Weekly Monetary Report
Mon 08 May 2000 0535Z
U.S. Money Supply
I will spare you, as well as my publisher, the tables this week.
All the aggregates advanced in this latest report. M1 grew by $13.8 bln ( far above expectations ), M2 climbed by +12.6 billion ( well above expectations ), and M3 climbed by +$7.8 billion ( far above expectations ). On a year-on-year basis, the now widely watched M2 aggregate climbed by +6.1%. That was up a bit from the +6.0% y/y gain seen in the previous week and marked the strongest advance in 6 months. Looking a bit more closely, M2 was advanced this week solely by an M1 component -- demand deposits. Remove the M1, and M2 is -$1.2 billion.
It appears money that's exited the stock market is traveling through a few of the components. This is exactly the sort of flame under the consumer economy the Fed may not desire. Or, do they?
A deep and sudden drop in the stock market may harm the economy, yet it would prevent money from finding its way into shorter-term instruments that make an overheated situation that much more difficult to manage or subdue. Divested monies being converted to short-term instruments is certainly a signal that the economy will not soon show a substantial slowing. Though maybe the Fed welcomes this sort of support, as they move interest rates even higher.
For bearish contrarians the news from the money supply statistics, therefore, is uneven -- neither good, nor bad. Again, maybe what Fed and 'Friends of Fed' desire.
Importantly, there is certainly no basis for a broad-based advance in the U.S. sharemarket; not from a monetary perspective. Selected issues, and sporadic gaps-up in the more popular indices, is certainly possible. Afterall, we have witnessed such events as the gifting last week of tax revenues to bank depositories. Money with which they may then do as they please. My guess is there will be similar activity, only unannounced.
It's important also to note, in retrospect, that U.S. economic growth was hardly slowed at all by either the 1987 stock market crash or the 1998 global financial contagion. So far in 2000 the NASDAQ is down 10.5%, the S&P 500 has fallen 2.4%, the Wilshire 5000 has dropped 4.1% and the DJIA has declined 5.7%. The modest stock market retreat would seem unlikely to do much to slow the current above-trend economic growth. Either a longer period of shallow equity market correction or a sharper decline in the Wilshire 5000 might be required to diminish the wealth effect and choke-off excessive demand growth.
Wish I had more enthusiastic news for those of you who've been such pleasurable company for a long while now. But you would not care so much to participate in contrarian investment activity, if it were easy. Would you?
Or would you?
--------------------------------------------------------------------------------
Fed Open Market Activity
Apr 24 Week
Day Action Amount Duration
Mon add $2.00b 10-day
Tue add $NR 2-day
Wed add $7.52b overnight
Thu add $3.51b 7-day
Fri add $NR weekend
May 01 Week
Day Action Amount Duration
Mon add $12.7b 3-day
Tue add $5.60b overnight
Wed add $9.99b overnight
Thu add $3.01b overnight
Fri none
NR = not recorded
Comments: Fed funds closed Friday at 5 15/16, just below the target rate. The Fed accordingly refrained from any action in the market. Expect the persistently high Treasury balances at the Fed as well as rising currency in circulation to have them adding anew next week. The Fed has $13 billion in long-term system repo operations in place, but they'll need more.
The FOMC, for some time now conducting reactive rather than pre-emptive policy, will view economic reports this week prior to voting members swapping current bias for conclusion and delivery at next Tuesday's meeting. While the Fed is in the process of making an effort to tighten its policy stance sufficiently to slow the economy to a more sustainable pace, Fed officials will want to be in a position to reverse course as soon as there is a significant slowing in growth. You know, as well as I, how they are. I wouldn't set my heart on more than 25 bp at the meeting next week.
--------------------------------------------------------------------------------
What's a Hard Landing Like?
For a financial system that has availed itself of a once-in-a-lifetime opportunity to create money and credit unimpuned by normal regulatory forces, it would be a period of rugged adjustment. More painful for some, however, who will of course attempt to distribute the grief as widely as possible. And, for knowing that, we should all be prepared.
