Home » Economy » A Tale of Two Charts: Are We 2007 America or 2006 Zimbabwe?

A Tale of Two Charts: Are We 2007 America or 2006 Zimbabwe?

by John Rubino on October 25, 2013 · 46 comments

The US equity markets are back in record territory, at least in nominal terms.

The last two times they spiked this way, the following year was pretty brutal. See the next chart, which tracks the S&P 500 and margin debt, the amount of money investors are borrowing against their shares of stock to buy more stock. The chart seems to show that when investors are optimistic enough to use leverage to invest in already-risky stocks, then the good times have pretty much run their course and something nasty is imminent. If recent history is our guide, it is now time to either take some money off the table or short the hell out of the big indexes – or whatever else you like to do when the market looks overbought.

Margin debt oct 13

But this conclusion is only valid if we’re in the same stage of the credit bubble as during those two previous sentiment peaks. In 2000 and 2007, to take just one measure of financial stability, the federal government’s debt was $6 trillion and $8 trillion, respectively, versus $17 trillion today. Plenty of other leverage metrics are also way up, indicating that the US is much further down the path of currency debasement than it was just a few years ago. So the question becomes: at what point does a quantitative difference become qualitative? When does the phase change occur? The next chart shows why this question is more than academic. In the early stages of Zimbabwe’s epic hyperinflation its stock market rose from 2,000 to over 40,000 in one year. Presumably a lot of indicators similar to margin debt were by then pointing to a blow-off top and screaming “sell” to students of history.

Zimbabwe

Then the market proceeded to run up to 4,000,000. What happened? The country ran its printing press flat-out and inflated away its currency, so the price of pretty much every tangible asset, when measured in Zimbabwean dollars, went parabolic. Since equities represent part ownership of companies, and most non-financial companies own tangible assets, their value went up as well. Not enough to increase in real terms (versus gold, for instance) but enough to make shorting that market a really bad idea.

So are we 2007 America or 2006 Zimbabwe? A lot is riding on the answer.

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  • Bill johns

    That’s an easy question to answer. Given that the US dollar is currently the world reserve currency, given that many important countries hold lots and lots of US Treasuries, given that the fate of the US economy is intimately tied to the overall global economy via US businesses having such strong ties to the international markets, given that loss of faith in the US dollar would lead to dumping of those US bonds, given that Obamacare is gonna hit a majority of the US population with much larger healthcare coverage than anyone expected and this is gonna dramatically result in far less cash to spend to boost the economy, given that consumer spending will inevitably lead to an increase in unemployment, given that the Fed will NEVER stop QE and with higher unemployment will probably increase QE dramatically which will lead to a further loss of faith in the US dollar and dumping of Treasuries, the answer to the question is obvious. I don’t have a clue. Just remember: Life is a dance, relax, enjoy and be ready for surprises.
    Bill

    • Dan

      Explain the results of the S&L failures and the Gramm, Leach, Blilely act……..on our banking system, yes unregluated capitalism does destroy free enterprise, and your so called free markets as there in no price discovery in fixed markets….Capitalism failed in the 20′s and then led to the depression and then to a regulated capitalim. When there was private capitalism we relied on JP Morgan to bail us out. Capitalism is only 300 years old and is not reliable in the aspect that it can keep the economy stable. Stop talking like a capitalist. You are at least a participant in capitalism. Learn what the word capitalist means…….

      • Bill johns

        OK, I’m curious. Given that I never mentioned or alluded to Capitalism in my comment, what did I do to earn being the target of your somewhat pointed reply?

        Bil

        • PaperIsPoverty

          I’m guessing he meant to reply to Dave Ziffer (below) but hit the wrong Reply.

          • Bill johns

            That fellow has a bright future! There are openings at the Fed or BLS for folks with his talent! ;-)

      • Sontauran Empire

        Stable? Pah! Nobody said it was stable. But it does create wealth, and is the only system to do so, save for feudalism, and that only provides wealth for the .01%.

      • fatman45

        Learn what the word capitalist means

        Take your own advice. Capitalism was already in the process of being destroyed in the 1920s thanks to the creation of a central bank in 1913. Prior to the creation of the Fed, whose purpose was allegedly to “stabilize” the financial system, economic downturns, while sometimes very sharp, were also short-lived. That is the way capitalism is supposed to work – the weak players, ideas, etc. are weeded out, and the good ideas continue. Thanks to the “stabilizing” influence of the Fed, that is no longer the case, and the weak are bailed out. The end result of this can only be disaster. Study Austrian economics, von Mises laid it out precisely as it is now unfolding!

