Mr. Moto's latest...
Weekly Monetary Report
R-053
Mon 29 May 2000 1230Z
U.S. Money Supply
Growth in the the monetary aggregates is little changed. M2 certainly doesn't appear to be gathering much momentum in the direction of the Fed's 5% growth limit. You might make a note of when, or if, it does penetrate that boundary.
The amount of recent share redemptions from equity mutual funds certainly doesn't signal an M2 turning-force is in the offing; much of that, of course, would gather in MM accounts or checkable deposits.
AMG Data Services reported $7.6 billion in weekly outflows, 45% from global and international funds ( international funds composed partially of U.S. shares ) and 38% from growth funds. Large cap U.S. index funds had an inflow. Share redemptions, should they persist, could exacerbate the Fed's current policy disposition.
And what of all the silly conjecture arising from the recent FOMC meeting?
It appears Mr. Kudlow has a habit of assembling his kites without a tail, and then expects them to fly.
They do fly, briefly. Much like an aircraft missing a stabilizer. But, then they crash.
"I have another bone to pick with Kudlow and his buddy Novak. According to Kudlow, the Fed's more aggressive policy will now put the economy's growth at risk. To the degree that President Clinton wants Al Gore to become the next president, would he want his FOMC "Gang of Three" to be cajoling Greenspan into a more aggressive tightening mode? I doubt it. Perhaps then, Ferguson, Gramlich and Meyer were pushing for a 50 basis point hike against the wishes of their patron, President Clinton. If so, then why refer to them as the Clintonite Gang of Three? Moreover, as one of my Northern colleagues pointed out, the word on the Street has been that Greenspan never loses a vote or face at an FOMC meeting. Why, all of a sudden, would Greenspan's influence have waned among his FOMC brethren?" "Finally, Kudlow writes that "the Fed austerity brigade is armed with an old-economy Phillips curve designed to slay non-existent inflation by depressing the new Internet economy [emphasis added]." Wait a minute Larry. Didn't you write an op-ed piece for The Wall Street Journal about a year ago saying that the Internet was more powerful than the Fed? Second thoughts, Larry?" - Paul Kasriel, Northern Trust
There is also an employment report due Friday morning, and, unless someone fiddle-faddles with the numbers, the figure for non-farm payrolls should not be bullish for share prices. Labor pressures have given no sign whatsoever of relenting.
Manpower, Inc. reported this past week that a record number of U.S. businesses expect to seek additional staff in the upcoming third quarter.
The real federal funds rate is currently 3.5 percent, and any recent slowing in the U.S. economy is but a drip in a great lake of surging activity worldwide.
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Fed Open Market Activity
May 15 Week
Day Action Amount Duration
Mon add $7.2b overnight
Mon add $2.0b 28-day
Tue add $4.5b overnight
Wed add $2.5b overnight
Thu add $1.0b 28-day
Fri drain $2.0b weekend
May 22 Week
Day Action Amount Duration
Mon add $2.5b 10-day
Mon add $2.0b 28-day
Tue none
Wed none
Thu add $3.1b 7-day
Fri add $2.2b weekend
NR = not recorded
Comments: Monday's action makes five 28-day repo's for $2 billion executed inside of three weeks. More preferable than a single 28-day repo for $10 billion. Much more preferable.
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MSDW Slams New Era of Productivity
The confidence game worked by supporters of the New Era economic thesis is gradually being exposed for the sham it is. One Morgan Stanley Dean Witter economist removed some of the blue sky from that false horizon as recently as last week, saying America's so-called productivity miracle has been confined to the technology-producing sector. In the remaining 88% of the economy, trend productivity growth remains as anemic as ever.
My contention for nearly a year has been that, once the Federal Reserve advances into the restrictive zone of policy action, the mask on the phoney productivity paradigm would be melted away.
There is also, now, a supply shortage in the 3-month T-bill, sending the yield down 25 basis points since the Fed hiked rates 50 bp on May 16. The 30-year bond hardly trades at all, and small volume could lead to large price movements.
I've always disagreed with the reverse auctions, and have wondered on occasion who's plan it was.
