Fed Z1: Time’s Up

Time's Up

The Fed Z1 dropped yesterday and it’s time for the quarterly update.

As a reminder: This data is three months in arrears.  For this reason it is necessary to look at trends to use it as an anticipatory tool, and you must further accept that being early is part of any analysis you may do using this tool.

But what’s here is very, very bad, and the pattern now apparent is nearly identical to that at the beginning of 2008.

First, let’s look at the benign — or apparently so:

Debt continues to rise, and the biggest growth area remains the federal government.  No surprise.

Debt-to-GDP has pretty-much held constant.  You can say it’s not getting worse, but that’s a one-dimensional view and is extremely misleading.

Let’s continue.

Note the sharp change over the last few quarters.  This is exactly identical to the sharp change in late 2007 and early 2008, even as the stock market maintained its cool.  

We all know what happened next.

We are now in approximately the same relative place compared to debt in terms of equity valuations that we were in 2007 before it all blew up.  And the worst part of it is that the violence of the last move was greater than the previous.  This augers for a potential collapse down to sub-700 in the SPX.

Do not believe for one second that as much as a 40% market correction is “unreasonable”; that wouldmerely intercept the credit and equity curves.  Which, incidentally, would be reasonably-arguable long-term stability on a historical basis.

Oh, and price tends to overshoot — in both directions.


No, your purchasing power has not kept pace.  In fact, what’s going to power this next move southbound is the same thing that powered the last one:

The consumer is falling behind at more than 5% a year, and they have been continually hammered without fail since the first quarter of 2010.  That’s three years of it and when you hammer on the consumer for long enoughhe eventually cracks.

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