Macro Charts for July 2020: Credit vs Equity Indexes

Here's the DJIA and QQQ versus TOTLL (Loans and Leases in Bank Credit, All Commercial Banks). You can see the market peaks in 1999 and 2020 clearly. What's notable is the market goes above the horizontal right around the time Greenspan warns of irrational exuberance. It also goes over right as volatility is about to blow up in February 2018. The "inflation lows" are in the early 1980s and 2008, the deflationary collapse at the end of a period of inflation.

This next chart is QQQ vs the Fed's balance sheet, WALCL. QQQ must rally about 32 percent to retake the horizontal.

My takeaway is stocks may lose value relative to credit creation in the coming years, assuming the relationship holds. An alternative is QQQ is basing and will break out to a new high, that QQQ will outstrip credit creation. This requires QQQ strengthening its intellectual property exposure towards efficiency rather than branding. Companies such as Apple could under perform in high inflation even if Apple beats companies with weaker brands, whereas a company such as Nvidia could climb as companies spend faster to beat rising costs.

Here's the ratio of gold to the Fed's balance sheet and TOTLL. WALCL doesn't tell us more than TOTLL: gold has been in a credit-adjusted bear market since peaking in 1980. The quick and dirty message is that gold is trading at 20 percent of its 1980 peak value relative to total credit. Gold would have to trade at $9,000 today to match the 1980 peak. For a more reasonable and more immediate target, for gold to hit resistance, it would have to rally to about $2170 per ounce.

What popped out to me was how the long-term gold-to-credit chart looked a lot like the U.S. Dollar Index, albeit with different dates.

Takeaway: if credit growth will accelerate here and CPI inflation also take off, then assets such as gold should experience turbocharged gains as they rise much faster than credit growth. An explosion in gold would require a much larger rise in inflation than seen in the 2000s though. Equities will underperform as they tread water or even decline relative to credit amid price inflation. However, if credit mainly flows back into assets such as stock, as has been the case from 2011-2020, then equities could still deliver large real returns for investors. It doesn't seem like a repeat of the past 10 years is coming if only because of the political volatility being generated.