Stormy weather moving in?

February 17-23, 2024

Big news. After a fairly busy previous week, this week was quite quiet. There were the Houthis sank the first ship (actually a British one) in the Red Sea, the “bubble” in the US stock market intensified (see the last section of the Review), but there were no bright economic events. Taking into account the picture of the next section, it can be said that this is exactly what a normal, without excesses, development of events now looks like.

It can only be noted that on one day in the previous week (February 22), Nvidia added 277 billion – the most significant one-day increase in capitalization for one company in the entire history of world trading (the previous record was held by Meta at trading on February 2, 2022 – 197 billion) with more than 66 billion trading turnover (record). We try not to pay much attention to the stock market (its local changes provide little information about systemic trends), but, as will be shown in the third section of the Review, today the situation is changing.

Macroeconomics. German GDP -0.3% per quarter:

And -0.2% per year, 2nd minus in a row:

In other words, at the border of 2023-24, the German economy officially acquired a negative trend.

Israel’s GDP -19.4% quarterly “in annual terms”, excluding covid, a record decline in 30 years of observation:

Economic activity in Argentina -4.5% per year, including in the manufacturing industry -11.9%:

Foreign direct investment in China -11.7% per year, the 8th minus in a row and the worst decline since 2009:

This is a very serious symptom, although it is difficult to separate purely economic effects from US sanctions activity.

Production capacity utilization in Sweden is at its lowest in 7 years (excluding Covid):

The balance of industrial orders in Britain has been in the red for 19 months in a row:

Net engineering orders in Japan -0.7% per year, 10th minus in a row:

The number of pessimists in the Japanese manufacturing industry exceeded the number of optimists for the first time in 10 months:

Industrial PMI (an expert index describing the state of the industry; its value below 50 means stagnation and decline) of Japan has been at the bottom since the end of 2013 (47.2), not counting the Covid failure:

Assessment of the current situation in the German business climate (IFO review) is the worst in 14 years (excluding Covid):

Leading indicators in the US -0.4% per month, the 22nd minus in a row (there was nothing similar even in 2008/09):

Mortgage applications in the US -10.6% per week:

This is due to the increase in loan rates to 7.06%; however, this is still far from the autumn peaks (7.9%):

But this was enough for applications for the purchase of new housing (not refinancing) to almost reach the bottom in October:

Retail sales in Mexico -0.1% per year, 1st decline in 3 years:

New Zealand retail -1.9% per quarter, 8th negative in a row:

And -4.1% per year, not counting Covid failures, the worst dynamics since 2009:

Wage growth in Australia (+4.2% per year) is the highest in 15 years and only 0.1% from record levels:

It is possible that this is a sign of beginning inflation.

The key rate in China remained unchanged. But the 5-year interest rate (which affects mortgage rates) was cut by 0.25% to a record low of 3.95%. It is quite possible that this is an indirect sign of the authorities’ recognition of the emerging economic problems.

The Indonesian Central Bank left monetary policy unchanged, as did the Turkish Central Bank.

Main conclusions. There are already so many symptoms of the crisis that there is no need to talk about “individual” problems; we clearly have a global systemic economic crisis. Judging by the fact that the rate of its growth is not particularly accelerating, but is not slowing down either, this is precisely a structural crisis, the specificity of which is that it occurs at a constant, fixed speed.

The fact that the amount of negative information has become greater is most likely due to the fact that economic statistics are more political than a purely scientific discipline. Accordingly, the authorities are doing everything to prevent negative information from leaking into the public sphere. When the scale of a crisis exceeds certain indicators, we have to admit the truth, and this is exactly what is happening now. Many negative processes began quite a long time ago (we, for example, believe that the real economic downturn in the United States began in the fall of 2021), but information about them is only appearing in the public sphere today.

In fact, the real economic picture needs to be reconstructed based on the totality of all information. This is how we calculated that economic growth in the US in 2023 is a fiction (in previous reviews we explained in detail what economic parameters show this). But the question arises: how are the US authorities demonstrating this growth? The answer to this question is quite simple and we will give it now. First, let’s show a picture of the distribution of wealth in American society:

We see a clear increase in the incomes of the rich, interrupted twice, in 2008-2010 and 2020. These are well-known crises associated with the fall of stock assets and for this reason the growth of wealth is associated with an increase in stock market capitalization. And here we turn to the analysis of Pavel Ryabov, who most clearly described this phenomenon at the present stage.

Let us note one important circumstance: the fact that there is a bubble can be calculated on the basis of very simple data. But its scale requires special research, which can only be carried out by a very qualified specialist. In the meantime, here are Ryabov’s analysis:

“Madness has no statute of limitations and every time everything develops according to the same scenario.

That grandiose, stunning, monumental, unimaginable and enchanting idiocy that was formalized in the speculative AI of the rally does not even have historical analogues, but first things first.

