Hysterianomics! Focusing on M2 Money Growth Is Misguided (Deficits and Debt Are What Is Scary)

I attended an investors presentation last week. Having given presentations to investors in the past, I thought I knew what to expect. I was dead wrong. The presentation was one chart, M2 Money Stock, and why the US economy is doomed because of rampant inflation. The sales pitch was to buy gold and other precious metals because the world is ending!! I just rolled my eyes.

Here is the chart (not their chart, but the same one from the Federal Reserve of St Louis).

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M2 is a measure of the money supply that includes all elements of M1 as well as “near money.” M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits.

To be sure, The Federal Reserve has ramped-up M2 Money Stock, particularly starting with the Clinton Administration and Alan Greenspan’s Fed. I suggested plotting M2 Money growth and population growth on the same chart.

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But if we look at the same chart in Year-over-year (YoY) terms, you will see that US population growth has declined from 1992 to today. Yet starting in 1995, M2 Money Stock growth soared (although it has been declining over the past year).

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But what about M2 Money VELOCITY (M2 Money/GDP)? M2 Money VELOCITY peaked shortly after Greenspan’s Fed started to rapidly expand M2 Money Stock. But M2 Money Velocity has kind of died (lowest in recorded history).

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What about the “runaway inflation”? He made it sound like The Weimar Republic is coming next! I requested that he plot M2 Money growth YoY on the same chart as Core PCE Prices YoY (core inflation). M2 is growing at 4.7% while Core PCE Prices are growing at … 1.5%.

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Besides, if one is worried about inflation, you can purchase Treasury Inflation Protected Securities (or TIPS).

And The Dow just broke 26,000 for the first time!

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The real problem is the growing Federal Budget deficits.

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With exploding healthcare costs (as in Medicare), spending is rapidly diverging from tax revenue.

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And with over $20 trillion in public debt, the US is facing hard decisions on spending and taxation.

M2 Money growth is NOT causing Weimar or Venezuela like inflation. But Gold is still a good alternative to Fiat currency.

Children playing with stacks of hyperinflated currency during the Weimar Republic, 1922

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Has The Fed Lost Control? VIX (Stock Vol) Falls Below 10, TYVIX (T-Note Vol) Falls Below 4

Are markets out of control due to The Federal Reserve keeping rates so low for so long?

The VIX just hit an all-time low.

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The VIX (Chicago Board Options Exchange SPX Volatility Index) has fallen below 10 and the S&P500 index has soared with massive Federa Reserve stimulus (aka, the punchbowl).

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The TYVIX (CBOE CBOT 10 year U.S. Treasury Note Volatility Index) has fallen below 4 despite Fed rate increases and their lame unwinding of their prodigious balance sheet.

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This bring up the question: Has The Fed lost control of markets? This is important in that it may lead the Fed Open Market Committee (FOMC) to raise rates as a faster pace, as indicated by The Fed’s “Dot Plot.”

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Meanwhile, “inflation” remains subdued at 1.5% YoY.

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We will see if The Fed is speeding up their balance sheet unwind after today at 3pm EST.

Will there be a trigger event that will bring markets crashing back to earth?

Janet Yellen better start drinking a few Tequila Sunrises if that happens.

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2017: A Review Of The Fed, Treasuries, Mortgages and Housing (Volatility and Velocity)

2017 has been an interesting year. Donald Trump was elected President and seated in January 2017. The Federal Reserve kept rates near zero with a massive balance sheet for almost all of Obama’s 8 years as President, then started to raise rates and unwind their massive balance sheet AFTER Trump was elected. Note the decline in M2 Money growth after Trump’s election.

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Inflation? Both Core PCE Price growth and Core CPI growth have declined in 2017 (yet The Fed has raised their target rate 4 times since Trump’s election but only once during Obama’s term despite declining inflation.

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The M1 Money Multiplier and M2 Money Velocity have finally stabilized.

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Mortgages? Mortgage purchase applications have declined since the financial crisis and have been slowly recovering, hampered by Dodd-Frank and CFPB rules and regulations.

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New and existing home sales? Smokin’!

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Home prices? Their YoY growth rates are continuing to rise, despite being almost 3 times YoY earnings growth for most Americans.

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How about 30 year mortgage rate and the 10 year Treasury yield? While the 10 year Treasury yield has increased over the year, the 30 year mortgage rate has declined. Although both have been increasing since early September.

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Both the 30Y-2Y and 10Y-2Y Treasury curve slopes have been flattening over the year.

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The 10 year Treasury volatility and term premium have both been declining over the year.

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With 2018 just around the corner, let’s see how many times The Fed raises their target rate and continues to unwind their balance sheet.

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S&P 500 Dividend Yield FINALLY Above US Treasury 2Y Yield (10 Years Afer)

The last time that the S&P 500 dividend yield was above the US Treasury 2Y yield was in September 2008, just prior to The Federal Reserve launching their quantitative easing (mass purchases of Treasury Notes/Bonds and Agency MBS).

For the first time since 2008, the dividend yield on the S&P 500 Index and theyield on two-year Treasury notes are essentially the same. For years after the financial crisis, the gap between the income generated from holding equities relative to government securities bolstered the case for U.S. stock markets to climb to record highs. Now, with the Federal Reserve raising interest rates, the yield on short-term Treasuries is attracting investors like BlackRock Inc.

