A Look at the Economy Ahead

Even the Fed's seasonally adjusted M2 numbers are showing a decline.

At the end of August, preliminary seasonally adjusted numbers show a 2.3 % decline in 3-month annualized M2. In other words, the Fed is not providing any money to the currents stock market run. It is purely coming from money that has been on the sidelines. Once that is completely sucked in, it is all over.

It is, however, important to realize this Fed posture will not go on forever. How long the Fed can continue this no money growth stance is the big question.

WSJ may provides some clues as it takes a look at the Fed's balance sheet and notes (htNick):

The Fed’s balance sheet expanded again in the latest week, rising to $2.072 trillion from $2.069 trillion, but the expansion highlighted the recent shift in the makeup. The increase came solely from purchases of mortgage backed securities, Treasurys and agency debt. The Fed started a program in March to ramp up such acquisitions in order to push down long-term interest rates. All of the programs set up as emergency facilities to prop up the financial system posted declines. Direct-bank lending remains at its the lowest level since the collapse of Lehman Brothers. Central-bank liquidity swaps gave back last week’s increase. The commercial paper and money market facilities also dropped again and are at their lowest levels since inception, as companies decide to take their funds out and tap investors directly as sentiment in the market improves.

The increase in the balance sheet of less than one percent (.145% to be exact) is a yawner, unless we see many more weeks of such activity. More interesting is the shift in where the Fed is pushing money. The commercial paper and money market facilities are declining as assets for the Fed, while Treasury security purchases (along side MBS buying) are increasing. In other words the private sector is losing some fear by going back into commercial paper and money markets, which puts greater pressure on the Fed to prop up government paper. The public was holding government paper and the Fed was holding commercial paper, that is switching. The real battle for the Fed starts, when the Treasury continues to issue more paper and there is no one else to buy it, and the Fed has no more commercial paper, and the like, to liquidate.

For those anxious to sound the inflation alarm, that would be the time to sound the first alarm. That type of money printing, however, may not do much for the stock market as it will be directed at Treasury security purchases. And the markets are likely at that first phase of Fed money to act as though none was going on..

Bottom line over coming months, this is what we have to look forward to:

A declining stock market

A declining economy

At some point a resumption in inflation

Continued growth of the government sector.

And the worst of all possible worlds: Stagflation.

First up, though the declining stock market.

Fear Subsides: M1 Money Growth Turns Negative

The M1 nsa money supply measure as of February 5,2009 is now lower than it was three months earlier on November 3, 2008. On November 3, 2008, M1 nsa stood at $1561.3 billion. As of February 5, 2009, it is below that number at $1555.9. This is an annualized decline of 1.4%.

Long term EPJ readers should not be surprised by this drop in M1 nsa. I have long pointed out that M1 nsa growth would drop once fear started to subside in the markets and individuals started to pull their money out of low-interest to no-interest checking accounts and move them into a bit more aggressive type accounts. This appears to be now occurring. It is an important signal that this phase of the downturn is very near its end.

M2 nsa, which we expected to continue to grow, even though M1 nsa would not, is, indeed, doing so. Three month annualized M2 nsa is growing at the remarkable rate of 19.3%. This M2 nsa growth is going to be highly inflationary, but what it is going to do first is rocket the stock market, and ultimately GDP and reverse the downtrend in employment.

Remember, you read it here first.

ALERT: M1 nsa Money Growth Collapses

After growing at annualized rates near 40%, three month M1 nsa money growth numbers (for the week ended Jan 19) climbed at a three month annualized rate of only 3.04%

One week does not make a trend, but we have consistently said that a key datapoint to watch would be M1 money growth, as a slowdown in growth of this number would indicate fear is subsiding--and corporations and individuals are not adding to their cash balances. This may be an early indicator that such may be occurring. It will be very important to watch this number closely in upcoming weeks.

One word of caution, the pre-Christmas period is a period of strong demand for cash, part of the slowdown may be a return to normal non-Christmas cash levels. When the Fed seasonally adjusts its numbers, M1 is growing at a healthy clip of 34%. But even a normal return to non-Christmas cash levels is a sign the flight into cash has stopped.

