Economic vs. Money Growth

Global PMIs are closely correlated with growth in the global money supply. So we asked our contributor network why this matters, and their answers range from fundamental, to techinical, to philosophical (thanks Sune!)

Economic vs. Money Growth

Growth is like Chicken.

It can be organic, free-range, antibiotic and hormone-free, non-GMO, etc.

Just clean, delicious, chicken.

Or, it can be an HGH fueled Franken-chicken that’s more lab experiment than Mother Nature.

Today’s economic growth appears much more like the latter, with Central Banks and Governments juicing growth reminiscent of the Sosa-McGwire home run record race in ‘98 (apologies to all our non-US based readers for that analogy, but you missed out on the greatest steroid experiment in sports history).

This month’s chart in question explores economic growth (PMI New Orders) and its unquestionable correlation to money growth (Economic HGH).

Thank you to Juliette of JDI Research for allowing us to use this one! And apologies to her for likely offending her French sensitivities with the baseball and chicken analogies. Viva La France!

Here’s what our contributors have to say about this month's “Why Does This Chart Matter?”

Darius Dale | 42Macro | @42macroDDale

  • Another fine chart here by JDI Research founder Juliette Declercq depicting the relationship between base money, broad money, and the global manufacturing cycle. The correlation varies over shorter durations, but the long-run cointegration of these variables is undeniable.
  • The latter dynamic is important to understand because even if global monetary policy dynamics remain completely unchanged over the next year – something we all know to be unlikely, as per inflation dynamics in the US and Europe – the YoY rate of change of both base money and broad money will decelerate sharply in the coming quarters. That implies we are likely to see a sharp deceleration in global manufacturing PMIs over that duration.
  • None of this is particularly new news to investors, as the buyside has effectively scrambled into defensive sectors and style factors in lieu of their cyclical counterparts over the past ~7wks. What is new news, however, is the growing realization that the COVID-19 pandemic is morphing into a variant-induced endemic, which likely delays full recoveries in services sectors broadly. In fact, we may never get back to 2019 levels of services sector capacity utilization – and why should we if commuting, business travel, and their associated economies are reduced by 30-50%?
  • All told, this chart is just one more reason for investor consensus to come around to @42macro’s 3mo-old bullish bias on duration in/across asset markets.

Danielle DiMartino Booth | Quill Intellegence | @DiMartinoBooth

  • Credit driven growth requires constant infusions of fuel or the engine runs dry. That’s where the world economy has been since 2017, the pre-pandemic record holder year for record global central bank liquidity.

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