MARKET COMMENT

December 6, 2006





Investors are just waiting around for Friday’s employment numbers. As they do, some are making adjustments by pushing the dollar a little higher and precious metals lower. Rumors swirl that employment numbers will be better than forecast, that notion reinforced by data from ADP showing 158,000 jobs were created last month.

That means that maybe interest rates will remain steady and not be cut as some bulls believe. But, in a data dependent world, each release is followed by more reactionary activity. I remember in the late 1970s standing with a group of my peers watching the teletype machine [yeah, I’m that old] that would spit-out the weekly money supply data. These were inflationary times and Fed Chairman Volker was trying to curtail runaway money supply growth. As soon as the figures were released everyone would scurry back to their desks to assess reactions. The then pundits of the day were folks like Joe Granville and Henry Kaufman. Everyone wanted their opinions of the data knowing their words would move markets.

[As an aside, I remember my wife asking me why I was down in the dumps one day and I told her, “Well Kaufman is talking and…” She asked, “Andy Kaufman?” That actually cheered me up!]

So fast-forward to this modern data-dependent Fed. There’s no teletype but not much has changed to the guessing game. The biggest change is how we view [or in the case of M-3 money supply data, don’t view] monetary policy. Recently deceased Nobel Prize winner Milton Friedman thought the Fed’s job was to “expand the money supply in a steady manner by 3% per year”. That’s it. Both Greenspan and Bernanke believe the Fed should intervene in markets strategically during times of financial crisis. In 1987 the Fed added heavy doses of liquidity to arrest the stock market crash. Rather than this being a brief rescue effort it seems to have become permanent policy rather than a now and again effort. The result has been first a stock bubble, than a housing bubble and now perhaps another stock bubble. The authorities just can’t seem to contain themselves. Below is the oft posted chart of what would be M-3 growth had it continued, courtesy of www.nowandagainfutures.com.





Now the Fed doesn’t think we should watch M-3 any more with the idea that the data is useless. So, let’s look at John William’s [Shadow Government Statistics] reconstruction here that includes M-2 and volatile M-1.






What would Milton Friedman say I wonder? I can’t find, although there probably are some comments, relevant to this. Anyway, the Fed doesn’t want us watching this data anymore. What we’re supposed to watch is interest rate policy period.

Despite the historical negatives of inverted yield curves, current interest rates are low and stimulative. That’s true for home mortgages and corporate debt. Hence, with the latter hedge funds and even emerging market countries can borrow money for a scant 150 basis points over equivalent US Treasury bonds. What we have is a liquidity bubble. And a tsunami of money will overwhelm clear thinking every time. You can get to higher ground and watch if you like, but if you want to make money, you must go with the trends. That’s all anyone can do.






So we wait. Tomorrow we may post more as we’re “event dependent” like everyone. Today the Iraq Study Group came out with their recommendations and I’m reminded of an old Vietnam era George Carlin joke:

“Pull out? Doesn’t sound manly to me! I say, stay in—get the job done!”

Um, have a pleasant evening.

Disclaimer: Among other securities, The ETF Digest maintains positions in: IEF.