Broken Relationships

This note highlights two key financial relationships that have recently broken. The first was golden for nearly 62 years and the other broke several years ago but few seem to have noticed.

Broken relationships are always emotionally difficult. This is equally true when an investor’s favored true blue financial or economic relationship stops working. Like in the real world, financial “relationships” – especially those which have been ‘money’ seemingly forever – break all the time.

In recent years, the inverted yield curve – a golden recession forecasting tool since the late-1960s -- no longer seems to be providing a reliable signal of a pending recession. After never being negative since it was first introduced in 1960, annual growth in the M2 money supply fell below zero for sixteen consecutive months beginning in late 2022. While never rising above $1 trillion before, the Federal Reserve’s balance sheet exploded to $9 trillion in early-2022 and still remains above $6.6 trillion. The U.S. has never experienced peace time Federal government deficit/GDP ratios as large as we have in recent years and total U.S. government debt to GDP recently surpassed 100% for the first time since WWII. U.S. household debt ratios have steadily declined during the last almost 20 years after persistently rising throughout the post-war era. The velocity of the U.S. money supply was historically fairly stable oscillating within a relatively narrow range. However, during the last quarter-century, monetary velocity has inexplicitly collapsed. Real corporate profit per job stayed within a tight range between 1948 to the mid-1990s but has subsequently tripled during the last 30 years. Finally, the most heartbreaking splintered financial market relationship of all – a definable and steady valuation range between 1870 to the mid-1990s – has shockingly trended persistently higher during the last three decades!

This note highlights two important financial relationships which have broken. The first was golden for nearly 62 years, before without warning or explanation, stopped working suddenly since the start of the contemporary bull market and the other key long-term relationship broke several years ago but few seem to have noticed.