Replies to post #101317 on Zeev's Turnips Patch-No Politics (ZEEV)

[phill]

Mr Reserves, re: "What happened to the stock market last year, after that same downward blip?"

Well, now you're changing the subject <g>

The issue I was addressing was your comment "MONEY SUPPLY CRASHING FROM 10% rate of growth to NEGATIVE GROWTH.....CRASH!"

My response was that this blip is perfectly normal - it's people paying their taxes. In fact, it appears to me that it happens annually at the same time for the same reason.

In my desk I keep a copy of the same StL Fed chart, showing the period from October 1999 through December 2000. The reason I keep it is that it shows the early 2000 market crash was (imo) the direct result of extraordinary Fed pumping in fear of Y2K. From 10/99 thru 12/99 the money supply went up more than 10%. Then, in only about 6 weeks in early 2000, 2/3 of that increase was drained back out. The Nasdaq crash followed shortly thereafter.

From mid-March thru mid-April of 2000, however, the money supply also tipped down, as it did last year and this year. Subsequently in 2000, both the money supply and the markets staged a decent summer rally.

So, my answer to your question "What happened to the stock market last year, after that same downward blip?" is that it probably doesn't matter, because the blip appears to be an annual, entirely predictable, event, with no evidence of correlation to the subsequent market action.

best of luck to you,

phill

[augieboo]

Why limit yourself to only last year? Here are the last thirteen Aprils, highlighted for you on the Wilshire 5000, which is the broadest market index there is.

[mish]

http://sg.biz.yahoo.com/030424/3/3ac3d.html
This is interesting.
Demand for US bonds to be bigger?
Consequences?

It would seem that shorting the 30 year bond paying .62% has to be a good move at some point doesn't it?

When and how?
M

[mish]

Whip Deflation Now
http://www.forbes.com/forbes/2003/0512/154.html

[mish]

From the Mogambo Guru:

[Shostak] writes, "Most economists ...are of the view that the policy makers of the Fed have learned the lesson of the Great Depression and know how to avoid a major economic slump." And what is that, you ask? Well, since the only tools they have is interest rates and money supply, then it follows as night follows day that their solution lies in more interest-rate bashing and money-supply expanding.

Let's apply those lessons to the busy mother of today. Problem: the toddler is drawing on the wall with his crayons. Old solution: take away the crayons and clean the wall. New Fed Solution: give the kid more crayons.

"Needless to say that such massive monetary pumping amounted to a massive exchange of nothing for something and to a severe depletion of the pool of real funding, that is, the essential source of current and future capital needed to sustain growth. When things start declining for whatever reason, banks get nervous" he says. "In response to this, banks curtail their lending activities and this in turn sets in motion a decline in the money stock."

Now, the Big Question is "How is it possible that lenders can generate credit out 'of thin air' which, in turn, can lead to the disappearance of money?" The answer is surprisingly simple. When I borrow money from you and subsequently pay you back with interest, the M1 money is all still there, and has traveled full circle back to where it came from.

On the other hand, since the Fed created the money out of thin air to start with, when the money comes back, there is no original owner of money, and so it disappears! He notes that right after the stock market crash in 1929, M1 dropped and kept dropping for years.

Then I took a look at our M1 with renewed interest. And it looks kinda peaked.

But this is just the start of the gloomy outlook that we seem to share. He continues, "Again, note that contrary to popular thinking, depressions are not caused by tight monetary policies, but are rather the result of previous loose monetary policies. On the contrary, a tighter monetary stance arrests the depletion of the pool of real funding and thereby lays the foundations for economic recovery. Furthermore, the tighter stance reveals the damage that was done to the capital structure by previous monetary policies."

http://www.dailyreckoning.com/home.cfm?loc=/body_headline.cfm&qs=id=3114

[mish]

GDP
http://www.reuters.com/financeNewsArticle.jhtml;jsessionid=APNUW22OBNXMMCRBAE0CFEY?type=businessNews...

[mish]

http://www.morganstanley.com/GEFdata/digests/20030425-fri.html
One of his best commentaries
snips

A sharply deteriorating federal budget position, in conjunction with Bush administration policy proposals that are now on the table, can only make matters worse as seen through the lens of America's national saving framework. The non-partisan Congressional Budget Office estimates that the President's proposals will add about $800 billion of deficit spending over the five year time frame, 2004-08. The ten-year estimate is an astonishing $2.7 trillion. In both cases, these totals are roughly double the estimated impacts of the first tax cut enacted in 1991. At the same time, budget analysts are scrambling to update their assessment of the current state of the US fiscal balance. In its March 2003 review, the CBO estimated the Bush Administration budget would produce deficits averaging about $310 billion during fiscal 2003-04 -- even after allowing for the so-called dynamic-scoring feedback effects that have long captivated supply-siders. Morgan Stanley's latest estimates are closer to $375 billion for both years, and other analysts are even less sanguine, with numbers topping $400 billion.

Federal budget deficits of this magnitude would equal about 3.5% of GDP over the 2003-04 period -- fully 1.2 percentage points larger that the shortfall hit in late 2002. Consequently, barring a spontaneous revival in private sector saving -- highly unlikely in times of economic distress -- ever-widening federal budget deficits could well be sufficient in and of themselves to all but erase the thin margin of net national saving in the United States. The likelihood of a "zero" net national saving rate -- or even a negative saving rate -- now looks to be a real possibility if Washington opts for another fiscal gambit.

The US current-account litany is every bit as worrisome as the saving saga. In the fourth quarter of 2002, the current-account deficit hit an annualized $548 billion, a record 5.2% of GDP. That surpassed the previous record of 4.5% hit in late 2000 and was well in excess of the 3.4% external gap recorded in 1987 -- the last time America was faced with a serious international financing problem. Here's where the budgetary arithmetic of saving-short US economy becomes so daunting. If, in fact, the net national saving rate now heads toward zero, the current-account deficit will have to widen sharply further, moving toward the 6.5% to 7.0% zone as a share of GDP over the next couple of years. In that case, capital inflows would have to total around $3 billion per business day. Neither the United States nor the world has ever faced an external financing burden of that magnitude.

History is clear on what to expect next. A classic current-account adjustment appears inevitable. America is on an unstable and perilous path that simply cannot be sustained. At a minimum, foreign investors will begin to exact concessions on the terms under which they provide financing for America. A weaker dollar and higher yields on Treasury securities are likely. Or the arbitrage could occur in equity or property markets. But whatever the outcome -- and I tend to favor the dollar-interest-rate correction -- there can be no mistaking the endgame. America's runaway budget deficit only compounds the external financing requirements of a saving-short US economy. It pushes both the national saving rate and the current account deficit into unprecedented zones of distress. And it leaves America plunging headlong down a most reckless path.

In the end, there's something more basic at risk, here -- the paradigm of a US-centric global economy. America's record and ever-widening current-account deficit is symptomatic of unprecedented imbalances in the US and the broader world economy. The US has consumed to excess and the rest of the world has done precisely the opposite -- perfectly content to sustain its growth by selling things to Americans. The bill for these excesses can go unpaid for only so long. Yet Washington is now upping the ante -- asking for the world to foot an even larger portion of the bill. Outsize budget deficits that spark a current-account crisis could well the tipping point that finally brings this house of cards tumbling down. It would be a policy blunder of monumental proportions.