At a time where, with the higher interest rates and money coming out from quantitative easing, which we’re seeing reflected in the m two, how is it that the stock markets are continuing to soar like this? Well, hello there, my friends. Chris Marcus here with you for Arcadia Economics as we get closer to a whole bunch of, of financial events that are coming up, especially in March, although some of these, I guess, will be a little bit later throughout the year, one of which I know people had been talking about interest rate cuts in March that is largely priced out with now, believe it or not, speculation of whether we’ll be seeing an interest rate hike before an interest rate cut, which certainly was pretty unexpected even a couple of weeks ago, last week’s CPI perhaps changing that a bit.

But fortunately, to dig through all these things, I have dear friend coming back on who is Greg Crennan from Golden Coast Consultants, also writes the Coastal Journal, has a great handle on a lot of the inner machinations of the Fed and how that is affecting things in the market. So especially at a time where, as we’ll dig into a lot of things, we’re seeing perhaps not as straightforward or coming across as a little counterintuitive to what we might expect.

Greg, it’s great to have you on here to try and unravel some of these things. And how are you doing today, sir? Great, Chris. Thanks for having me. I’m excited to kind know, go over some macro stuff and kind of go over where markets are and where possibly they continue to go here in the future. Well, I appreciate that. And we’re going to have this posted tomorrow. So who knows? We could have some new all time records in the stock market between now and then.

First thing that I would love to start with is something that I saw a couple of days ago. Here we have m two money supply contracting at levels last seen during the Great Depression. Obviously not the ideal comp that you would like to see when we’re talking about some of these things. Yet I think something that has been perplexing to a lot of people who are looking at this is that we’re seeing m two decline, yet at the same time we have stock markets almost daily hitting new records.

Here is the Dow Jones, up to 38 and almost a half thousand again back at the depths of COVID was in the low 20s, even here back in the beginning of 2022, 28,000 or so. So quite a move. Similar case with S and P. But how does that reconcile at a time where with the higher interest rates and money coming out from quantitative easing, which we’re seeing reflected in the m two.

How is it that these stock markets are continuing to soar like this? Yeah, great data that you point out, Chris. So first off, m two money supply is the broad base money that’s out in the economy right now. And so when you look at the total dollar amount of the m two money supply, it’s really only about 20. I think it’s at 22 trillion. I haven’t forgot what it was the last time I checked it at, but it has declined on a year over year basis.

But if you pull back that chart up, you can see that there was the massive increase from 2020 when everything was going on due to the virus. So you had that massive increase. And we increased money supply from that March low by almost, was it almost by 30%? And if you actually look at the CPI price index, prices across the board basically have risen 30%. But I think reported on the CPI by the BLS, it’s around 21%.

So you can see that the prices of goods have basically increased in line with the massive increase on the money supply side. Now, when looking at it well, how can the stock market be rising if the money supply is declining? And that’s because our stock markets aren’t just correlated to m two. And also the size of the stock market today is closer to, I think, 45 trillion, somewhere between 40 and 45 trillion.

So the stock market index is worth more than the total m two money supply out there. And so the m two money supply, as far as stocks goes, may not be the best indicator on why one is going up and the other. The other part is that the Fed has created the bank term funding program, which started last March. We actually was with you last March when the Silicon Valley bank crisis was ongoing.

And I said that this BTFP is going to be providing liquidity to the markets. It was actually going to be worse than QE because the BTFP, or the bank term funding program was actually giving 100 cents on the dollar for all the toxic assets that the banks had. So, for example, if a bank originally spent $10 billion on bonds when interest rates were lower, say around 1%, and then those values value of those bonds declined by, say, 50%, they’re really, instead of worth 10 billion, they’re worth 5 billion, the Fed says, hey, we created this program and we’re going to make you whole, basically 100 cents on the dollar.

So instead of losing 5 billion, you now hold that extra five. And then what happens is the banks had to do something with that money, and so that money has gone through a speculative mania since last March in equities. Now the other part to it is you, you know, why is our stock market at record highs? Now a couple of other things. The zero date expiration options have caused a massive mania.

If you actually look at the Footsie index and like China’s markets, those stock markets have not been hitting record highs. The footsie, which is the european stock market, does not have zero date options expirations. And so if you looked at their markets, they aren’t really reaching record highs or at a level that the US stock market has. And the ECB has actually said that the zero date options that have taken the US stock market by mania over the past year, year and a half may actually cause systemic risk.