That said, if this collapsing trend in non-seasonally adjusted M1 continues (while M2 nsa continues to grow at double digit rates), I will be prepared to say the worst is over for the economy, on a short-term basis. Afterall, it is non-seasonally adjusted money that is ultimately working its way through the economy. Money number trends over the next 4 to 6 weeks will be very important to watch. Continued slow M1 growth and continued rapid M2 growth will signal the end of this recession. And, for one week that's what the data is pointing to.

Despite slowed M1, three month annualized M2 nsa is now growing at a remarkable 25.2%.

Fed: We Are Going To Pump Money Until It Floods the System

Following its regualarly scheduled two day meeting on the economy and interest rates, the Fed issued a statement that said:

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.

Latest Money Supply Numbers

Three month M1 nsa annualized money supply growth stands at 30.9%, as of this week. Three month M2 nsa annualized stands at 15.6%.

They are both down from the week before, when M1 stood at 73.2% and M2 stood at 19.3%, but even at these slowed rates the growth rates are extremely inflationary.

Money Supply Explosion Madness

M2 nsa three month annualized money supply growth has ticked up another notch, this past week, and is now growing at an incredible 19.3%. This is extremely high money growth, that is somehow being usurped by M1 growth. M1 nsa three month annualized money supply growth is at an astounding 73.2%, which means Fed Chairman Ben Bernanke is doing all he can to ease fears and get the economy going, by a policy of reckless abandoned. That most continue to put their money in the M1 components of currency and checking accounts is an example of the lack of understandng by the man on the street.

At some point this attitude of placing money in M1 will reverse itself and the economy will climb (at least as far as tracked data is concerned)and prices will soar. This is not the time to be in short-term Treasury paper.

As George Reisman has put it (Via an annonymous commenter at Free Advice):

The government today has unlimited powers of money creation. And so it is highly likely, given its evident willingness to use those powers, and the overwhelming public support that exists for using them, that the increase in the supply of money it brings about will ultimately outweigh the present increase in the public’s demand for money for holding. When and to the extent that that happens, and business sales revenues and profits begin to rise and employment and wage rates begin to rise, the public’s demand for money for holding will once again begin to fall.

At that point the massive increase in the quantity of money the government is currently bringing about will fuel sharply rising prices and give birth to a new crisis.

Bernanke Signals He Will Shrink the Fed's Balance Sheet Before Inflation Hits

Yesterday, Fed Chairman Ben Bernanke delivered the Stamp Lecture at the London School of Economics. As part of his speech, he explained how he envisions the Fed will shrink its balance sheet once banks begin to loan aggressively again:

Some observers have expressed the concern that, by expanding its balance sheet, the Federal Reserve is effectively printing money, an action that will ultimately be inflationary. The Fed's lending activities have indeed resulted in a large increase in the excess reserves held by banks. Bank reserves, together with currency, make up the narrowest definition of money, the monetary base; as you would expect, this measure of money has risen significantly as the Fed's balance sheet has expanded. However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed. Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much lower than that of the monetary base. At this point, with global economic activity weak and commodity prices at low levels, we see little risk of inflation in the near term; indeed, we expect inflation to continue to moderate.

However, at some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to unwind its various lending programs. To some extent, this unwinding will happen automatically, as improvements in credit markets should reduce the need to use Fed facilities. Indeed, where possible we have tried to set lending rates and margins at levels that are likely to be increasingly unattractive to borrowers as financial conditions normalize. In addition, some programs --those authorized under the Federal Reserve's so-called 13(3) authority, which requires a finding that conditions in financial markets are "unusual and exigent"--will by law have to be eliminated once credit market conditions substantially normalize. However, as the unwinding of the Fed's various programs effectively constitutes a tightening of policy, the principal factor determining the timing and pace of that process will be the Committee's assessment of the condition of credit markets and the prospects for the economy.

