Tag Archives: money supply

Any Quantity of Money is Just Fine

Guest Post by Steve Saville

Some comments by John Mauldin towards the bottom of a recent article reflect popular opinions about money that can be summarised as: “a growing economy needs a growing money supply” and “there isn’t enough gold in the world for gold to be used as money today”. These opinions reflect a basic misunderstanding about money.

Here are the Mauldin comments to which we are referring. We’ve put notes below each excerpted comment, but the main part of our response is further down the page.

“The current structure of Bitcoin carries the same inherent flaw that gold does (and to some extent the euro, too): in a world of ever-increasing abundance, gold is massively deflationary and provides unreasonable “rents” to those who hold it. Even given that inherent flaw, it has been the most stable store of value for millennia.”

Continue reading Any Quantity of Money is Just Fine

A Stroll Through Market History on FOMC Day

We take the Way Back machine to a time of normalcy and plenty, in the 50’s when the stock market did okay but savers were paid (through T Bill yields) to do the most prudent thing people in a natural economy can do… save.  Ever since 1980 the theme has been for the nation to eat its seed corn, with asset owners getting increasingly more portly in the process and savers nudged ever further out to the margin.  The S&P 500 has sure got no complaints these days.  It’s in lockstep with policy.


The 10 year view shows savers have been erased from the picture.  ‘Screw them’ is the implication as the brave new world of finance follows one rule,  ‘asset appreciation or bust!’  In service to asset appreciation has been the duel input of ZIRP (zero rate policy) and a rising money supply, much of which we’d presume was instigated by QE’s money printing and Treasury and MBS asset purchases.  S&P 500?  Still not complaining.

Continue reading A Stroll Through Market History on FOMC Day

US Money Pumping, Past & Present

Guest Post by Steve Saville

US money pumping by decade and Fed chairman

A large increase in the money supply will always lead to large increases in prices somewhere in the economy. However, monetary inflation affects different prices in different ways at different times, so the pertinent question is: which prices? The answer to this question is important from the perspective of almost everyone and is always obvious with the benefit of hindsight, but it is often difficult to determine ahead of time. Also, depending on which prices are affected the inflation will sometimes be widely perceived as a problem and at other times be widely perceived as a benefit or a non-issue.

Continue reading US Money Pumping, Past & Present

Au-Cu, Au-WTIC & Au-SPX

The US Fed is pumping the money supply and trying to manage the unmanageable.  There is now ‘QE exit’ hand wringing at each FOMC meeting, which comes out later in the minutes as the markets hang on every fretting statement that these policy clerks utter.  Then the jawbones come out and talk nicey nice in the media and the market calms down.

They are not going to be able to manage this to anything other than a very sad outcome.  They actually seem to think that policy making is bigger than the market and the economy.  But it isn’t.

We are in an economic contraction and even after gold has been blown up, its ratio to the 3 Amigos of positive economic correlation continues to indicate the counter cycle.

Gold ratios to copper, oil & stocks

Gold bugs need to be really careful here.  There is still bottom calling going on and it is best not to root root root for the home team in any kind of a speculative casino patron type manner because the precious metals may have entered the realm of macro economic indicator and exited the realm of near term profit play.

The destruction in gold and gold stocks along with the now pronounced weakness in key commodities like copper and oil bring the prospect of deflation front and center, or rather the prospect that the inflation is not taking in economically sensitive materials and resources.

Yesterday the St. Louis Fed updated the Monetary Base data and it is still boinking upward.

Adjusted Monetary Base, updated 2.21.13

But then the dBoys would immediately produce this picture for contrast…

M2 Velocity

We are in an economic contraction and they are still inflating against it.  The big question – the one for all the marbles – is ‘is it deflation first and then hyperinflation or the other way around?’

I cannot shake the feeling that what the precious metals and now commodities are indicating is much darker than what the pom pom waving gold bug community may believe.  It’s an economic contraction and that is the only environment that the accursed gold mining sector has a chance to thrive.

But in that scenario they go down first.  And boy have they been going down.  They may have bottomed and they may not.  I have refused to bottom call a thing since HUI lost 460’s parameter to normalcy.  I’ll just keep it that way, pending what any new data points that any coming bounces may produce.

But a bigger question is what are the PM’s forecasting?  People need to get that answered right.