And actually why Europe hasn’t approved the zero date expiration options in their markets because they’re worried about the underlying risk of causing asset bubbles and systemic risks to possibly downside in the future. All right. And certainly not something that seems to be too much concern about here, even if maybe there should be. Although Greg, in there, you mentioned another thing that I was hoping to touch on today, which was the BTFP program now a couple weeks away from the expiration of that.

And I will pull up the, have the chart of that in here somewhere. I’ll get that up. Although obviously that’s something that people have been wondering how this goes when it expires. But curious what you’re expecting in, I believe it’s March 11 when that program comes to an end. As of right now, it’s supposed to be March 11. That is correct. We’ll see if it changes. But that’s the information that we all have.

And so the banks are going to be, we already know the banks are in trouble. There’s a commercial real estate that everyone knows. It’s not even a black swan because everyone knows about it. The banks have tons, like somewhere around 700 billion in unrealized losses. I think just recently, last week I forgot the amount, but actually now there’s an increase in bank outflows again. And so the banks are definitely in trouble and their profits have been taken hit.

I think when they reported Q four earnings, I know, quote unquote, the articles will say they all beat, but a lot of their revenues and profits are down not only on a year over year basis, but basically over the past two years. And so the beat by the media has caused the banks to hold up pretty well. But if you actually look at their balance sheets, you could see that they’re not in good shape at all.

So I still think that the banks are very risky, especially when this goes away in March. Those problems will probably rear its ugly head again. Yeah, I think that’s something that a lot of people have been concerned about, and so far, we have not heard any comment to the contrary from the Fed. So I think I was hoping for a different answer, that you may have found some way that it doesn’t look as it appears to look yet.

Certainly something to keep an eye on in a couple of weeks. Now, at that same time, as I mentioned earlier, we’re hearing now speculation of perhaps the next move by the Fed would actually be an interest rate hike instead of a decrease. Was interesting last year when the Fed launched the BTFP program. Even in the midst of all that was happening, they did continue with the interest rate hikes back then.

So I guess we can’t rule that out of the range of possibilities, although do you think that’s something that is actually likely, and how does that factor all in if we see that around that same time frame? No, absolutely. So this Fed has been very commutative and have never surprised markets under Jerome Powell since really 2018. And so I think that there is possibly a chance they would raise again.

But I think maybe it would be more of a talk of raise to maybe calm down speculation in the financial markets. Because if you look at what happened under Greenspan during the tech bubble, is that they were actually saying a soft landing was going to happen in end of 99 and that they were expecting rate cuts in 2000. And as the market was pricing in rate cuts, inflation reared its ugly head, and inflation actually started to reaccelerate, just like we’re starting to see now.

And so Alan Greenspan at the time said, listen, we need to get this inflation in check. And so they decided to actually raise the interest rates from five and a half where they are today, to over 6% to tame and kill inflation. Well, those were very similar things that are happening today, and I can never say never, especially when we’re dealing with such bad inflation that the Fed should be doing something more, in my opinion, to stomp it out, because now we’re going on year four of inflation.

And so compounding the loss of purchasing power for people who have not kept up with inflation over the past four years is really having your boot on the back of the american population. I wouldn’t rule it out completely. I also think it depends on asset prices. And so back in 2000, in some of the old articles, they used to question the stock market tech bubble. Tech bubble 1.

0 and saying that Alan Greenspan was deliberately going after lower stock prices, or also known as the wealth effect. And because stock prices were rising at the time, at the peak of the tech bubble, it caused inflation to continue to run rampant. And so they talked a lot about the wealth effect during the tech bubble 1. 0. And I think that the wealth effect also has caused inflation to stay stubbornly above average.

I mean, the target is 2%. We’re averaging around 4% right now. So that’s 100% higher than what the Fed is targeting. And so I think that wealth effect is driven because like you just said, the stock market is at a record high. So people who have 401, their net worth technically is at a record high. And so home sales have come down. But by certain indexes and a lot of media headlines, they’ll say that real estate is at a record high.

So you still have these wealth effects that are ongoing, which is causing, and if you look at where spending is, it’s mainly in the goods and services sector, as discretionary items like iPhones have collapsed. Home depot just came out with earnings, their revenue is down. And so a lot of the discretionary goods where people, when they have extra money, spend on things they don’t really need, but where the money now is being spent is in restaurants and bars.

