Insert shocked face here.

the money supply figures no one wants to see

I know that my calculation of the money supply differed slightly from Robert Wenzel’s. While I still do a 13-week annualized method, his calculations never went negative. I realized early on that mine could and had gone negative in the past. Both calculations followed a similar trend and I thought that watching this trend was the most important aspect of the 13-week annualized money supply analysis.

After ringing the alarm bell for the last few money supply reports, today’s report seals the deal. We are headed for an extreme period for the stock market as the money supply growth has declined to extremely serious levels.

I’ve put in the last 10 years’ worth of money supply numbers to give a better perspective on this decline of the money supply. To say that we are scrapping the bottom of the barrel is an understatement. We have gone into an area where capital markets have traditionally fared very poorly.

This is crazy, so I went through the history of the 13-week analysis and found a few instances of similar sluggish money supply growth.

• June-July of 2015

• June-October of 2009

• June-July of 2008

• July of 2000

• Feb-April of 1993

Every single one of these instances spelled trouble for capital markets and I strongly believe this time will not be different. At this point, the money supply has hit the seasonally low territory 6 weeks early. The Federal Reserve isn’t really monitoring money supply growth and at this point it will be nearly impossible for them to reverse the money growth decline before there will be significant negative consequences for the stock market. I realize this is doubly crazy to say as we have already entered a bear market.

There are many that believe the stock market is due for a turn-around because the Fed will initiate a policy reversal soon. Retail investors have been buying the dip and continue to hand over their money to the market. Soon they are going to be left holding the bag.

The Fed is going to be slow to action due to inflation risk. We have had several instances now of Fed speakers talking about the need to get inflation under control by raising rates “above neutral”. The latest was Fed Governor Michelle Bowman. She spoke with a group of east coast bankers last week and stated,

“The case for further rate hikes is made stronger by the current level of the "real" federal funds rate, which is the difference between the nominal rate and near-term inflation expectations. With inflation much higher than the federal funds rate, the real federal funds rate is negative, even after our rate increases this year. Since inflation is unacceptably high, it doesn't make sense to have the nominal federal funds rate below near-term inflation expectations. I am therefore committed to a policy that will bring the real federal funds rate back into positive territory.”

Now there are three “near-term inflation expectations” that I think Governor Bowman could be talking about; University of Michigan surveys, NY Fed surveys, or the Cleveland Fed’s surveys. I’ve covered both the UofM and NY Fed surveys earlier this month. The Cleveland survey is no different. They all show expectations of higher inflation in the near-term. The current Federal Funds Effective Rate is 1.58%. If we subtract that from the various inflation expectations, we come to the following conclusion:

• UofMichigan : 5.3% - 1.58% = 3.72%

• NY Fed : 6.6% - 1.58% = 5.02%

• Cleveland : 4.2% - 1.58% = 2.62%

  

With a 75 basis point rise on tap for the next meeting, we would then need to see 50 basis point increases for the following 4 meetings to reach the Cleveland Fed’s wimpy inflation expectation number. In all three instances, we are looking at a “real” federal funds rate that is a long ways from neutral and these Fed officials want to raise it above that level. This means that the Fed is going to be slow to save the day. They’ll most likely be stunned that they didn’t see this coming. At that point, panic will certainly have set in.