Money Market Magic

I have revised the investment classic The Money Market, a book first published in 1978 and revised in 1983 and 1989 by the late Marcia Stigum. It is one of the most famous books in bond market history.

I took great care to assure that the fourth edition, titled Stigum's Money Market, would stay true to its reputation as the definitive and most widely read work on its subject matter; it can be found in nearly every major financial institution on Wall Street and in every major university.

When The Money Market was first published, it was hailed as a landmark work by leaders of the financial, business and investment communities. The fourth edition contains an all-encompassing, cohesive view of the vast and complex money market, a market at the center of the behavior of the financial markets, chiefly through the influence of the Federal Reserve.

Stigum's Money Market is loaded with insights into complex topics, which are broken down throughout the book, sometimes with a simple chart or illustration. For example, we hear a lot these days about credit default swaps, a recent financial innovation that is having a great deal of impact on the appetite for risk-taking, and this revision contains an illustration that shows how credit default swaps work.

As mentioned, the money market is at the center of the behavior of the financial markets. The money market is where money is created and where the Federal Reserve does its handiwork. Although attention is not normally put on the money market itself, investors' constant obsession with the Fed and the flow of money means that by extension they are focused intensely on the money market, too. This is why it is so important to gain as much understanding as possible about the money market.

There are three main sections of the book covering subject matter that can help investors better understand how the money market affects their investments:

Money market fundamentals: This section opens the book by explaining the flow of money, which has a major bearing on the way that both the economy and the markets behave. For example, for many years, money has flowed from the household sector, but in recent years the situation has become reversed, largely because of the sharp growth in corporate profits and the negative savings rate in the household sector.

This has had profound impact on the performance of the stock and bond markets, because more of the income generated in the economy has been flowing toward corporations, a good thing for stock and bond prices. This section also discusses the instruments of the money market in brief, and discusses discount and interest-bearing securities and duration and convexity.

The major players: This section explains the critical role of the banking sector, showing in great detail the major trends now in place, such as interstate branching, the importance of fee income banks, money creation and how banks manage their risks.

More than 200 pages are devoted to the banking sector here and abroad, and there are plenty of good trading ideas that can be developed from increased familiarity with the topics discussed. Also discussed are the Treasury, federal agencies and the Fed -- institutions with vast impact on the markets. The important role of Wall Street dealers is also covered.