Tuesday, July 29, 2014

The Chart That Will Scare You Out of Your Wits

ZeroHedge is running the chart below. It shows that after rising by 18.2% in April, the San Francisco housing market in May posted only a 15.4% Y/Y price increase: the lowest since 2012.

As long term EPJ readers know, I am not one to offer up casual correlations, and project out extrapolations from the correlations. There are no constants in the world of human action. Relying simply on correlations can be very dangerous. It has brought down many traders and firms, including Long Term Capital Management and those who held subprime adjustable rate mortgages.  However, I always look to see if there is a paraxeological way to explain a correlation. The bubbles pictured in the above chart all coincide with significant slowdowns in money supply growth. Austrian business cycle theory explains the praxeological reason why slowdowns in money supply growth generally lead to economic crashes. The money supply is starting to slow again. This probably explains the dip in San Francisco housing prices.

Money supply growth has become very erratic in recent months, but if the current slowdown continues,we are likely headed for another economic crash. In the EPJ Daily Alert, I am watching money supply growth very closely. Indeed, based on the method I use to calculate money growth, I have set a target slowdown rate for money growth that might be hit this week. If money growth comes in below the target, I will be advising in the Alert for  aggressive traders to start shorting the US stock market. (I have already advised investors to start liquidating long positions, except in one sector.)

Bottom line: We are in a very delicate time with regard to the stock market, real estate and economy, money supply growth must be watched very closely. We are very close to heading off a financial cliff once again. I am not sounding a full alarm warning just yet, but I am very close.


No comments:

Post a Comment