Kevin Spires, CFA, FRM

The Federal Reserve just released the results of its quarterly Senior Loan Office Survey(SLOS).  The results show continued easing of credit conditions across the vast majority of Real Estate, Commercial and Industrial Loans (C&I), and Consumer Loans.  Demand continues to be strong across most categories as well. 

The SLOS is a great predictor of C&I loans.  The SLOS conditions for medium and small business loans leads C&I loan growth by 4-6 quarters.  Loan conditions have been easy enough to support 10-15% loan growth since the summer of 2010.  Conditions will continue to support credit creation over the next 4-6 quarters.

There is no evidence of a credit crunch in the SLOS data.  One interesting tid bit is that the FOMC had the SLOS data in hand for their last Open Market Committee meeting last week. 

It is very difficult to argue for QE3 when credit conditions are this supportive of credit creation.  The recent acceleration in Money Supply and Bank Credit should continue based on the Senior Loan Officer Survey.  This data alone should have been enough to stop the Fed from embarking on further Quantitative Easing.  It may be a bit premature to call Mission Accomplished, but the way I read the data, the Fed should be moving towards a normalized policy stance, not trying to ease further.  Talk of a recession is fanciful and I think by year end, the chatter will move back towards the timing of the next Fed tightening and QE3 will have a stake put

Kevin Spires, CFA, FRM

M1 growth rates continue to decelerate.  The M/M growth rate is 3.53% (All figures Seasonally Adjusted Annual Rates or SAAR).  The Q/Q growth rate is 5.58%, while the Y/Y growth rate is still quite frothy at 16.72%

The downward trend has been in place for months with no clear bottoming in sight.

M2 growth has followed a similar path, but has seen a bit of stabilization over the past month.  The M/M growth rate is 7.80% - higher than the Q/Q growth rate of 4.99%, but still lower than the healthy Y/Y growth rate of 9.57%

If the M2 growth rate can rebound in the absence of further quantitative easing then the economy is probably a lot stronger than the gloomier economists are projecting.

Kevin Spires, CFA, FRM

The Federal Reserve just released their weekly balance sheet update (Fed H4.1 Report) and Monetary Base update (Fed H3 Report).  The Federal Reserve has held their balance sheet relatively constant just below 3 Trillion USD this year, with no growth in total over the past 12 months.

Over the past 3+ years, the composition of the Fed's balance sheet has changed, with most of the special programs rolling off and being replaced with Treasuries and Agency Mortgage Backed Securites (MBS).  At the height of the Crisis, special programs took up 1.5 Trillion of the Fed's Balance Sheet.

With the Federal Reserve not expanding their balance sheet, the supply of high powered money - the Monetary Base - has stagnated.  Over the past year, the Monetary Base has actually dropped by a bit over 1%.  This is not yet a worry, as most of the Fed Money Printing was just kept as excess reserves (which had reached 1.58 Trillion at their peak) on deposit with the Federal Reserve and not lent out.  The Monetary Base less the excess reserves   has grown at a healthy 9%+ rate over the past year.

While not yet a concern, because there are still 1.4 Trillion in excess reserves that banks could use to propel increased lending, these reports should be followed closely to see if banks are starting to lend out their reserves, or conversly, pull back from lending.

Kevin Spires, CFA, FRM

Yesterday after the market close, the Federal Reserve released its weekly Money Supply (H6) Report.  M1 Growth continues to decelerate with the Q/Q growth rate at 5.82% while the Y/Y growth rate is still quite steamy at 16.76%.  Looking at the chart to the left, the sharp deceleration in the quarterly rate is slowly flowing through to a slower yearly growth rate.

For now, there is plenty of money in the system, but if the quarterly growth rate turns negative, expect the Fed to leap into action on QE3

M2 Money Supply growth has also decelerated. with the Q/Q growth rate at 4.78% versus a quite healthy 9.58% yearly growth rate. 

Operation Twist hasn't been a boost to Money Supply (or Credit) growth.  The big boost to Money Supply has come from the Federal Reserve's outright money printing from QE1 and QE2.  As big banks continue to come under pressure to delever, expect Ben Bernanke to rev up the helicopters again this fall and print money in a QE3 operation.

Watching how Money Supply & Credit Growth behaves over the next 2-3 months is crucial to calling the exact meeting where Bernanke will be able to convince the FOMC to undertake QE3.  QE1 and QE2 were undertaken in response to money growth rates close to zero.  If quarterly money growth rates continue to drop over the next quarter, expect the FOMC to leap into action. 

This does not mean that I think QE3 is necessary or good for the economy.  In my quest to understand Ben Bernanke's outlook on the world, I have come to believe he would rather ignite an inflationary episode like the 1970's rather than repeat the mistakes of the 1930's. Unfortunately, I think the Fed's medicine is counterproductive and is allowing a massive leveraging up of the Federal Government that will ultimately have to be unwound. There is an increasing probability that the unwinding of the Federal Government's fiscal situation will be accompanied by a debt crisis that will make the current European Debt Crisis pale in comparison. 