So most of the inflation is where people want to go out and have a good time. And that will probably stay elevated until the Fed gets probably the labor market and tighten that labor market a little bit because people feel like as long as they have some sort of income, they would rather spend it on food and alcohol and going out with family and friends than on things like, you know, we’re starting to see that dynamic shift happen.

And usually, and really always, services is always the last sector to get pulled under as the Fed tightens the rates, basically. Yeah. I guess it could lead someone to start drinking as the Fed finagles their interest rate cycle. Know, Charlie Munger and Warren Buffett used to have or had a saying, know, the Fed is supposed to take away the punch bowl at the party. So right now, America is mainly still at the party, drinking from the punch bowl and going out having a good time.

And that’s causing the prices to rise. And it is the Fed’s job to pull it away when we’re having too much fun. So that was one of their quotes that I paraphrased. So give credit to them when they said that, came up with that. Well, with that said, do you think that we still see the interest rate cuts that market has throughout the year had largely priced in, still being priced in, and we see 1234 cuts priced in by the end of the year.

Do you think that that is likely to actually occur? I think that if we don’t have a major downturn event like a 2008 or a 1987 or a 2000, that we may get no rate cuts this year. And so basically, the only way that the market is going to be getting rate cuts is if unemployment unexpectedly shoots way above 4%, 5%, which is what happened in 2008. Inflation actually started rising in 2008 and unemployment started rising in 2008, and then it wasn’t until the fall of eight where everything just came crumbling down and then inflation stopped going up.

And so I don’t think that the Fed will be cutting the interest rates because the deficit that we’re running today is massive and that money printing, the quantity of money is still being issued out. So we have less tax revenue in the economy and the government is substituting that up by running these massive deficits. And so I don’t think there’s going to be much progress on inflation. So unless there would be more bank losses, whether it be in the commercial real estate or a bank that has massive unrealized losses, that causes more of like a Silicon Valley bank last year that then spread into five other banks, that I don’t think that we’re going to see any rate cuts.

And there could be possibly more talk from the Fed that if inflation stays at this 4% or even starts to go even higher, that, yeah, they may have to raise the rates. And even one of the most dovish Fed from Atlanta, Fed Bostic, he said that he’s only pricing in two rate cuts. And that’s like at the end of the, you know, maybe if inflation starts to come down more meaningfully, but I doubt we’re going to get four unless some sort of major catastrophic event happens this year.

Basically, yeah. Although as you outlined earlier, we might not want to entirely rule out the possibility of that happening. Especially. We’ll see what happens with the banks. One other thing that I was curious to get your opinion on. We have over $7 trillion of us debt set to be rolled over this year, and certainly in the past year, especially as rates have gone up and there have been losses on a lot of that debt, and we’re seeing deficits and the debt load just continue to grow at a rapid pace, leading some to wonder if we’re getting closer to the point where there’s some sort of issue in funding the debt.

With everything that you’ve just talked about and mixed together, are you concerned that we are nearing the point where something like that starts to become more of a possibility? It would. But realizing that the stock market’s value right now is, and I think you and I were talking about before the show here, the Buffett indicator, which is stock market to GDP, is somewhere between 100 and 8200 percent of the US economy.

And so when you look at the stock market, it’s double what the US GDP is. And so that’s a lot of money. And I think to me that’s saying that the stock market is overvalued. So if people start selling their stocks, which is somewhere valued over 40 trillion, and let’s just say they brought the stock to GDP ratio at 100, you’re looking at a 50% decline in the stock market.

And so if people are selling that money would have to go somewhere and say if they’re selling because they’re worried because of some sort of Cris, whether it be economic, geopolitical, et cetera, well, that actually may drive yields lower as people are more fearful or maybe not keep rates lower, but maybe keeps rate tamed where you don’t really see them rise, but you don’t see them fall. And so that’s definitely an interesting dynamic.

Also, when you look at the US interest rates, they are the highest in the world. And so out of all the other fiat currencies right now, the dollar is the one that yields you the most. And so that is another tool that we have versus why would someone exchange dollars for euro and get a less rate of return for an interest rate. And so that has another dynamic of least keeping a decent bid.

And after recent auctions, there have been pretty good. And so there’s always that fear that you have no one show up to an auction. But I think the greatest fear in my eyes first would be the stock market and that going no bid because of the rampant speculation and fraud that’s throughout the entire market. So I’d be first fearful of the stock market right now. I was fearful when bonds were yielding almost nothing back in 2020.

