Money Supply Balloons

[DrStool]

Financial Markets Forecast and Analysis by Robert McHugh

 

Oh, they didn't "speak" the words, no sage quote from a Fed governor or the venerable Chairman, but their actions did the talking. If you go the Fed's website, you'll see that they reported M-3 is up an astounding $104.8 billion in just the past two weeks! That computes to 30% annualized growth in the money supply! That's not a typo. Thirty percent per year, a $2.72 trillion increase to our current 9.1 trillion M-3 supply. The Fed was chartered to "maintain a stable currency." Yet here we see them inflating the value of our currency by 30 percent. Why? Have they gone loony? What is going on? The answer can only be one thing: The Federal Reserve has come to the conclusion that equities are at grave threat to deflate at crash proportions - and soon. The Fed is convicted that deflation in assets is so probable, that it is worth the risk to manufacture money at a thirty percent annualized clip. Hyperinflation by the US Central Bank, right before our very eyes. What's next, Dubya declaring martial law? Did you ever think you'd see this?"

I agree with McHugh about the stock market, but I can't say this any other way. This is just misinformation.

 

The Fed has zero influence over M3. If you follow the Feed report, you know that the Fed has been increasing its assets at a 4% rate for more than a year. This rate varies depending on what the Fed's guess is as to how much liquidity the economy needs. Back in 2001-2002, they grew it at 10%. For brief periods in the last year, up to 3-6 months, they cut back to 1%, and even went to a negative growth rate from January through March of this year.

 

There is zero correlation between the rate of growth in M3, and the rate at which the Fed pumps liquidity into the system.

 

Repeat.

 

There is zero correlation between the rate of growth in M3, and the rate at which the Fed pumps liquidity into the system.

 

Hell, the Fed barely has much control over M1, although there you can see the correlation between how much they pump and the response in the more narrowly defined money supply. When you move out to M2 and M3, which includes both retail and institutional money funds, and all manner of other financial flora and fauna, any correlation disappears.

 

What stoolies who follow the Feed report know, is that the larger M's respond most directly to GSE credit creation, as seen a couple months in advance by the MoGauge. The recent surge in M3 is tied directly to the enormous surge in the MoGauge in mid March.

 

It really annoys me when people carp and whine and moan about the Fed being to blame for everything that happens in the market. It's total bullshit. It's not that the Fed is blameless, but a steady 4% annual growth rate in the Fed's base is hardly extreme, and cannot in any way be related to a 30% rise in M3. M3 is not currency.

 

Furthermore anyone following credit measures closely, as we do, knows that broad based measures of credit have stalled in the last month. The effects show up in the crash up of short term interest rates. This appears to be a developing liquidity crunch. If ever the Fed were justified in opening the spigots, it would be times like this. Especially with a $54 billion payment due the Treasury tomorrow, of which only $33 billion is rollover. But instead, the Fed was draining big time on Thursday and Friday, perhaps in repsonse to the mammoth rise in M3.

 

Ironically, this draining comes at exactly the wrong time, and could be the very thing which triggers the stock market crash we have been waiting for. Instead of adding liquidity in the midst of crisis, the Fed has made a classic blunder by responding to something over which they have no control in the first place, the ballooning of M3. Even more ironic is the fact that the very forces which caused the broad money supply to blow sky high have already been working in reverse, and will continue to do so. The Fed is simply exacerbating the problem further by cutting back now, as opposed to flooding the system with liquidity.

 

I believe we have witnessed the final blowoff in the broad money supply. All of the forces now at work, including a less than accomodating Fed, could cause a crash not only in the stock market, but in the money supply as well, in the days ahead.

 

The Feed report, a regular feature of the Anals of Stock Proctology, will be published later this morning. Take a subscribatory and you can download your Anals just in time! Click the link below.

[DrStool]

This is in response to a post over on B4 the Bell.

 

To say that the Fed has done nothing to cause the broad money inflation is about as bad as McHugh confusing M3 with direct Fed action.

