Stocks - Seasonal Performance II

[flow5]

The countdown:

5 (Monday), 4 (Tuesday), 3 (Wednesday), 2 (Thursday), 1 (Friday)

Then SELL, SELL, SELL!!!!!!!

[flow5]

"Much of the growth in PCE did not come from rising incomes but from a reduction of the savings rate from 4.5% to 3.9%"

[flow5]

bit.ly/Idr053

Barring countervailing intervention by the FED (& based on the roc in MVt), the most probable trades will be:
----------------------...
(1) Buy CME Treasury bond futures in the first week of June 2012
(2) Sell CME Treasury bond futures in the second week of July.
----------------------...
However, the disappointing economic news after May 7th should allow you to buy bonds (enter positions), even earlier (as traders seek to front-run an accelerating downswing).
----------------------...
(3) Initiate a short sell position on the second week of July 2012. Instead of taking quick profits, continue to add to these postions, with the profit generated from your existing position (e.g., with "self-financing" piller, or pyramid trades).

[flow5]

Milton Freidman's "MVi=PQ": Where:

PQ=total expenditures.
MVi=total income.

P=the price level.
Q=economic output.
Vi=income velocity.
M=money supply.

& Friedman's car license plate read: PQ=MV.

However Vi (income velocity) is a contrived figure (Vi = Nominal GDP/M).

To the Keynesians (& Friedman), aggregate monetary demand is nominal GDP, the demand for services (human) and final goods. This concept excludes the common sense conclusion that the inflation process begins at the beginning (with raw material prices and processing costs at all stages of production) and continues through to the end.

To ignore the aggregate effect of money flows (MVt) on prices is to ignore the inflation process. And to dismiss the concept of Vt by saying it is meaningless (that people can only spend their income once) is to ignore the fact that Vt is a function of three factors: (1) the number of transactions; (2) the prices of goods and services; (3) the volume of M.

Inflation analysis cannot be limited to the volume of wages and salaries spent. To do so is to overlook the principal "engine" of inflation - which is of course, the volume of credit (new money) created by the Reserve and the commercial banks, plus the expenditure rate (velocity) of these funds. Also overlooked is the effect of the expenditure of the savings of the non-bank public on prices. The (MVt) figure encompasses the total effect of all these monetary flows (MVt).

Friedman can be accidentally right. Vi & Vt are currently moving in the same direction. That has not always been true. Vi can move in the opposite direction as Vt:
----------------------...
Transactions Velocity of money (money actually exchanging hands)

The Fed calculates these velocity figures by dividing the aggregate volume of debits of these banks against their demand deposits:

1974-Oct. ,,,,,,, 77
1974-Nov. ,,,,,,, 70
1974-Dec. ,,,,,,, 75
1975-Jan. ,,,,,,, 75
1975-Feb. ,,,,,,, 67
1975-Mar. ,,,,,,, 72
1975-Apr. ,,,,,,, 75
1975-May ,,,,,,, 73
1975-June ,,,,,,, 73
1975-July ,,,,,,, 75
1975-Aug. ,,,,,,, 72
1975-Sep. ,,,,,,, 73

Income Velocity (the contrived figure)

1974-07-01 5.604
1974-10-01 5.680
1975-01-01 5.705
1975-04-01 5.747
1975-07-01 5.843
1975-10-01 5.984

"Velocity is a ratio of nominal GDP to a measure of the money supply. It can be thought of as the rate of turnover in the money supply--that is, the number of times one dollar is used to purchase final goods and services included in GDP."

This above example is one case where Milton Friedman's income velocity (a contrived figure), moves in the opposite direction of the transactions velocity of money (an actual figure).
================

SEE: Member Bank Reserve Requirements -- Analysis of Committee Proposal, February 27, 1938 - declassified March 23, 1983 (too late for any consideration).

In 1931 this committee recommended a radical change in the method of computing reserve requirements, the most important features of which were:

(2) "Requirements against debits to deposits"
(5)"the committee proposed that reserve requirements be based upon the turnover of deposits"
====================
Today: We have just gone thru the widespread deleveraging of U.S. consumers (liquidations, redemptions, account balance transfers, & conversions to currency).

This was expressed by depositors raiding their savings/investment (interest-bearing) type accounts, & shifting these balances into transactions based (non-interest-bearing) type accounts. This represented an overall increase in the transactions velocity, or turnover, of the money stock.

This consumer behavior (one-time phenomenon) changed the composition of the money stock & distorted Vi (decreasing the numerator & increasing the denominator of income velocity). This represented another case where VI moved in the opposite direction of Vt.

The impact from these money flows has virtually dissipated. Funds "saved for a rainy day" have been largely depleted, & the accompanying deposit classification shifts have ended.

[flow5]

Given an output gap, the concept of "ngDp targeting" is very simple. Coming out of a recession economists agree that the economy experiences "RE-FLATION", but by using the same logic, the economy also experiences "RE-GROWTH" (an increase in the "growth rate" of goods & services).