And I was saying that bonds are in a bubble and people were still buying ten year bonds at 1%, which is what the banks did. And now they’re insolvent. So it just goes back to what you can get for a real yield. Now, technically, the interest rate curve or the bond curve is somewhere between four and five and a half percent on the short end of the curve.

And so it is still inverted right now. And usually, I think actually this week it was like the ten and three spread is the most inverted it’s been since the data has been recorded. And that’s like 100 years worth of data. So it’s very massive. And what that’s doing is it’s cutting off the lending. And so how is that playing out in the real economy? Well, banks aren’t lending, which is causing their profits and revenue to decline, which is clear.

It’s in their reports if you break them all down. And one of the things that they lend for is for the real estate market. And mortgage demand is at record lows, I think, since there hasn’t been lesser demand for mortgages since the 1960s. So there’s no demand for people to go out and get a 30 year mortgage at today’s interest rate. So the real estate market is pretty much controlled right now.

The issue is that people haven’t really started dropping their prices. So people, because of all these narratives and stories, keep hearing that real estate is at these high valuations. And so the current market for real estate is overvalued. And now you’re seeing houses just sit on the market because there’s no demand. And so the current supply of housing, they think their house is worth x, but it’s really worth y, but they don’t know that because that’s not what’s being told to them.

And so prices haven’t declined significantly yet. They started to decline. I think somewhere some like ten to 15 of the major metropolitan areas are starting to see some serious price declines, especially like places like Austin, Texas, California, the tech bubble, San Francisco real estate is not doing well. You have Florida real estate now, kind of, which was very bubbleicious. Inventory there is starting to rise. And so the inventory rising and housing staying on the market longer is a clear sign that prices are too high, because you have that thing, the bid and the ask spread.

And right now the ask is way different than there is no bid on real estate. And so there goes back in the line, what you were saying about the m two contraction, because if you start selling more houses, that’s more people getting more money, because more loans are created. And so that contraction in the money supply right now is affecting the real economy, not necessarily the stock market.

Well, that makes a lot of sense. And another thing that I know has been on people’s minds, seeing the reaction in the real estate market. So appreciate you breaking that down and putting it in context. And Greg, perhaps just in wrapping up, you can let people know where to find you and certainly the journals that you’re writing that do a great job of breaking these things down on a regular basis when the data comes out.

I like that you explain the difference between the headline and the data that’s presented and a lot of the things that people might not necessarily think to look underneath the surface, which you explain. And perhaps you could tell people where they can find that. Yeah. So Golden coast consultants have started a news financial information source, the Coastal Journal, which is online. You can follow us on x. You can also, for our articles, go to our substac, the Coastal Journal, which has a direct link in our page on x.

This is where you can get the latest and greatest information on macroeconomic data, where you can really get a better understanding of what’s going on with the economy, separate from the legacy media that tend to push agendas and narratives that can end up hurting many people. And so the Coastal Journal’s mission is to give you the best economic data and breakdown without any type of biased opinion, just the facts and data for you to make your own decisions and help undiscover what people may not realize about what’s happening with the economy.

So someone who doesn’t have a PhD in economics can understand the basics of supply and demand and what’s affecting the markets as a whole. Yeah, well, you do a great job of not only explaining it, but explaining in a way that people can understand, which I know obviously with some of the concepts in the financial markets get quite complex and a little tricky to interpret. So appreciate you doing that.

And Greg, I might add, you’re also the first person I’ve heard call it X without the clarification formerly known as Twitter. So very ahead of your time, and certainly your writing is quite ahead of your time and think going to be helpful for people in the years going forward. So the link to the Coastal journal in the description field below, and Greg will certainly have plenty to keep our eyes on as we progress throughout 2024.

Amazingly, already almost done with two months into it, so should be a fun year, and we’ll have to do this again. But thank you, as always for joining me, and it’s always a pleasure to catch up with you. Always. And let’s see how things progress after the BTFP ends in March and see what the next Fed conference is and see if Powell either stumps out the speculation of possible rate hikes or even fuels it.

So, like I said, those are the two ways that I see rates going this year. Yeah, I don’t think he’ll stomp it out. He seems to have been reluctant to rule out any possibilities of not going further against inflation over the past two years. So we’ll certainly be keeping an eye on it. And soon enough we’ll have you back on and take it after a couple of months down the road and we see how it develops.

All right, great. Thanks, Chris. .

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