 

OK, perhaps I have caused some confusion here. I have written, perhaps not here on the boards so much, but in the newsletter, that the Fed's policy of subsidizing abnormally low interest rates was the culprit in most of the issues we face, by causing hyperspeculation and malinvestment. This policy was clearly one enabling factor in the abnormal extension of the credit bubble. I did not say, nor did I mean to imply that the Fed was not responsible for inflation. I have complained bitterly about the Fed's behavior, like most of us, but in this case blaming the Fed for the 30% rise in M3 is not justified.

 

One cannot look at M3 or an other aggregate or the GSE actions in isolation. They are all intertwined and the masses feed off the psychology of low rates and the Fed misinformation about the fear of "deflation".

 

Indeed, that's what I endeavor to do every day in the Feed report. And I have repeatedly shown that the Fed's actions do not macth their words. They are a bunch of circus barkers and clowns, not machiavellian schemers.

 

4% growth in high-powered money coupled with reckless interest rate policy leads us to where we are today, hyperinflation in the broader aggregates.

 

4% growth in the Fed's assets is not responsible for the growth of M3. A money cost of 1% may be contributory, but the key culprit, in my view, has been foreign central bank subsidies of long term interest rates. Artificially low long term interest rates, coupled with artifically low short term interest rates, enabled and promoted the mortgage bubble, and hence unbridled gse credit creation, leading to the explosion of M3. The mortgage bubble cannot be sustained if either of those subsidies is removed. Even if the Fed keeps Fed funds at 1% or less, it will not matter if long rates are skyrocketing as they are now. Borrowing will shrivel away, the gse's will shrink their portfolios, and M3 will shrink with it.

 

Here we have a situation where the key 1 year Treasury yield is exploding in a way that is historically unprecedented. Where is the Fed, where is the Fed funds rate. The Fed has done nothing different, yet the market is imploding. The Fed does not have anything close to the degree of control that people think. Their low interest rate policy created an atmosphere that enabled speculation and credit creation to explode, but it was only one part of the equation. If long rates had not been forced down by the Bank of Japan, then I doubt that the hyperspeculation leading to the mortgage and housing bubbles could have occurred.

 

I would like to know what action the Fed is taking to dampen speculation. 1 or 2 token 25 bps rate increases this year will not do anything to dampen the speculative fever running rampant around the globe.

 

The Fed has been holding their daily actions to a level below the longer term trend rate. They are not adding excess reserves to prop the markets. They have in fact been draining reserves lately at the most surprising times, times when in the past they would have been pumping furiously, such as immediately before and after a major Treasury refunding, or on days when economic data, or the stock market was weak. For two years they responded with regularity to bad days in the stock market by adding large amounts to their asset base, usually with gigantic repo blasts. Over the past several months they have stopped doing that, and in fact have been, at times doing the exact opposite. The Gang of 23 is responsible for moving the market. The Fed provides the fuel. In the last several months, they have kept the Gang on a starvation diet.

 

I think the Fed is grossly incompetent. History has proven that the Fed invariably makes its most major blunders at the absolute worst moments. This may be one of those times.

 

I invite everyone who has not already done so to tune into the daily Fed update in the Anals, and follow the Fed follies every day. This is a bunch of old, academic farts and political hacks, led by the biggest farthack of them all. Incompetent, yes, evil and diabolically trying to rob us of what is rightfully ours, I doubt it.

[DrStool]

I read and report on the Fed balance sheet every week, and track the open market operations every day, and report on them every day. The Total Feed Index is the daily total of the Fed's asset base. There is zero correlation between the rate at which the Fed grows its asset base and the wild fluctations in M3. The Fed does its OMO with its primary dealers, who buy the paper directly and hold it in their investment and trading accounts.

 

Anyone is free to believe anything they want to believe. Facts are facts, and they are illustrated every day in the Feed Report. I believe only what my eyes tell me when I look at the charts. There is no relationship between M3 and the Fed's OMO, or their total assets. There is a direct relationship between mortgage application growth and M3. Those are observable facts.

