To M3, or Not to M3
SAN FRANCISCO -- When 1999 comes to an end and we get past whatever Y2K issues (if any) are looming ahead, the
will shut off the monetary spigots, thus cooling the economy and, by extension, the equity market. Or so the common thinking goes.
of this column is to poke a finger in the eye of conventional wisdom whenever the opportunity presents itself. That often puts us on the "other side" of the tech-stock juggernaut, raising the ire of many readers in the process. But in this case, we've got a rationale of why you
be worried, proving there are no dogmatic forces at work.
The "conventional wisdom" regarding the Fed's pre-Y2K activities got its biggest showcase in a Dec. 17 article in
The Wall Street Journal
, which noted M3 rose 18% on an annualized basis in November vs. 5.7% for the first six months of the year. The
piece was preceded (by a week) by a
story that reported M3 rose "an incredible" $194 billion in the prior 13 weeks, calling it "the biggest increase ever."
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But to focus on M3 is wrongheaded and "inexcusable," according to Lou Crandall, chief economist at
R. H. Wrightson & Associates
, a provider of credit market analysis and forecasting.
"You'd be hard pressed to find any economist who'd argue hard on paper that M3 was a useful definition of money," Crandall said in an interview late last week. "Analysts talk about massive liquidity,
but all that's happened is the Fed has prevented
bank reserves from declining. They do that every year-end. This is just the year-end to end all year-ends, so they've had to do more."
Rather than fretting about M3, Crandall said investors should focus on M1, which has been "virtually flat" this year, and M2, which is "uncharacteristically close to its target range."
(You can think of M3 as the broadest definition of money supply, but
glossary defines M3 as "M2 plus CDs over $100,000, institutional money-market funds and term repurchase agreements." Definitions of all the "Ms" can be found in this
story, and their long-term track records are available
Indeed, Mickey Levy, chief economist at
Banc of America Securities
and one of the more high-profile monetarists on Wall Street, admitted not having looked very closely at M3 of late, and said the Fed focuses "primarily" on M2.
Moreover, there has been a gradual deceleration in the pace of growth by every measure of money (except bank reserves) since the Fed began tightening, Levy said. This process was accompanied by the unwinding of the flight-to-quality trading so evident in the fall of 1998, he noted.
While differing in methodology, Levy and Crandall agree the growth in bank reserves is strictly due to banks anticipating Y2K-inspired withdrawals vs. -- to co-opt the phrase used by many doom-forecasting press reports -- the Fed "flooding the system" with cash.
Given the unique circumstances of the calendar, banks' demand for reserves is expected to be fleeting. "The additional holdings of liquidity assets have been an expensive luxury for banks and can safely be expected to evaporate in January," Crandall wrote in a recent report.
This temporary demand for liquidity from banks should not be confused with Fed policy. The Fed may engineer a slowdown in 2000 through additional tightening, but "don't look for it now," Levy added, suggesting it won't become evident until the second half of the year.
The point being: If and when stocks falter in the new year, the "conventional wisdom" about a Fed-directed liquidity squeeze will no doubt be proffered as one factor. You can either choose to get swept up in that or take everything you read (yes, even here) with a stack of saltines.
Have to hand it to Jay Walker, founder of
noted, Walker and his company masterfully played the PR game with the timing of its "Perfect YardSale" announcement.
I was most impressed with Walker's handling of a question about the company's stock price during his appearing on
. The name-your-own-price impresario gleefully told
that he'd recently bought 2 million shares of priceline.com shares from
Delta Air Lines
Of course, Walker left out the details of that byzantine transaction, which stemmed from priceline.com's last "big" announcement -- that three major carriers would offer tickets on its site. In anticipation of that deal, which I critiqued on
Nov. 18, priceline.com shares traded as high as 76 7/8. Today, they dipped 1.4% to 54 3/8, some 29% below the November heights (not to mention the stock's all-time closing high of 162 3/8, hit April 30).
Perhaps investors are displaying some rationality after all.
Aaron L. Task writes Monday through Thursday for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at