Saturday, 18 January 2014

U.S. Money, Credit & Treasuries Review (as of 8 January 2014)

Based on the most recent data published by the Federal Reserve, the tables below present some key developments in the monetary statistics for the bi-weekly period ending 8 January 2014 (17 January for treasury yields):

The U.S. Monetary Base (base money) dropped USD 77.9 billion, or 2.22%, for the bi-weekly period ending 8 January 2014. As the Federal Reserve is to buy assets worth USD 75 billion in January, the monetary base will again increase over the coming weeks. Compared to the same period last year, the base increased by 35.5%.

The M1 Money Supply increased USD 104.3 billion, or 3.88%, during the last two weeks. Compared to the same period last year, it increased 8.91%, the highest reported for 10 weeks. The growth rate however remains substantially lower than the substantial increases in 2011 and 2012.

The M2 Money Supply growth rate continues to be in free-fall. Though it increased USD 56.7 billion (0.46%) compared to two weeks ago, the year on year (YoY) growth rate dropped to 4.92% for the week, the lowest reported since the bi-weekly period ending 9 March 2011 (when it was 4.66%). The M2 YoY growth rate has now dropped from 7.11% at the end of October 2013 to the current 4.92%, a fall of 2.19 percentage point or 30.80% in just 10 weeks. This significant fall in the growth rate is even more dramatic than the 10 week period preceding the bank credit crisis when the growth rate tanked from 6.03% for the week ending 2 July 2008 to 4.80% on 10 September 2008: a fall of 1.23 percentage point, or 20.40%. Now, markets are very complex and the money supply growth rate could pick up quickly again. But the plummeting of the M2 YoY growth rate in recent weeks, combined with a U.S. stock market in bubble territory (and still very low treasury yields - see below), have set the stage for a potential and substantial fall in stock market prices. 

Bank Credit, a driver of M2 money supply, is continuing to expand at a very low rate in a historical perspective. The current 1.19% YoY growth rate was up from the 1.03% reported two weeks ago, but represented the 6th consecutive bi-weekly period with a growth rate below 2.00%. The low YoY growth rate in bank credit since August last year is unprecedented based on data going back to 1985 (excluding the 2009-2011 period). Money supply grow when banks expand credit and the Fed monetizes debt. As banks more so than ever before (again excluding the 2009-2011 period) are reluctant to expand credit (a reasonable yield on treasuries could be one trigger for an increase), the burden falls on government spending (through issuing new debt) and the Fed (through monetizing this new government debt) to keep the money supply expanding. If this continues to be the case, 2014 will be a year when the markets and the economy become even more dependent on the government and the Fed to expand the money supply in order to keep the economy growing in USD monetary terms. If the two don't, the house of cards will collapse. The U.S. government and the Fed have in effect cornered themselves. As someone once said: a country can print itself into problems, but never out of them.

The growth rate in the broadest measure of money supply in this report, the "M2+IMF+LTD" (M2+Institutional Money Funds+Large Time Deposits), is now also falling. Having remained very stable around 5.80% for most of 2013, the YoY growth has now dropped to 4.45% (the lowest since September 2012).

The 10-Year Treasury Yield declined 14 basis points on two weeks ago to 2.87% as of yesterday (17 January 2014) while the 1-Year yield declined 1 basis point to 0.12%. The spread hence narrowed 13 basis points compared to two weeks ago and at 2.75% remains substantially higher than the 1.49% average since 1984.

Also see: 2013 Recap.