Thus, ceteris paribus, it is true that: whenever the target for ngDp is below trend, then "ngDp targeting" is applicable.

However in the case where aggregate monetary demand proceeds pari passu with real-gDp (when nominal gDp exceeds its target), a nominal gDp target is moot.

[flow5]

Other things being equal:

Given:

(1) a discrepancy between the growth of ngDp & its target;
(2) any ratio between the composition of ngDp (inflation vs. real-output);
(3) a correction to aggregate monetary demand to adjust the growth of ngDp

Then: the resultant change to real-growth will be disproportionately greater than the change to the inflation component.

[Aman A.K.A. Ahamburger]

Thanks for all the info flow5.. I like Friedman's view of economics on society, but I can't stand the way he applied his vision to monetary policy. If only the would have all read Warburg's book about banking instead of bonding the grown in the country.

[flow5]

Friedman is interesting only insofar as no one recognized how stupid he was.

DOW @13,279.32 - new 4 year top. Onward & upward until Friday. The level isn't noteworthy, only the direction. Should be a reversal on Friday. Should be a slide until June month-end.

[bimetalaupt]

May 1, 2012 23:01:32 GMT -5 flow5 said:

Friedman is interesting only insofar as no one recognized how stupid he was.

DOW @13,279.32 - new 4 year top. Onward & upward until Friday. The level isn't noteworthy, only the direction. Should be a reversal on Friday. Should be a slide until June month-end.

Flow5,
Then what are your thoughts on the decline in the increase in M3 and Decline in none M2-m3.

Looks like tight money on the top and a huge cash reserves in none banking bonds!!

Thank-you in advance,
Bruce

[Aman A.K.A. Ahamburger]

May 1, 2012 23:01:32 GMT -5 flow5 said:

Friedman is interesting only insofar as no one recognized how stupid he was.

DOW @13,279.32 - new 4 year top. Onward & upward until Friday. The level isn't noteworthy, only the direction. Should be a reversal on Friday. Should be a slide until June month-end.

LOL, now flow, lets not forget that a generation of economists were drinking the Keynesian kool-aid... However, some things he thought were dead on.

“A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”
― Milton Friedman

“Well first of all, tell me: Is there some society you know that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course, none of us are greedy, it’s only the other fellow who’s greedy. The world runs on individuals pursuing their separate interests.

The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way. In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history, are where they have had capitalism and largely free trade.

If you want to know where the masses are worse off, worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear, that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by the free-enterprise system.”
― Milton Friedman

[Aman A.K.A. Ahamburger]

I have been thinking about this for a few days now BTI. You say that M1-2 are up but M3 isn't... I think u nailed it on the head, there is a base and that means no cliff. However, real money creation isn't up becuase business just isn't expanding as fast as the were. This isn't terrible, however, this is also why I don't expect a huge boom for a long while. Slow and steady..

[flow5]

In Dec. 2004, M1 spiked @ $1401.2b. M1 didn't return to that level until Apr. 2008 @ $1406b.

M1 was falling at the same time the economy was booming. Let’s reverse engineer this. Nominal gDp stood @ $12,123.9 in the 4th qtr of 2004. It grew to $14,415.5 in the 2nd qtr of 2008 (its peak). I.e., nominal gDp expanded by 19 percent during the same period. How did nominal gDp grow this big when the primary money supply was falling?

The decline in M1 was offset by an increase in the transactions velocity of money. Because of the widespread increase in the proliferation of new financial innovations, Vt climbed -- offsetting the "shortfall" in M1. This is identical to the circumstances surrounding the 79-82 recession.

While Greenspan thought he began tightening monetary policy in Dec. 2004, money flows (MVt) were still increasing (albeit at a decreasing roc). The roc in (MVt) became negative (below zero) in March 2006 (@ the same time the Case–Shiller Home Price National Index peaked @189.93 in the 2nd qtr 2006 -- when money flows (MVt) peaked (not when M1peaked @ $1401.2 billion in Dec. 2004). I.e., Greenspan never tightened monetary policy.

[flow5]

11-Aug ,,,,,,, 0.16
11-Sep ,,,,,,, 0.24
11-Oct ,,,,,,, 0.26
11-Nov ,,,,,,, 0.24
11-Dec ,,,,,,, 0.25
12-Jan ,,,,,,, 0.25
12-Feb ,,,,,,, 0.29
12-Mar ,,,,,,, 0.26
12-Apr ,,,,,,, 0.25
12-May ,,,,,,, 0.28
12-Jun ,,,,,,, 0.31

The above figures don't correspond to any specific rate of inflation, they just show the trend will be up.

12-Jan ,,,,,,, 0.16
12-Feb ,,,,,,, 0.15
12-Mar ,,,,,,, 0.13
12-Apr ,,,,,,, 0.15
12-May ,,,,,,, 0.13
12-Jun ,,,,,,, 0.07

These above figures show the trend in the (rate-of-change), in real-output. Barring countervailing intervention, June still looks very weak.

