The broadest measure of U.S. money supply–the so-called M3–has less than a month to live, but its swan song continues to be one of growth, and growth that’s notably higher relative to that of M2, the official replacement for the doomed series.
We’ve written previously on the impending death of M3 (see here, here and here), and found reason to question the Fed’s decision to terminate the most-expansive measure of dollars floating about in the economy as of March 23. We won’t repeat ourselves, other than to reiterate our original point: M3 growth is well above M2’s, as the chart below reveals. That’s been true in the past, and remains true now, based on the latest update on money supply. According to the Fed, seasonally adjusted M3 rose by 7.9% for the 52 weeks through February 14, or nearly twice the rate of increase for the narrower definition of money supply labeled M2.
Why is the central bank killing the brand of money supply that’s growing the fastest, which just happens to be at a rate that’s well above the yield on a 10-year Treasury (4.58%), the latest estimate on the annual rise in inflation (4.0%), and the annual pace of economic growth in inflation-adjusted terms (1.6%)? The Fed is mum on the issue, other than to say that M3 is redundant, and therefore M2 should suffice. The numbers suggest otherwise.
Monthly Archives: February 2006
RISK NEVER TAKES A HOLIDAY IN THE WORLD OF OIL
There are several catalysts driving oil prices higher over time. Some are economic, some are geological, and some are none of the above. In the latter category, Nigeria and Saudi Arabia figure prominently in the news of late as poster children for disturbing examples of what awaits the bigger oilfields that occur all too infrequently on the planet for satisfying the increasingly ravenous consuming crowd.
Politics reborn as war on low and stable energy prices is leverage in the global economy for those who, rightly or wrongly, think they have no other means of expression and influence. For consumers, it’s a new tax on an old concept: the cost of doing business.
That cost is vulnerable to upside spikes in the short run, and a slow but steady rise in the long run. For the former, Friday’s attempted but ultimately foiled attack on the Abqaiq oil facility in the Saudi Kingdom was one more wake-up call about the nature of the energy business in the modern era. The site chosen for the attack was hardly a surprise. Abqaiq processes about two-thirds of the 9.5 million barrels a day of Saudi production, home of the world’s largest single source for crude exports.
IT’s COMING
Inflation targeting (IT) is the “next logical step” for the Federal Reserve’s monetary policy. So said Alan Blinder, a Princeton economics professor and former vice chairman of the Fed’s Board of Governors, at a symposium yesterday in New York. A key reason: the arrival of IT supporter Ben Bernanke as Fed chairman, Blinder explained at a discussion of what comes next in monetary policy at an event sponsored by the New York Association for Business Economics. (It was fitting that the assemblage was held at the Manhattan office of the Canadian Consulate, which represents a country that adopted IT in the early 1990s.)
The Greenspan standard is gone, destined for replacement, Blinder continued. What was the Greenspan standard? The iron law that monetary policy should be exactly what Alan Greenspan wanted it to be, he quipped. “The Fed must get off the Greenspan standard, and IT seems the logical next step.”
Another speaker, Laurence Meyer, an economist with Macroeconomic Advisers and a former Fed governor, also found reason to predict that IT is coming to the world’s most influential central bank. His talk, titled “Coming Soon: An Inflation Target for the FOMC,” expounded on the internal Fed debate that Meyer said is slowly evolving toward a policy favoring IT.
Perhaps, but for all the aura of surgical precision that surrounds the idea of a clear and exact inflation objective, the transition from the Greenspan standard promises to be messy just the same. For starters, the use of the term “inflation target” is so yesterday, and arguably carries some political baggage. For cover, IT advocates increasingly reference their favored brand of monetary policy indirectly. At the February 2005 FOMC meeting, for instance, a debate on IT was labeled a “broad-ranging discussion of the pros and cons of formulating a numerical definition of the price-stability objective of monetary policy,” according to Fed minutes.
TWO’S COMPANY
Another day, another opportunity to see whatever you want to see in the economic data. The latest example arrived yesterday within the packaging of consumer prices, which at once threatens and calms. The source for the duality comes by way of yesterday’s report on January consumer prices, offering a now-familiar refrain of maybe we’re in trouble, and maybe we’re not, a la producer prices.
Top-line inflation advanced by a seasonally adjusted 0.7% last month, according to the Labor Department, up dramatically from December’s slight decline in CPI. The jump was also above the consensus 0.5% forecast for January, and now stands as the highest monthly rate of increase since September’s Katrina-induced 1.2%.
