bitcoin was in the process of basing, before heading higher, were wrong.
So don’t try and rationalise bitcoin’s price moves from a fundamental perspective. It’s all emotion and sentiment right now, and will be for some time.
What about original money, gold?
Its recent performance has been far more interesting. As you can see in the chart below, gold hasn’t had a great 2018 either. It started the year strong, but then started to fall in April, culminating in a sharp sell-off in August…
But that looks like it might have been the bottom for gold. Over the past few months, gold has made a series of ‘higher lows’, which is a sign that the trend might be turning higher.
The next step is for gold to close above US$1,240 an ounce and therefore make a new short-term high. That would be a positive and suggest more gains are ahead.
The biggest threat to gold’s recovery is the ongoing US dollar bull market. So gold still has some work to do. However, it is coming into a traditionally bullish time of the year for gold. So the next few months will be crucial in determining whether we’re at the start of a new bull market or not.
Aussie interest rates heading lower
Moving on to phoney, state sanctioned money, and there is a good chance you will earn an even lower return on it next year.
As you know from the royal commission into bad banking behaviour, the banks are now clamping down on irresponsible lending. That’s leading to lower credit growth.
Housing credit growth has slowed every month this year. According to the RBA’s latest figures, in the year to September housing credit growth was 5.2%. That’s down from 6.2% in the year to January 2018.
Given the banks’ new-found zeal for responsible lending (at least while the spotlight is on), credit growth is likely to continue to drop.
The last time annual housing credit growth dropped below 5% was in 2012. This was a lagged response to a two-year interest rate tightening phase that saw the official rate rise from 3% in September 2009 to 4.75% in November 2010, and stay that way until November 2011.
But this time, you can’t blame the slowdown on interest rate rises. The market has simply run out of puff.
An even more concerning stat is the effect of this on the broad money supply. Broad money measures currency in circulation, bank deposits, and short-term debt securities that can be easily converted into ‘money’.
In the year to September, broad money supply growth was just 2.1%. That’s the lowest it’s been since the Aussie economy emerged from the early 1990s recession.
While we don’t know the exact cause behind the sharp slowdown, our guess is that it simply represents a slowdown in credit growth combined with an increase in outstanding debt repayments.
When you pay off debt, it reduces the amount of money in the economy. That’s because we operate in a debt/credit based monetary system. New credit/loans create money, debt repayment extinguishes it.
The fact that broad money supplied growth is now at the lowest point in decades tells you just how fragile the Aussie economy is. That’s why the stock market is struggling. It suggests a period of lower corporate profits ahead.
The RBA knows it too. That’s why in 2019, you should expect interest rate cuts.
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