Diary of a Financier

Whispers from the Money Supply

In Capital Markets on Mon 3 Oct 2011 at 06:35

Once upon a time (November 2009), I wrote a feature piece over at Seeking Alpha about the decreasing marginal yield of Fed stimulus, Fed swap lines with Europe, and the consequent burgeoning Eurodollar bubble. After reflecting upon August’s US Money Supply data, I think these topics are relevant again.

First off, check out the month-over-month spikes in M1 & M2 Money Supply:

US M1 Money Supply (m/m %change)- big spike in August.

US M2 Money Supply (m/m %change)- spike on par with that of Lehman's collapse.

I’ve mentioned (and predicted) the Fed’s renewed swap lines with the ECB. The Eurocrisis has caused a shortage of dollar funding for European institutions–as suggested by EURUSD FX Future Swaps. In conjunction with a general global flight to safety, it’s responsible for the US money supply spike. Aiding & abetting it all are the Fed’s swap lines, which liquidity seems to have gone straight to domestic USD assets. With explicit QE3 too politically contentious right now, you can start to understand how these foreign swap lines achieve easing via an end-around.

Since the cash has to flow into something, US Treasuries are a readily identifiable security that has spiked in respose. Naturally, the spike has matched that of the US Money Supply, returning Treasury prices to the lofty heights acheived back during Lehman’s collapse. An overlay of the Long Dated Treasury ETF (TLT) and Pan-European Stock Index (FTSEE) is illustrative of the money leaving Europe for the States. Using Lehman as a proxy for panic, it looks like European equities have far to go to match the move already covered by US Treasuries:

FTSEE v TLT monthly- US Treasury spikes match that of the US Money Supply.

Treasuries are still the safety trade, despite all the recent hubbub to the contrary. I’ll present that as fact, given the overruling verdict continually delivered by Mr. Market. With all the carnage in European sovereign, corporate and CDS credit markets, do European stocks not deserve to be lying face-down around their late-2008 lows? What’s more, are the Ron Pauls, the Rick Perrys, the American Congress missing this stealthy offshore QE?

–Romeo

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