Velocity of US money supply at long last edging up

Friday, November 20th, 2009

Despite ballooning Fed reserves to bail out banks, money supply as measured by the growth in money supply with a zero maturity (notes and coins, check accounts, savings deposits and money-market accounts collectively) continues to slow.

The slowing growth is contra to what normally happens when the Fed lowers the Federal funds rate.

In real terms the growth rate is also slowing.

The slowing in MZM growth is a consequence of US banks’ tight lending standards. The trend is likely to continue until the banks relax these standards.

Velocity of MZM is at long last picking up after it started falling in the first quarter of 2007 - six quarters before economic growth slumped. The increase in MZM velocity effectively points to increased economic activity. Further increases in this velocity are essential for sustained economic growth.

Bottoms in consumer sentiment and MZM growth coincide, emphasizing the importance of improved consumer sentiment to get the economy going.

Lastly, the US bond market is an excellent indicator insofar as MZM velocity is concerned. Currently the yield on the 10-year note is pointing to further improvements in money velocity. The US bond market therefore also suggests that consumer sentiment is likely to continue improving and that the current improvement in the economy is sustainable, albeit probably at a slow rate.

Note: The source for all graphs is Plexus Asset Management, based on data from I-Net Bridge.

Tags: Asset Management, Banks, Bottoms, Bridge, Coins, Consequence, Consumer Sentiment, Economic Activity, Federal Funds Rate, First Quarter, Graphs, Improvements, Money Market Accounts, Money Supply, Money Velocity, Mzm, Quarters, Sustained Economic Growth, Us Bond Market, Zero Maturity
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Picture du Jour: Prepare for higher inflation

Monday, November 2nd, 2009

The graph below shows the historical relationship between the annual change in the oil price and the year-on-year change in the US Consumer Price Index. Should the oil price remain around current levels, the CPI is bound to rise markedly. It comes as no surprise that gold bullion and Treasury Inflation-Protected Securities, or TIPS, have been relatively solid performers over the past few months.

Source: Plexus Asset Management (based on data from I-Net Bridge)

Tags: Advertisement, Bridge, Consumer Price Index, CPI, Gold, Gold Bullion, Graph, Inflation Protected Securities, oil, Oil Price, Plexus Asset Management, Relationship, Surprise, Treasury Inflation Protected Securities, Treasury Securities, Us Consumer Price Index
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Barron’s Confidence Index - Sentiment for Equities Improves

Friday, July 3rd, 2009

As often stated in my weekly “Words from the Wise” reviews, a confidence indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds.

Source: Plexus Asset Management (based on data from I-Net Bridge)

Not surprisingly, a strong historical relationship exists between the Barron’s Confidence Index and the S&P 500’s 12-month rate of change.

Source: Plexus Asset Management (based on data from I-Net Bridge)

The improvement in the Barron’s indicator augurs well for the outlook for equities - specifically for the return of confidence - and provides further evidence that US stock markets are in all likelihood mapping out a base development formation. However, in the short term I still maintain it is quite likely that markets could consolidate further and possibly retrace more of the prior gains.

Tags: Amp, Barron, Bond Investors, Bonds, Bridge, Cape Town, Change Management, Change Source, Confidence Index, Confidence Indicator, Discrepancy, Index Points, Investment, Investor Confidence, Likelihood Mapping, Outlook, Plexus Asset Management, Postcards, Relationship, Sentiment, Stock Markets, Target
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Baltic Dry Index - more than a snap-back rally

Friday, June 5th, 2009

The Baltic Dry Index - a measure of freight rates for iron ore and bulk commodities - rose non-stop for 23 sessions until Wednesday, before declining somewhat yesterday. This surge represents a gain of 517% from its low on December 5. But one needs to put this in perspective: the Index fell by 94% from its high in May 2008, and therefore still needs to rise by a further 188% to match the previous peak.

More importantly, this rise seems to be more than a snap-back rally and points to better economic tidings. This becomes apparent when considering the close relationship between China’s Purchasing Managers Index (PMI) for New Export Orders and the Baltic Dry Index, showing both indices turning sharply higher.

Source: Plexus Asset Management (based on data from I-Net Bridge)

Also, the improvement in China’s PMI (with the composite Index back in expansionary territory above 50) and the Baltic Dry Index is consistent with the improvement in the Metals Index. (See my recent post “Secular bull in commodities remains intact“.)

Source: Plexus Asset Management (based on data from I-Net Bridge)

Tags: Asset Management, Baltic Dry Index, Bridge, Cape Town, Commodities, Composite Index, Export Orders, Freight Rates, Higher Source, Iron Ore, Metals Index, Perspective, Pmi, Postcards, Purchasing Managers Index, Relationship, Sessions, Snap, Target, Tidings
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Stock markets – keep an eye on confidence measures

Thursday, March 26th, 2009

It is important that confidence be restored for the recent stock market gains to be more enduring. A few comments regarding this issue are highlighted in this post.

As shown in Sunday’s “Words from the Wise” review, there is a strong historical relationship between the US Consumer Confidence Index and the 12-month change in the S&P 500 Index. One needs to take a view on the direction of consumer confidence, but should it for argument’s sake pick up from 30 to 40 by the end of June, the relationship indicates a S&P 500 decline of 30-35% in year-ago terms. Using end-of-quarter prices, this means an Index at between 832 and 896 by mid-year.

Source: Plexus Asset Management (based on data from I-Net Bridge)

Interestingly, a report from Franklin Templeton Investments has just arrived, also showing that when confidence was low in the past, it had been time to buy. For example, on average, stocks returned 12.5% a year following consumer confidence of 66 or lower. The consumer confidence reading at the end of February was 25.

Another confidence indicator worth monitoring, is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been an improvement in the ratio since its all-time low in December, showing that bond investors are growing somewhat more confident and have started opting for more speculative bonds over high-grade bonds.

Source: I-Net Bridge

Not surprisingly, a strong historical relationship also exists between the Barron’s Confidence Index and the S&P 500’s 12-month rate of change. But unlike consumer confidence that has not yet bottomed, the Barron’s indicator has already been working its way higher over the three months.

Source: Plexus Asset Management (based on data from I-Net Bridge)

As mentioned before, taking one step at a time, the next hurdle is the release of potentially ugly earnings and guidance announcements in April. By then a clearer picture should also start emerging on the results of the Fed’s medicine and whether credit markets are thawing and confidence is beginning to improve.

Tags: Asset Management, Barron, Bond Investors, Bonds, Bridge, Buy Stocks, Confidence Indicator, Confidence Measures, Consumer Confidence Index, Decline, Discrepancy, Franklin Templeton Investments, Investor Confidence, Relationship, Sake, Stock Market Gains, Stock Markets, Stocks, Three Months, Us Consumer Confidence
Posted in Bonds, Credit Markets, Emerging Markets, Markets | No Comments »