Money Supply Hits Post 9/11 Record

Since making a new low on May 17th, the markets have moved appreciably higher. In less than a month, the Nasdaq gained 8.5%, while the S&P500 and Dow each netted nearly 6%. This fast run led us to note one week ago that the markets were “rapidly approaching – but not quite at yet – an overbought short term condition.”

Since then, the markets have achieved that dubious distinction of being dramatically overbought state. That suggests to us that some selling and/or sideways action would be healthy, allowing the market to work off its “condition.” That i’s what must happen when markets get ahead of themselves.

To work off this overbought condition, we would like like expect to see a few more days of orderly selling – or simply sideways action. This could will bring equities down to a level that may be too tempting for buyers to ignore. We like that selling hasnot begat more selling. What few “disasters” we’ haveve seen have been admirably contained to individual names, and are not painting entire sectors red. We continue to be relatively constructive on the markets, and are willing to be patient in looking for more advantageous entry points.

But we keep coming back to the issue of Money Supply (see chart nearby). As mentioned previously, the Federal Reserve has been pumping cash into the system at a fantastic rate. Indeed, the Money Supply increase for May was the highest injection of liquidity the Fed has put into the system since the post 9/11 period.

That grabs our attention. Recall the two most recent periods of high Money Supply increases: Pre-Y2K, and post 9/11. The Markets greeted each of these M2 spike intervals like an injection of nitrous oxide into a racing engine.: They took off, soaring further and faster than anyone expected. The recent fuel injection is a significant increase: It has led to some speculation (amongst the cynics) that the Fed – the ultimate insiders – are bracing us for ‘something bad.’

We find this argument unconvincing. The Fed has shown little in the way of prescience (i.e., Y2K) and gets the same intel – for better or worse – as does the White House, Pentagon, and USAG. We continue to advocate patience in waiting for appropriate levels: Dow 10,200-300, Nasdaq 1950-60, and SPX 1115-25 are where investors youcan start scaling into the markets adding as they pull back further.

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  1. muckdog commented on Jun 14

    Hmm, and look at the put-call. This much money being dumped on the economy combined with bearishness, and now energy prices that are on the decrease?

    Best Buy better hire more cashiers.

    But maybe the money drop is to soften the blows of the coming rate hike.

  2. Mike commented on Jun 15

    So if they’re so worried about inflation, why are they busy monetizing? Watch what they do, not what they say. My guess is that they’ll talk tough about inflation all the while they keep on buying (unless they can convince BoJ to come back to the rescue).

    Another site had a theory that the rise in Mx is related to “settlement fails”. This is reported by the Fed at

    The idea was that the settlement fails were timed eerily to interest rate increases and that the Fed was increasing liquidity to keep continuity in the banking system.

    I don’t have an opinion, just putting the theory out there.

  3. Mike commented on Jun 17

    Yep, there they go again, more monetizing… Fed Securities Held Outright Increases by $1.9B in Past Week (

    In all of March, Fed monetized $2.6B. Then in April it was $2B. In May it was $4.5B. For the first three weeks of June, so far, it’s already $4.6B (including the $1.9B data just released).

    They must be really worried about inflation.

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