As lending programs are scaled back, the size of the Federal Reserve's balance sheet will decline, implying a reduction in excess reserves and the monetary base. A significant shrinking of the balance sheet can be accomplished relatively quickly, as a substantial portion of the assets that the Federal Reserve holds--including loans to financial institutions, currency swaps, and purchases of commercial paper--are short-term in nature and can simply be allowed to run off as the various programs and facilities are scaled back or shut down. As the size of the balance sheet and the quantity of excess reserves in the system decline, the Federal Reserve will be able to return to its traditional means of making monetary policy--namely, by setting a target for the federal funds rate.

So now you have the theory. Will Bernanke be able to pull this off by smoothly shrinkng the monetary base without shrnking the money supply so rapidly that it plunges the economy back into recession, or too slowly that inflaton gets out of control? It's unlikely, and the best bet appears he will err on the side of inflation.

Extraordinary Money Supply Growth Continues

The latest Federal Reserve money supply numbers, through December 29, 2008, continue to show huge money supply growth. Three month M1 sa is growing at 30.6% annualized rate. Note: Although we normally use non-seasonally adjusted numbers, during the Christmas season it makes more sense to look at M1 on a seasonally adjusted basis since there is abnormal demands for cash during the holiday season. Further, M1 is our fear indicator, the faster it grows relative to M2, the more fear remains in the system. At current M1 growth, fear is obviously through out the system.

Three month M2 nsa is growing at 18.0% annualized rate.

Clearly, Ben Bernanke is serious about his "quantitative " approach to monetary policy. This will reverse the economy and cause eyeball numbers such as GDP and unemployment to flash that the worst is over, much faster than most expect. However, the price inflationary impact of this money printing will be astounding.

Bernanke's Monetary Reserve Problem

The Fed will add even more monetary reserves into the system then they normally would based on this new development. The money multiplier has collapsed.The M1 money multiplier just slipped below 1. So each $1 increase in reserves (monetary base) results in the money supply increasing by only $0.95 (In 2000, it was above $1.80):


The fear in the system is astounding. At some point, it will subside and banks will put these reserves to work. When that happens, Bernanke's plan has to be to withdraw reserves from the system, so that a true volcanic monetary eruption does not occur. His ability to get this right is probably slim to none. If he leaves too many reserves in the system, inflation will go out of control. A dramatic reversal of money reserves on the other hand will crash the economy. It's not a pretty picture. The likelihood is that he will err on the inflationary side.


(Via Bill Seyfried through Greg Mankiw)

Is the FEAR Over?: Mutual Fund Outflow Has Stopped

The first sign that fear is subsiding has appeared, in the mutual fund sector.

Investors pulled a net $320bn from mutual funds in 2008, a record in both dollar terms and as a percentage of assets. Equity funds had outflows of $233.5bn in the year to December 29, with bond funds seeing outflows of $58.2bn and balanced funds – which include both securities – having outflows of $28bn, according to Emerging Portfolio Funds Research.

However, it appears that outflows stabilised and even reversed in the final weeks of the year. Investors put a net $23bn into equity funds during December and withdrew only $3.5bn from bond funds.

Stocks are now in very strong hands, meaning that if those holding stocks right now were not scared out of stocks by the crisis period of 2008, it is going to be very difficult to spook these people. They are long term holders. Further, given that M2 nsa is growing in excess 0f 20% on an annualized basis over the last three months, the stock market is set for a huge, and I mean huge rally.

The fear may be over. Up to the plate next, somewhere in 09, major inflation.

Shop 'Til You Drop: The Retail Sales Picture

The headline retail sales spending number is down 8% in December according to MasterCard's Spending Pulse. However, taking the number apart, gives a slightly different story.

When gasoline sales (gasoline prices are down 40%, year-over-year) are excluded, the decline through Christmas Eve is only 4%. Since the price of oil is influenced, not only by retail gasoline demand, but also commercial and industrial use, this is a much more complicated number.