So if June is weak, then the FED will intervene -- shoving inflation temporarily higher.

[flow5]

Estimates by the Department of Commerce put the net debt figure as of the end of 1939 at $183.2 billion compared with a figure of $190.9 billion as of the end of 1929. I.e., for the period encompassing the Great Depression there was no over all debt expansion.

Relative to nominal GDP we had the highest deficits during WWII and interest rates approximating the lowest levels of the Great Depression. Interest rates on Treasury obligations ranged from less than on percent on TBs to 2 ½ percent on long term bonds. This was accomplished by the Fed pegging the rates on all governments through the unlimited use of their open market power. If the market pushed any rate above the predetermined “peg level” the Fed entered the market on the buying side, etc. This resulted in a vast increase in m1, bank credit and commercial and reserve bank holdings of governments.

At the same time due to rationing and the absence of available goods transactions velocity of demand deposits fell from around 20 to 13. The production of houses and automobiles was virtually stopped and credit rationing severely reduced the demand for all types of goods and services not directly connected to the war effort this plus controls on prices and wages kept the reported rate of inflation down.

It was true, as the Keynesians insisted, that monetary policy didn’t matter; fiscal policy was everything. NO MORE. The future holds the prospect of sharply declining levels of consumption for the vast majority of the American people, who will be facing years of stagflation. It is probable that we will never be able to dig ourselves out of the present morass of debt and still operate the economy within the framework of a free capitalistic system.

Total Net Debt,,, Private,,,, Public
1916 ,,,,, 82.1 ,,,,, 76.5 ,,,,, 5.6
1917 ,,,,, 94.4 ,,,,, 82.4 ,,,,, 12.0
1918 ,,,,, 117.4 ,,,,, 91.5 ,,,,, 25.9
1919 ,,,,, 128.0 ,,,,, 97.2 ,,,,, 30.8
1920 ,,,,, 135.4 ,,,,, 105.8 ,,,,, 29.6
1921 ,,,,, 135.8 ,,,,, 106.2 ,,,,, 29.6
1922 ,,,,, 140.0 ,,,,, 109.5 ,,,,, 30.5
1923 ,,,,, 146.3 ,,,,, 116.3 ,,,,, 30.0
1924 ,,,,, 153.0 ,,,,, 123.0 ,,,,, 30.0
1925 ,,,,, 162.6 ,,,,, 132.3 ,,,,, 30.3
1926 ,,,,, 168.8 ,,,,, 138.9 ,,,,, 29.9
1927 ,,,,, 177.3 ,,,,, 147.6 ,,,,, 29.7
1928 ,,,,, 185.9 ,,,,, 156.1 ,,,,, 29.8
1929 ,,,,, 190.9 ,,,,, 161.2 ,,,,, 29.7
1930 ,,,,, 191.0 ,,,,, 160.4 ,,,,, 30.6
1931 ,,,,, 181.9 ,,,,, 147.9 ,,,,, 34.0
1932 ,,,,, 174.6 ,,,,, 136.7 ,,,,, 37.9
1933 ,,,,, 168.5 ,,,,, 127.5 ,,,,, 41.0
1934 ,,,,, 171.4 ,,,,, 125.1 ,,,,, 46.3
1935 ,,,,, 174.7 ,,,,, 124.2 ,,,,, 50.5
1936 ,,,,, 180.3 ,,,,, 126.4 ,,,,, 53.9
1937 ,,,,, 182.0 ,,,,, 126.7 ,,,,, 55.3
1938 ,,,,, 179.6 ,,,,, 123.1 ,,,,, 56.5
1939 ,,,,, 183.2 ,,,,, 124.3 ,,,,, 58.9
1940 ,,,,, 189.9 ,,,,, 128.6 ,,,,, 61.3
1941 ,,,,, 211.6 ,,,,, 139.0 ,,,,, 72.6
1942 ,,,,, 259.0 ,,,,, 141.5 ,,,,, 117.5
1943 ,,,,, 313.6 ,,,,, 144.3 ,,,,, 169.3
1944 ,,,,, 370.8 ,,,,, 144.8 ,,,,, 226.0
1945 ,,,,, 406.4 ,,,,, 140.0 ,,,,, 266.4
1946 ,,,,, 397.5 ,,,,, 154.2 ,,,,, 243.3
1947 ,,,,, 418.0 ,,,,, 180.3 ,,,,, 237.7
1948 ,,,,, 434.3 ,,,,, 201.6 ,,,,, 232.7
1949 ,,,,, 447.9 ,,,,, 211.2 ,,,,, 236.7
1950 ,,,,, 488.2 ,,,,, 248.8 ,,,,, 239.4
1951 ,,,,, 521.2 ,,,,, 279.2 ,,,,, 242.0
1952 ,,,,, 552.7 ,,,,, 302.7 ,,,,, 250.0
1953 ,,,,, 584.7 ,,,,, 328.0 ,,,,, 256.7
1954 ,,,,, 605.5 ,,,,, 341.9 ,,,,, 263.6

Sources: Office of Business Economics, United States Department of Commerce, “Survey of Current Business,” Sept, 1953, p. 14; May, 1955, p. 9.

