Thursday, July 30, 2009

Monetary Trends – August

Each month the St. Louis Federal Reserve issues a report on Monetary trends. August’s (covering the month of July) is below containing the very latest data from the Fed. Frankly, it’s frightening and historic what is happening to our economy – while money is being produced like there’s no tomorrow (for the dollar that may be true), the rest of the story is not for the faint of heart.

Take a look at the charts contained in this report and I’ll break out the exciting ones for you below:

Let’s start by looking at the Adjusted Monetary Base as expressed in percent change from one year ago. Base money is the most narrow measure of money supply (mostly cash and reseves) and it has basically doubled from one year ago. But is that trend continuing and sustainable?:

Next, let’s look at the Adjusted Monetary Base expressed in percent change at an annual rate. When we look at these changes two different ways, we see that the base is up from one year ago, but is currently falling at a rate nearly the equal of last fall’s:

This next chart shows PRICE DEFLATION, not price inflation with the CPI in negative territory, but EXPECTATIONS are disconnected from reality, expecting inflation all along, and recent expectations rising further against reality:

A real economic recovery would be one where the debts are cleared. Take a look at what is happening to Federal Debt. Suicide by Government:

To compensate for all the money that must pay back debt, the government prints and prints. Look at the percent change from one year ago in the money supply figures:

Yet, when we look at them in percent change at an annual RATE, we see that only cash and equivalents (M1) is moving up, the broader aggregates are moving down!

And even though we’re printing like crazy, overall inflation is NOT happening as the base money velocity is CRASHING at a 70% +/- rate! Look at the charts below, you will not see anything like it in the previous recessions, and THAT is a huge difference:

Nonfinancial Commercial Paper (loans) are plummeting, losing more than 20% from one year ago. Growth in Consumer Credit is negative for the first time since 1992:

Here are the charts of Velocity for M2 and MZN – a steady and sharp decline into historic low figures. Money does not turn over when it must be used to service DEBT. The harder the Fed pushes money into the system with DEBT, the lower velocity goes and that counters their efforts. Do it too much and it becomes a death spiral:

And the graph that should have all the greenshoot toker’s attention is this chart showing the S&P 500 against its Price to Earning’s ratio. This chart is current up through July 15th and shows how disconnected the market is from actual earnings. Earnings have been PLUMMETING while the market price has been soaring (but look at the rally in proportion to the collapse) creating a huge disconnect all the way to HISTORIC P/E ratios:

I think I’ll leave the equity buying to Goldman’s computers. Have fun with that!

Speaking of Goldman, they’ve got to change their evil ways… baby!

Santana – Evil Ways: