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December 23, 2005

M3 under the microscope, Fri., Dec. 23, 2005, 11:45 AM

Clearly there is good reason to be focused on the U.S. money supply at this point. I received several pieces of mail on this subject, including these.

"Bill, Check this out! Over the past two days, December 21 & 22, 2005, Safehaven is reporting the FRB added 18 billion and 20 billion in reserves! This is the largest two-day Repo injection of money into the system since September 2001.

The article also mentions the significance of Iran trading its oil in Petro Euros on its bourse in March, which by coincidence is the same date the U.S. has decided to hide the M3 figures.

The kicker is the trend of resignations over the past two years at the Fed, which may be another coincidence.

The link is: http://www.safehaven.com/showarticle.cfm?id=4331

I think I'll stay in gold a little longer. /Seamus

"Bill: Here is an interesting view on the growth in M3 from Paul Brodsky of Spyglass Capital.

http://www.weedenco.com/welling/gpframe.htm

It's an interesting read. You probably agree with some of it. /Andy "

I believe there is a credit bubble ready to pop in the U.S. capital and financial markets, which the Treasury and Fed are trying to manage. The issue today is whether there will be a hard or soft landing.

As I see it, this issue will go on for many years " probably at least into 2010. As part of a soft landing scenario, I believe that the equity market pullback that may occur in the next quarter will see the Dow Industrial Average drop to between 9800 and 9200.

As you know, I recently offered the view that Dow=9200 would be the likely bottom. Now, based on the strength of the economy in the U.S. and abroad, I am not so sure.

I feel now that pretty much anything can happen. With the reflationary (money printing) exercise underway in the U.S., we could see a softer landing, albeit following a sharp, sudden, bear phase, at about Dow=9800.

If that were to happen, I believe that much higher gold prices, as well as slower growth in equity prices, will result for the next couple years.

It could be that the U.S. Administration will be working to keep interest rates lower through the next federal election result, which would help the bond market more than I have been thinking up to now.

For sure, 2006 is going to be an interesting year.

I think you'll find that in 2006 I will become more focused on capital market prices, and less on economic and corporate fundamental data. That will not be by personal choice, but because I feel that transparency issues with respect to Corporate America and the current U.S. Administration are such that I have no other choice.

What I am saying here is that my New Year's resolution will be to follow the tape. The last time I made that resolution was December 31, 1999, which I published in my Dow 30 (Internet) Journal at the time.

And you know what happened in 2000.

Posted by Posted by Bill Cara on December 23, 2005 11:45:03 AM | Category: Economics

Discourse

Great bonds a fire! I have been adding to my long bond exposure, now at 15% of portfolio. My thinking has been that the biggest move for bonds would come AS STOCKS SELL OFF. Happy New Year? (I believe I have outlined in prior post the contra or bullish case for bonds.)

Scaled back on precious metal miners and added to GLD. If the market weakens significantly I would suspect gold holds better than miners.

Posted by: stockman [TypeKey Profile Page] at December 23, 2005 1:36 PM [link]

Alan has written: "Bill, there are some people that are well respected that feel this increase in M3 is money coming home (being repatriated) because of the current one time tax exemption for foreign US corporate profits that is expiring at the end of this year. Whether this money was in US debt instruments in foreign subsidiaries of US banks abroad, eurodollars or other foreign currencies, it was not counted in M3, but when it came home, it also caused the dollar to go up in value."

If the story is true, then why is the USD weakening? Also, the forex trading losses must have been huge given the relative strength of the trade-weighted USD during most of this year.

I don't have a position on this, but would like to hear from others who do.

Posted by: Bill Cara [TypeKey Profile Page] at December 23, 2005 2:02 PM [link]