Adjusted Monetary Base Updated

Updated just 7 whole minutes ago by the St. Louis Fed.  The money supply measure that actually matters just ticked up again, painting any stock market correction (pretty please?) to come as a potentially healthy one, if anything in this circus can be called healthy anymore.


I dunno, it looks like the consolidation is broken doesn’t it?  Behold the picture that will bring on the next bust.  Because it will one day.

Goldilocks Ends and ‘Currency Wars’ Begin

Below is a copy of this week’s free eLetter that went out this morning.

Goldilocks Ends & ‘Currency Wars’ Begin

Amid continuing inflationary policy, the US Dollar is at a critical juncture by both daily and weekly charts.  Euro targets 142+ and the Yen approaches our target.  Currency war kicks off; gold just sits there biding time.

From last week’s eLetter:

“A Goldilocks atmosphere was expertly created in large part due to the fact that Operation Twist (yes, we are still dealing with its effects) by its very definition held long-term interest rates down (buying long-term T bonds) while sopping up any money supply implications and inflationary signals by sanitizing the process with the sales of equal amounts of short-term bonds.”

Policy makers have not found a new way to indefinitely manage the economy.  Traditional laws of economics have not been repealed.  The Federal Reserve used the equivalent of a macro parlor trick to dampen inflation signals and help produce today’s Goldilocks atmosphere, which features stocks rising now that the public and its mainstream money managers feel the worst is over with respect to the Fiscal Cliff non-event and the Debt Ceiling noise.

But in economics and macro finance, there is is always a price to be paid for unnatural (read: man-made) distortions.  The Fed ran out of short-term bonds to sell and now something has to give, as its ongoing inflationary operation is now unsanitized.

A bearish Head & Shoulders pattern has formed on the currency for which the Fed is  supposedly a steward.  If the neckline breaks, the measured target is 76.50.

The weekly chart of USD targets 74 off of an even more significant H&S, with the baby H&S of the first chart merely representing the right shoulder of the big daddy H&S.

A breakdown in the US dollar would confirm that the recent tick higher in Adjusted Monetary Base is the beginning of a new trend up in inflationary policy.

Unsurprisingly, USD’s chief rival, the Euro is in an inverted and bullish H&S.  We have been targeting 142 in NFTRH since the break above the neckline.  The Euro appears to be attracting a ‘long Euro/short Yen and gold’ momentum (read: hedge funds) crowd playing the opposite game to that from mid 2011 when Yen and Gold rose strongly in reaction to the Euro crisis.

Yen has been played to the hilt by the hedgies.  We have had 106 as the downside target since the neckline to the massive H&S broke down.  Yen could be a heck of a contrarian play for a counter trend rally, as the short-covering should be massive.

Meanwhile, the currency that resides outside the system bides its time.  Gold is unofficial money and with all the hype about currency war people who are not patient may have expected a rocket launch in the precious metals.

Here we bring it back to the Euro and realize that too many unhealthy would-be gold bugs came aboard during the acute phase of the Euro crisis in 2011.  That is being worked off now in gold’s ongoing consolidation.

Bottom Line

US dollar looks bearish.  Euro looks to complete its rally to 142+ where it will by the way, encounter a bigger picture DOWN trend line.  Yen is bearish but due for a whale of a short-covering bounce soon.

In the near-term some currencies are bullish and some are bearish.  But the US Fed, Europe’s ECB and the BOJ are not going to engineer their way out of their respective ‘inflate-or-die’ predicaments.  Gold may have a few more months of correction/consolidation but that is a drop in the bucket when viewing its entire history as a monetary anchor to value.

Biiwii.com, Twitter, free eLetter, NFTRH

Gold & Silver Up on Fed Day? FOMC Thoughts

It seems curious.  One would like to think that virtues like honesty and integrity encompass the financial markets and the highest levels of officialdom…  ha ha ha.

Short positions had recently bumped back up in gold and especially silver.  Yesterday, the Fed rolled over and just came with the happy inflationary stuff.  We would not ever think that our friends in the biggest investment banks may have had the playbook and covered shorts into the FOMC meeting.  How could we think such a thing?  That would be illegal at worst or just plain immoral at best.


Anyway, they came with the inflation and no austere talk, with all the important inflation indicators under control (I believe Monetary Base comes out today) and a bad GDP conveniently hot off the presses as well.  Backward looking stuff.