It should be noted that every time there is a fundamental justification for the expansion of the bubble.

In 1924-1929, the fundamental justification was the technological revolution in the automobile industry, active industrialization (the first introduction of industrial clusters), the development of the oil and gas and metallurgical complex, the emergence of radio and the development of the telegraph, the massive emergence of construction companies, a boom in the commercial and residential real estate market.

In 1995-2000, the fundamental justification was active digitalization, the widespread introduction of computers, the Internet and mobile communications in industry, business, government agencies and private individuals. In fact, a technological revolution was being implemented in the IT segment – it was in the 90s that the IT sector received a parabolic takeoff, where new sectors of the economy were created, directly or indirectly related to IT

In both cases, the stock market’s rise occurred against a backdrop of outstanding economic success.

(And the source for such development was the markets of the former USSR and the issue of the dollar, notes from the Khazin Foundation)

Cumulative GDP growth from 1924 to 1929 (6 years) was 32.6%, and from 1995 to 2000 almost 27%, i.e. in the 20s the average annual growth rate of GDP was 4.8%, and in the late 90s it was a little about 4.1%.

Incomes of the population grew, financial indicators of business increased, the state budget was balanced, the economy functioned more than well, because real economic growth was higher than the rate of debt growth.

Over the 5 years at its peak in September 1929, the market grew 3.6 times, and over a comparable period in the 90s (during the dot-com bubble era) the market grew 3.4 times. Accordingly, the average annual growth in the 20s would have been 29.2%, and in the 90s about 27.8% at par.

In monetary terms, capitalization in September 1929 added about 94 billion (at its peak it was almost 130 billion for all public shares), and in March 2000 market capitalization was about 16 trillion with an increase of almost 11 trillion over 5 years at par.

From September 1929 to February 2024, prices increased almost 14 times, i.e. in February 2024 prices, the increase in capitalization 1925-1929 amounted to only 1.3 trillion dollars, and from March 2000 to February 2024 prices increased by almost 72%, i.e. taking into account inflation, the dot-com bubble of 1995-2000 added 19 trillion.

From the minimum of October 27, 2023 to the maximum of February 22, 2024, market capitalization increased by $10 trillion (in less than 4 months), while in February 2024 prices the increase in capitalization in the 1925-1929 rally amounted to 90 billion on average in 4 months, and the dot-com bubble had an average intensity of 1.3 trillion over 4 months.

The AI rally is more than 7 times more intense than the dot-com rally, adjusted for inflation.

In just 1 day, in the Nvidia rally on February 22, the increase in capitalization of the entire market amounted to $1.1 trillion, where Nvidia contributed 277 billion.

The last time there was a more significant increase in market capitalization was on December 1, 2022 (1.2 trillion), but this happened after a protracted decline throughout 2022.

Never before in the entire history of trading has the market added more than $1 trillion in capitalization in a day, being at its highs (previously, this happened to compensate for the collapse).

The bubbling scenario is the same:

• emergence of a factor causing excitement (technological revolution, as a rule),
• intensification of hype and mass involvement with a heightened sense of optimism and faith in a bright future (this time everything will definitely be different)

• euphoria against the backdrop of a disproportion between expectations and reality, when the rate of absorption of income and savings in the market is many times higher than their accumulation
• sobering up and severe collapse.

This time the difference is that the market growth is much stronger, the economy is not even close to the expansion phase, the AI factor is greatly overestimated, and the source of savings and income has already been reset.”

We have presented this type of data in order to show how much information needs to be analyzed in order to show the scale of the problem. Although the presence of the problem itself, as we have already noted, can be stated quite easily. In any case, despite the fact that the crisis that began in 2008 practically coincides in mechanism with the crisis of 1930-32, its apparent course is strikingly different. This is due to the fact that the crisis of that time, which led to the “Great Depression,” proceeded according to a deflationary scenario, while the current one occurs according to an inflationary scenario.

Then the collapse of bubbles (land speculation in 1927 and stock speculation in 1929) preceded the economic crisis; today the situation is reversed. Emission mechanisms made it possible to prolong the crisis process, but they seriously aggravated its scale. Which we have yet to see. However, the economic decline has already begun, the authorities hid it for about two years as part of statistical manipulation, but the result is already evident.

Theoretically, further events can develop within two scenarios. The first is that the US monetary authorities will try to contain inflation, and then a collapse of the financial bubble may occur this year. And the crisis will go into the “typical” deflationary version of the 30s, only it will be about 1.5-2 times stronger.

Or they can continue issuing, then the decline will occur against the backdrop of high inflation, approximately like in Russia in the 90s. Of course, the US monetary authorities will behave more adequately than the Russian monetary authorities of that period, but this will not change the essence of the processes.

However, there are still months left before the start of these events, so for now you can calmly relax on the weekends in order to begin preparing for all sorts of serious events in the economy on weekdays.