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Strategies & Market Trends : The New Economy and its Winners -- Ignore unavailable to you. Want to Upgrade?

To: 16yearcycle who wrote (4811)	1/12/2001 10:41:07 PM
From: patron_anejo_por_favor	Read Replies (1) \| Respond to of 57684

<<indeed, if you follow my choice back, it seems to reflect each economic turn the past twenty years, and mzm doesn't. Why would that be?>> The "short and dirty" answer is that it (the monetary base) does loosely approximate fed tightening and loosening cycles, but not as closely now as it did in the past. This is due to institutions using more leverage (i.e., syndicated loans) and derivatives now than they ever did in the past (in large part because Information Technology makes it possible to use more sophisticated strategies). In an environment where more leverage is being employed, MZM is the more accurate metric. Note in particular the large increase in MZM since the '94 correction (as opposed to M1), correlating with the great bull market of that period. I think this chart shows MZM (graphed in terms of Y-T-Y % change, plotted monthly, which eliminates seasonal bias) looks pretty tightly correlated with the markets (and more so than M1, which resembles the monetary base). In particular, note the increase in MZM and M3 since the 1994 market correction. The '98 correction was not primarily a monetary event, rather than a panic related to the foreign currency crisis, and therefore NEITHER measurement declined significantly then: stls.frb.org I think the reason it has finally diverged this year is three fold: 1) The most visible part of thecorrection was focused in the Nasdaq, ie, the S&P is down very little on a trailing 12 month basis. If you charted it against the S&P, the divergence this year wouldn't look so large. 2) More importantly, there has been a concomitant boom in other financial assets, especially real estate, which has "absorbed" much of the monetary increase. 3) Some of the monetary increase has been necessary just to keep borrowers solvent (so called "Ponzi finance"). For example, to avoid recognition of bad loans on their balance sheets, lenders make additional loans to their bad debtors in order to avoid a default. See XRX and their recent deal with GE capital for a good example. dailynews.yahoo.com As a (fairly astute) tech investor, do you think XRX is a good credit risk now? They're not an isolated case, either. Have a good weekend (and keep some powder dry). Regards, Patron