But if the news has got you down, why not keep reading to find something more encouraging to lift your spirits? As with previous bouts of CPI-defined inflation, last month’s ascent is primarily a function of energy prices, a point that comes through loud and clear in the far-less bubbly core CPI, whose pace of ascent was a relatively cool 0.2% in January.
Top-line inflation, in sum, continues to raise warning flags, while the core CPI keeps telling the bond market what it wants to hear. The question is whether anyone will ring a bell when and if energy driven inflation becomes a clear and present danger as opposed to something barely worth mentioning beyond a footnote in future textbooks.
FRESH CORROBORATION FOR WHAT YOU ALREADY KNEW
It’s hardly a surprise to anyone who’s been following the economic news of late. But even if it’s just the latest confirmation of what’s already become clear in recent weeks, the soaring state of the Conference Board’s index of leading indicators is a sober reminder that the economy won’t easily be dragged into a slowdown anytime soon.
The Conference Board yesterday reported that its U.S. leading index jumped 1.1% last month, surprising economists by a fairly wide margin. The consensus estimate called for a rise of less than half of what was reported, according to TheStreet.com. In addition to being among the highest monthly advances in some time, it’s the fifth gain in the last six months. The implication: economic growth in the future will stay robust.
Among the catalysts moving the leading indicators higher: the fading of weekly claims for unemployment insurance. It’s old news in late February that the labor market has found a new head of steam. Old, but the trend still warrants attention if only because employment strength carries so much influence over the economy overall. That includes Joe Sixpack’s thinking on whether he’ll keep spending more within the temples of consumerism, otherwise known as malls and other retail outlets.
WHICH ONE BLINKS FIRST: INCOME OR INTEREST RATES?
Fear not–the U.S. will not go bankrupt, legally or otherwise, opines James Galbraith, senior scholar at University of Texas, in a new essay published by the Levy Economics Institute. Joe Sixpack’s finances, however, are another matter.
Yes, the U.S. government is running a large and growing current account deficit. And yes, that deficit portends trouble, at least in theory, in part because it could send the dollar tumbling even as the American government avoids bankruptcy in any practical sense of the word. Still, Galbraith counsels such a potential outcome wouldn’t be the end of the world, at least not any time soon. “First, it is not in the interest of key players outside the United States to permit [the dollar] to collapse in the near term,” he writes. “Second, there is no good and ready alternative to the dollar; that of the euro remains for now on the horizon.”
Elaborating on the second point, he reminds that if, say, China started dumping dollar-denominated bonds in exchange for euro-based replacements, the limited supply would create challenges for effecting the transaction. Galbraith explains:
There are, in fact, no proper European bonds on the market, only euro-denominated bonds of individual countries, such as Italy. A major effort to buy those up would, of course, drive the euro up and drive the dollar down. This in turn would hurt the Europeans, with the likely result that they would buy dollar assets—the bonds that China, Japan, and other nations would be seeking to sell. The net result would be a redistribution of dollar asset holdings, no doubt with some decline in the dollar’s value, but that alone would not put an end to the dollar system.
MONDAY’S FIVE-CHART EQUITY DIAGNOSIS
Risk continues to pay off in 2006 in the U.S. stock market. Exhibit A is slicing equities by market cap and comparing year-to-date performance through February 17. By that tactic, small cap is well ahead of mid cap, which in turn is comfortably beating large cap, as the chart below reveals. We expect no less over the long haul, and for the moment, the hierarchy is intact for 2006 thus far. (All charts below use data from StandardandPoors.com)
Further refining of equity market cap by style also shows a penchant this year for rewarding both smaller stocks and those with a value tilt. Value in fact has been on a roll for several years, trouncing growth in no uncertain terms in the 21st century. There’s been talk that growth is due for a rebound, but judging by the year-to-date numbers, the evidence of growth’s revival still looks premature, as the following chart details.
Moving to a sector analysis of equities, the taste for risk remains largely intact, or so one could argue. Consider that in the large cap space, as defined by the S&P 500, telecom stocks are not just leading, they’re flying. Even the recently red-hot energy sector is having a tough time keeping up with telecom this year. Telecom, of course, has long since shed its aura of Ma Bell stability, and by most accounts is now a volatile sector with about as much visibility in any given company as a gray ship in heavy fog. As such, the embrace of telecom this year suggests something other than running for cover as the strategy of preference.
Over in midcaps, risk is arguably in favor as well. Telecom stocks aren’t first in this slice of equities, but they’re a comfortable third, and doing quite nicely in the slot. Meanwhile, information technology stocks are the midcap leaders, suggesting that risky business remains alluring in this space as well, albeit with a slightly different strategy.