[flow5]

.Net..........................Bank
.Federal....................Financed
.Debt........................Debt
1916 ,,,,, 1.2 ,,,,, 20.6
1917 ,,,,, 7.3 ,,,,, 25
1918 ,,,,, 20.9 ,,,,, 29.7
1919 ,,,,, 25.6 ,,,,, 24.9
1920 ,,,,, 23.7 ,,,,, 39.5
1921 ,,,,, 23.1 ,,,,, 35.7
1922 ,,,,, 22.8 ,,,,, 35.2
1923 ,,,,, 21.8 ,,,,, 38.5
1924 ,,,,, 21 ,,,,, 41
1925 ,,,,, 20.3 ,,,,, 44.4
1926 ,,,,, 19.2 ,,,,, 45.2
1927 ,,,,, 18.2 ,,,,, 48.4
1928 ,,,,, 17.5 ,,,,, 51.1
1929 ,,,,, 16.5 ,,,,, 51
1930 ,,,,, 16.5 ,,,,, 48.1
1931 ,,,,, 18.5 ,,,,, 41.5
1932 ,,,,, 21.3 ,,,,, 37.2
1933 ,,,,, 24.3 ,,,,, 33.5
1934 ,,,,, 30.4 ,,,,, 36.2
1935 ,,,,, 34.4 ,,,,, 38.5
1936 ,,,,, 37.7 ,,,,, 42
1937 ,,,,, 39.2 ,,,,, 40.9
1938 ,,,,, 40.5 ,,,,, 41.2
1939 ,,,,, 42.6 ,,,,, 43.2
1940 ,,,,, 44.8 ,,,,, 46.1
1941 ,,,,, 56.3 ,,,,, 53
1942 ,,,,, 101.7 ,,,,, 73.6
1943 ,,,,, 154.4 ,,,,, 96.7
1944 ,,,,, 211.9 ,,,,, 125.2
1945 ,,,,, 252.7 ,,,,, 149.1
1946 ,,,,, 229.7 ,,,,, 138.1
1947 ,,,,, 223.3 ,,,,, 139.5
1948 ,,,,, 216.5 ,,,,, 138.4
1949 ,,,,, 218.6 ,,,,, 139.7
1950 ,,,,, 218.7 ,,,,, 148.9
1951 ,,,,, 218.7 ,,,,, 155.4
1952 ,,,,, 224.2 ,,,,, 166.5
1953 ,,,,, 228.1 ,,,,, 171.6
1954 ,,,,, 230.2 ,,,,, 182

[flow5]

Change in...................Change in
Total Debt..................Bank Debt

1916 ,,,,, ,,,,,
1917 ,,,,, 12.3 ,,,,, 4.4
1918 ,,,,, 23 ,,,,, 4.7
1919 ,,,,, 10.6 ,,,,, 5.2
1920 ,,,,, 7.4 ,,,,, 4.6
1921 ,,,,, 0.4 ,,,,, -3.8
1922 ,,,,, 4.2 ,,,,, -0.5
1923 ,,,,, 6.3 ,,,,, 3.3
1924 ,,,,, 6.7 ,,,,, 2.5
1925 ,,,,, 9.6 ,,,,, 3.4
1926 ,,,,, 6.2 ,,,,, 0.8
1927 ,,,,, 8.5 ,,,,, 3.2
1928 ,,,,, 8.6 ,,,,, 2.7
1929 ,,,,, 5 ,,,,, -0.1
1930 ,,,,, 0.1 ,,,,, -2.9
1931 ,,,,, -9.1 ,,,,, -6.6
1932 ,,,,, -7.3 ,,,,, -4.3
1933 ,,,,, -6.1 ,,,,, -3.7
1934 ,,,,, 2.9 ,,,,, 2.7
1935 ,,,,, 3.3 ,,,,, 2.3
1936 ,,,,, 5.6 ,,,,, 3.5
1937 ,,,,, 1.7 ,,,,, -1.1
1938 ,,,,, -2.4 ,,,,, 0.3
1939 ,,,,, 3.6 ,,,,, 2
1940 ,,,,, 6.7 ,,,,, 2.9
1941 ,,,,, 21.7 ,,,,, 6.9
1942 ,,,,, 47.4 ,,,,, 20.6
1943 ,,,,, 54.6 ,,,,, 23.1
1944 ,,,,, 57.2 ,,,,, 28.5
1945 ,,,,, 35.6 ,,,,, 23.9
1946 ,,,,, -8.9 ,,,,, -11
1947 ,,,,, 10.5 ,,,,, 1.4
1948 ,,,,, 16.3 ,,,,, -1.1
1949 ,,,,, 13.6 ,,,,, 1.3
1950 ,,,,, 40.3 ,,,,, 9.2
1951 ,,,,, 33 ,,,,, 7.5
1952 ,,,,, 31.5 ,,,,, 10.1
1953 ,,,,, 32 ,,,,, 5.1
1954 ,,,,, 20.8 ,,,,, 10.4

[Aman A.K.A. Ahamburger]

Thanks for the info flow, can't wait to dig into the numbers a bit more.

