Monday, May 07, 2007

More on Wall Street-U.S. Economy Decoupling

Michael Shedlock has an interesting post which after arguing the case for a recession highlights how it may come even in the face of continuing robust money supply growth. M3 is likely growing at more than 10%, and another broad money supply indicator, MZM, is up 8% over the last year and an annualized 11% over the last 6 months. This is of course one of the explanations of how bond yields can stay low while the stock market surges even though earnings growth is slow. Rapid monetary growth is prevalent not only in America, but also in most other countries except for Japan, which of course is why both stock and commodity prices have increased so much.

The rapid monetary growth is likely to mean two things with regards to the recession: first it will make it milder than it otherwise would have been at least in the beginning, although it is also likely to make a recovery later more difficult. Second, it implies that the recession will be a case of stagflation, not some Keynesian "weak aggregate demand" recession.

Meanwhile, while profits for large U.S. corporations have been much weaker than stock prices, they have nevertheless been positive, despite the deteriorating U.S. economy. The reason for this is found in this Bloomberg News story. Companies in the S&P 500 index received 48.6% of their revenues from non-U.S. sources last year, up from 30% as late as 2001. The reason for this is both the fact that slower economic growth and a falling dollar have decreased the relative importance of the U.S. economies and the increasing general globalization.


Anonymous Anonymous said...

Hi Stefan,

I read your blog regularly and find your analyses very logical and up to speed. I have many questions about the potential of a US recession leading to a global one. I read this interesting post by a Chris Laird that points to a probable china-led recession instead. What are your thoughts? The link to his post is


10:13 AM  
Blogger stefankarlsson said...

I don't see a Chinese recession coming unless the U.S. completely stops its imports from China or something similarly dramatic. While China has many distortions and excesses, underlying structural growth is so high that negative growth is unlikely. And while Europe is building up its own excesse, it will be some time before it reaches the recession stage of the business cycle.

3:55 PM  

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