Here is my playbook, as it currently is written (revisions sure to come):

Dumb money punished in stocks > Precious metals stocks bottom first (check the sentiment backdrop!) > an inflation cycle is born as money supplies continue to rise (not the MZM and M2 crap; BASE) > commodities firm up > stock market sentiment is reset as the dumb money is flushed > stock market fills those gaps (I hope), bears start chest thumping and smart money launches a new rally that eventually will hit new highs > Dumb money gets in as inflation hysteria reaches a fever pitch right at the red line (100 month EMA) on the long bond’s yield > and then the whole thing lurches, rolls over and implodes.  Hello Bob?  Mr. Prechter?

It is almost as if the financial markets are a giant orchestra playing in unison and in concert.  The GDP bass tone and the faint clarinets of inflation way in the background will one day be replaced by bull horns declaring ‘inflation is here to stay!’  That may the ‘sell’ signal as in sell the speculations, own what you own, have no debt and value life, because paper and digital values may no longer provide comfort.

NFTRH 222 Out Now

222 talks about the WoW (Wall of Worry) in the gold sector that has been erected as a sickening mirror image to the over bullishness inspired by the Euro crisis knee jerk, QE hype and the Gold Generals always rallying of the troops.

222 talks about broad markets, commodities, money supplies and sentiment.  There is a lot of talk, period.  There are also a lot of charts to back up the talk.  In all, 30 pages of content doing what it has to do to get this challenging macro environment right.


Monetary Base Hot Off the Presses

Courtesy of the simply awesome resources at the St. Louis Fed, here’s the most recent adjusted monetary base data.  Recall the post from earlier in the week that included the blown up short-term view of the BASE.  Here it is updated as of today at 3:46 CST.


From that post:  “Recall that the BASE is still within a consolidation that began in mid-2011 after ramping up into early 2011.  The view above shows that while the BASE has not broken consolidation, it has increased since the Fed announced it would buy MBS to support the economy.  A new uptrend would have to start somewhere, after all.  Has it started?”

Well, it’s still in consolidation but it made a little hook upward this week.  A new uptrend would have to start somewhere, after all.  We have to assume that they are still TWISTing for another week or two, so I would not expect anything really notable until January.

For reference, here’s the graph from that earlier post.


Money Supply, Money Supply, Money Supply…

Did I mention money supply?


Inflation is the act of inflating money supply.  The cost effects will show up later, somewhere or everywhere, eventually.  The FOMC just acknowledged the ending of the sanitary half of Operation Twist, while keeping the other half – the inflationary half – intact and ongoing.  Inflation is a little below their objectives after all… ha ha ha.

See the beautiful consolidation of the graph above.  That is called a bullish consolidation.  With T bonds indicating a deflationary backdrop… ha ha ha… there is no longer any public outcry against the inflators.  Where are the angry mobs of austerity now?  Blabbing about the Fiscal Cliff is where they are.

‘How you like me now??’ Ben has said to the gold bugs for nearly 1.5 years now.  Well, he just became passive toward the gold bugs once again.  Gold has been in a pretty consolidation as have the Twisted Yield curve and that graph above for 1.5 years.

Today’s announcement – pending the completion of the final Twist remnants – clears the way for the consolidation to break.

Party on Garth.  Deflationists not invited.

Pre-FOMC Money Supply Discussion

With our dear monetary leaders only two days away from bestowing upon us their latest financial wizardry, we should be aware of the money supply dynamics in play.  This week FOMC will either ramp the production of printed money, hang back and play coy while letting the existing $40 billion in MBS carry the load or heaven forbid, talk in some sort of austere manner in a bizarre game of brinksmanship.

Money Supply Discussion From NFTRH 215:

Moving on, here is how one money supply indicator got it wrong…


People who want to pump you up about hyperinflation will probably show you the stand-alone M2 money supply graph.  See?  They’re inflating!


People who want you on Team Deflation will show you the chronic and impulsively declining view of M2’s velocity.


In reality, the Adjusted Monetary Base seems to be the view that is most in line with reality.  It has been stagnating since mid-2011.  Here’s a blown up view…


The ramp into spring of 2011 came in concert with a noisy time when inflation expectations were rising, the Bond King was going long on interest rates (short the long bond), a new Austerity movement had thrust Paul Ryan into the limelight and mobs with pitchforks were calling for “Helicopter Ben’s” head.