It was true, as the Keynesians insisted, that monetary policy didn’t matter; fiscal policy was everything. NO MORE. The future holds the prospect of sharply declining levels of consumption for the vast majority of the American people, who will be facing years of stagflation. It is probable that we will never be able to dig ourselves out of the present morass of debt and still operate the economy within the framework of a free capitalistic system.

I would say that the lower consumption levels aren't going to be a problem. We here in Canada have had a "stagnant" public debt since the 90's, and we continue to grow and operate in a Capitalistic fashion. So without a doubt the USA will be able to operate at current levels. If it wasn't for 9/11 and the Crash of '08 both the USA and Canada would be paying of small amount of the Federal debt at this time, I have no doubt about that. I also have no doubt that the USA can operate at a fiscal surplus at some point in the future.

[flow5]

Velocity matched its yearly low in the latest reporting week (ending 4/30/12). Money flows still projecting a June bottom.

[bimetalaupt]

May 5, 2012 0:42:39 GMT -5 flow5 said:

In Dec. 2004, M1 spiked @ $1401.2b. M1 didn't return to that level until Apr. 2008 @ $1406b.

M1 was falling at the same time the economy was booming. Let’s reverse engineer this. Nominal gDp stood @ $12,123.9 in the 4th qtr of 2004. It grew to $14,415.5 in the 2nd qtr of 2008 (its peak). I.e., nominal gDp expanded by 19 percent during the same period. How did nominal gDp grow this big when the primary money supply was falling?

The decline in M1 was offset by an increase in the transactions velocity of money. Because of the widespread increase in the proliferation of new financial innovations, Vt climbed -- offsetting the "shortfall" in M1. This is identical to the circumstances surrounding the 79-82 recession.

While Greenspan thought he began tightening monetary policy in Dec. 2004, money flows (MVt) were still increasing (albeit at a decreasing roc). The roc in (MVt) became negative (below zero) in March 2006 (@ the same time the Case–Shiller Home Price National Index peaked @189.93 in the 2nd qtr 2006 -- when money flows (MVt) peaked (not when M1peaked @ $1401.2 billion in Dec. 2004). I.e., Greenspan never tightened monetary policy.

Flow5,
Yes but M2 and m3 were both up in 2004-2005..

M3 increased some 700 billion and M2 also increased some 200 Billion..
year....................M3............M2.....................NoneM2-m3.............M1
2004................9433............6440.2...............2992.8.....................1389.2


2005...............10150............6669.4.................3480.6..............1368.5

Much of what I have seen is the banks aggressively lend from the super larges CD's..IE NoneM2-M3!! Much of M1 is in useless Cash!!!Drug Money and not banking..

Just a thought,
BiMetalAuPt...

[flow5]

"Securities purchased (and sold) by the Fed, for example, could be absorbing assets that were held by the non-bank private sector or by the banking system itself."

But the Fed's research staff missed the corollary - IOeR's "could be absorbing assets that were held by the non-bank private sector or by the banking system itself."

IOeR's induce dis-intermediation where the financial intermediaries shrink in size -- but the commercial banking system stays the same).

bit.ly/KuakdE

[flow5]

The flight-to-safety contagion (a liquidation of Euro assets which were converted into dollar-denominated assets), was a lesson in the transactions velocity of money, Vt fell in the Eurozone as Vt rose in the U.S. The dollar rose as the euro fell.

We have completed the widespread deleveraging of U.S. consumers (liquidations, redemptions, restructuring, repudiation, account balance transfers, & conversions to currency), including the spill-over from Europe (flight-to-safety).

This downsizing was expressed by depositors raiding their savings/investment (interest-bearing) type accounts, & shifting these balances into transactions based (non-interest-bearing) type accounts. Because of the uncertainty in the investment climate, savers sought to add FDIC insurance coverage & with ultra-low interest returns (and small difference in the rates of return between deposit classifications), moved their money into the most liquid of assets.

This represented an overall increase in the transactions velocity (financial), or turnover, of the money stock.

This consumer behavior (one-time phenomenon) changed the composition of the money stock & distorted Vi (decreasing the numerator (gDp) & increasing the denominator (money), of income velocity). This represented another case where VI moved in the opposite direction of Vt.

But in the process of moving these balances some consumers tapped part of these savings adding to new spending (dis-savings). I.e., Vt increased.

Now, the impact from these money flows has virtually dissipated. Funds "saved for a rainy day" have largely been depleted & the accompanying deposit classification shifts have ended. In the U.S. economic activity is set to fall & in the Eurozone economic activity is set to rise. The euro is set to rise & the dollar fall.