        • Dan

          Capitalism in not producing the goods….because it has a high failure rate and causes what we call today depression conditions, as in inequality everywhere it goes and is not sustainable. Read a 21 st century economist like Keen and let go of the past theory that will never be instituted today due to the large population we now have in the world. What we are seeing is currency wars, and was starting in the 20′s because nations would not adhere to the rules of gold, and the never will and that’s why something like bitcoin may end up as another currency; it is taking hold in China now. You have to think outside of your little box that sits on top of those shoulders.

          • theblues77

            Its rude to post a slander like you ended your comment so I wont go there. Capitalism is the only system that produces personal wealth and the middle class. You dont offer an alternative after the jab at capitalism.

            Its not perfect. There will be crooks, etc. The goods that America used to produce have been offshored due to NAFTA, but they are still being produced. Its the intervention of the Fed that has caused all the problems like others have said as well as open borders.

            Let me say it again: Capitalism is not perfect but it produces goods and innovation and services even the most well run socialist country could even dream of.

  • pipefit9

    John, that is arguably the most intriguing and intelligent financial question that I have seen in a long time. My gut feeling is that the answer is ’2006 Zimbabwe’, if the choice is restricted to those two. We’re probably closer to Zimbabwe 2005, but that is a mere quibble in the bigger picture.

    Regarding your point on phase change and charting, it reminds me a financial blog I used to read on a regular basis. The author always had about 20 charts with analysis. Charts like the ones you show, as well as trade deficit, gold, dollar, interest rates, unemployment, housing starts, leading indicators, lagging indicators, etc.. The most thorough analysis of any blog I have seen. The dude predicted the 2008 crash. Problem is, he predicted it about every month.

    For all we know, the phase change has already happened and is invisible, except on that one chart that know one is posting, lol.

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  • PaperIsPoverty

    In 2006 Zimbabwe’s inflation rate was roughly 1300%, having more than doubled from the previous year’s 600% inflation. Unemployment was rising toward 80% and agricultural and industrial output had already collapsed by 25-50% and were still falling. We’re not there yet, and I don’t think it’s time for the Dow to head into the millions.

    At least one more plunge into the abyss will be required to justify the kind of QE that leads to hyperinflation, in my opinion. We’re still in Germany just after WWI, when prices were increasing at only half the rate that the money supply was, because the economy was in shambles & money velocity was low. The amount of money printing doesn’t matter until the new money starts moving around. I suspect the phase change is when velocity spikes (as it seems to have been for the Germans). It’s hard to see what’s going to get velocity going except some sort of massive stimulus that goes directly to the public– the proverbial money falling from the helicopter. But that could only occur out of desperation, during an extreme crisis.

    The idea that stocks might soon head into the hyperinflationary stratosphere strikes me as one of those “this time it’s different” rumors that accompany blow-off tops, similar to “the Fed’s got our back” and the idea that with Yellen in, stocks will never again have a major correction. I’ve no doubt that one day the Dow will be cited in billions, but at this moment in time I think it’s a risky notion that could lead people to stay in these markets too long.

  • Dan

    Unregulated capitalism destroys free enterprise and the supporting infrastructure as taxes fall from unemployment. It’s amazing how the MSNBC’s and the capitalists think tanks have convince a lot of the public to think like capitalists, when they are not, but merely participants in it.

    It has been around for only about 300 years but we still cling to it as if is the wholly grail of economic thought and dismiss anything else, and rail at keeping it in check.

    The capitalists are failing to deliver the goods and the government has failed to make sure they were.

    • DaveZiffer

      This is not unregulated capitalism, and in fact it’s not capitalism at all. Look back in history and you will see nothing like these kinds of cycles pre-1990. The US had something much more akin to “unregulated capitalism” in the 1800s and yet there were no financial events like this. What we are seeing here is government policy run amok during the final days of a collapsing empire. This kind of margin borrowing would be entirely possible without the Federal Reserve, which is basically an agency of the federal government, robbing the populace of all its interest income for the purpose of propping up failed government-sponsored assets. Capitalists do not print money and hence capitalists do not artificially manipulate interest rates to induce unwarranted borrowing. You’d better start studying and understanding who your real enemies are.

