Category Archives: Economy and Meltdown

$10 Trillion M2 Is Now In The Rearview Mirror

Two weeks ago we observed that the broadest money aggregate tracked by the Fed, M2, was less than $10 billion away from crossing the historic $10 trillion mark. As of this week, this number now officially has 14 digits for the first time ever, or $10,035,100,000,000 to be precise (technically the non-seasonally adjusted number crossed $10T last week, but for some reason bank deposits need to be seasonally adjusted, so waiting for the traditionally fudged data seemed appropriate). And we have a $50 billion increase in savings deposits, aka deferred buying power to those who still have the capacity to save, in one week to thank for putting $10 trillion in the rearview mirror.

Which actually brings us back to a point we have discussed previously, namely that even though M1 may be flattish and declining in direct proportion with the amount of excess reserves held by banks, and currency in circulation is rising at a glacial pace of about $1 billion each week – a key reason why the inflationary animal spirits have not bee unleashed yet, it is M2, i.e., total deposits, where the bulk of electronic money is contained, and which is rising at a soaring pace as seen on the chart below. And this is happening even despite ZIRP and soon – NIRP. Because this is real, well technically electronic, money that is just waiting for the signal to be withdrawn and spent on other things. Like bread. And wheelbarrows.

Now as the chart below shows, while the ratio of total deposits (checking, savings, small-denomination time deposits, and other) to currency has declined from a peak of 13.0x in 1987 to just over 6.0x in 2000, this ratio has been increasing since 2000 and is now back to 8.0x.

Which then begs the question: if and when the US currency in circulation starts picking up, due to conversion of reserves into dollar bills, and if the current ratio of reserves to currency persists, then the conversion of another $1.6 trillion in reserves into currency (since the Fed will be absolutely unable to withhold the reserve avalanche from converting into real circulating money without raising the IOER to a level which would crush the stock market, directly in opposition of what the Fed’s prime and only directive is) would mean, all else equal, total bank deposits would rise from the current $8.4 trillion to $21 trillion.

What the price of a loaf of bread, or a bar of silver, will be at that point, is anyone’s guess. Or a wheelbarrow for that matter.

Austerity At The Olympics: Each "Gold" Medal Contains 1.34% Gold

As every Olympic athlete knows, size matters. The London 2012 medals are the largest ever in terms of both weight and diameter – almost double the medals from Beijing. However, just as equally well-known is that quality beats quantity and that is where the current global austerity, coin-clipping, devaluation-fest begins. The 2012 gold is 92.5 percent silver, 6.16 copper and… 1.34 percent gold, with IOC rules specifying that it must contain 550 grams of high-quality silver and a whopping 6 grams of gold. The resulting medallion is worth about $500. For the silver medal, the gold is replaced with more copper, for a $260 bill of materials. The bronze medal is 97 percent copper, 2.5 percent zinc and 0.5 percent tin. Valued at about $3, you might be able to trade one for a bag of chips in Olympic park if you skip the fish.



Size Matters…(via BBC)


Though Olympic gold is no longer 100 percent gold, a medal can still fetch big money. In 2010, a gold medal worn by Mark Wells, a member of the 1980 “Miracle on Ice” U.S. men’s hockey team, was auctioned off for $310,700. Several years before that, Wells had sold his medal to cover medical expenses. Just before the auction, the medal was valued at $100,000 but it earned three times that amount. Heritage Auctions of Dallas identified the 2010 buyer as a rancher from the western U.S.

The question remains – with the minimum 103 medals expected to be won by US athletes, will Bernanke be forced to reduce the size of NEW QE as ‘all that precious metal is horded and repatriated back to the USA’?