[flow5]

Krugman's solution:

"The federal government needs to step in and spend. A lot."

That begs the question -- how much? That's relative to how an increase in the f-i-s-c-a-l multiplier (government spending), effects the s-p-e-n-d-i-n-g multiplier: (i.e., PRIVATE investment spending, CONSUMER spending, "government" spending, & FOREIGN purchases). And only when output (income), exceeds input (spending), is the "K-e-y-n-e-s-i-a-n multiplier " greater than one (productive).

[flow5]

bilbo.economicoutlook.net/blog/?p=19397

Disagree with this:

"Central banks cannot control the money supply"

While it is true that commercial bank lending & investing (fractional reserve banking), is not now constrained -- it was not true when legal reserves were "binding" (the system’s expansion coefficient was operative between 1942 until 1995). Today, increasing levels of vault cash (larger ATM networks), retail deposit sweep programs, fewer applicable deposit classifications (including the "low-reserve tranche" & "exemption amounts"), & lower reserve ratios, & most recently “Reserve Simplification” procedures have combined to remove most reserve, & reserve ratio, restrictions.

Today commercial banks need (& expect to be accommodated with), central bank deposits (e.g., daylight credit), -- for clearing & settlement transactions, credit transfers, & making other interbank payments, which gives the central bank leverage over money and bond markets. But the development of payment & settlement systems was driven by de-regulation, i.e., principally by the elimination of Regulation Q ceilings. CBs now buy their liquidity (from a system’s standpoint, pay for what they already own), as opposed to traditionally storing their liquidity (prudential reserve banking).

The Central Bank has assumed both the CB’s current test of liquidity (along with FDIC liquidating assumptions). I.e., the FDIC, in the course of receivership, has authority to merge (auction), an insolvent bank with a solvent one. In the final analysis either the “lender of last resort” (Federal Reserve), or the FDIC’s backstop (U.S. Treasury’s Orderly Liquidity Fund, created under Dodd-Frank), may decide to guarantee a bank’s creditors (or apply a haircut to their assets), but will ordinarily in the process, require the shareowners to take the losses (perchance completely wiping out common shareholder’s equity).

The CB’s credit (liquidity & solvency), has been replaced by the Federal Reserve’s credit (e.g., advancing funds thru the discount window when FDIC reserves are inadequate to meet wholesale runs on a bank). There are degrees of restructuring (Federal bailouts): conservatorship (government control: Freddie Mac & Fannie Mae), partial nationalization (government purchases of preferred stock to boost Tier 1 common capital ratios: TARP-CCP), i.e., equity investments designed to minimize shareholder’s losses.

While injecting reserves is not automatically accompanied by an increase in the money stock, the undue draining of District Reserve inter-bank balances can still trigger a multiple contraction of money & credit (aka the Great Recession).

Today’s “corridor” was yesterday’s “Fed Funds Bracket Racket” (the operational technique used by the NY Fed’s “trading desk” when it first emerged in 1965). The brackets for these two rates were set: -buying operations in the open market were used to prevent rates from rising above the bracket, -selling operations when rates tended to fall below the bottom of the bracket. The effect of these misguided procedures was to allow any and all banks to acquire added legal reserves (legal lending capacity) by simply entering the federal funds market and bidding up the federal funds rate to the “trigger” level.

Since the demand for bank credit, and subsequent increase in the money supply, is reinforcing and not self regulatory, an inflationary environment was quickly fostered. Consequently, the prevailing pressures in the credit markets were on the top side of the federal funds brackets. Demands for bank credit to finance real estate and commodity speculation soon became excessive.

Monetary flows (MVt) (money times its turnover rate) expanded sharply. Price rises as a consequence accelerated, & more and more bank credit was required to finance all transactions. In other words, the Fed’s technical staff, by adhering to the false Keynesian theory – that the money supply could be properly controlled through the manipulation of interest rates, specifically the federal funds rate -- lost control of both the money supply and the federal funds rate.

The money supply (and thus commercial bank credit), can never be managed by any attempt to control the cost of credit (i.e., thru pegging the interest rate on governments; or thru "floors", "ceilings", "corridors", "brackets", etc). Keynes’s liquidity preference curve is a false doctrine.

[flow5]

"Yes but M2 and m3 were both up in 2004-2005..

M3 increased some 700 billion and M2 also increased some 200 Billion..
year....................M3............M2.....................NoneM2-m3.............M1
2004................9433............6440.2...............2992.8.....................1389.2

2005...............10150............6669.4.................3480.6..............1368.5

Much of what I have seen is the banks aggressively lend from the super larges CD's"
=========================

Agree. While the narrow money supply stagnated, the non-banks flourished. And this was reflected in an acceleration in the transactions velocity of funds. This was déjà vu (a repeat of the 79-82 period) where there was a widespread proliferation of new financial innovations.

[flow5]

(1) Ben S. Bernanke Chairman and a member of the Board of Governors of the Federal Reserve System. Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body.

