Later today, the Federal Reserve will release new data on the nation's money supply, which in recent weeks has been growing at a very fast pace, mainly because of increases in bank deposits, demand for cash and the influx of money back into money market funds. M2, which is the Fed's broad money gauge, consists of currency in circulation, savings deposits, time deposits and retail money market funds (those with balances under $100,000).
M2 has increased at a 27% pace over the past five weeks, far faster than the five-year average of about 5.5%. The growth rate for the past year is about 7%, including the recent period.
Keep in mind that only banks can expand the money supply through the creation of bank credit. Shadow banks, which essentially act like banks by borrowing money and extending credit, cannot increase the money supply because they are merely in the distribution (of money) business. If the money supply grows, it would suggest better times for the economy and the stock market.
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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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