Source: Dillon Gage

Snow White Dumps Prince Charming

Via Mark E. Grant, author of Out of the Box,

Magic Mirror: Snow White still lives, fairest in the land. ‘Tis the heart of a pig you hold in your hand.
Queen: The heart of a pig! Then I’ve been tricked!
You know how when you were a little kid and you believed in fairy tales, that fantasy of what your life would be; a shimmering white dress, a Prince Charming who would carry you away to his castle on a hill. You would lie in bed at night and close your eyes and you had complete and utter faith in God, country and Superman. Santa Claus, the Tooth Fairy, the quest for the Grail, the Easter Bunny were so close you could taste them, but eventually you grow up, one day you open your eyes and the fairy tale disappears.
Sneezy: Hey, someone stole our dishes!
Most people, most markets, operate on the basis of reality and probable scenarios based upon fact. This is not true for the equity markets however as it is here where hopes and prayers and visions of Tinkerbell and little blue fairies that will come to the rescue reside. It is in the stock markets where great dreams take place and where Batman guards Metropolis. It is also here, however, where eyes tightly closed are pried open from time-to-time and where the horrors of the known universe stare back at you with disquieting eyes.
Sleepy: Maybe the Old Queen has got Snow White.
Thursday and Friday of last week, I should imagine, will prove to be those once again days where the flight of fantasy took off and hoped for the best only to find that the fuel in the tanks was dangerously low. Treasuries moved some, not much, the bonds of Spain and Italy gained a bit of ground while the stock markets soared on the basis that all of Europe’s problems had been solved by Draghi & Company. Interestingly enough, after the close of course which is the way these schemes are pre-arranged, the German Central bank came out and said there were no changes in their stance and so the cold water was poured upon the fire after all of the party-goers had gone home. Just this morning in Berlin the German Finance Minister declared that the Stabilization Fund that is currently in existence, the EFSF, will not be buying Spanish debt in the market which topples the dreams and fantasies of last week.
Magic Mirror: Prepare to be amazed beyond all expectations. After all it is what I do.
Draghi represents the Southern contingency, the periphery nations, the troubled cousins who cannot live on what they make. This is all fine and dandy but do not kid yourself; if the Germans say “Nein” then it is “Nein” and any other conclusion is foolhardy. We will soon get the German opinion on Greece, the money for the Spanish banks is going to the nation of Spain and will be controlled by the German auditors, Italy is staring at mounting difficulties, Portugal is going to face an Act II and there is only $65 billion left in the EFSF fund while the ESM fund is hung up in the German courts until September 12 and today is July 28. 
Whoosh and sorry for the dose of reality.
Snow White: That was fun!

‘Micro’ Equity Focus Is Shifting To ‘Macro’ Bond Reality

Fixed income markets have always focused closely on news about the US macro-economy; while traditionally, equity market participants have focused more on the “micro” data – in particular, news about current and prospective corporate earnings – to form their views about the relative attractiveness of different stocks or the market as a whole. Goldman finds that the financial crisis changed all that. The responsiveness of the US equity market to economic news increased dramatically, now showing about twice as much sensitivity to macro data as it did in the years before the financial crisis. While micro data remains important – especially in quantifying just how much QE-hope the market is ‘abiding’ by, macro news is likely to be the critical driver of equity markets until the global economic outlook is considerably brighter than it looks today (or macro decouples from Fed/ECB jawboning). On average the market’s responsiveness to all these economic indicators suggests that we are still very much living in a macro world. In the meantime, there are some exceptions to the fairly consistent reactions to economic news that we see between equity and bond markets.


Goldman Sachs: Economic News and the Equity Market

Traditionally, equity market participants have focused more on the “micro” data – in particular, news about current and prospective corporate earnings – to form their views about the relative attractiveness of different stocks and about the market as a whole.

While equity market investors were certainly well aware of the major economic releases, they were often seen as just one part of the “mosaic” of information gathered by investors rather than a central driver of markets.

The financial crisis changed all that. The responsiveness of the US equity market to economic news increased dramatically during the crisis and has remained high since (Exhibit 1).


Assessing the Market Impact of Economic Data

The equity and bond markets show fairly consistent reactions to economic news, with a couple of notable exceptions. Stronger-than-expected news about growth pushes up both equity prices and bond yields, but stronger-than-expected news about inflation has the opposite impact on the equity market.


Bond markets appear to be more attuned to business survey data and relatively less responsive to news about consumer confidence or GDP. This is portrayed in Exhibit 4, in which the vertical axis measures only the average absolute response of the equity market to each indicator (i.e. we reverse the sign on the inflation data) and omits NFP.


Market Focus Varies over the Cycle

In general, the equity market appears to have shifted its focus in intuitive ways:

  • News about housing activity was extremely important as this sector of the economy collapsed in 2007-2008, but moved markets much less before and since.
  • Similarly, equity investors worried about upside surprises to inflation while the economy looked strong, but have paid relatively little attention to these data lately.
  • Reports on consumer spending and confidence were extremely important in the early recovery, but seem to have received a bit less attention over the last year or two (Exhibit 8).
  • Concerns about the global growth outlook and the still-weak labor market have kept markets very focused on news about the manufacturing sector and employment (Exhibit 9).



While the response of equities to economic data is generally straightforward—more growth and economic activity is good, more inflation is bad — there are some limited circumstances under which “good news is bad news” from a market perspective.

Towards the end of the business cycle, when inflation pressures and Fed tightening are a concern, markets may see especially strong activity data as a mixed blessing. This is evident in Exhibit 9, which shows that as of early 2007, the two-year trailing average response to employment data was negative (i.e. in 2005-2006, when the economy looked good, the equity market didn’t react well to stronger-than expected employment reports). But at most times, good news on employment or economic activity is also good news for the equity market.

Taking an average of the market’s responsiveness to all these economic indicators suggests that we are still very much living in a macro world. The equity market shows about twice as much sensitivity to macro data as it did in the years before the financial crisis (refer back to Exhibit 1). We suspect this will remain the case until the US and global economic outlook becomes considerably clearer.