At the same time, because economic forecasting is far from a precise science, we have no choice but to regard all our forecasts as provisional and subject to revision as the facts demand. Thus, policy must be flexible and ready to adjust to changes in economic projections.

(2) European Central Bank (ECB) Central Bank for the EURO

The transmission mechanism is characterised by long, variable and uncertain time lags. Thus it is difficult to predict the precise effect of monetary policy actions on the economy and price level…

(3) Janet L. Yellen, President and CEO of the Federal Reserve Bank of San Francisco

You will note that I am casting my statements about the stance of policy and the outlook in very conditional terms. I do this because of the great uncertainty that surrounds these issues. Frankly, all approaches to assessing the stance of policy are inherently imprecise. Just as imprecise is our understanding of how long the lags will be between our policy actions and their impacts on the economy and inflation. This uncertainty argues, then, for policy to be responsive to the data as it emerges, especially as we get within range of the especially as we get within range of the desired policy setting.

(4) Thomas M. Hoenig President of Federal Reserve Bank of Kansas City

Monetary policy must be forward-looking because policy influences inflation with long lags. Generally speaking a change in the Federal funds rate may take an estimated 12-18 months to affect inflation measures….But the course of monetary policy is not entirely certain. & will depend on how the economy evolves in the coming months.

(5) William Poole* President, Federal Reserve Bank of St. Louis

However inflation is measured, economists agree that monetary policy has at most a minimal influence on the rate of change in the price level over relatively short time periods—months, quarters or perhaps even a year. Central banks are responsible for medium- and long-term inflation—such inflation, as Milton Friedman wrote, is a monetary phenomenon that depends on past, current and expected future monetary policy. As a practical matter, the medium- to long-term likely is a period of two to five years.

(6) Robert W. Fischer – President Dallas Federal Reserve Bank
November 2, 2006:

"In retrospect [because of faulty data] the real funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been. In this case, poor data led to policy action that amplified speculative activity in housing and other markets. The point is that we need to continue to develop and work with better data."

(7) Governor Donald L. Kohn

I think a third lesson is humility--we should always keep in mind how little we know about the economy. Monetary policy operates in an environment of pervasive uncertainty--about the nature of the shocks hitting the economy, about the economy’s structure, and about agents’ reactions. The 1970s provide a sobering lesson in the difficulty of estimating the level and rate of change of potential output; these are quantities we can never observe directly but can only infer from the behavior of other variables.

(8) James Grant (Grant’s Interest Rate Observer)

“Both use quantitative methods to build predictive models, but physics deals with matter; economics confronts human beings. And because matter doesn’t talk back or change its mind in the middle of a controlled experiment or buy high with the hope of selling even higher, economists can never match the predictive success of the scientists who wear lab coats.”


TOTAL B.S.


For those who need a reminder, the equation of exchange is an algebraic way of stating a truism; that the product of the unit prices, and quantities of goods and services exchanged, is equal (for the same time period), to the product of the volume, & transactions velocity of money. Velocity is the rate of speed at which money is being spent.

It is self-evident from the equation that an increase in the volume, and or velocity of money, will cause a rise in unit prices, if the volume of transactions increases less, and vice versa. This is merely algebra, but it has economic importance.

The transactions concept of money velocity (Vt) has its roots in Irving Fisher’s equation of exchange (PT = MVt), where (1) M equals the volume of means-of-payment money; (2) Vt, the transactions rate of turnover of this money; (3) T, the volume of transactions units; and (4) P, the average price of all transactions units.

The “econometric” people don’t like the equation because it is impossible to calculate P and T. Presumably therefore the equation lacks validity. Actually the equation is a truism – to sell 100 bushels of wheat (T) at $4 a bushel (P) requires the exchange of $400 (M) once (V), or $200 twice, etc.

MVt = aggregate monetary purchasing power (demand). Roc's in MVt = Roc's in nominal & real (gDp). To those who question the validity of using transaction data with gDp data, there is evidence to prove roc’s in nominal-gDp can serve as a proxy figure for roc’s in all transactions. Roc’s in real-gDp have to be used as a policy standard.

======================...


"Contrary to economic theory, & Nobel laureate Dr. Milton Friedman, monetary lags are not "long & variable". The lags for monetary flows (MVt), i.e., the proxies for (1) real-growth, and for (2) inflation indices, are historically, always, fixed in length.

Assuming no quick countervailing stimulus, MVt will again be right.

Should see in 7 months. Stock market makes an abrupt top in May (so put premiums will still be cheap). Real-output of final goods & services falls/inverts 9 points (the same amount as it fell on May 6th's 2010 flash crash).

Nov 21 10:45 AM (BLOG DATE)


April month-end thru June month-end currently has a very high probability of developing into an economic contraction.

Jan 22 03:41 PM (BLOG DATE)


It is more likely that the stock market will drop at the end of your time frame, @ April month-end.

Jan 24 11:19 AM (BLOG DATE)


From April month-end to June month-end, real-gDp falls an
astounding percentage (from .14% to .04%).

