An Eye on M1, Cyclicals, and Junk Bonds: What Matters?

Rosenberg says "Keep an eye on M1", others watch Cyclicals, and still others have an eye on junk bonds.

An Eye on M1

The problem with this story is that it does not match the hype. Nor does M2.

Real M1 and M2

Watching M1 is Useless

If we are supposed to keep an eye on M1, it sure is not clear why. The dashed lines above so instances in which M1 growth turned negative and nothing happened for years.

I also added M2. It's equally useless.

Watching these monetary aggregates seems downright silly.

Cyclicals vs. Defensives

The chart shows the cyclicals vs. defensives relative performance line against the S&P500. The key point is that cyclicals drove the last leg of the bull market, hence why I say this is basically the market's Achilles' heel.

The cyclicals vs. defensives line takes the ratio of the equal weighted performance of cyclicals (materials, industrials, technology) vs. defensives (telecoms, utilities, healthcare). As this line seems to trend during the study period, I have added a linear trend line for analytical purposes (the indicator is stretched vs. trend also).

As you can see on the chart, it's been the solid performance of cyclicals relative to defensives that drove the last leg of the bull market. The extreme runup in the cyclicals vs. defensives relative performance line can unwind in one of two ways: 1. A bullish rotation: where the S&P 500 heads higher but defensive sectors take the lead; or 2. A bearish rotation: where the S&P 500 undergoes a correction/bear market, and defensives simply fall less than cyclicals.

Much, of course, will depend on the path of the economy, and I've previously shown how cyclicals vs. defensives tracks the ISM manufacturing PMI. So I think it's fair to say that this is going to be a key indicator to watch from a risk management and market timing perspective.

The above chart makes far more sense than watching M1 (but so does watching a monkey throw rocks at the moon). Yet, the timing is clearly problematic, even if the thesis has merit. Let's move along.

Junk Bonds

I added the solid red line and the red box. There was a huge divergence in 2015 that did not amount to much. But the warning was accurate. There was a pullback in stocks and stocks did blast higher when junk bonds recovered.

If junk bonds remains weak, the stock market is highly likely to follow.

Watching junk bonds is an idea I have stated many times over the years. The above chart highlights the setup nicely.

Mike "Mish" Shedlock

No. 1-8
Salmo Trutta
Salmo Trutta

You don't use m1, you use "total checkable deposits". Then you apply the distributed lag effect, which has been a mathematical constant for > 100 years.

Economic prognostications are infallible. And secular strangulation is a math formula, one that explains the fallacious accounting. It was predicted in 1961.

Nobody talks about the velocity of circulation. It's one of the most important determinants of economic growth.

And nobody understands the mechanics of money velocity either.

It is not income velocity, Vi, it is a transactions concept, Vt. The transactions velocity, Vt, is an “independent” exogenous force acting on prices.

Most of this “S-Curve” dynamic damage (sigmoid function), was done by the first half of 1981, with the widespread introduction of new negotiable demand drafts, e.g., the effervescent “saturation value” of ATS, NOW, and MMDA accounts.

Thus, began secular strangulation. The decline in money velocity is identifiable. It is particularly traceable to the decline in savings put back to work (that produces financial perpetual motion). This is due to the preponderance of bank-held savings, funds that are un-used and un-spent, lost to both consumption and investment. Why? Because from the standpoint of the entire economy, the DFIs always create new money whenever they lend/invest. They do not loan out existing deposits saved or otherwise.

That is the error in Keynes' General Theory. In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term financial intermediary in order to make his statement correct.


Mish, isn't your dismissal of monetary aggregates a sin in the temple of Austrian Economics? You risk disbarment, surely!


Simon Ward at Money Moves Markets is the top banana at economic forecasting, he has real narrow money slowing rapidly across the world, even the US too. Achtung.


I appreciate everyone's attempt to predict the next downturn in the economy and/or the stock market. Personally, I am not much for trying to ”time” the market (though I admit to missing the crashes of 80, 87, and 2000). Historically, the number of ”up” years far outnumber the ”down” years. I prefer to use the same approach as well managed pension funds; diversify broadly, plan for the long term, avoid all the short term noise.


"I added the solid red line and the red box. There was a huge divergence in 2015 that did not amount to much."

The thing about indicators, is that under certain conditions they don't work. Everything is reaching an extreme. An extreme amount of U.S. corporate cash was sitting overseas. With Trump unexpectedly winning, a large amount of it was repatriated. More stock buybacks. The SNB was busy in the second quarter, buying major U.S. tech stocks, helping push the Nasdaq to new highs in 2018. The U.S. stock market is becoming a safe haven for those in an unstable EU.