Beyond the recent hedge fund liquidations, there are a substantial number of business and industry operatives whom I'm certain are unaware by what means their bottom lines have benefited during the monetary explosion of the past several years. We could, therefore, expect to see more seemingly spontaneous financial capitulation that undresses certain business savvy and Wall Street savoir faire, leaving them both exposed to a variety of angry truths. Many would doubtless make a frantic sprint for another ride on the money carousel, arriving only to find the festive sounds of the credit calliope are no more.
--------------------------------------------------------------------------------
Inside Moves
It now appears, with reports in the Financial Times and other domestic services, the awakening to the wholesale manipulation of U.S. financial markets is growing. It's not something new, of course, to those of us who've been discussing the topic for well over a year now. Arthur Levitt, I believe, has played the part of financial 'good humor man' for too, too long and should be replaced.
Friday, U.S. Senators Kerrey, Moynihan and McCain all called for yet another forum to study social security privitisation. ( Note: Fleet Boston happens to be one of the largest pension plan advisors in the nation. ) It was also learned Friday that House Republicans threatened to delay a controversial plan to eliminate pooling-of-interests accounting for mergers, arguing that further study of the plan's effect on the economy is necessary. Members of the House Commerce Committee, Thursday, told Financial Accounting Standards Board ( FASB ) Chairman Edmund L. Jenkins that he should slow his project until its impact can be more fully assessed.
--------------------------------------------------------------------------------
What Price Progress?
Do you favor the current course of our national investment fancy?
If you suppose not, you may be interested in several costs that, if not afforded now, you will be fastened with in the not too distant future.
But what has this to do with monetary policy, you might ask. Simply, it is too often that an extended period of relaxed money and credit policy leads to politically selfish spending; wasteful investment inconsiderate of our national betterment.
It should be of some concern to everyone that necessary investment has already been by-passed, preferring instead instruments for enlarging personal and private wealth. Wall Street, of course, does nothing to preclude this national predilection.
Some of the billions of dollars afforded to conceptual ventures with foundations in nothing more than a desire to profit from the current investment vogue can be better applied to underwriting initiatives that will enhance life and living conditons in the nation at large. We need them more sorely than you might know.
The following figures are indicative of necessary and, I believe, desirable costs that, if not now addressed, we will one day regret having to fund at a much greater price.
Subject
Amount Needed
(billions)
Roads $357
Bridges $80
Mass Transit $72
Aviation $60
Schools $172
Drinking Water $138
Wastewater $140
Dams $1
Solid Waste $75
Hazardous Waste $750
Source: ASCE, April 1998
The federal government is essentially, today, only providing to pay down the interest owed to this type of spending without a sincere commitment to the entire amount.
Twelve months after the figures were first published the American Society of Civil Engineers ( ASCE ) announced the only area to which the federal government wholeheartedly responded was surface transportation. Currently, we have more funding for other of the listed projects; though only token amounts sourced more out of consideration for political economy, in this an election year, than any real commitment.
Too, these are costs that have become increasingly difficult to fund from an already overtaxed electorate. More financial innovation is required in fixed-income products to fund projects that may not be so fanciful as participating in a new internet portal or so attractive as some quick profit enterprise with proprietary access to an investment bank for neccesary funding, but have a far greater ability to improve more aspects of our now and future existence. Depending upon what economic outlook you prefer, these costs will either accelerate or become increasingly unaffordable.
The fixed nature of some of these national assets under a constant variety of intended use and climatic abuse also requires their current value be reassessed occasionally. The degree of the infrastructure's utility is not static but one that degrades with time. All the more critical that both projects and financing not be delayed.
--------------------------------------------------------------------------------
Portions of this report may appear somewhat cynical, as well as ones with which certain of you may not agree. Yet, so was a certain British PM once a bit ruffled by the realization, that
"There are a lot of lies going around in this world today, and the worst of it is half of them are true."
See you next week.
beartopia.net
Best Regards,
John |
