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Adam Hamilton

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing…

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MZM Growth Plummets

As investors in the Information Age we are all constantly faced with a virtually infinite phalanx of information to digest.

In addition to the usual daily financial newspapers that investors have eagerly devoured for generations, today's investors at the dawn of the Information Age also have to contend with 24-hour financial television and the unlimited torrents of data careening around cyberspace. Trying to absorb it all is like trying to drink water from a commercial firehose, a self-defeating exercise in futility. I suspect as well that the farther we travel into the fantastic wonders of the glorious new Information Age the worse the information overload situation will become.

Thankfully this very real surplus data threat to investors can be easily bypassed.

When all the incessant minute-to-minute market noise is filtered out of the immense information feeds to which we all have access, there are really only a few pieces of data that all investors should check once a day. As I am a self-confessed market junkie that not even a 12-step program could ever hope to cure, even when I am on vacation I always seek seven crucial bits of information from each trading day.

First, I always like to know where the major US equity indices closed, the S&P 500, Dow 30, and NASDAQ. These three simple numbers, the daily closes of the world's most important stock indices at this moment in history, are invaluable to maintain awareness of to quickly discern strategic trends and glean an overall abstract handle on short-term market psychology. My day never feels complete if the markets are open and I don't know where the Big Three closed.

I also believe it is crucial to check the gold price, the crude oil price, long-term interest rates (the money price), and the dollar price once a day.

Gold, even while constantly battling the endless games that nefarious central bankers play with its price, truly is the ultimate financial commodity. A significant move up or down in the gold price can signal many things and is very important to watch for even if you don't happen to be investing in the gold arena at a given moment in time. Crude oil is the very lifeblood of our modern global civilization and it is almost certainly the most geopolitically-important commodity the world has ever seen. Gold prices and oil prices, often known as the "inflation markets", are exceedingly important to monitor on a daily basis. Whenever gold or oil embark upon any significant moves, the implications for global finance and trade are often profound and incredibly far-reaching.

Long-term interest rates, the price of money, are also tied in with the inflation markets. Long-term interest rates, say the yield on the 10-Year United States Treasury Note (until the Treasury's venerable and beloved 30-Year Long Bond is resurrected), are very important to observe as well. I like watching the long-term interest rate daily because in a single yield it summarizes the aggregate expectations for future inflationary pressures of the massive global debt markets, far larger than the equity markets. Even better, sniveling bureaucratic sycophant central bankers lack the firepower to actively manipulate long rates, unlike the short-term interest rates which they presume to manipulate and fix all over the world just like the notorious communist despots of last century. Central planning is so 20th century!

The international dollar price is also super important to monitor daily as our whole modern hyper-consumptive American way of life is extremely dependent on the dollar's level in international foreign exchange markets. I always need to know where the US Dollar Index closed, representing the dollar's level against a basket of major currencies. Unfortunately for American consumers, sooner or later the day is approaching when the vastly overvalued US dollar begins to fall and we can no longer export mere computer blips (virtual dollars) around the world to "trade" for the valuable real goods produced through the hard labors of the rest of the world's nations. I definitely don't want to miss the climactic ending of the world's ultimate scam!

Even in the brave new Information Age an investor can easily spend merely a couple minutes a day and get a perfect strategic overview of the day's global financial market developments. Only seven tantalizing morsels of information, the S&P 500 close, the Dow 30 close, the NASDAQ close, the closing gold price, the closing crude oil price, the closing 10-year US T-Note yield, and the closing US Dollar Index level are the ultimate executive summary of a day's global trading activity.

While these seven crucial datapoints digested once per day provide a wonderful high-level strategic picture of current financial events, there are of course all kinds of other information streams that are worthy of following. One of these arenas is the relentless rate of growth of the US money supply, the very same seemingly magical fiat paper currency and electronic traces that we export around the world in return for other countries' tangible goods and resources.

Unlike the seven primary daily datapoints, however, an investor only needs to glance at money supply growth once every few months or so to gain a strategic overview of the prevailing money growth trends. I haven't penned a Zeal essay on money growth since December's "Inflation or Deflation?" so it is probably about time to take another peek and see what is transpiring on the US monetary front.

Our lone graph this week is actually an update of one that originally appeared in October's "The Inflation Tsunami" essay. As I explained in that essay, MZM is Money of Zero Maturity, the measure of the money supply for totally liquid money that can be spent immediately. MZM includes currency, checking accounts, and cash in money market funds. Since the narrower M1 money supply does not include the huge money market funds that are so popular as cash management tools these days, we prefer MZM over M1 as the premier narrow money supply measure.

This graph uses the most conservative possible measure of MZM money growth, the actual absolute year-over-year percentage change in MZM itself. If the actual total US MZM money supply is 15% higher this week than it was during this same week one year ago, then 15% is the number plotted on the graph. There is absolutely no annualizing or mathematical wizardry embedded in this simple depiction of absolute MZM growth.

