Friday, June 12, 2009

MAJOR ALERT: Another Major Switch in Fed Policy?

After unprecedented money growth, in recent weeks I have hinted that Fed money growth was slowing. The latest data now show that money supply is now in a nosedive.

The whipsaws in Fed monetary policy under Fed chairman Ben Bernanke are unprecedented.

In early 2008, money supply (M2 not seasonally-adjusted) grew at rate of around 12%. During the summer of 2008, Bernanke reversed engines and completely slammed on the breaks and slowed money supply growth to 1.2% annualized. This last money slow down is what I believe intensified the downturn.

In late September 2008, in panic, Bernanke opened the money spigot, again, For approximately 6 months we had money growth of near 15% on an annualized basis. An unprecedented amount of Fed money growth. This is what I believe is fueling the current rebound in stocks and commodities.

However, it appears that Bernanke may now be reversing policy, again. The latest numbers from the Fed show that over the last three months the money supply has actually declined. On March 9, 2009 M2 non-seasonally adjusted stood at 8363.7 billion. Yesterday, the Fed reported that as of June 1, 2009 the money supply stood at 8335.1 billion. This is an annualized decline of of 1.4% in the money supply.

Needless to say, this stock market climb is pretty much over, if Bernanke keeps this money shrinkage act up. If Bernanke then sticks to form, he won't reverse engines until the financial system is again on the verge of collapse.

I know it is very difficult to make long term, investment plans under these circumstances, but I am just the messenger. Bernanke is causing the whipsaw action. I have been bullish for most, if not all, of the run up in the stock market--and it now appears a good time to take profits.

The big move at this point will be the continued drop in the bond market. Without the Fed printing money, interest rates are headed higher--and if the Fed does start printing again, inflation will push rates higher. Thus the bond market is in trouble under either scenario.

Long term, inflation will be the major problem, since any Fed tightening now will simply result in panic Fed printing down the road.

Note: WSJ has a feature story today on the debate over what Fed policy is going to be from here, without any mention of the fact that M2 money supply is declining NOW. It is a mark of the current dismal state of economics that no one WSJ contacted for the story brought up the current action of the Fed, rather the debate centered over whether the Fed would start to tighten, as if this decline hasn't even occurred. Amazing. Don't pay attention to these nonsense analysts. Watch the numbers and you will be at least a couple of months ahead of what will happen in the markets.


  1. Maybe this explains why the "long knives" are out against Bernanke. A second leg down wouldn't look good for Obama

  2. Thank you for the alert sir. They are very much appreciated.


  3. Nick,

    Au contraire, perhaps Bernanke is precipitating another crisis to consolidate his power. If things all go to hell, everyone will be too busy scrambling to get a grip on the situation (pols and administration eyeing it hungrily, drooling, working overtime to figure out how to get more power and bailouts out of it) for anyone to have time to question Bernanke and whether he's fit for office.

  4. "Au contraire, perhaps Bernanke is precipitating another crisis to consolidate his power."

    This is utter rubbish.

  5. Wow. Glad I took your advice last month. Good call.