Now for the retail picture ex-gasoline. Bad weather on both coasts clearly had a negative impact on sales, but a more important factor is that between Thanksgiving and Christmas this year there were just 27 shopping days versus 32 in 2007, a difference of 16%. Unlike 2007, you have a very strong post-Christmas day shopping window Friday-Saturday-Sunday. Thus the number to watch is the number I posted earlier, January 8, when full December numbers are announced.
All this said, it was still a dismal Christmas season for retailers. The demand for cash is obviously very strong--people are very scared about the economy. However, this doesn't mean that the consumption-savings ratio is not readjusting towards consumption. If capital goods sales plummet faster than retail sales, and they are, the ratio is readjusting in favor of consumption. ABCT lives. What's going on is a downward readjustment of the price level at the same time as the consumption savings ratio is readjusted, with the added demand for cash acting as though the money supply is shrinking.

This is a once in a lifetime phenomena, equivalent to a Total Solar Eclipse. What makes this even more amazing is that you now also have the Fed aggressively printing money at record levels. It's almost as though the "Big One" earthquake hits Southern California on the same day as the Total Eclipse of the sun.

At some point the Fed money printing, what Bernanke is calling "quantitative (I'll say) money management", will overtake the desire to hold cash balances. Things will reverse and there will be a flight from cash. Thus, your money right now is worth more than it probably ever will again.

In other words, there are major discounts at most retailers---you will never see these type prices again, if Bernanke succeeds in his money printing--it's not a day to be reading blogs. It is the ultimate shop 'til you drop day. If there is something you need or want, today is the day to buy it. The price is likely never to be as low again.

Cash is king, probably only for about another week.

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10 Municipal Bankruptcies In 2009?

It's a race. On the one hand you have the Fed pumping money into the bank system at near Zimbabwe rates to re-inflate the system, on the other had, Ben Bernanke's 2008 Summer of Monetary Stinginess is having its latest impact on municipalities.

Will Bernanke's money gusher reach the municipal sector in time? If not, it is going to be another mess.

The accountant who predicted the nation’s largest municipal bankruptcy says as many as 10 insolvencies will roil the $2.7 trillion U.S. market for state, county and city debt next year, according to Bloomberg.

John Moorlach said in 1994 that Orange County, California’s leveraged investing strategy could wreck its finances. The county went bankrupt about six months later after losing $1.6 billion.

As many as four cities in California and six others nationwide may seek court protection from creditors next year under Chapter 9 of the bankruptcy code, the section devoted to municipal governments, Moorlach said in an interview.

Moorlach said many California cities are watching Vallejo, a city of 117,000 on San Francisco Bay that filed under Chapter 9 in May. The city hopes to rewrite its labor contracts with police and firefighters.

“If Vallejo is successful in unwinding pension agreements, you could see Chapter 9 become a whole new industry,” Moorlach said.

Of course, the Fed and Treasury will in some fashion come to the rescue of any big cities that get into trouble, but it still is extremely dangerous to hold this paper. For smaller municipalities where a rescue may not occur at all, holding municipal paper is like playing Russian roulette.

Money Supply Watch and the Real Story for 2009

M1 nsa continues to grow at remarkable rates.

According to the Fed's latest numbers, three month annualized M1 nsa is growing at 52%. This indicates there is still tremendous fear in the system.

Three month annualized M2 nsa is growing at 20.8%. Growth in M2 is indicative of Fed money printing. 20.8% M2 growth is also remarkable. The readjustment period in the economy is going to end much sooner than most expect, given these money injections by Bernanke. Inflation and a collapsing dollar is going to be the real story in 2009, if Bernanke keeps this up.

Fed Sets Target Rate at 0 to 0.25%--Will Buy Huge Quantities of Assets; Major Inflation Ahead

The Federal Open Market Committee announced that it will establish a target range for Federal Funds of 0 to 1/4 percent.

A lot of this is window dressing since the effective Fed Funds rate has already been trading around 0.15% for the last two weeks.

Further, as I have pointed out, since the Fed has started paying interest on reserves on balance at the Fed, the level of the Fed Funds rate is not as significant since the Fed can add as much reserves as it wants at given interest rate levels.