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But Ten Years After, massive monetary stimulus is finally going home. By helicopter.

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Is A Recession Looming? Low Unemployment And Declining Treasury Curve Occur Just Before Recessions (And Lousy Wage Growth)

US Real GDP is growing at 2.3% YoY.  What’s not to like?

How about the lowest unemployment rate since 2000 and the worst wage “recovery” in modern times? AND a flattening Treasury yield curve?

Yes, we are once more staring into the abyss of a recession where unemployment rates are low (as they seemingly always are just prior to the end of a business cycle). Throw in a skidding Treasury curve and … this is it?

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As we are painfully aware,  wage growth is the worst it has been in modern times after The Great Recession. Despite the staggering printing of money by The Fed (and ultra-low interest rates).

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Of course, The Fed is raising rates cautiously and unwinding their balance sheet very slowly in order not to disrupt markets (and pop the numerous asset bubbles).

 

 

Fed Chair Janet Yellen Urges Congress to Monitor U.S. Debt As She Steps Down (NOW A Warning??)

Federal Reserve Chair Janet Yellen’s final speech to Congress (Joint Economic Commitee)  reminded me of the scene in the movie Death Becomes Her where Meryl Streep swallows a magic potion and  Isabella Rosselini then says “Now a warning.”

Yes, Yellen warned Congress that they should monitor the US debt load, now at $20.6 trillion, up from $9.5 trillion in Q2 2008.  She also called on Congress to adopt policies that will promote investment, education and infrastructure spending.

Yes, US public debt outstanding has more than doubled since Team Bernanke/Yellen began quantitative easing (QE) back in September 2008.

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Of course, The Fed buying US Treasuries helped fuel the enormous growth in US debt leaving The Federal Reserve as the largest owner (by far) of US Treasury debt.

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Why didn’t Yellen mention declining M2 Money Velocity (GDP/M2 Money Stock)?

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And why didn’t Yellen mention that The Fed killed-off Treasury volatility?

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Notice that Yellen issued this warning as she is being replaced as Fed Chair and a new President (Trump).

Why did Yellen wait until her last speech to issue a warning that most economists already knew? 

At least Yellen didn’t say “Bottom’s up!”

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This Flat Yield Curve Is No Greenspan Conundrum (Low Inflation Prevails)

  • Fed Study Says San Francisco Fed research blames low inflation, neutral rate
  • There’s some risk that term premium could rise abruptly

(Bloomberg) —  This isn’t Alan Greenspan’s yield curve.

The gap between short and longer-term interest rates has been narrowing even as the Federal Reserve raises its policy rate, a trend that echoes the so-called “flattening” of the curve between June 2004 and December 2005. Then-Fed Chairman Greenspan called the mid-2000s episode a “conundrum,” but the leveling out is no mystery this time around, Federal Reserve Bank of San Francisco researcher Michael Bauer writes in a note called the Economic Letter.Low inflation and neutral interest rates as well as political uncertainty are all weighing on longer-dated bond yields, keeping them low even as the Fed boosts the cost of borrowing in the near-term, Bauer writes. That’s important, because it means that if price pressures pick up quickly, investors could begin to demand better compensation for holding longer-dated securities — reversing the flattening and potentially dinging stock market valuations, which are based partly on the low level of yields in the bond market.

“Perceived inflation risk could reverse its course quickly if inflation suddenly trended up,” Bauer says in the note. “Similarly, if investors’ expectations about the Fed’s balance sheet were to change suddenly, or if investor sentiment about the relative attractiveness of Treasuries deteriorated for other reasons, the term premium could rise quickly.”

Inflation has been low this year, with the Fed’s preferred index posting a 1.6 percent gain in September, well below the central bank’s 2 percent goal.

Market-based indicators suggest that investors are starting to doubt whether inflation will accelerate. When investors expect prices to rise, they require extra return to hold longer-dated securities because of the risk that price gains will erode the investments’ value. But if they see a greater risk of tepid inflation progress, they’re willing to pay extra to hedge against low inflation — driving down longer-term bond yields and flattening the curve.

Likewise, Fed officials have gradually marked down their forecasts for how high they’ll ultimately lift their overnight policy benchmark. The shift reflects a growing sense among policy makers that the neutral rate — the one that neither stokes nor slows growth — has declined and will stay low. Expectations about future short-term rates are a key determinant of long-term yields, so as markets followed the Fed’s lead, it probably helped to flatten the curve, Bauer writes.

Finally, expectations for fiscal stimulus drove up bond yields when Donald Trump won the presidential election last year, but have since waned. The study shows Treasury yields falling on days with negative headlines about domestic politics and geopolitical risks.

Yeppers, core inflation is still 1.33% and the neutral real rate is 1.40% leading the San Francisco Fed to generate a Taylor Rule estimate of 5.96% for the Fed Funds Target Rate,  while it is only 1.25% — A GAP OF 471 BASIS POINTS.

Yes, the Taylor Rule gap is higher now that during Greenspan’s tenure as Fed Chair, mainly because core inflation is lower under Bernanke/Yellen.

But notice that core inflation declined to under 1% in 1998 under Greenspan. But 10-year Treasury note volatility is near an all-time low (under 4).

Cheers to Alan Greenspan, the architect of monetary expansion!