US Money Supply Data Hints At Trouble Ahead

Confirmation over the weekend that the Spanish government will receive €100 billion from eurozone rescue funds to help shore up Spain’s fragile banking system has lifted stocks and commodities this morning. Spain’s benchmark IBEX-35 index surged 4.5%, with strong gains seen on British, French and German exchanges. However, though the euro bounced early in trading it has started sinking again, though it remains above last week’s low of $1.241.

Gold and silver have also been lifted following the Spanish news, with some traders looking to lighten up on their US dollar/Treasury positions. Gold broke back above $1,600 briefly during Asian trading – suitably so given the strength of sovereign demand there at the moment – but has fallen back from this resistance point over the last few hours. Silver had an even stronger rally – up nearly 2% to $29 in a matter of minutes – but is now back around that familiar “magnet” at $28.50.

Of potentially much greater significance than these day-to-day price moves is what is currently going on with the US money supply. Economist Robert Wenzel reports that M2 is now shrinking at -1.9% on an annualised basis. This slowdown in money growth is also seen in private estimates of M3, a broader money measure.

This may simply be the lull before Bernanke and the Fed once again fire up the printing presses. It provides a helpful indicator as to why US economic data has been disappointing recently – in contrast to earlier this year and late last year, when hopes of a US recovery were growing (which followed a surge in money supply over 2010 and the first half of last year).

Simply put: the more sluggish money supply growth is, the more likely it is that we see a stock market and broader economic crash that would make 2008 look like child’s play.