 

Don't worry about the toothless, incompetent tiger Al. Everything from here on out is beyond his control. Does one year yield chart look like a chart of something the Fed is in control of?

 

There is no such thing as a "permanent repurchase agreement." Repurchase agreements are temporary. Permanent paper isn't even permanent, since all of it has a maturity date. Do I include permanent open market operations in the Feed report. Certainly. But permanent paper has a more lasting effect on the behavior of the Gang of 23. The Fed's addition of permanent reserves tends to come once or twice a month in amounts around $1 to 2 billion. The $ 9 billion added this year is just enough to keep the growth rate of the permanent paper in the Fed's portfolio growing at 3-4% annualized on an asset base of 700 billion.

 

Domestic capital is nowhere near sufficient to fund the new Treasury paper. Foreign central banks absorb almost half of it. Big trouble as the start to pull out.

[Hiding Bear]

Over-simply put, recent positive changes in the money supply may have to due seasonal maladjustments of the figures, closings on the real estate/refinancing mini-boom of March, a stronger dollar, and some nomimal strength in the GDP - meaning more dollars at work to get the same volume of goods/services consumed.

 

A weaker real estate market is already baked into the cake, along with a weaker

refinancings. The dollar has leveled against most currencies. These factors will act to reduce money supply. Yes the economy stills needs to make an ever growing amount of interest payments, but interest payments due not necessarily represent a reduction of money supply.

 

Doc is right about the Fed. The Fed is going to squeeze the markets (bond and stock) next week for partially unknown reasons.

 

Overestimation of the Fed even prevades thinking with the bears. It was Japan and China that bailed the US out from mid-2003 to the first quarter 2004. Credit to the Fed is misplaced.

 

Sorry for the brief response.

[Hypertiger]

If it ain't Doug Nolan shitting his pants over M3 then it is this Robert McHugh clown now...

 

No one seemed to shit their pants when it was heading down by a 100 Billion a few weeks ago...

 

It isn't growing as fast as it did prior to 2000...

 

This is just another example of some idiot that is dying to see hyperinflation so bad that he shits his pants after a 2 week blip...there are plenty of examples of 100 billion blasts over the last few years...why is this one different?

 

Maybe in 2 more weeks we will have a better idea...

[DrStool]

What's the world coming too when Hypertiger sounds like the vice of reason?

 

[PandaBear]

I have a question, Doc.

 

As I understand it, your info is based on NY Fed data published at their website, correct? Isn't it possible that the Fed could be deliberately lying or obfuscating their true activities? Nothing in their charter says that they MUST publish accurate accounts of their open market activities, does it? If CPI and PPI are hedonically massaged to heck, what prevents them from sanitizing the Feed numbers?

 

Maybe they're so arrogant that they feel they can leave clear footprints and J6P will be no wiser, but if they are like the current administration they would take no chances...

[DrStool]

M3 growth is tied to changes in mortgage debt, not the Fed's daily activities which impact primarily the banking system, the bond and stock markets.

 

I do not believe that everyone at the Fed is a liar. The Fed has to communicate with 23 dealers every day in order to solicit bids. Seems to me that the information on the size of the repos, or the bill and coupon passes needs to be accurate so that the market can function.

[cam]

Does the discussion on the topic seem a little bit doctored?

 

Anyway, I wish I could understand the bottom line of the disagreement!

 

Peace.

[DrStool]

Yes, I have deleted several posts.

 

They were nonsense. The mindless ramblings of an intellectual blowhard.

 

I don't allow tripe. Furthermore, posting while under the influence of drugs and alcohol is prohibited. If someone glorifies drinking and drugs on this website, they're gone.

 

Finally, I don't allow rudeness toward me, or other stoolies.

[threadbare]

Doc, Hey good buddy, Thanksh a lot man, hic...that poster was hic...gettin on my nerves. Belch. Thas all.