Over the past 13 weeks the rate of growth of M3 has slowed dramatically.
M3 is a preference supply number so it doesn't tell you much.
Only a mere 50 odd billion dollars of new bank credit plus Fed currency printing has occured in this time period.
That's worth about $500 billion in M2. At that rate in one year M2 would grow $2 trillion. It's $4.5 trillion now, so that's about a 40%/year growth rate. Fortunately, if true, the FED doesn't believe these days that money matters. Fortunate for buyers of gold.
The growth rate is down in the 3-4 percent range, under nominal GDP.
Assuming the reference is to M3, there is little connection between GDP and M3 since M3 is preference based.
The slowdown in credit growth is probably attributable to two sources.
The FED is creating credit faster than in any period since the '70s. The almost daily coupon passes affirms this. Perhaps they mean C&I loans which are no longer representative of demand for credit since banks and borrowers have developed instruments which enable most to get around the prime rate. Also, money creation doesn't go as much to economic projects like it did in the past. Now it goes more to support the paper shuffle game including hedge funds.
First off, the rise in long rates of better than 100 basis points off the spike bottom, has dried up mortgage refinancing.
This is a mistaken view. Mortgage rates are reasonably connected to treasuries, but a 100 basis point rise in mortgage rates doesn't necessarily change either the availability of funds or the demand which are not strictly inversely related. When rates start rising there is an increase in demand. This is like the J curve effect. People rush to take down credit before the price rises.
When rates are dropping, people often pull equity out of their homes by getting a bigger mortgage with a lower rate and keeping the monthly payments static.
Some do, most refinance and lower their monthly payment.
This increase in mortgage size causes bank credit and hence money supply to expand.
This is erroneous. There is no net effect on money supply.
Back in the fall when LTCM met its demise, credit spreads widened dramatically.
What is a credit spread? It's an incoherent use of unrelated terms. Only banks are both borrowers and lenders.
This shut out many corporate borrowers from the bond market and instead caused them to draw upon lines of credit at the bank.
Bonds are time paper. Last fall there was no significant jump up in bond rates. Corporations coming to the the issue bonds at that time did so. There wasn't a paucity of lenders such that bonds couldn't be floated. A short term bank loan is more expensive say, 100 basis points. In September as the LTCM mess was being covered up as quickly as possible, banks refused many worthy borrowers because they had 0 confidence that the US was worth two cents and so they wouldn't loan at any rate. This is one reason why Greenspan panicked. So, in a way "credit spreads" did widen, bid 2%, ask infinity. These are the world's greatest and most powerful private bankers telling you in a non-existent crisis how much confidence they have in the shell game they continue to support. The game could only exist under the continuing aegis of a benevolent and caring FED. They have a lot of good to do.
This also expands the bank balance sheet and causes growth in money supply.
Completely mistaken. A mini-credit crunch causes bank credit to decrease. Short term borrowings flow out and in. There is no net money supply effect.
Now that spreads have come in greatly, these corporations are once again able to issue paper in the bond market
Mixing apples and oranges. The commercial paper market is different from the bond market. No doubt the rates on bonds help to determine the rates on paper.
and paydown the bank loans which they had been forced to take. This paydown causes a contraction in money supply.
It's a short term borrowing preferences 0 sum game and has little to do with M2 growth.
The net effect of a slowdown in the growth of money means that there is less free cash running around bidding up financial assets.
This is such a dumb comment it isn't worthy of comment. M2 persists in its dynamic upward rise and is well-correlated with stock price increases. The FED is causing rapid reserve base growth which will continue the rise in M2 and stock prices. As long as the FED continues to expand the base ever more rapidly which they must in order to keep the federal funds rate from rising, M2 and stock prices will rise. The FED is trapped and the stock market knows it so stocks have advanced way ahead of the current money creation rate. You see this in multiple expansion. The FED finally sees what we all see and that is inflationary trouble is developing, so they anticipate they will have to slow base growth. That means the stock market is extended relative to an expectation in change of base growth acceleration. So the market must correct the excesses built on the great expectations which have now been muted.
This is a bad thing for the equity market.
Correction is quite good for the stock market. In the past it would taken several actual tightenings before the stock market would substantially correct. Since the market is expensive the mere suggestion of a possible tightening is reason enough for the trading oriented to get out.
Short stocks -- buy silver.
My father keeps his horses in the cowshed. |
