Keep An Eye On M-3

Two years ago, in my “Story On Gold – 2” essay, I described how G&C (government and central bank) discredited the meaningfulness of the broad money supply data known as M-3 (the broader measure of money, which includes money-market funds and large time deposits held by private individuals & institutions). They went on to discontinue collecting M-3 data in 2006 when M-3 aggregate amount was sky-rocketing and outpaced the growth of M-1 and M-2 by a large margin. They explained that M-3 is “irrelevant” and “misleading”.

Granted. Since the Fed’s assigned missions are :(1) monitor and control inflation (that’s demon number 1 in macroeconomic doctrine), and (2) monitor and promote employment (since unemployment is the arch enemy in our 80% consumption-dependent economy). So M-3 indeed does not matter as much to these objectives than M-1 and M-2, which tracks quickly dispensible M&C (money and credit) to the general puclic, i.e., the little guys whose spending ability would directly affect inflation and consumption.

However, for the financial markets and investment managers, M-3 can be very meaningful and revealing, since the ebb and flow of funds and M&C are a primary variable that moves financial markets in big ways. I pointed out that the surge of M-3 during the lead-up to the bursting of the bubble in 2008 was in large part a reflection of “amplified M&C in huge doses through the activities of securitization and derivatives trading” and “unregulated leverage”. As a result, I took my money out of the market and sought refuge in gold and foreign currencies. That helped me survived the holocaust in the aftermath of 2008.

After the G&C stopped collecting M-3 data, other groups continued to try to track the data, however imperfectly. Hence, there is a so-called Shadow Government Stats Continuation charts (see attachment “M-3 Money Supply 2011”). Notice how the rate of growth of M-3 sharply declined after 2008 and, more importantly, was signigficantly out-paced by the corresponding growth rates for M-1 and M-2. That led me to conclude in 2009-2010 that there would not be much of a bull market any time soon.

Now look at the other attachment “M-3 Money Supply 2013” which tracks the data through more recently. Notice how M-3 has been growing more quickly and at a moderate pace (healthy) since the last chart and, importantly, the differential rates of growth between M1-M2 and M-3 have significantly narrowed. That’s why I mentioned that the stock market was poised for some healthy appreciation at the end of 2012.

Now that we went through a year of 30% rise in the S&P, we will have to watch the data very closely again. Obviously, the QE injections are necessary to prop up the market. But what about the down side? I don’t have the crystal ball. But start tracking the M-3 shadow stats for obvious distress signals. For example, if M-3 growth begins to lag QE-induced M-2, you should be careful.

And, for the good year 2013, I am signing off … “And that…that…that’s all, folks”

– doublewoodM3_Money_Supply_2011[1]M3_Money_Supply_2013[1]


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