Show Me the Money

One of the major headwinds facing the global economic recovery and financial market recovery is contracting money supply.

As can be seen in the chart below, U.S. money supply is growing at an anemic 1.5 percent on a year-over-year basis. In Europe the situation is even worse—money supply there is actually contracting.

We like to equate this phenomenon to trying to run a marathon using only one lung—it will both slow you down and leave you gasping for air. Frank Holmes, our CEO, says it another way—“No money, no honey” and “No finance, no romance.” Without a growing money supply to lube the gears of commerce, the economy and the financial markets suffer.

US and Europe Money Supply

There was a lot of concern regarding last week’s trading action, but these short-term factors often just distract from the bigger and more important macro issues. We really shouldn’t be too concerned over a “fat-finger” trade—a “skinny finger” when it comes to money supply, however, is something to worry about.

The struggling economies in the eurozone—Spain, Ireland and Greece among them—carry more than $2 trillion in external debt as a group. Generating the kind of growth needed to get out from under that collective burden is not impossible, but it is certainly more difficult when money supply growth is negative.

As we navigate through these turbulent markets, we will continue to use a matrix of statistical models to monitor market volatility and money flows. As a result, we may at times maintain higher-than-normal levels of cash.

This contribution from director of research John Derrick originally appeared in the May 7 version of our Weekly Investor Alert.

M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds. M3 money supply is the broadest monetary aggregate, including physical currency, demand accounts, savings and money market accounts, certificates of deposit, deposits of eurodollars and repurchase agreements.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.