MZM and other data. Fed policy is no longer accommodative.
research.stlouisfed.org
See also the more in-depth comments in the John Mauldin Weekly E-Letter concerning the change in Fed activity.
"Bill King noted this morning: "M2 has fallen under its 5-week moving for
the first time since March and April. This occurred in March/April '02;
stocks then tanked. After M2 spiked for 9/11, it fell under its 5-week MA
when that extraordinary monetary injection was removed. You have to go
back to April 1995, when the Bank of Japan went to zero interest rates, for
any protracted occasion of M2 trading under its 5-week MA.
"Except for three weeks in April 2002, M2 has not traded below its 13-week
(quarterly) moving average since April 1995. M2 is about $16B over its 13- week moving average. Stay tuned; stay alert!
"M2 fell $4.1B for the week end 9/8, but M3 rose $11.5B (Fed and central
bank debt buying?). The M2 chart shows the biggest decline since just
after 9/11. There is no comparable decline in the past 12 years.
"It's only one week, but Fed 'free reserves' for the 2 weeks ended 9/17
fell to a meager $790m. We cannot recall the last time Easy Al allowed
free reserves to fall under $1B! The previous 5 reports for 'free
reserves' are: $2.051B (9/3), $5.148B (8/20), $2.012B (8/6) and $2.098B
(7/9). The monetary base fell $3.547B (9/17). Is Easy Al quietly
tightening? The summer bond collapse is a seminal event, a revolt against
Fed largesse. For years, Fed easing produced bond rallies as wise guys
poured into bonds because financing costs were reduced. However, now there
is little room for cost-of-carry profits and pros are concerned about
currency risk and the budget deficit. Easy Al and the Fed realize that the
exploding budget deficit and dollar weakness, with foreign central banks
holding the bulk of US debt, is a dangerous environment. They also
increasingly realize that they are at the limits of easy money and if the
dollar tanks, rates will rise. It's time to closely watch Fed behavior
because it appears to be diverging from its rhetoric, which will soon be
encumbered by the '04 campaign."
Does that mean that it is time to shift away from PM stocks?
I don't think so, although it is a negative factor, because there are signs of a more direct positive factor: impending dollar devaluation among the currencies of the world. This also from Mauldin:
"The Fed is buying US Treasuries, and has now for two consecutive weeks, as
revealed within last night's Fed money supply data. Japanese investors are
buying UST, and ....increased their NET exposure by a whopping $12 billion,
in just the latest week.
"...And, last, but FAR from 'least', Foreign Central Banks are buying US
Treasuries, as reflected by a string of weekly increases in Custody
Holdings, including the $3.2 billion increase posted last night.
"And yet ... USD-JPY is still ... lower."
"We feel that a MAJOR shift is taking place, where the US and Japan might
agree, to allow the USD to depreciate...."
This echoes readings from others over the past few weeks, but Weldon
crystallizes the trigger point. I sense we are ready for another round of
dollar depreciation.
If the dollar were allowed to drop against the yen, might other Asian
currencies allow it to drop as well? Slowly re-adjusting the trade balance
and the value of the dollar?
If Asian countries buy fewer dollars, thus allowing their currencies to
rise, this would normally mean that US interest rates would rise. Not only
would their US bonds be worth less in terms of their local currency, they
would also lose as their US bonds fall in value. A double whammy! It is the
old supply and demand conundrum.
But if the Fed quietly agrees to buy enough bonds to maintain the value as
they seem to be doing now, and foreign governments don't actively sell (in
effect, they just buy less), the hope would be a slow re-setting of the
value of the dollar, a reflation of the US economy and a lower trade
deficit.
Weldon believes the Fed does not give a time frame because they don't have
a clue as to what the time frame is. They are playing this one by ear. If
they announce an inflation target north of where we are today, would that
spook the bond market? Would they feel boxed in if they set a target at 2%
and then decided we needed more stimulus even if we were already at that
same 2%?
Think of the European Central Bank. They set inflation targets and then
came under enormous pressure to ease their money supply as some of their
main countries went into recession. Greenspan does not want in that box.
Trust me on this one. He made that very clear in Jackson Hole.
Everybody and their dog knows that the dollar is going lower. The debate is
only about how far. If the Fed were to allow interest rates to rise as
foreign central bank buying slows up, that would trigger higher home
mortgage rates, which would put in jeopardy home values. Deflating home
values, as Weldon points out, is the last thing the world or the Fed wants
to see.
If the world (read China and Asia) pulled the plug on the US dollar, which
they could do in about 15 minutes, the result would be a world wide
depression. Nobody wants that. Everyone's interest is aligned in keeping
the game going. They want the Us to keep buying and they want to keep
selling.
However, it must now becoming apparent even to central bankers that the
current trends cannot continue. You cannot keep racking up $500 billion
trade deficits forever. You cannot keep adding up $500 billion dollar
government deficits. We no longer simply "owe it to ourselves." Since
foreign governments are buying an ever higher percentage of US government
debt (they currently are at an all-time high of 46%), the current trend if
left unchecked means eventually the US government owes trillions to foreign
nations. When you are increasing the foreign debt by $500 billion a year,
it does not take long.
A rise in rates would mean the US would owe hundreds of billions of tax
dollars in annual interest payments to foreign banks, unless the trends are
stopped. Such an event would mean an unraveling of the current world
economic structure.
Thus, the dance truly begins to allow the dollar to drop. Hopefully slowly,
while the Fed keeps rates low, hoping the US economy can begin to produce
jobs."
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