Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (5331)	1/16/2004 9:22:56 PM
From: ild	Read Replies (1) \| Respond to of 110194

Comstock Partners, Inc. What's Wrong With the Money Supply? January 15, 2004 What’s wrong with the money supply? The three-month annual rate of change in M2 was plus 10.5 percent in late August, and is now dropping at a rate of 5.2 percent. MZM, which was growing at 15.6 percent, is now plunging at a rate of 8.5 percent. Hardly anybody pays much attention to money supply these days, but old-timers will remember when the Street used to pay even more attention to the new money supply releases than they do to the employment figures today. The Fed used to target money supply, although they gave up the practice officially in 2000, and, unofficially, some time before that. Even so, the correlations between money supply and the economy are still important, and the economists at the Commerce Department continue to use M2 as one of the 11 leading indicators of the economy. In fact, of the 11, M2 ranks second, statistically, in its ability to lead the business cycle. At a time when the Fed is easing vigorously, it is certainly odd that money supply is falling. Keep in mind, however, that when the Fed prints money it is not automatically included in the money supply. Money held in a Federal Reserve or bank vault that is not in anyone’s name is not money. In order for it to become money somebody must want to use it. The Fed basically has a limited number of ways it can attempt to control the money supply. First, it can raise or lower bank reserve requirements. Raising required reserves takes money out of the system whereas lowering requirements adds money to the system only to the extent that some one wants to borrow it. Second, the Fed can buy or sell Treasury bills and notes. Third, it can change the fed funds rate. Note that it is relatively easy for the Fed to pull money out of the system, but can only increase the money supply if somebody wants to use it That is the reason why we have, in past comments, been so concerned about the Fed pushing on a string, and, is also, we suspect, the reason why the Fed is so much more concerned about deflation than inflation. Having said that, we admit that the majority of leading indicators are still positive, and that there are some definitional problems as to what constitutes money. In addition some observers that we respect think that the drop in M2 and MZM is a result of people reallocating funds from money market instruments to other investments such as equities, bonds or commodities. In this case, however, it seems to us that the money merely changes hands between buyer and seller, and there is no net change in overall money supply. All in all we suspect that the plunge in money supply may be confirming our belief that the economy is about to slow in the months ahead. It also could be related to the 80 percent drop in mortgage refinancing (REFI) since last summer. Since the annualized rate of cash-outs on these REFIs were 3.5 times the amount of the last tax cut, this also means there is less cash in the hands of consumers as we enter the new year. comstockfunds.com

To: ild who wrote (5331)	1/18/2004 11:16:42 AM
From: russwinter	Respond to of 110194

<Oil is still in backwardation> The year ahead can just be seasonal, however for one year and beyond, backwardization just reflects the psychology of the market. That spin presumes some now mythical natural price level well below $30. Bernanke dismissed oil prices in his infamous speech, by pointing out this backwardization. Of course the same bunch said the same thing last year. It went something like this, "once the war is over, oil will return to it's natural (mythical) level." Just one more bogus theory out there. Besides it's irrelevant to talk about backwardization out two years when TODAY, the immediate price of energy is acute and disrupts spending patterns for consumers, and input costs for industry. To dismiss an acute problem by pretending or assuming (which in Beenanke's case?) it might be temporary is folly.