Economic Data Points to Further Cooling

It is shaping up to be a cold winter economically speaking. Let's look at some of the data. First of all, the Consumer Price Index was reported a slight rise of 0.2% for October and that number made headlines. I mean think about it, even with the rising price of gas, and all of the problems with hurricane damage, 0.2% does not seem like much does it? What the media is really good at is reporting partial statistics in an effort to make things look as good as possible. If you read the entire report the numbers will shock you. For example, energy costs increased by 29.5% over last year. If you calculate an annual rate based on the last three months numbers, you will arrive at something in the neighborhood of 89.3%. Add to that transportation costs increasing by 26.3% and you have the makings of some serious price increases as those costs trickle down through the economy.

Add to these numbers the fact that October housing permits fell by 6.7%, the largest drop since 1999. It appears that the news that has been trickling out about the cooling real estate market is showing up in the official government stats. If real estate continues to slow down, the demand for money will slow and the Fed will have to inject more liquidity into the financial system to keep things afloat.

That brings me to another piece of news that I first read about on Tuesday and now it seems to be showing up everywhere. The Fed announced that they are going to cease the publication of their M3 monetary aggregate statistics. What is M3? Well, it is one of the measures of total money in circulation. Now I admit, most people do not follow the Fed's reporting of M1, M2, and M3 and so may think it doesn't matter. But many people do follow these numbers because they get a feel for how much money the Fed is creating. The softer the economy, the more liquidity the Fed creates in an attempt to keep the party going. I have heard two different views on the discontinuation of the M3 measure.

First, the measure of M3 is no longer relevant because thanks to electronic or digital currency, and low reserve requirements, the banks can create unlimited amounts of money out of thin air. Since very few people actually demand money in hard currency, it is simply a matter of adding numbers to an account electronically. Their logic is that the Fed has no idea how much money is being created out there. Kind of scary eh?

The second view is a little more ominous. There are those that feel that the primary reason the Fed is discontinuing the reporting of M3 is to hide stock market interventions. You see for years there has been a story circulating about a group called the plunge protection team or PPT. It supposedly was created after a presidential executive order was signed into effect by president Reagan on March 18, 1988. The original name of the group was the Working Group on Financial Markets or WGFM. They were formed after the 1987 market meltdown with the idea that the government needed to be able to intervene in the markets during times of high volatility in an effort to smooth the price action. Their primary means of funding their operations is through the use of repos or repurchase agreements. It just so happens that M3 includes the amount of repos, which lately have been fairly significant. So the feeling is among market watchers that the Fed by discontinuing the reporting of M3 will be able to hide their market interventions from the public so as not to cause alarm should it become massive. Sounds like they are preparing for the next leg down in the current bear market.

Everyone who is a free market advocate, including myself, believes that this manipulation by the government only exacerbates the problem. While they may be able to effect the market direction short term, it will only worsen the drop in the future. In fact any intervention by the government in markets or money supply only worsen the problem and cause more pain later, but then you knew that, right?