Provocatively the trend in US money supply growth has changed about as dramatically as it possibly could in the intervening months, exhibiting a massive turn-one-eight since we last looked at it in a Zeal essay.

Weekly Y/Y MZM Growth

Holy trend reversals Batman! The rate of growth in the perpetually expanding US MZM money supply has fallen off a cliff. If this were a graph of a stock or equity index, one could probably make a convincing case that it was actually crashing! This is an incredibly interesting development.

All throughout 2001 the rate of growth in the crucial MZM money supply was rocketing northward. The year-over-year MZM growth rate exploded from 7.7% at the dawn of 2001 to an almost unbelievable 22.0% in early December 2001! While the travails and horrors of 9/11 certainly led to a vertical jump in MZM growth, it was already running above a 16% growth rate in the quiet summer months leading up to the shocking September 11th financial bombshell.

Even though today the rate of growth of MZM is finally plunging from December's stratospheric heights, MZM is still growing far faster than it has in recent history. Over the past 20 years the average US MZM growth rate has been 9.4%, seemingly quite high in light of US economic growth but still low compared to the latest weekly MZM year-over-year growth reading of 13.1%. Using a shorter timespan of a decade in which to establish a baseline, MZM growth averaged 8.4% over the last 10 years. It may not be appropriate to include current high MZM measures since 1998 in establishing a reasonable MZM growth baseline target, however.

Since 1998 the global financial markets have been rocked by crisis after crisis which have cost countless hours of sleep for the politburos of communist-style central planners at the US Federal Reserve and other central banks. Since the US Fed has such an enormous influence over the MZM money supply we can almost visualize the MZM growth rate as a proxy for levels of naked fear felt by the central bankers. As the Fed can simply create money out of thin air with a snap of its fingers via computer entries, print physical currency whenever it wishes, and bludgeon investors into undertaking different cash management strategies by arbitrarily changing short-term interest rates, money supply growth rates reveal a lot about the psychology of the central bank behind the fiat money.

MZM growth rocketed up in late 1998 following the implosion of hyper-leveraged hedge fund Long-Term Capital Management that apparently threatened to sink the entire global financial markets. On an always fascinating LTCM sidenote, I continue to be utterly amazed that investors aren't more than a little bit nervous about investing in a system where the failure of a single small hedge fund with only $3b in capital could have control of large enough leveraged positions to threaten the entire financial system. Does this seem logical? Obviously something is very wrong when such a tiny entity even matters at all in the grand scheme of things. If LTCM's problems after the Russian Debt Default caused a scare in 1998, imagine what will happen when the first giant US bank up to its eyeballs in derivatives goes under!

Following the LTCM fiasco, the MZM growth rate eventually decayed back down to average levels with the notable exception of a brief Y2k spike surrounding the overwhelming general nervousness over the millennial date changeover. All throughout 2000 MZM growth finally behaved, remaining under historical average levels indicating a low level of anxiety at the Fed regarding then prevailing market and economic conditions in the United States.

Starting early in 2001 before the New Year's hangovers even wore off however, Alan Greenspan and his private Federal Reserve central bank flat-out panicked. It launched the most aggressive rate-slashing spree in its entire 89-year history in a vain attempt to bailout whining equity speculators who couldn't handle the hard realities of bubble speculation. Interestingly, all throughout 2001 the MZM growth rate exploded in parallel with the plummeting manipulated short-term interest rates. The Fed was finally calming down a little in July and August 2001 but then once again lapsed into total panic mode following the September 11th attacks.

As the market environment since 1998 has been plagued with all kinds of messes from the LTCM implosion to Y2k to the NASDAQ bubble collapse to 9/11, perhaps a better and much sounder fundamental baseline average MZM growth rate can be established by excluding these high anxiety periods. Starting in 1984, after the worst of the massive early 1980s interest rate dislocations, and running until the end of 1997 annual MZM growth registered a 6.8% mean. The current 13.1% MZM growth rate, while much lower than the post 9/11 21%+ levels, is still far above all the long-term averages of MZM growth.

While it was pretty obvious to even the usually deaf, dumb, and blind central bankers that MZM growth couldn't stay above 20% indefinitely without fueling massive price inflation, the abrupt trend change and subsequent plunge of MZM growth we are now witnessing in early 2002 is still quite stunning and extraordinary. If MZM growth is indeed in the process of regressing back down to and possibly through its long-term mean, what are the implications for investors? Definitely an interesting, but tough, question!

In 1999 and early 2000 when MZM growth was generally declining the US stock indices were launching into huge spectacular supercycle bubbles, roaring to the heavens. In the following year when MZM growth was rocketing up in the Great Fed Panic of 2001, US stock indices were plunging like a 747 mortally wounded by a surface-to-air missile. Yet, when MZM growth went parabolic following September 11th, the latest magnificent bear market rallies in equities commenced. These deceptive bear market rallies continued higher even after MZM growth started to plunge in late 2001. With this kind of almost complete non-correlation in the recent track records of the US equity indices and MZM growth it is difficult to draw any short-term conclusions regarding stock investing and MZM growth.

