Weekly Monetary Report
R-056
Mon 19 Jun 2000 2340Z
U.S. Money Supply
Comments: Back to the M2-M1 table this week for a rounder observation. It appears that, after last month's episode, M2 is back on schedule.
Last week I reported on the significant reduction noted in the savings account component -- the largest since March of 1995 -- mainly to alert readers to the higher opportunity cost of holding the elements of M2; however, it's little indication in the short-term that monetary policy is tight. The natural response in this environment is for people to shift money out of savings deposits and other low-yielding elements of M2 into higher-yielding instruments.
The M2 aggregate recovered somewhat in the Fed's latest report. Yet, the proper perspective, I believe, is one of opportunity cost playing mitigator to one of the chief contributors to growth in the money supply, a rather steep rise in the collective liabilities of commercial banks. Assets supposedly equalling liabilities, you can see in the following plots the extent of the contribution.
As you can see in any recent depiction of money supply growth, the only circumstance of which anything certain may be said is that of above-target growth. Regardless of any mitigation, growth remains significantly higher than during any other Fed tightening cycle. And, contrary to popular opinion, it's not different this time.
I'm moving along fairly fast in my writing this week. Regular readers will pardon, I hope, the substitution made yesterday for this report. It's a busy time.
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Fed Open Market Activity
Jun 05 Week
Day Action Amount Duration
Mon add $3.7b 3-day
Mon add $2.0b 28-day
Tue drain $1.9b overnight
Wed drain $1.0b overnight
Wed add $0.6b permanent
Thu add $2.5b overnight
Thu add $2.0b 28-day
Fri none
Jun 12 Week
Day Action Amount Duration
Mon add $2.5b 3-day
Mon add $2.0b 28-day
Tue none
Wed add $1.8b overnight
Wed add $0.6b permanent
Thu add $4.2b overnight
Thu add $2.0b 28-day
Fri none
NR = not recorded
Comments: Funds are not tight. Any drains put on by the Fed are only temporary.
The nominal passes ( reverse auctions ) conducted by the Treasury will continue this week and next. With a new report from the Congressional Budget Office due any day, Mr. Summers may also announce an even greater amount of debt to be retired. As I've stated on prior occasions, the money being created by these permanent injections will doubtless surpass the record amount of last year. Not the best way to combat inflation, but any respected text on political economy should tell you such is the way during a year in which national elections are conducted.
Treasury buyback operations will continue on June 22nd and 29th. The Treasury, like the Federal Reserve, expanded its collateral eligibilty for their TT&L program; which means only that banks are this year capable of borrowing more money from tax revenues than was previously the case. Don't get lost in all this financial meandering, ladies and gentleman. It's all in an effort to support the U.S. economy, its financial markets, and other items I can only speculate upon.
Too, if you are convinced of the widely reported advancements in productivity, you might not be too concerned about the current inflationary episode. But, should you, as I, believe that what's been termed productivity is merely an extraordinary opportunity while much of the remainder of the world struggled with financial crisis, then you will remain sensitive to what tenuous ground Wall Street now occupies. Should the FOMC refrain from a rate hike at their next meeting, it's doubtless in my opinion that the need to hike yet again will be made quite obvious prior to Summer's end.
The counterfeit economic data now being released by the U.S. Government on a regular basis is very good fuel for the equities market, but could also cause some severe problems for financial markets met eventually with the truth.
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Notes
I have just a few items lingering in my notes. Some of which you may be aware, others not.
The New York Post detailed recently how Mexico's President, Ernesto Zadillo, refused calls a few weeks ago from Citigroup's Robert Rubin, who was calling to ask Mexico to reconsider dumping some Citigroup high-interest rate paper for cheaper debt.
On June 15 in Quito, Ecuador, a Citibank branch was bombed, by demonstrators protesting the continued sell-off of their country's resources to pay a crippling foreign debt which amounts to more than 150% of that nation's gross domestic product. And we're still not aware of what in the way of collateral the Federal Reserve may have /should have demanded prior to the issuance of American currency ( U.S. Federal Reserve Notes ) in that country.
The Times of London reported that Bank of America has received a $4.6 billion demand for damages from the creditors of Bank of Credit and Commerce International, the notorious BCCI.
The worth of Swiss gold reserves swelled in May as Switzerland's central bank revalued its large holdings of the metal at market prices, masking the impact of bullion sales it had launched on May 1. The Swiss National Bank gave no information about just how much gold it had sold in the first 10 days of the month as part of its plan gradually to divest 1,300 tons of excess gold - around half of its 2,590 tons of reserves.
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Earnings
Moody's chief economist, John Lonski, alerts us to the fact that, in a lagged response to earlier Fed rate hikes, the average annual growth rate of core non-bank earnings would drop from 1995's 20.2% to 1996's 9.4%. After climbing up to 1997's 12.5%, a drop by world real GDP growth from 1997's 4.5% to 1998's 2.5% would slash the annual growth of core non-bank earnings to the 2.3% of 1998.
Contrast Mr. Lonski's remarks with those of Goldman Sach's Abby Cohen, who today stated her target for the end of 2000 represents a 6 per cent gain from yesterday's close. "We believe that the first-quarter profit growth rates will be the strongest for the year, and that positive earnings surprises will be less frequent," said Ms. Cohen.
Contrarian readers of this report should have by now prepared themselves for the opportunity that approaches. Those of you in possession of the monetary calendar may have also noted how the Bureau of Labor Statistics pummeled one of the primary considerations for the month of May -- employment.
Note that Mr. Greenspan will be available in mid-July during his Humphrey-Hawkins testimony to assuage any investor fears. I'm a bit upset with Mr. Greenspan, labeling as "cynics" those of us who've voiced doubts over the accuracy of recent economic reports.
Also, another G-8 collusion is scheduled for July 21st. Those who respond to accusations of collusion with the time-worn tag of conspiracy theory should either stop attempting to be so fashionable and, therefore, socially acceptable and be more receptive of the truth. More, here, on the G-8 agendas as the time approaches.
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Lastly, of the per barrel price of oil, I can only suspect that, like a mind once sufficiently expanded, the price per gallon of vehicle fuel will not return to it's original dimension.
See you next week.
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regards,
jm
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