Kevin Spires, CFA, FRM

M1 Money Supply Growth continues to decelerate.  The 13/52 Week Rate of Change is still very frothy at 16.87%, but the 13/13 Week rate of change is down to 5.97%.  Prior to the last recession, M1 growth was rather tepid and never made it above 5%.  If these measures continue to decelerate over the coming weeks, that would be a good indication that Helicopter Ben will succomb to pressure to institute QE3. 

M2 Money Supply growth is also decelerating.  The 13/52 Week rate of change is still very strong at 9.61% but the 13/13 Week rate of change has dropped to 4.92%.

Click on our weekly Money Supply Chart Package for more data and charts

Kevin Spires, CFA, FRM

One of the very bright spots of this recovery has been the Corporate Sector.  C&I Loans have growth at a 13%+ clip over the past year.  Small & Medium Sized Corporations have been borrowing to fund inventories, capital projects, and hiring.  Expect the C&I loan growth to continue in the coming quarters.

For more data and charts from the Commercial Bank Credit Sector click here...

Kevin Spires, CFA, FRM

The Federal Reserve released its Weekly H6 (Money Supply) Report yesterday.  Yesterday's report showed a continuing decerlation in Money Supply Growth.

M1 Money Supply Growth has clearly peaked - although from very frothy levels to levels that would be considered inflationary under normal circumstances.  The Q/Q growth rate (annualized) has decelerated to 6.1% from the very frothy 30%+ growth rates seen a year ago.  The 13 Week/52 Week Growth rate has decelerated to 17.0% from the 20%+ rate seen last year as well.  The Month over month growth rate has declined to just .32% on a Seasonally Adjusted Annual Rate (SAAR).

The M2 Money Supply Growth rate is following the M1 deceleration.  The Q/Q Growth Rate (SAAR) has dropped to 5.15% from peak levels of 18%.  The 13/52 Week Growth rate has dropped to 9.63% - just off the peak levels of just over 10%.  The Month over month growth rate has dropped to just 3.24% on a SAAR basis.

The M1 growth rate decelerated to below zero leading up to the last recession and almost hit zero befor QE2 - lending credibility to the idea that continued Monetary Decelaration will lead to QE3 - based on expansion of the Fed's Balance Sheet - although we are probably a quarter or two away from that point.

Kevin Spires, CFA, FRM

I will just leave it to the xtranormal bears to explain what Quantitative Easing is all about...

(xtranormal video by  Omid Malekan www.omidmalekan.com)

Easy monetary policy is all about trying to fool investors and consumers into bringing activity forward in time.  It is amazing that Bernanke is reacting in such a pavlovian fashion to the markets.  The market drops and Bernanke trys to prop it up with Quantitative Easing.  I just wish the Fed would adopt a simpler approach so the markets can stop speculating and get back to allocating capital to those industries that are likely to earn sustainable long term profits.

Kevin Spires, CFA, FRM

Yesterday, the Federal Reserve released its weekly Money Supply (H6) Report.  The QE2 Money Printing is now fully distributed into the Money Supply.  M1 growth rates peaked on a quarterly basis last October and are now taking another dive down after stabilizing during the first quarter of this year.  Year over year growth rates are still solidly above 15%, so the economy won't be starved for liquidity, but the QE2 effect is finally starting to fade.  For anyone who is wondering why I am refering to the QE2 effect, remember that Monetary Policy acts with a long and variable lag.  QE2 is just now hitting the real economy with a 6-8 quarter lag - as expected.

The Growth in the broader M2 measure of Money Supply has also peaked - although at rates above nominal GDP -especially on a year over year basis, where the M2 growth rate is still 9.77% for the past 13 weeks over the same 13 weeks one year ago. 

The trend in Money Supply growth bears watching as extremely low Money Supply growth can be a harbinger of an economic slowdown.

Kevin Spires, CFA, FRM

The Federal Reserve releases a break down of its Balance Sheet every Thursday afternoon.  The Fed has been holding its balance sheet fairly steady this year.  Changes in the Fed's Balance Sheet tend to hit the economy with a 12-18 month lag, so we are just now feeling the full effects of QE2 and Operation Twist won't be fully into the economy for another 6-12 months.

Monetary Base Growth Rolling Over?
The Monetary Base has been flat for the past couple of quarters - causing the year over year change to drop to 2%.  Does the Fed need to print more money?

Not really - over 50% of the Monetary Base is Excess Reserves held by banks at the Fed.  During QE1, there was only a 1% increase in the Monetary Base without Excess Reserves for every 10% increase in the Total Monetary Base.  After QE2 and Operation Twist, the relationship has been a 1% increase in the Monetary Base without excess reserves for every 2-2.5% increase in the overall Monetary Base.  In other words, Banks have been passing through a higher percentage of the Fed Money Printing as loans to Corporations and Consumers and the growth in the Monetary Base less Excess Reserves is still a healthy 10% year over year.  There are plenty of Excess Reserves for Banks to increase lending without any more increases in the Federal Reserves Balance Sheet.