Saturday, 25 May 2013

U.S. Money, Credit & Treasuries Review (as of 15 May 2013)

Following the decline two weeks ago, the U.S. Monetary Base expanded by USD 65.1 billion for the bi-weekly period ending 15 May as the Fed continues its asset purchase program. The base has now increased USD 399.0 billion, or 14.8%, this year alone. At USD 3.09 trillion, it is the highest base ever reported and is now some USD 2.22 trillion, or 256.6%, higher than it was at the beginning of 2008.

The M2 Money Supply for the week increased 6.8% on the same period last year, which was slightly lower than the 7.0% growth delivered in recent weeks and is also lower than the 7.4% average year-on-year (YoY) growth rate during the previous 52 weeks. Year to date, the M2 has only expanded 0.50% in total compared to the end of last year, demonstrating a significant slow down in the growth rate, but this could naturally reverse in the coming weeks and months. The current growth rate is however significantly higher than the long term growth rate since 1985 of 5.5%.

Bank Credit (for all U.S. commercial banks) shows a similar development in the growth rate as the M2 money supply with one exception: the average growth rate during the last several weeks is substantially lower than the long term growth rate, i.e. the average growth rate during the last six weeks of 4.2% is substantially lower than the 6.5% average YoY growth rate since 1985. As with the M2, the growth rate in bank credit in recent weeks is lower than the 52 week moving average and at the same time it has only expanded 0.74% this year in total compared to the end of last year. This demonstrates a slowing down of the growth rate for bank credit as well.

The declines in the growth rates for both M2 and bank credit are, as stated before, important to the extent that money supply and credit help drive stock prices (e.g. see here and here). Paying close attention to the growth rates in the two is perhaps especially important now as we believe the U.S. stock market is expensive in a historical perspective. Readers who are stock market investors can take a look at the following reports (more reports are available at both this website and the economicsnexus.com, just search for "stock market"):

Yields hit Five Year Low: 10-year Average Earnings- and Dividend Yields, S&P 500 (as of 7 May-13)
Approaching Bubble Territory: Wilshire 4500 to GDP Ratio Hits New All-Time High!
S&P 500 at Record Highs...and so is Margin Debt! And Implied Volatility is back near its Low...
Monetisation on steroids
Equity Risk Premiums (ERP) and Stocks: Bullish or Bearish Indicator

The 1-year U.S. Treasury yield remain near record low while the 10-year yield is now 35 basis points higher than the record low yield of 1.49% reported on 25 July last summer (bi-weekly data). Compared to two weeks ago, the spread between the 10-year and the 1-year treasury yield widened by 14 basis points as the 1-year yield declined slightly and the 10-year yield increased 13 basis points.











*The Federal Reserve stopped publishing its M3 Money Supply series back in 2006. As an incomplete substitute, the M2+IMF+LTD money supply is a broader measure than M2 and consists of M2 + Institutional Money Funds + Large Time Deposits, data series which used to be included in the M3 series and which are still reported on a regular basis by the Fed.

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