M3 is back...

[bart]

After reading this little known press release ( http://www.federalreserve.gov/releases/h6/20060316 ) a few weeks ago, I started to wonder… and the surprising result is that (except for the Eurodollars element of M3), the data is still available with which to reconstruct M3.

* The formula used has over five nines (.9999946 – 1.0 being perfect) correlation to the original data back going back to 1980, and is taken directly from the Federal Reserve’s definition of M3.
* There is only one missing element that is apparently no longer available (Eurodollars) and I've applied an adjustment to generate it. Its only about 3% of total M3 so should not have a material effect on the total
* The data sources are M2, Institutional Money Market and two weekly reports from the Fed – H.8 and H.4.1.
* Not surprisingly, the growth rate has continued up since the last official report in early March
* I’ll leave it up to the reader on why M3 was discontinued but wish to point out this quote: The last duty of a central banker is to tell the public the truth. -- Alan Blinder, Vice Chairman of the Federal Reserve, on PBS’s Nightly Business Report in 1994




[image]http://www.nowandfutures.com/images/m3b.png[/image]

[EJ]

Nice. We can call it the iTulip.com M3 index.

How about we start keeping a few of our own monthly statistics in addition to bart's M3. Some suggestions:

- Consumer Confidence Game Index
- Alternative to Consumer Confidence Index - Measures the level of confidence of households in the future health of the economy by measuring the amount of debt taken on relative to real income
- Bubble Domestic Product
- Alternative to GDP - Measures economic growth that's dependent on asset appreciation versus production
- iTulip Price Index
- Alternative to CPI - Measures eal Household Inflation, comprised of traded and non-traded goods and services, in proportion to the average household's budget for each category. Currently, expenditure on non-traded goods represents 83% of the typical household's expenses. This weighted approach shows that the average household experienced a 4% rate of annual inflation between 2003 and 2004.

http://www.alwayson-network.com/comm...d=7525_0_1_0_C

Other ideas?

[bart]

I actually already have taken a shot at bubble GDP.

Its based very roughly on John Williams work on the lies imbedded in CPI (and therefore the GDP deflator), and simply takes GDP with the deflator and subtracts CPI in an attenpt to get a truer picture.

John's work indicates the needed adjustment to CPI is roughly about 3%, and that's the rough range of CPI itself. Its obviously not terrbibly accurate to do this over the period 1988-1996 (when the Boskin Commission work made a major CPI adjustment) but it sure does present a more true picture in my opinion.



[image]http://www.nowandfutures.com/images/real_gdp.png[/image]

[bart]

By the way EJ, my M3 work is fully in the public domain.

There's even a full copy of the Excel data with how its calculated and the various sources for the data available in the zip at http://www.nowandfutures.com/download/m3b.zip

[bart]

Re: M3 is back...

An update - just recently the broad money measure called M3, which was discontinued by the Fed last March and reconstructed by me in April, broke above a 10% year over year growth rate. It also is now over $11 trillion in total value.

Here's the current chart:




Do note that its actual effect will be delayed for at least 12-18 months due to the nature of monetary lags... but if it were still being published by the Fed. it would likely trigger a gold buying spree.

A definition of M3 and it components are available in my glossary under "money measures".

[Finster]

Re: M3 is back...

An update - just recently the broad money measure called M3, which was discontinued by the Fed last March and reconstructed by me in April, broke above a 10% year over year growth rate. It also is now over $11 trillion in total value.

Here's the current chart:




Do note that its actual effect will be delayed for at least 12-18 months due to the nature of monetary lags... but if it were still being published by the Fed. it would likely trigger a gold buying spree.

A definition of M3 and it components are available in my glossary under "money measures".

Holy monetary profligacy, Bartman!

Ten percent? That ROC line looks too scary even for Halloween!

FWIW, if that's what they're doing, I think the markets will react before too long even if they don't publish M3. (Of course those of us privy to m3b needn't even wait for that). Think we ought to be making sure we have some gold now?

[bart]

Re: M3 is back...

Holy monetary profligacy, Bartman!

Ten percent? That ROC line looks too scary even for Halloween!

FWIW, if that's what they're doing, I think the markets will react before too long even if they don't publish M3. (Of course those of us privy to m3b needn't even wait for that). Think we ought to be making sure we have some gold now?

Methinks you're correct on all counts, oh Maven of the Manor - and I wish it were an April 1st joke too. Its actually probably higher than that, since I'm estimating the truly discontinued Eurodollar component very conservatively.

I've recently added to my gold long position substantially too, based on many indicators of which M3 is only one. Here are a few more:

[Finster]

Re: M3 is back...

Methinks you're correct on all counts, oh Maven of the Manor - and I wish it were an April 1st joke too. Its actually probably higher than that, since I'm estimating the truly discontinued Eurodollar component very conservatively.

I've recently added to my gold long position substantially too, based on many indicators of which M3 is only one. Here are a few more...