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Think Factories
You might guess that opportunities, such as the current prescription and plans for treating our national debt or funding USG trust funds now filled to the brim with non-marketable securities, are hatched from within Washington's think tanks. And my opinion is that yours would be a very good guess.
Much of the current U.S. Presidential Administration's policy has obviously been formed by and steered from the Brookings Institution, which numbers among it's active and honorary trustees -- Chairman James Johnson ( former Fannie Mae chair ), Brookings President Michael Armacost ( former U.S. Ambassador to Japan ), Robert McNamara ( former Sec'y of Defense ), Lee Hamilton ( former U.S. Congressman ), Teresa Heinz ( wife of Senator John Kerry ), Warren Rudman ( former U.S. Senator ), Barton Biggs ( Morgan Stanley Asset Management ), David Maxwell ( former Fannie Mae chair ), Stephen Friedman ( Principal, Marsh & McLennan Capital ), Zoe Baird, Vernon Jordan, David Rockefeller, Jr. and James Wolfensohn. Wolfensohn and Rockefeller, very chummy.
Mr. Rudman, Ms. Baird and Mr. Friedman also serve on the President's Foreign Intelligence Advisory Board.
The corporate money behind Brookings reads like a who's who of blue chip companies:
Bell Atlantic, Citibank, J.P. Morgan, Goldman Sachs, NationsBank, Exxon, Chevron, Microsoft, HP, Toyota, Pfizer, Johnson & Johnson, Dupont, Mobil and Lockheed Martin, and the foundations of companies like American Express, Travelers, AT&T, GM, ADM and McDonnell Douglas. A few media conglomerates, like Time Warner and the Washington Post Co., are among the donors.
Brookings' influence on the operations of the federal government has been substantial. In the 1920s, it was largely responsible for the creation of the federal budget. Prior to that, Congress had doled out money as requests came in. In the 1970s, Brookings pushed for the creation of the Congressional Budget Office, and then provided its first head, former senior fellow Alice Rivlin.
Don't bother too much with the political affiliations, folks. This is a politically centrist organization that's only added to the confusion present in nearly all policy implemented at the executive level of our government.
Brookings' pragmatic approach to military spending is called How to Be a Cheap Hawk. I wonder whether or not that one will work, and what the consequences might be should it not.
Neither is there any need for concern over the next U.S. Presidential Administration's appointees and what agendas might be constructed. Brookings is there in the persons of Nancy Kassebaum Baker, Franklin Raines ( Green Team Captain ), Donna Shalala, Alan Simpson, Patrick Moynihan, Nicholas Brady, Lawrence Eagleburger and Lloyd Cutler "to promote an agenda of pragmatic reforms that will simplify and expedite the appointments process."
Fannie Mae is certainly well-represented at Brookings.
Also, news this past week has both teams in the GSE debate forming-up much as I'd imagined.
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Easy Come, Easy Go
I'm certain many have noticed remarks in the financial press, and during informal discussions as well, about foreign capital flows into U.S. investments. Though I, myself, can't recall much being offered in the way of supporting data.
Let's take at look at where any substantial outflows are originating.
Net of Purchases of Long-Term U.S. Equity Securities ( $millions )
Country MMM 1998 MMM 1999 Jan 2000 Feb 2000
Taiwan -69 37
Hong Kong -2223 -156
India -18 -7
Indonesia -13 143
Japan -117 5723
Malaysia -173 -14
Singapore -8438 -852
Total Asia -13781 3379 -968 319
Total Europe 68168 98060 24375 15704
Latin Am & Caribbean 766 5187
Canada -4731 -335
Australia -571 866
GRAND TOTAL 50020 107522 27745 10532
Source: U.S. Treasury
Purchases from Great Britain ( $24b ) comprised nearly 50% of the 1998 grand total amount. British purchases ( $43b ) were nearly 40% of the 1999 total.
Non-Japan Asia is a net seller, signifying of course capital outflows from the U.S. to that region.
Worldwide purchasing of USG securities totaled $15 billion for January and $20 billion for February. The figure for federal agency debt tripled from January to February, while, at the same time, purchases of Treasury securities were reduced by more than half.
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See you next week.
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