      • PaperIsPoverty

        These debates would be more fun without the oversimplifications and the insulting language. No financial events like this in the 1800s? The “Great Depression” once referred to the 1870s (and 80s– it lasted about 20 years), up until it was replaced in living memory with the 1930s. And it was brought on by over-speculation, inflationary expansion, and financial collapse, with a railroad bubble instead of a housing one.

        One economist says the classical economic definition of a “free market” was “a market free from monopoly power, business fraud, political insider dealing and special privileges for vested interests.” The way we protected against corrupt corporatism was through regulation. The classical term has been perverted to mean the exact opposite of what it used to. It’s like if we suddenly decided a “free society” meant one in which the police can do whatever the hell they want, and a cop-controlled media screamed about the evils of police regulation, with horror stories about the dangerous times we’d face if we attempted to limit police powers in any way.

        There are all kinds of crippling and unnecessary business regulations, often crafted to limit any start-up competitors from hassling the big guys, but that doesn’t mean any and all regulation is evil. I’ll give you one I’d like to see: a 10-second minimum turn-around time between buying and selling a security (or selling short & buying back).

    • Bruce C.

      There is a reason that Ayn Rand titled one of her books “Capitalism: The Unknown Ideal” There is so much confusion and misunderstanding associated with it. However, not unlike the US Constitution, it does imply and require that the market/people be educated, active-minded and proactive for things to work properly. That may be its only weakness.

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  • Bruce C.

    The only way I can see the US stock market going parabolic is if the US dollar starts to plunge in value, and I don’t see that happening any time soon mainly because other countries don’t want that to happen – yet.

    But I also don’t see the markets selling off either because I think the central banks would literally start buying stocks too. I don’t think there will be any meaningful corrections in the financial markets until the central banks become impotent.

    Besides, why is the US stock market the big focus here? I think the Japanese stock market is likely to explode first. With 3-times higher national debt ratios JGBs are paying one-third as much interest as Treasuries. Unbelievable, and yet indicative of just how complacent everyone seems to be about just about everything, and how far down the rat hole things may have yet to go.

    • pipefit9

      Agree with your suggestion that stocks might not be the canary in the coal mine this time around. Doesn’t look like it will be gold either, at least in the early stages of hyperinflation.

      We’re nearing the end of the Fall ‘shoulder season’ for hydrocarbons, and crude appears to be putting in a higher low. It might take some sort of energy shock to tip over the house of cards, like an unusually cold Winter, or an oil tanker on the bottom of the Persian Gulf, or maybe just the attrition of cheap oil.

      Most of our problems (at least those that weren’t self inflicted) started right around the time of peak cheap oil, 10 years ago. Every day that goes by means that there is less cheap oil in the daily production stream and more expensive oil. I believe that in less than 12 months we see a huge step up in retail and wholesale prices. This may not necessarily help the stock market, especially if costs go up just as fast as sales for most companies.

      • Bruce C.

        The bottom line is that the current global fiat money, fractional reserve banking and monetary system requires that the total money supply in the world must grow approximately 2% per year. That’s simply not happening through ordinary economic activity. Therefore, additional money growth ( also called “total aggregate demand”) is being created via deficit spending by governments and debt monetization by central banks. But without “normal” economic activity distortions and mal-investments result that will eventually destabilize the system. That’s where we are but it is any one’s guess as to how and when everything starts to fail catastrophically.

        • pipefit9

          Why does it have to fail catastrophically? I think it will, but it doesn’t have to. Why can’t they keep creating money out of thin air and buying up bad debt 4-ever? It is accepted that the fed has no exit strategy and will continually expand its balance sheet in perpetuity.

          It has already occurred to the World that sovereign debt is pretty much worthless and will never be paid back. But as long as interest payment checks don’t bounce, who cares?

          The planet is so heavily militarized, especially with new anti-ship weapons, a full scale super power war is pretty unlikely. Look at Syria, in terms of chemical weapons. You wouldn’t have seen a diplomatic settlement to a crisis like that 20 years ago.

