I was comparing the chart of the Dow:
bigcharts.com
with the chart in the Northern Trust article, which is a somewhat more complex version of the one reproduced by Abelson:
ntrs.com
The correlations are very far from perfect, but in general, reduction in monetary growth rate does seem to anticipate a flat or downward move in the stock averages. The picture seems to be of increasing instability.
The Northern Trust economist argues that one explanation of the M3 spurt late last year was that businesses resorted to bank lines of credit while the bond market was distrubed, but that now they are paying these lines down:
M3 and bank credit growth likely got a boost in the fourth quarter of last year from the "seizing up" of the capital markets. Some corporate borrowers who found themselves effectively shut out of the capital markets may have activated their bank credit lines for funding. Now that the capital markets are operating in more liquid fashion, corporations may e paying down their bank loans. Because loans are an asset to banks and deposits are a liability, and because assets and liabilities tend to move in tandem, a slowdown in bank loan growth would imply a slowdown in bank deposit growth, too. Hence the slowdown in M3 growth.
It is difficult to fathom why M3 growth would be slowing as much as it has other than for the loan-payback explanation given above. After all, the Fed cut the U.S. economy's base rate by 75 basis points last fall. All else the same, that should lead to faster bank credit and broad money growth, not slower. Bank credit is starting to strengthen a bit. So, maybe M3 growth will soon start to turn up. Let's keep an eye on the behavior of the broad monetary aggregates even if no one else is. Most analysts were surprised by the strength of the economy last year. Had they been watching M3 growth, they would not have been. Now, just as many analysts are cranking up their 1999 economic growth forecasts, M3 growth is slowing. If M3 growth continues on its present weak path, the same analysts who were surprised last year by the strong economic growth could be surprised this year by slower-than-expected growth.
Paul Kasriel
Chief Domestic Economist |