Gold seems to make sense, and the action there the past few days might even be the first early signs it's being felt. Any other actions investors ought to consider?

[spunky]

Re: M3 is back...

Silver


1) Has many industrial uses

2) Often isnt mined for primarily; so if mining operations looking for copper,zinc,gold slow down, even with a high silver price, you wont necessarily get alot of increased output.

3) China and India will need it

[bart]

Re: M3 is back...

Gold seems to make sense, and the action there the past few days might even be the first early signs it's being felt. Any other actions investors ought to consider?

Things could get squirrelly pretty fast after the election. It also depends a lot on how much the Fed & Treasury are pumping. In my opinion, the markets are being artificially propped up and could drop significantly at any time.

Also, if anyone doesn't have a clear idea what they will do if the dollar starts to drop precipitously, now is the time to do the research and make decisions.

Here's a chart from JesseL's site ( http://www.geocities.com/arthurcutten/jesse.html ) that speaks to the first issue:

[Finster]

Re: M3 is back...

Things could get squirrelly pretty fast after the election. It also depends a lot on how much the Fed & Treasury are pumping. In my opinion, the markets are being artificially propped up and could drop significantly at any time.

Also, if anyone doesn't have a clear idea what they will do if the dollar starts to drop precipitously, now is the time to do the research and make decisions.

Here's a chart from JesseL's site ( http://www.geocities.com/arthurcutten/jesse.html ) that speaks to the first issue:

...

It sounds like you are saying that this 10% money growth is apt to end fairly abruptly (after the elections). But wouldn't a more restrictive Fed be good (or at least less bad) for the dollar? What am I missing?

[bart]

Re: M3 is back...

It sounds like you are saying that this 10% money growth is apt to end fairly abruptly (after the elections). But wouldn't a more restrictive Fed be good (or at least less bad) for the dollar? What am I missing?

Sorry - what I was referring to on a possible drop off after the elections was the "hot money" actions of the Fed & Treasury. If they start dropping off much, I think we'll see a stock market correction due to the likelihood of recession, etc.

The M3 10%+ growth rate has more to do with inflation 12-24 months in the future... but if it was still around, it would give even more impetus to gold & hard assets.

As far as a more restrictive Fed being good for the dollar, very true... and also not very likely in my book. It appears to me that there's at least a 40% chance that the Fed is loosening up already. Here's a chart showing credit growth in all four of the main types - we're not exactly in a credit crash.

[Finster]

Re: M3 is back...

Sorry - what I was referring to on a possible drop off after the elections was the "hot money" actions of the Fed & Treasury. If they start dropping off much, I think we'll see a stock market correction due to the likelihood of recession, etc.

The M3 10%+ growth rate has more to do with inflation 12-24 months in the future... but if it was still around, it would give even more impetus to gold & hard assets.

As far as a more restrictive Fed being good for the dollar, very true... and also not very likely in my book. It appears to me that there's at least a 40% chance that the Fed is loosening up already. Here's a chart showing credit growth in all four of the main types - we're not exactly in a credit crash.

...

So if I understand you right, my congnitive dissonance is due to different time frames. Near term, a lighter Fed foot on the accelerator pedal would remove support from stock prices, but further on down the road the money growth will do the same for the dollar.

My only quibble (and how boring things could get without quibbles ;-) would be to argue that that 10% money growth represents inflation in the here and now. The mere fact that it would take 12-24 months to work its way into consumer prices (and measures of them) reflects the lagging nature of those measures, not of the inflation itself! :eek:

[bart]

Re: M3 is back...

So if I understand you right, my cognitive dissonance is due to different time frames. Near term, a lighter Fed foot on the accelerator pedal would remove support from stock prices, but further on down the road the money growth will do the same for the dollar.

My only quibble (and how boring things could get without quibbles ;-) would be to argue that that 10% money growth represents inflation in the here and now. The mere fact that it would take 12-24 months to work its way into consumer prices (and measures of them) reflects the lagging nature of those measures, not of the inflation itself! :eek:

Always with the nits, eh FinMeister? ;)

Very much true on both the time frames issue and it also being inflation now. And speaking of inflation now and lags and predictions, gold sure is tracking pretty well with my chart with its high so far today of about $615... even though it doesn't include M3 as an input.

[Finster]

Re: M3 is back...

Always with the nits, eh FinMeister? ;)

Very much true on both the time frames issue and it also being inflation now. And speaking of inflation now and lags and predictions, gold sure is tracking pretty well with my chart with its high so far today of about $615... even though it doesn't include M3 as an input.

...

Well it's a good thing gold is on the move today, because that Canadian government tax grab has the income trusts tanking big time!

On to your gold chart. It is suggesting gold will return to its earlier highs within a couple months or so? FWIW, my gold forecast is calling for something very similar, only just a little later on towards mid-year. Remarkable concurrence.