Apr 14 07:07 PM (BLOG DATE)


Ready to break down (ENDOGENOUS):

11-Oct ,,,,,,, 0.26 ,,,,,,, 0.13
11-Nov ,,,,,,, 0.24 ,,,,,,, 0.14
12-Dec ,,,,,,, 0.25 ,,,,,,, 0.16
12-Jan ,,,,,,, 0.25 ,,,,,,, 0.16
12-Feb ,,,,,,, 0.29 ,,,,,,, 0.15
12-Mar ,,,,,,, 0.26 ,,,,,,, 0.13
12-Apr ,,,,,,, 0.24 ,,,,,,, 0.14 *****
12-May ,,,,,,, 0.24 ,,,,,,, 0.10
12-Jun ,,,,,,, 0.27 ,,,,,,, 0.04 *****
12-Jul ,,,,,,, 0.25 ,,,,,,, 0.04

Real-output falls ***** : 14 -> 4 (April month-end to June month-end)...with no change in inflation. Regardless, Fed intervention is inescapable

Apr 27 05:24 PM (BLOG DATE)


Real-output (MVt) falls: 14 -> 4 (April month-end to June month-end).
with no change in inflation. But the upcoming downdraft isn't as severe as the figures would suggest.

Apr 29 03:30 PM (BLOG DATE)

[flow5]

How Long Will The Stock Market Rebound Last? The Dow made a double top (April 2, @13,264 & May 1, @13,279).

Update: from April month-end > May month-end money flows (MVt) our means-of-payment money Xs its rate-of-turnover, is slated to fall (-)6. From May month-end > June month-end money flows (MVt) is now projected to fall (-)12.

Just prior to the "flash crash" on May 6th 2010, money flows (MVt) fell (-8).

These 2 periods aren't comparable (because of the changing composition in narrow money). Thus the deleveraging, dis-saving, & flight-to-safety (which occured last year) has ameliorated the current abrupt deceleration in the calculation of roc's for MVt during May-June 2012 (periods are comparable only to the extent that the weighted arithmetic average of the metric remains constant).

It's déjà vu:

"Contrary to economic theory, & Nobel laureate Dr. Milton Friedman, monetary lags are not "long & variable". The lags for monetary flows (MVt), i.e., the proxies for (1) real-growth, and for (2) inflation indices, are historically, always, fixed in length (mathematical constants). However the lag for nominal gdp (the FED's target??), varies widely."

Assuming no quick countervailing stimulus:

Ready to break down (ENDOGENOUS):

Been saying this for the last 6 months. Should see shortly. Stock market makes a double top in Apr & May. Then the real-output of final goods & services falls/inverts from (29) to (11) from Apr to June.

Recent history indicates that this will be a marked, short, one month drop, in rate-of-change for real-output (-12). So stocks follow the economy down (with yields moving sympathetically?)

The FED will (like in 2010) inject liquidity to offset this decline. The fall in these calculations will be erased afterwards.

[flow5]

Countervailing intervention in the money market:
----------------------...
Permanent OMOs: Treasury

The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserve’s balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC).

Operation - RESULTS

Operation Date: 06/04/2012

Operation Type: Outright Coupon Purchase

Release Time: 10:15 AM

Close Time: 11:00 AM

Settlement Date: 06/05/2012

Maturity/Call Date Range: 06/30/2018 - 05/15/2020


Total Par Amt Accepted (mlns) : $4,745

Total Par Amt Submitted (mlns) : $15,387
----------------------...
Place buy stops a little above current levels (Dow now down 57 points).

If the Fed has guaged this intervention accurately then short bonds.


AS STATED ON APRIL 10TH:

"As with any sudden aberrant cave-in (in the financial & economic sectors), the “trading desk” will supply whatever’s required (as soon as they think it’s required), in order to accommodate the short-term money, & long-term capital markets; & thus re-establish, & stabilize, whatever term structure of interest rates that preceded the breakdown."

"Don't have any idea about the precise timing & size of any open market operations. But as the FED usually "follows" the market JUNE will be my best guess for any intervention. Right now there is a lot of speculative (anticipatory), selling. In the U.S., May will be soft & June will usher in the primary & final leg down. Then the plan is to buy."
Apr 10 11:18 PM
----------------------...

Maybe the Fed's technical staff has learned from their past mistakes.

[flow5]

Obviously no QE3 now.

[flow5]

5/31 coupon purchase of $1,833b bids $4,564b
------------
6/01 sale $8,620b bids $111,237b
------------
6/04 purchase $4,745b bids.$15,387
6/05 purchase $4,854b bids...$8,437
------------

The last few day's POMOs have supported stocks.

[Aman A.K.A. Ahamburger]

There you go flow, June bottom just like your math pointed out. Wxyz over at Investing Basics and Beyond was saying a little over a week ago that this correction might be close to being over for now. AKA... A great dip to buy on, I wonder if anyone else was listening?..