Posts filed under “Federal Reserve”

The Return of M3

Last year, we lamented the passing of M3 reporting. This broadest of money supply measures had shown a discomforting increase in liquidity, far greater than what M2 was revealing. 

At the time of the M3 announcement, we suspected the Fed was attempting to cover their tracks, disguising an ongoing increase in money supply and an unstated "easing" in Fed bias. Since that time, we have learned: the Treasury Department was also adding liquidity — a duty they have assumed, in part, in addition to the same performed by the Fed. Indeed, based on the credit growth data Doug Noland published last month (October
Credit Review
), it appears that the Fed has – despite increasing
interest rates – actually eased over the last two years.

In light of all this excess cash sloshing around, we wondered what M3 might look like if it were still being reported.

Wonder no more:  We  have located 2 separate sources  for the reporting of M3. The first is Nowandfutures.com. As this article discusses, recreating M3 from publicly available data was relatively easy to do (to 5 nines accuracy).

As the chart below shows, M3 is alive and well and growing significantly. (A longer term M3 chart can be found here).

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M3 January 2003 to present
click for larger graph

M3b_1

Source: Now and Future

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Why is this significant? Well, M3 is growing quite rapidly, with the annual rate of change now over 10%. Prior to the announcement of M3′s demise, its growth was in the range of 3 – 7%.

Anytime a government agency stops reporting about their goings on, it should raise a few eyebrows. Now we see what happened once the reporting of M3 was killed — that measure of money supply spiked much higher — a rate of change that’s even greater than 10%+.

Funny how we alter our behavior when we think no one is watching what we are doing, isn’t it?

What makes this particularly egregious is that the broadest measure of Money Supply that is still "officially" reported — M2 — and its been flat for 2006 (as my pal LK likes to remind me all the time).

Have a look at this chart: 

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M2 versus M3 Money Supply Growth
M2m3

Source: Shadow Government Statistics

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This is a classic case of "ignore what they are saying, because what they are doing is speaking so loud:"  While the Federal Reserve has been reporting rather flat money supply growth in M2 (blue line), in reality they have been dramatically increasing the cash (red and blue line) available for speculation.

Hence, that sloshing sound you heard. They have been providing the fuel for the rally, the huge M&A activity, the explosion in derivatives — even the eye popping Art auctions are part of the shift from cash to hard assets. It is just supply and demand — print lots of lots of anything, and that thing becomes increasingly devalued. It works the same for cash as it did for Beanie Babies.

Its not just the increase in Money Supply that should be concerning to investors — its the misdirection about it. If Money Supply matters so little, as Fed Chair Bernanke has been out explaining to anyone who will listen, why pray tell has the Fed been working those printing presses overtime?

Given M3 increases, its no wonder the European Central Bankers laughed at the suggestion.

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William McChesney Martin, Jr., Fed  Chair from April 2, 1951 to January 31, 1970, famously described the role of Central Banks thusly:  "The job of the Federal Reserve is to take away the punch bowl just when the party starts getting interesting."

It seems the present Fed is not only NOT taking the punch bowl away — they are spiking it with alcohol. I am not looking forward to the hangover that’s to follow . . . 

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UPDATE: November 21, 2006 4:05pm

Our M3 discussion was picked up by WSJ’s MarketBeat:

Money (That’s What I Want)
David Gaffen
WSJ,  November 21, 2006, 12:55 pm
http://blogs.wsj.com/marketbeat/2006/11/21/money-thats-what-i-want/

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Sources:
M3 b, repos & Fed watching: Is M3 1 really gone?
April 25, 2006
http://www.nowandfutures.com/articles/20060426M3b,_repos_&_Fed_watching.html
http://www.nowandfutures.com/key_stats.html

Alternate Data Series
Shadow Government Statistics
Nov 19, 2006    
http://www.shadowstats.com/cgi-bin/sgs/data

Credit Bubble Bulletin, Financial conditions
Doug Noland
October 13, 2006
http://tinyurl.com/ymq8on

Category: Data Analysis, Economy, Federal Reserve

Yield Curve Says Probable Recession

Category: Economy, Federal Reserve, Inflation, Investing, Markets

Fed Official Says Bad Data Helped Fuel Rate Cuts, Housing Speculation

Category: Data Analysis, Economy, Federal Reserve, Inflation

Why 2006 won’t be like 1995

Category: Economy, Federal Reserve, Inflation

When Does the Fed Cut With the Dow at or near Record Highs?

Category: Economy, Federal Reserve, Markets

The Return of Goldilocks?

Category: Economy, Federal Reserve, Markets

Blog Spotlight: The Mess That Greenspan Made

Today we start a new series:  Blog Spotlight.

We put together a short list of excellent but somewhat overlooked blog that deserves a greater audience. Expect to see a post from a different featured blogger here every Tuesday and Thursday evening, around 7pm.

First up in our Blogger Spotlight:  Tim Iacono and The Mess That Greenspan Made. Tim is a software engineer in his mid-forties, living in Southern California. He calls his blog is a "vain attempt to stave off a mid-life crisis, and here’s hoping that it’s going to work."

Tmtgm

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Today’s focus commentary is called Friends in High Places? and it address the controversey we discussed last week.

 

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Friends in High Places?

Life is always much more fun when there’s a good
conspiracy theory to kick around. When the New York Times starts kicking it
around too, then it can really be
enjoyable.

Such is the case with the recent plunge
in the price paid for gasoline by formerly dour consumers leading up to an
election where the party in power is clearly having difficulty wooing the
electorate. It just so happens that the newly appointed Treasury Secretary used
to run the investment bank that controls the world’s most important commodity
index, which seven weeks ago cut the weighting of unleaded gasoline by nearly 75
percent, causing all commodity investments based on this index to sell their
unleaded gasoline futures.

For the same number of buyers, a glut of
sellers means lower prices, and voila! Prices at the pump drop precipitously,
consumer confidence rebounds, and the electorate develops a new spring in their
step.

Or at least, that’s what some would have you believe. . .

Read More

Category: Blog Spotlight, Commodities, Corporate Management, Federal Reserve, Finance, Politics

Paul Volcker at Bloomberg HQ

Category: Economy, Federal Reserve, Inflation

Quote of the Day

Category: Federal Reserve

As we wait for the Fed Announcement…

Category: Federal Reserve, Inflation