Things are a bit more complicated in small caps, where the top-performing sector this year through February is materials. We’ll leave it to the analysts to tell us if materials represent something safer than telecom and tech these days. In the meantime, we can say unequivocally that sector rotation in small caps marches to the beat of a different drummer relative to mid and large caps. Significant? Stay tuned….
IF YOU SEE A FORK IN PPI’S PATH, TAKE IT
What a week. After a string of economic reports in recent days suggesting that the death of growth has been greatly exaggerated (at least for the time being), today’s release on the producer price index surprises with a higher-than-expected rise in wholesale prices for January. The consensus forecast called for a 0.2% rise in PPI last month, with the actual number coming in a bit higher at 0.3%, according to TheStreet.com.
No big deal, right? Maybe. Monthly numbers don’t mean much. Trends over time are something else. With that in mind, consider the following chart and the conspicuously rising rolling 12-month change in PPI. You don’t need to be an economist to see that wholesale prices are on the rise, advancing at an annual pace of 5.7% last month vs. falling in 2002.
But if such a vision sends you into paroxysms of despair, we have the perfect antidote for what ails you: wholesale prices less food and energy. This is the pick-me-up you’ve been waiting for to chase the inflation blues away. Core PPI, after making a run for higher elevations in 2004 and early 2005, has taken a turn for lower realms lately. As the following chart illustrates, core PPI rose by 1.5% in January over the year-earlier pace. That’s down from the 2.8% rate of increase posted last May, and a heck of a lot lower than the 5.7% in top-line PPI.
STEADY AS SHE GOES…FOR NOW
The market hardly needed another piece of evidence to support the notion that the economy remains bubbling. Bonds, however, are another story, which we’ll get to in a minute. Meanwhile, Fed Chairman Ben Bernanke debuted his Congressional testimony act yesterday and added to the general suspicion that growth is still the path of least resistance for the foreseeable future, accompanied by all the usual risks for monetary policy that come with such a view.
The Federal Open Market Committee’s “central tendency” forecast of GDP growth in 2006 is about 3.5%, and slightly lower for 2007, according to the Monetary Policy Report Bernanke submitted to Congress yesterday. That compares with a 3.1% rise in GDP for 2005. Consistent with that outlook is FOMC’s expectation that the jobless rate will decline a bit in 2006 from 2005’s 5.0%. For the moment, that guess on the jobless level looks like a safe bet in light of the fact that January’s unemployment rate dropped to 4.7%.
Beyond Bernanke, there’s no shortage of statistical props for arguing that the economy’s humming along nicely. That includes this morning’s release of initial jobless claims for the week through February, which are running below 300,000 for the fifth consecutive week. Meanwhile, continuing claims for jobless benefits remain impressive too, with the fifth straight week of below-the-2.6 million level. Together, the two trends are putting labor-market pessimists on the defensive. As Nomura Securities chief economist David Resler writes from New York today, “As much as job and income growth are the key ingredients to a healthy consumer, the outlook remains relatively bright, peering into 2006.”
IT’S JOE’S PARTY, AND HE’LL SPEND IF HE WANTS TO
Joe Sixpack is at once confounding the experts and inserting himself into every debate among economists, politicians, investors and anyone else who has a dog in the race otherwise known as the American economy.
Indeed, yesterday’s blowout retail sales report revealed a sizzling 2.3% rise in January over December’s admittedly weak report. Even more impressive is the 8.8% rise for last month over the year-earlier number. That’s head and shoulders over general economic growth and the overall pace of inflation. Rumors of Joe’s death as a spending entity, in sum, continue to look greatly exaggerated.
To be sure, by a number of metrics, Joe’s spending looks set to get the better of him and his associates across the nation. Consumer debt is mounting in relative and absolute terms, in some cases to record levels, triggering anxiety attacks for some pundits. But no matter what you expect comes next in consumer spending, it’s a topical subject, and arguably the only subject at the Fed, on Wall Street, and Main Street. All eyes, in other words, are keenly focused on Joe in an attempt to divine his next move when it comes to pulling out his credit card.
With that in mind, now seems a good time to take a closer look at the January retail sales report, if only to amuse ourselves as we await the next injection of data and news. As such, we present the following chart, which shows the major categories tracked in the government’s retail sales survey. It’s ranked by one-month percentage change, with the 12-month change for each category tacked on for added perspective.