Indeed, it appears that it will add huge amounts of reserves. From today's Fed statement:

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Unless the Treasury is going to be borrowing funds to put on deposit with the Fed, this means the Fed will be creating additional reserves when they buy these assets. Since the latest money supply numbers show three month annualized M2 money supply growing at 17%, it appears that Bernanke is clearly clueless as to the platform he is building for one of the greatest inflation bursts in the history of the United States.

Whoever is buying T-bills at near zero interest is in for a rude awakening, the inflation ahead is going to be fast and furious. It could start as early as January.

FEAR!!!

Because of the Thanksgiving holiday, I haven't calculated money supply growth rates for a couple of weeks. In early November, I reported that M1 nsa was climbing at a three month annualized rate near 25% and that M2 nsa was growing at a three month annualized rate of 7.7%. The M1 growth rate of 25% was huge.

Things have changed.

The three month annualized M1 nsa is now climbing at an astounding rate of 64.1%. Three month annualized M2 nsa is climbing at a rate of 17.1%.

As long time readers know, I generally don't look at seasonally adjusted numbers, since the money out in the economy, and not "seasonally adjusted" money, is the only money that can have an impact on the economy. But given that this is December and that currency (which is part of M1) tends to climb in December, it pays to take a look and see how much of the sky rocketing M1 can be attributed to seasonal factors, rather than fear. The answer is some, but three month annualized and seasonally adjusted M1 is climbing at 39.5%.

Bottom line, enormous fear remains in the economy. That is the only thing that can account for the tremendous shift into M1 money supply components, currency and demand deposits. The economy will not turn until this dramatic growth in M1 slows down, at a minimum, to the growth rate of M2.

And speaking of M2, which is a great long term measure of how much the Fed is trying to spark the economy, three month annualized growth of 17.1% is major. Once the fear subsides, the economy will turn much quicker than most expect, and a jackknife up in inflation is very possible.

December always has unusual crosscurrents, so things could start changing as soon as January, and if the fear subsides simultaneously, we will have record upside action in the stock market. The T-Bill market and Treasury bond markets will then see a reversal of their current upside performance.

Bernanke's Madman's Toolbox

Yesterday, I commented:

Bernanke better watch out with all these new financial "tools" he is creating. It's possible one of them won't be completely thought out and will result in all sorts of unintended consequences.

Today, my inbox contains two emails containing links to stories detailing how haywire events could develop from Bernanke's toolbox.

Nick sent along this link from NYT's Dealbook which warns about the Bernanke proposal for the Fed to issue their own debt:

The prospect of the Federal Reserve issuing its own bonds now that the United States Treasury has stopped borrowing on its behalf could paradoxically make the world a riskier place, according to Breakingviews. It threatens to reduce the effectiveness of Fed policy moves or, worse, influence them, the publication argues.

The tactic is only at the trial-balloon phase, and Congress may well reject it as an end run around its right to determine government borrowing. But lawmakers have blessed questionable strategies before, it notes.

If the Fed did issue traded debt, the market prices would act as a barometer of how investors viewed its policies, Breakingviews says.

Even if the debt were explicitly backed by the government, prices would probably still reflect market sentiment, it argues. After all, the publication says, bank-issued bonds insured by the Federal Deposit Insurance Corporation and the quasi-guaranteed debt of Fannie Mae and Freddie Mac trade with effective interest yields that exceed Treasury securities by notable, and in some cases volatile, margins.

It’s likely that rates on any Fed-issued bonds would diverge from Treasury bonds too, especially since the central bank lacks the power to raise tax revenue to pay interest, says Breakingviews. The market would probably look to the Fed’s own balance sheet, which has more than doubled in the last year, and weigh that against its ability to raise money by increasing reserves, when determining the risk of the bonds.

If the Fed pursues policies that could result in a loss — like its plan to lend to entities that buy packages of consumer loans — the risk premiums on its bonds should increase, it says.