          As we get into the early stages of hyper inflation, what is to stop them from saying, ‘OMG, hyper inflation will destroy the planet. We MUST all switch to IMF issued SDR’s'? Some Tea Party type says ‘no way’, so the next day the slizzards raise the price of gasoline from $20/gal to $40/gal. The day after that they get the go ahead to switch to SDR’s. (not my desired outcome, just sayin’)

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  • Dan

    Example: Germany has 2000 banks controlling 70% of the deposits while the UK has 5 and us 6 that control more than 70% of the deposits. The capitalists control to much of the wealth in this country and slowing the growth. Unregulated capitalism destroys free enterprise, period…………..

    • PaperIsPoverty

      But in the UK, it’s regulations that make it nigh impossible to start up a new bank, e.g. in 2008 only 7 new banks made it through the regulatory hoops and were approved to begin doing business. This is what I was saying in another comment, many of the regulations currently out there are designed to prevent small competitors from hassling the big cartels. Call it misregulated capitalism, not unregulated. Or just call it bankster corporatocracy, I think we could all agree on that? But what am I saying, there’s nothing ideologues on both sides hate more than the notion of common ground. God forbid.

    • nevket240

      ((Unregulated capitalism destroys free enterprise, period…………..))

      Oh God!! another Banana Republic Finance Minister.
      Capitalism is Free Enterprise you idiot.
      It is the “expert” regulation of business by ponzi scam Government wankers like you that ensure everything IS destabilised. Therefore ensuring their continued relevance and salary. Let the good prosper and the bad fail. THAT, you idiot, is capitalism. As close to a natural state of business affairs as human enterprise can get.
      regards

      • Dan

        US banks= ponzi scheme=depression number 2

      • PaperIsPoverty

        Several things make it nigh impossible for the good to prosper and the bad to fail, such as monopolies and cartels, or the biggest companies lobbying for laws written on their behalf, or the curious lack of prosecutions of large corporations even while the little guys are docked and fined for minor infractions. How do you propose to prevent this corrupt lack of competition if not through regulation?

        Of course, no one has seen a government by the people in generations, and no one even remembers the idea of fair laws, even as an abstract concept. In today’s environment it only makes sense to try to limit government and starve it of funds, but in times past there were some regulations which delayed the onset of the total corporatism / banksterism that we have today. When it comes time to rebuild we might not want to forget the very concept of a sensible regulation.

  • sculptor

    The USA is printing $2,000,000 every minute of every day, $1T /year on year. But how much debt is defaulting/vanishing every minute?…because that debt/money goes to money heaven-it vaporizes. What growth of economy/goods/products services justifies the left over extra cash printed? Who knows, thats all a complex system to manage…tuff to meter.

    the bigger question is when do people get pissed off and hate the dollar rather than greedily try to accumulate/ store wealth in the dollar? if they sell it cause its dropping, and the dropping starts it sellingdroppingselling……., and they start to spend it on anything/everything to quick turn bux into stuff………then we have a problem, cause there is SOOOOOOOOOOOOOO much $USD out there….there are more USbux than there is stuff to buy in the universe.

    Thats when ya wanna be in gold and silver boys…in land and cattle etc Good luck all, keep your butt hedged or you may lose it quick

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  • boohooboohooboo

    So, who made it out of Zimbabwe with wealth? How did they protect themselves?

    • pipefit9

      One of the downward forces was the confiscation of prime farm land from white farmers. Mugabe redistributed the land, but the new owners did not have the skills to operate modern farms, so a lot of wealth was destroyed in the exercise.

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  • SystemBuilder

    From 1945-1990, we did not live under capitalism. We lived under cold-war-ism. The Allies were on their best behavior to model “what a great thing” was capitalism. The united states heavily subsidized satellite countries with its military bases, and in return they traded oil in dollars as a “thank you” and did not attempt to overthrow the status quo.

    Starting in 1970 the Asian Tigers countries (beginning with Japan) said, “We have a right to export our way to prosperity by rigging our markets to destabilize and demoralize America. We will bury America by hollowing out all the jobs in America!”

    At the same time, the USSR dissolved and American captains of industry said, “Finally! We get to do what we love to do most, which is to screw the proletariat!”

    And that is how we got in the horrible hole we are in right now …

  • commonsensesd

    Capitalism with all its bad sides has made this world a much better place then it was any time in history. The alternatives all have a fate that ends in destruction.


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