Gold prices exploded in autumn 1999 in response to the European central banks' Washington Agreement to limit their annual gold sales. At the same time MZM growth was still running quite high even a year after the LTCM crisis. MZM growth was falling in a downtrend though and gold soon fell too, with the old gold downtrend not reversing until April 2001. Gold and MZM growth both rose in apparent lockstep for the rest of 2001. It seems that gold could have a positive correlation with MZM growth over the short-term, but then this comparison soon breaks down as well. As MZM growth began its sharp drop in late 2001, marked by the blue arrow in the graph above, the gold uptrend continued and indeed accelerated on heavy Japanese gold investment buying. Once again it is difficult to draw any short-term conclusions regarding gold investing and MZM growth.

Over the long-term, however, anomalously high MZM growth has quite obvious implications for investors.

We all happily use money everyday as a medium of exchange, to buy and sell valuable goods and services. In the United States and indeed the whole world, the pool of goods and services available for sale grows each year as the economy grows. Over the long-term we can probably expect the economy to grow at an average of perhaps 4%-5% each year. If money supplies persistently grow at a long-term rate much higher than the growth rate of the underlying economy, big inflationary problems soon surface which can eventually lead to a series of devastating financial reckoning events like those which are tragically hammering Argentina.

When the pool of money grows faster than the available pool of goods and services on which to spend it, price increases are the inevitable result. This is the textbook definition of inflation, relatively more money chasing after relatively fewer goods and services. As the irresponsible central bankers around the world ramp up their money supplies at rates faster than their respective economies are growing, they are injecting more fiat money into the system that will have to bid competitively on the relatively smaller pool of available goods and services, pushing up prices. Price inflation follows promiscuous money supply growth as surely as winter follows summer. This iron-clad economic truth makes no exceptions in history.

The US economy has grown by 88% in real terms since 1980, very impressive. But, MZM has exploded up by 581% over the same period, along with similar outrageous growth rates for all the other fiat monetary aggregates! This is the reason why everything from houses to cars to candy bars cost many more dollars today than they did back in 1980.

Inflation is the inevitable vile hellspawn of the terrible folly of allowing mortal central bankers to "manage" the amount of fiat currency in circulation, a horribly immoral stealth tax that hits those folks the hardest who are struggling along on fixed incomes and have the least ability to fight it. This is all central bankers do today and all they have ever done in history, inflate with a vengeance and destroy currencies and the hard-earned savings of the populaces of the countries they supposedly represent. Centrally-managed currencies have an unblemished track record of failure.

It is indeed very encouraging to see the MZM growth plummeting in 2002, but it is only a small start in addressing a monumental problem.

Money supplies should not grow faster than the US economy, which has only grown by 5.7% in real terms since 2000. MZM on the other hand has exploded up by 32.4% since 2000, dwarfing economic growth rates! This terrible situation is an unmistakable harbinger of serious price inflation hurtling down the pike since the monetary inflation that spawns it has already been injected into the pipeline. I truly hope that Greenspan and his mega-inflationist central banker ilk are trying to finally push MZM growth back down to levels near economic growth so we don't have to once again face late 1970s style inflation in the 2000s.

In a perfect world the MZM growth rate plunge would continue well below its 1984-1997 mean of 6.8%, perhaps even to actual MZM shrinkage, to eat up and dissipate the huge bubbles of MZM growth of 1998-1999 and 2001. This seems like the only prudent course of action that can stave off the increasing price inflationary consequences of the amazingly promiscuous monetary growth of the last four years.

Unfortunately, central bankers being central bankers, I don't have high hopes (or any hopes, truth be known) that MZM growth will plunge below zero. Even if the central bankers are finally actually trying to clean up their own enormous past messes, some new crisis will sooner or later rear its ugly head, either a market or geopolitical one, that will "necessitate" that the central bankers ramp money growth again to try to fight off some new perceived threat of a market meltdown.

What a sad state of affairs when men meddle in free markets to such an extreme degree that they feel the free markets will not survive without their continuing meddling! Unbelievable!

If the mega-inflationist central bankers foolishly choose this course of inflationary action yet again, continually "reinflating" without relent after every latest crisis du jour, the 2000s will prove to be a perfect decade to invest in the ultimate inflation hedges of the 1970s like gold, oil, and other commodities. Equities get slaughtered when central bankers are given free reign to inflate at will.

However this all plays out in the coming years, the recent sharp plunge in MZM growth is quite extraordinary and exceedingly interesting. It may not have the raw sex appeal of a spectacular stock rally, but it is certainly a provocative development of which investors should be aware and periodically monitor.

We'll check back in with the US money supply growth in a few months and see how the long-overdue apparent MZM growth mean reversion is faring. Interesting times!

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