Such snap judgments on policy moves could undermine the Fed’s effectiveness, Breakingviews says. If the bond market gave a thumbs-down to even a sensible policy, it would throw doubt on the Fed’s willingness to follow through, especially because the higher risk premium would increase the Fed’s future borrowing costs, the publication argues. Since monetary policy has a large psychological element, that could be a big problem.

Of course, there are already indicators of market sentiment about Fed policy, the publication notes. And the devil of any Fed debt would be in its details, it says. But with the Fed’s resources stretched and its mandate expanding, giving the markets another red flag to wave seems foolhardy, Breakingviews concludes.

Also this morning, Jeffrey Rogers Hummel emailed a link to his extensive analysis of the Bernanke decision by the Fed to pay interest on bank reserves. The JRH conclusion:

I predict that future economic historians will look back on this change as a major blunder during the current credit tightening, making traditional monetary policy less effective...Moreover, the paying of interest on reserves was motivated by the misguided focus on interest rates, rather than money supply measures, as an indicator and target of monetary policy...The irony is that the Fed is now less able to hit its interest rate target than ever before. It first adopted the corridor or channel system of the ECB, setting the interest rate on reserves below its Federal funds target, as a lower bound, with the discount rate above the target as an upper bound. But as the effective Federal funds rate fell not only below target but below the interest rate on reserves, the Fed on November 5 moved to the New Zealand system, where the interest rate on both required and excess reserves is set right at the target Federal funds rate. So far, this hasn't worked either.

Bernanke: Fed Money Policy Shift to Buying Notes, Bonds and Other Financial Instruments

As the Fed Funds rate trades below 1%, it is clear the Fed is looking at alternative monetary tools to manipulate the economy.

In a speech before the Greater Austin Chamber of Commerce, Austin, Texas, Fed chairman Ben Bernanke said:

Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve's quiver--the provision of liquidity--remains effective. Indeed, there are several means by which the Fed could influence financial conditions through the use of its balance sheet, beyond expanding our lending to financial institutions. First, the Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand. Indeed, last week the Fed announced plans to purchase up to $100 billion in GSE debt and up to $500 billion in GSE mortgage-backed securities over the next few quarters. It is encouraging that the announcement of that action was met by a fall in mortgage interest rates.

Second, the Federal Reserve can provide backstop liquidity not only to financial institutions but also directly to certain financial markets, as we have recently done for the commercial paper market. Such programs are promising because they sidestep banks and primary dealers to provide liquidity directly to borrowers or investors in key credit markets. In this spirit, the Federal Reserve and the Treasury jointly announced last week a facility that will lend against asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration.

Translation: The Fed is going to pump and pump money into the system every way it can think of, damn the banks.

Paul Volcker and the October 1979 Saturday Night Massacre

Interactive video, graphics and front pages from NYT on the historic financial moment when then Fed chairman Paul Volcker announced the Fed would target money supply instead of interest rates.

Money Supply Watch: Fear Continues; Fed Countering With Money Printing

There's a battle between fear and the Fed. Fed money printing is likely to win out in the long run.

M1 nsa for the week ended November 3 increased by $42.5 billion. This indicates that fear remains in the system. It is unlikely we will see a rebound in the economy until individuals stop pulling money out of other money components and putting the funds in cash and checking accounts, i.e. M1.

However, M2 nsa also increased for the week. It climbed by $45.6 billion. The Fed is clearly in money printing mode (as opposed to the slowdown this summer). The M2 money growth rate is now expanding week after week. The annualized growth for the last three months is almost at double digits at 9.89%.

If this growth in M2 is sustained, the downturn will end much sooner than most expect.

Stop Printing Money...

....like the Fed did this summer and you kill inflation.

Wholesale prices plunged a record amount in October.

The Labor Department reported today that wholesale prices dropped by 2.8 percent in October, the biggest one-month decline on records that go back more than 60 years.

The 2.8 percent overall decrease marked the third straight month that wholesale prices have fallen.

Money supply growth, as measured by M2 nsa, was under 2% on an anualized basis this summer, but is now back up over 7%. Take advantage of the inflation pause while it lasts by buying hard assets.