Wednesday, June 02, 2004

Monetary Policy Edition: Potential Crisis in Money Supply?

A friend of mine, B pointed out that Robert McHugh has put out an alert on money supply indicating that the Fed may be taking a position to supply liquidity in the event of a market crisis.

Let me just say from the outset that the Federal Reserve has confirmed our Stock Market Crash forecast by raising the Money Supply (M-3) by crisis proportions, up another 46.8 billion this past week. What awful calamity do they see? Something is up. This is unprecedented, unheard-of pre-catastrophe M-3 expansion. M-3 is up an amount that we've never seen before without a crisis - $155 billion over the past 4 weeks, a $2.0 trillion annualized pace, a 22.2 percent annualized rate of growth!!! There must be a crisis of historic proportions coming, and the Federal Reserve Bank of the United States is making sure that there is enough liquidity in place to protect our nation's fragile financial system. The amazing thing is, the Fed's actions mean they know what is about to happen. They are aware of a terrible, horrific imminent event. What could it be?

One can draw no other conclusion except that the Fed is acting irresponsibly in its managing the money supply, in fulfilling its duty to "maintain a stable currency." I reject the notion that the Fed is acting irresponsibly. No, something is up, bigger than we have ever seen in the history of the United States. Let me ramble. Perhaps they simply see the ominous technical landscape we have been warning about in recent issues, and are attempting to pull out all the stops to avert the predicted crash. The recent rally in just about everything is similar to 2003's market behavior when the Fed pumped massive amounts of liquidity into the system during the first half of the year. This time seems different. The amount of liquidity is too large. The Fed is deflating the value of the monetary base by a fifth! Why are they willing to do this? Wisdom says something bad is up - big time.

My friend R in the financial industry had this comment:

I don't know them personally and the money supply stuff is on the shrill
side but Dow Theory definitely forecasts bear market after September or so
unless market is manipulated (see: "plunge protection team").

You can find out more about Dow Theory at Dow Theory Letters by Richard Russell. Personally the oldman is not a follower of Dow Theory, but he has been for completely separate reasons forecasting a probable double-dip recession from the attendant property price retrenchment from the real estate bubble. Here's a comment from if you check out their Monday, May 31st entry on "What's up with June 20?" you can see an interesting piece of news from the Chicago trading boards.

I read with interest your weekend update about something big coming in mid June. I was particularly interested in Robert McHugh's warning about the massive Federal Reserve money pumping (article linked to Indeed, it does seem the Fed is still in "panic mode" even as the rest of the world fixates on interest rate hikes, etc. Why would the Fed be pumping money like mad if they're planning to raise interest rates?? Something here is fishy.

Something else fishy has been happening in the options markets. I follow the Chicago Board of Options Exchange (CBOE) put/call ratio on a daily basis. The put/call is often a contrary indicator.. when everyone buys alot of calls, the market is likely near a top. When everyone loads up on puts, we're probably near a bottom.. BUT NOT ALWAYS.

I've seen something in the CBOE put/call ratio over the past month that I've never seen before in nearly 10 years of following the markets. The put/call ratio has closed at 1.0 or higher on 13 of the past 22 trading days, stretching back to late April. There are two things unusual about this: First of all, I can't recall the put/call ratio closing over 1.0 for more than 3 or 4 days in any 1 month, even after the market reopened after September 11, 2001!! Someone somewhere is buying a HECK of alot of bearish options contracts... and they have been loading up on them for the past month.. What's even MORE remarkable is that market really hasn't rallied much at all. Normally a spike in put buying like that would be indicative of overly bearish sentiment on the part of the PUBLIC.. A rally usually would follow. This time, it doesn't appear to be the PUBLIC loading but instead, someone else... But whom?? And why?

Your guess is as good as mine.

There's a bunch more speculation about the June 20th date, naval deployments, etc. but the important point is that there is something fishy going on behind the scenes and it's time for the average investor to scuttle for safety and batton down the hatches.


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