Following Third Largest Weekly Surge In M2, Expect Artificial Spike In Leading Economic Indicators

Tyler Durden's picture

In the past two weeks, one of the curious development in monetary aggregates, in addition to a spike in the Adjusted Monetary Base (discussed previously here), was the $88.7 billion surge in the M2 for the week ended July 4, the third largest jump in the broadest tracked monetary aggregate in history. Some have speculated that this number may be indicative that the money multiplier has once again started working as bank reserves after 2 long years, finally start making their way into the broader market. Unfortunately as Stone McCarthy explains this is not the case at all (sorry Fed: QE is still a failure) but merely has to do with the repeal of Regulation Q (explained here) which has resulted in a surge in small tie deposits inclusive of money market deposit accounts, which have jumped by $110 billion in the past two weeks, coupled with an accelerating shift of dollar deposits back to banks domiciled in the US. In other words: regulation explains the entire move. There is, however, a kicker, and it goes to another indicator of "economic growth" - the leading economic index, which is actually driven by M2. This means that the fake surge in the M2, will result in an all too real jump in the LEI, which in turn will push the market higher as vacuum tubes interpret the data as positive for the economy as opposed to merely driven by a regulatory forced shift of money from Pile A to Pile B. Expect stocks to surge once the next LEI reading is announced as a result.

Weekly change in M2:

Stone McCarthy explains the impact of M2 on the LEI:

We have revised our projection for the growth in the June leading economic index due to an explosion in M2 growth in the last two weeks. In the week ended July 4, M2 money growth booked a $88.6 bln increase, the second largest weekly increase on record.

We now project the leading economic index to rise by 0.5% in June (earlier forecast was +0.3%) after jumping by 0.8% in May. On an annual basis, the leading index is projected to rise by 6% in June after rising by 4.3% in May.

As you might have guessed, the largest positive contribution to leading indicators in June is expected from real M2, +0.38, which would be the largest contribution since the financial crisis.

At this point, the outcome for leading indicators will likely come in way above the current consensus expectation of +0.2% for June. Since the explosion in M2 growth occurred in the most recent two weeks, unless other economists have revisited their projections for leading indicators, they may not be accounting for the spike in M2 money supply.

Since most Wall Street economists are idiots, expect one after another chatterbox (especially those out of 60 Wall) to appear on CNBC and praise the phenomenal LEI number which "validates" their thesis of a temporary soft spot, instead of admitting they once again have no idea what they are talkig about.

As to what prompted the surge in M2, here again is Stone McCarthy with the explanation:

Institutional money funds have witnessed some recent outflows, but the extent of these outflows is not alone sufficient to explain the growth of M2.

Most of the gain in M2 is attributable to 2 components. First there is the growth of the narrower monetary aggregate, M1. M1 rose by $48.1 bln in the July 4 week.

Second, we have witnessed strong growth in small time deposits inclusive of MMDAs (money market deposit accounts). Over the past 2 weeks these accounts have swelled by roundly $110 bln.

Regulation Q--Sweeps and Money Supply

The Dodd-Frank Act allows banks to pay interest on ordinary demand deposits beginning July 21. Associated with this legislation the Federal Reserve Board has repealed Regulation Q.

The undoing of Regulation Q should render sweep arrangements as relatively less attractive.

With the unwinding of Regulation Q there is simply less incentive to sweep funds from checking accounts into overnight investment vehicles. Banks can simply offer business firms non-zero interest rates on demand deposits. There will simply be a diminished incentive for firms to sustain Sweep accounts.

Against this backdrop what we may be seeing is an unwinding of sweep arrangements prior to the July 21 repeal of Reg Q. As Eurodollar deposits mature, the deposit may be coming back home to the domestic branch in the form of a demand deposit for business accounts, or as an MMDA for accounts owned by individuals.

From the Fed's H.8 release we know that there has been a dramatic sudden drop in US banks liabilities to their foreign branches. This is exactly what would happen if Eurodollar deposits were to be brought back to the balance sheet of the US branch.

And there you have it: no attempt to force more money into the market, yet another regulatory flub, and certainly not an improvement in the economy as the upcoming Leading Economic Indicators index will have you believe.

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Cognitive Dissonance's picture

Is that an EKG?

I that America's EKG? Doesn't look good from here.

spiral_eyes's picture

quantitative wheezing and chest pains.

Cognitive Dissonance's picture


May I add to your masterpiece?

quantitative wheezing and chest debt pains.

CH1's picture

Or maybe "quantitative wheezing and death pains"?

fuu's picture

Gonna need some bigger paddles.


Thanks for the thread cleanup Tyler!

carbonmutant's picture

 Looks like we may need to schedule some Executive Branch surgery...

jeff montanye's picture

again thank you zh for the story behind the story.  and for the story that keeps on telling, by the first guy i heard say the two parties were substantially indistinguishable (doubted him then, don't now):

Oh regional Indian's picture

Following up a JW in FL post is daunting.
I have no data to offer. But mostly because I think it's meaningless crap.