What we have in the graph directly above is the resultant come down, with inflation blow horns being replaced with a deflationary backdrop.  The Fed announced a QE operation in September, which was met by a burst of euphoria in the precious metals and markets in general.  But the reality of Operation Twist and I suppose Dennis Gartman’s theory of CDS maturing out the back door of the money supply shack has dampened the QE effect.

The graph is in consolidation within a massive uptrend.  Just as if we were reading a stock chart, we have no reason to believe the trend is over.  If the Base starts declining, then we should not stand above the data and we should not rally to a potential final slaughter.  We should say “the Base is declining and maybe our current assumptions are wrong”.

But as of now, to project a decline in Monetary Base would be pure wishful thinking from a deflationist’s standpoint when we consider what the FOMC has repeatedly stated (not in so many words) it will promote inflation.  FOMC has stated that inflation dampener Operation Twist is due to end in December, 2012.  Gold and silver have been getting clobbered lately as some apparently big and powerful interests aligned against them into, and since the QE3 announcement.

Perceptions folks.  If the big trends remain on track, then the current turmoil is simply about perceptions and perceptions management.  Think back to 1.5+ years ago when, at the instigation of the gold bugs and inflationists they wanted to hang the great inflator, “Helicopter Ben” from the highest yardarm.  “How you like me now?” says Ben.

Have patience with the process as the game changes.  You can only have patience if you are strong and in this racket you can only be strong if you think like a predator.  You can only think like a predator if you manage risk.  See, it all comes back around.

Money Supply Discussion From NFTRH 216:

Op/Twist Ending?  What next?

I learned early on not to trust a Central Banker who is wrapped up in lies and deceit.  In the modern era, that would mean most of them.  The outliers like Fisher, Bullard and other ‘bad cops’ are probably something better.  But I wonder if they do not just serve as window dressing to maintain appearances of a fair debate.

FOMC has stated that Op/Twist will run through year-end, 2012 and has not indicated it will be renewed.  If the selling of short-term Treasury bond instruments is removed from the current Treasury and MBS asset purchase regimes, the inflationary effect should by definition be amplified.  That is because inflation is always an increasing money supply, not the knock-on cost effects that the media and the public will trumpet later on.

If FOMC drops the entirety of Twist however, including the purchases of long-term T bonds, this would leave $40 billion of MBS being sopped up per month and net of the current Op/Twist, this has not been ramping the ‘adjusted’ money supply as yet.  Dennis Gartman says it is because as ‘new’ bonds are purchased old ones are maturing off the books, keeping the Fed’s balance sheet stable.


The above is a more close up view of the Adjusted Monetary Base graph shown last week.  Recall that the BASE is still within a consolidation that began in mid-2011 after ramping up into early 2011.  The view above shows that while the BASE has not broken consolidation, it has increased since the Fed announced it would buy MBS to support the economy.  A new uptrend would have to start somewhere, after all.  Has it started?

The ending of Twist would leave the BASE to go on its merry way as money is printed to purchase mortgage ‘assets’.  Again, here we must tune out the hyper-inflationists who only want us to look at the straight M2 incline and the deflationists who would taunt us with M2’s declining velocity.  Absent additional asset purchases (like Twist-free long-term Treasury bonds), the BASE may have started to rise on its own.

NFTRH will keep the blown up short-term view of the BASE front and center going forward.  Precious metals bulls… that 1.5+ year long consolidation in monetary base is the primary reason for the 1.5+ [year] malaise experienced by the precious metals sector.

Regular stock market players have had an advantage that I think has to do with the strategic buying of long-term T bonds (keeping economically important long-term interest rates low, at the expense of less strategic short-term interest rates).

The stock market is a reflection of the equity of corporations and their ability to function within the economy, after all.  Gold is a reflection of the monetary backdrop.  Twist has provided the added benefit (for the stock market) of painting a gold-bearish picture while indicating that inflation is anything but a threat at this time.

Now we are on the brink of more honest and straightforward monetary policy operations if Twist is indeed about to end.  At the least there should be $40 billion in MBS per month being monetized.  FOMC could well hold off on adding straight, unsanitized monetization of Treasury bonds to keep up appearances for now.  Or, they could simply let the short-term bond sales portion of Twist end while keeping up the long-term T bond purchases.

Either way, it looks like we are going to get inflation sooner or later.  This inflation could be moderate or extreme.  We should watch the adjusted money supply data like those above to see if the consolidation does indeed break to the upside.