Bill Cara: Money on the run, Thurs., Feb. 23, 2006, 6:43 PM

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February 23, 2006

Money on the run, Thurs., Feb. 23, 2006, 6:43 PM

There is no letting up. The Fed reported in its weekly (Thursday, 4:30 pm) release today that money supply growth continues to boom in the U.S.

For the 13 weeks ending Feb-13-06 (last figures available), the growth of M3 was +7.9 pct from the comparable period 52 weeks ago, and +9.4 pct compared to 26 weeks ago. The money supply growth year-over-year, has escalated over last week's figures.

As you know, the total money supply is growing three times faster than the total economy. This week, like the last, and the one(s) before that, it picked up speed.

Are you not finding a consistency in these remarks week after week?

Yes, the U.S. is financing the incredible growth in countries like China and India, and it is doing it with USD taken from savings and increased borrowing to put into the cash registers of American companies like Wal-Mart to be sent overseas to pay for products consumed in America.

And the U.S. is financing the economies of Iraq and Afghanistan by sending USD over there in the name of "homeland defense".

Borrow and spend is the name of the game. And as and when these USD leave the country, they must be replaced by the printing of new USD because not all the USD going out are coming back in the form of foreign purchases of U.S. goods and services, or securities like U.S. treasury debt.

And as all this new money is being created but not being matched by equivalent or greater amounts of new wealth at home, America is in fact becoming poorer. The value of the USD is being eroded.

Yes, there will be a day of reckoning.

There will be a day when foreigners are not willing to call a USD a USD. Eventually they will not call it anything more than twenty wooden nickels.

There will be a point when the foreigners who are selling their labor (in the cost of goods manufactured) or their commodities (oil, metals, wood, fish, coffee " you name it) will demand more than those 20 wooden nickels. They'll want gold, or the Trump Tower; all of them, or California... all of it.

At the end of the day, at the rate we are going, it is foreigners exclusively who will be America's bankers. They will hold all the debt " people like HRH Prince al-Walheed bin Talal bin Abdul Aziz Al-Saud, who already owns the biggest piece of the world's biggest banker Citigroup, who some year could move this American flagship to Riyadh.

; Oh, your Four Seasons and Fairmont Hotels yesterday; your seaports today, and goodness knows what tomorrow. But that's what happens when people get into debt and can't pay back their banker.

Hopefully, before then, the USD will not be on the run, but will stay home and finance economic growth in America.

Posted by Posted by Bill Cara on February 23, 2006 06:43:08 PM | Category: Economics

Discourse

it's an old saw, but it bears repeating: if you owe the bank a dollar and you can't pay, you've got a problem. If you owe the bank a million (or a trillion) and you can't pay, the bank's got a problem.

Posted by: awestruck at February 23, 2006 8:33 PM [link]

Bill,

My guess as to why the Fed does not want to continue publishing M3 is that while over the past 24 months M3 has grown by 14% the Eurodollar holdings by US addressees , a component of M3, has grown by 24%. Not a exactly a confidence-building stat is it.

Posted by: TerryC at February 23, 2006 10:43 PM [link]

Bonds-

For sentiment I have used the Rydex Bull Bear ratio 20 dma in combination with trend lines. After reaching extremes and rolling over (as it is now) it has been a major warning flag. If you subscribe to DP, go to Home page / Sentiment Indicators / Bond Sentiment / Scroll to lowest panel. The red line is the 20 dma, note that it has curled up- also note that over the past two years this has been an excellent exit point.

If one is long other than core or hedge positions it would be a good time to review your sell discipline / trigger. If the sentiment rollover works as in the past we should see the TLT break down and resume the weekly downtrend. A channel low target around 87 looks achievable.

JMHO

Posted by: stockman at February 24, 2006 5:58 AM [link]

stockman-

What would be the logical effect on a portfolio having an average duration less than 2 years, mostly Treasuries and TIPs?

Posted by: MarkM at February 24, 2006 6:24 AM [link]

MarkM-

I see little risk to 2 year paper, especially considering the relatively high yield. Look at SHY one year chart for a good idea of what would happen if the fed raised at every meeting this year (highly unlikely!).

Good safe haven IMHO.

Posted by: stockman at February 24, 2006 7:06 AM [link]

MarkM - with a 1% rise in interest rates, a treasury bond with a 5 year duration should fall roughly 5%, a 2 year duration should fall roughly 2% and so on. Your risk rises when you own non-treasury bonds. Hope that helps.

Posted by: g034 at February 24, 2006 7:51 AM [link]

You might find the following snipet from the Marketwatch column interesting(http://www.marketwatch.com/News/Story/Story.aspx?column=Metals+Stocks&siteid=mktw&dist=):

"Meanwhile, the minutes released from former Federal Reserve chief Alan Greenspan's last interest-rate meeting showed that Richmond Fed President Jeffrey Lacker dissented from votes to authorize the Fed's trading of foreign currencies, including the euro and yen, according to Peter Grandich, editor of the Grandich Letter.
This raises two questions: "Why does the Fed think it must be prepared to intervene ... and if they're willing to intervene in the currency market, how about the stock, bond or gold market?" said Grandich."

Posted by: g034 at February 24, 2006 8:05 AM [link]

stockman-

Thanks. Yes, this is as I expected.

Oh, and right on cue (oil approaching $60bbl) geopolitics gives a boost. Does oil have a PPT?

Posted by: MarkM at February 24, 2006 10:00 AM [link]