Contrary Investor
contraryinvestor.com
states here that credit expansion merely needs to slow to contract money supply. That must be what's happening over the last two months since CI wrote this July 31:
""But probably the very last thing the Fed would like to see at the moment is a contracting money supply. For now, we're still miles away from an absolute dollar or year over year contraction in money, but it may just very well be that we might head more closely in that direction if longer term interest rates continue to rise from here, even modestly. And the potential for a significant slowing in money growth or even a trip into the land of real contraction would be transmitted through activity, or lack thereof, in the mortgage credit markets, consumer credit and corporate debt markets. Although it sounds rather simplistic, we went back and looked at the relationship between year over year changes in the money supply (as measured by M3) and the change in the 10 year Treasury yield over time. What we found was that especially during the mid-to-late 1990's to present, increasing Treasury yields were accompanied by periods of relatively flat or slowing year over year money growth. The following chart is clear on the relationship (please note that the monthly data in the chart only run through the end of June):
subscriber based chart available at CI
If the above relationship continues to hold looking forward, will the recent back up in longer term interest rates result in a meaningful decline in the rate of money supply growth ahead (assuming interest rates do not revisit their recent lows any time soon)? Well, it all depends on credit creation. Now we're back to housing and the sympathetic refi world. Now we're back to auto loans. Now we're back to consumer lending. Now we're back to corporate debt expansion. The asset leveraging game needs to continue for money supply growth to charge ahead in anything other than a mediocre fashion. The Fed may believe that they can fashion this borrowing through scaring corporations and consumers into "spending now before prices go higher", but the chart above is pretty clear on just what has motivated credit creation and money supply expansion over the last decade at least. And it's not suggestions or threats, it's absolute cost of capital.
The other characterization of money that we continue to believe will play an important role ahead is velocity. Essentially how often, or fast, money is "turning over" in the economy. And at the moment, velocity (as measured by GDP/M3) stands at a multi-decade low. |