Need pump, run printer. Simple. I can envision a cartoonish ending with wheels flying off printers and smoke rising from the mint as exhausted money-printers work overtime to keep the heli-chop-ters loaded.


Oh regional Indian's picture

Hmmmmmm, I guess JW went too data far it seems.


hambone's picture

Expect stocks to surge once the next LEI reading is announced as a result.

Uhhhhh, I thought we learned the 2nd rule of post March 2009 fight club was to expect stocks to surge forever and always based on anything / nothing / something???  Is something changed here?  Or are you suggesting stocks will surge 100% again (go Minsky)?  Are you suggesting that this surge will be more artificial than the previous surges or simply more vertical trajectory???

If I understand you this is the equivelant of replacing one set of silicone breast implants with an even bigger set while the MSM all sit and discuss if they are real and/or will they continue to grow indefinitely???

GiantWang's picture

Does anyone really still put stock in LEI?  I seriously don't know, so I'm asking.  The greatest service/skill anyone could ever acquire is the ability to discern good information from bad.  In the absensce of the ability to do that, I believe average investors disregard all information, in much the same way that commercial advertising is often "tuned out" in favor of word-of-mouth recommendations.

I do, however, click on every single Ally Bank ad served to me by adsense, just to increase their marketing expenses!

Smiddywesson's picture

The greatest service/skill anyone could ever acquire is the ability to discern good information from bad.

If you are trading this market based on what you consider good information, good luck to you.  This market responds to the manipulation that has kept it afloat.  Understanding that scam is the only thing that will work.  In this environment, faith in good information will destroy your account.

GiantWang's picture

We are on the same page.  I was saying that if good information does exist, it doesn't matter to the masses.  If there is a universal truth with a logical and unavoidable conclusion, I would put faith in that as "good information," but other than eventual collapse of the ponzi scheme (which is almost impossible to time), does such information exist?

Eric Cartman's picture

What time is this data release? 8:30a or 10am? 

Bear's picture

Released on 7/21/2011 10:00:00 AM

YesWeKahn's picture

Tyler, when this will be annonced?

RacerX's picture

"Kool-Aid" sugar spike.

Just wait'll the crash..

mayhem_korner's picture

The proclamation of wellness is a greater sickness than the sickness that lies beneath.

Larry Darrell's picture


Would it be safe to say immediately after this release we should get the ES - RISK divergence free money arb?


HowardBeale's picture

Since it is a recurring...occurence, are there any of you that are playing it both ways? That is to say, play the divergence, then reverse and play the convergence.

Larry Darrell's picture

Not playing the divergence.  Although it does seem like it always diverges 1 way  ES too high compared to RISK basket, if you set up a divergence trade and for some unknown reason it goes the other way ES below the RISK basket, you end up losing it all fairly quickly.

PIGS get slaughtered.  Don't get greedy.  Take the easy free money when it shows up.

And Tyler never fails to point it out.

Fourth Horseman of the Apocalypse's picture

A reason for the rise in M2 is the debt ceiling limit.  Since late May, the US Treasury has reduced its issuance of Treasury Bills.  This has reeked havoc in the repo market and it has forced short-term investors like corporate CFOs into the bank deposit market.  

Catullus's picture

This is an indication that the excess reserves in the system are beginning to hit the real money supply. The Austrians economists have been pointing at this for a few weeks now. Look at Robert Wenzel from The effects of QE2 haven't ended yet. The immediate impact was a bond swap event with the primary dealers. That was really more about prevent a liquidation event in late 2010. Inflation is about to pick up significantly over the next several months.

Eric Cartman's picture

I'm just gonna buy some ES at 9:55, hold it for 10 minutes and sell. Then go play my xbox.

flyr1710's picture

june leading indicators reported in august - need i say more

Problem Is's picture

Nice analysis and post Tyler... Way to expose that systemic corruption on which Wall Street & DC fraud are based...

Chairsatan and Obama Bin Lyin' are pulling out all the bullshit stops...

flow5's picture

Reg Q removal backfired?  Confusing to me because DDs have 10% reserve requirement whereas MMDAs don't.  But then confirmation is that required reserves just exploded.

platoslast's picture

wondering what the fees associated with this latest transaction were...the banker bitchez know its coming to an end and they are grabbing everything they can

flow5's picture

"has to do with the repeal of Regulation Q (explained here) which has resulted in a surge in small tie deposits"


If the effective date of the repeal is July 21, 2011, how can any substantive deposit shifts already be in place?

hardcleareye's picture

Against this backdrop what we may be seeing is an unwinding of sweep arrangements prior to the July 21 repeal of Reg Q.

The change is taking place in the middle of July, folks are changing banking arrangments at the beginning of the month...

Eric Cartman's picture


Stone McCarthy could NOT have been more wrong with this study!!!!! WOW. I'm glad I listened but it was a joke. It was a horseshit victory, it was a horseshit win.