M1

The authors identify two "externalities" to the triggers for default cascades: 1) variability of financial robustness of all of the interconnected financial entities; and 2) the average financial robustness of the interconnected entities. If all parties have similar financial robustness (variability is low), then increasing connectivity makes the system more robust. Stability is even likely through diversification if the individual parties are not very robust. It was only when the initial robustness was highly variable across agents (i.e., some agents are weak and others strong) that increasing interconnectedness tended to stimulate systemic defaults.... The lesson here is diversification is not always a good idea. If you diversify across financial entities with wide risk profiles (i.e., some are weak and some are strong) you actually increase the likelihood of a financial calamity.  We don't have to confine ourselves to financial institutions. If we consider our agents to be sovereign, we expect the same problem. Creating a financial superpower out of a group of Germanys would be perfect--even a group of Greeces might be okay. But creating one out of Germanys and Greeces tends to encourage a financial catastrophe. Who could have predicted that? The authors suggest that the "fix" for this situation is to concentrate risk rather than diversify it. I wonder--in whose hands will the risk be concentrated? Perhaps if you hold gold, the risk won't find its way into yours.

It was one short week ago that both Australia surprised with hotter than expected inflation (and no rate cut), and a Chinese CPI print that was far above expectations. Yet in confirmation of Dylan Grice's point that when it comes to "inflation targeting" central planners are merely the biggest "fools", this morning we woke to find that the PBOC has cut the Required Reserve Ratio (RRR) by another largely theatrical 50 bps. As a reminder, RRR cuts have very little if any impact, compared to the brute force adjustment that is the interest rate itself. As to what may have precipitated this, the answer is obvious - a collapsing housing market (which fell for the fourth month in a row) as the below chart from Michael McDonough shows, and a Shanghai Composite that just refuses to do anything (see China M1 Hits Bottom, Digs). What will this action do? Hardly much if anything, as this is purely a demonstrative attempt to rekindle animal spirits. However as was noted previously, "The last time they stimulated their CPI was close to 2%. It's 4.5% now, and blipping up." As such, expect the latent pockets of inflation where the fast money still has not even withdrawn from to bubble up promptly. That these "pockets" happen to be food and gold is not unexpected. And speaking of the latter, it is about time China got back into the gold trade prim and proper. At least China has stopped beating around the bush and has now joined the rest of the world in creating the world's biggest shadow liquidity tsunami.

A graph is worth a thousand words.  Here's three grand worth:

The surge in the U.S. money supply in recent years has sent gold into a series of new record nominal highs.  Money supply surged again in 2011 sending gold to new record nominal highs. Money supply has grown again, by more than 35% on an annualized basis, and this is contributing to gold’s consolidation and strong gains in January.  The Federal Reserve's latest weekly money supply report from last Thursday shows seasonally adjusted M1 rose $13.2 billion to $2.233 trillion, while M2 rose $4.5 billion to $9.768 trillion.

Together with the Fed's balance sheet, we are now convinced that the second most important developing metric for the economy is a granular analysis of the key public monetary aggregates: M1+M2. Within a month we also hope to develop our own definition of M3, to supplement such work elsewhere, in order to provide an independent opinion on what the true monetary growth is, now that increasingly more people are discussing the threat of outright hyperinflation. But before we get there, here is our first breakdown of M1 and M2 data. As a reminder, M1, or the monetary base, consists of the i) Currency in Circulation, ii) Demand Deposits, and iii) Other Checkable Deposits (technically it also includes roughly $5 billion worth of Travellers Checks each week, but this is merely a remnant of a bygone era and it rarely if ever changes). In the most recent week, total M1 was $1,700.7 billion, a modest decline from the prior week mostly due to a $12 billion drop in Other Checkable Deposits. Beyond pure M1, there are also i) Savings Deposits at Commercial Banks, ii) Savings Deposits at Thrifts, iii) Total Small Denomination Time Deposits and iv) Retail Money Funds. All these, in addition to the items listed under M1, make up M2, which closed the week ended September 8 at just over $8.7 trillion for the first time in history. For those who look at M2 as an indication of just how much liquidity is sloshing in the system, and use it as a proxy for inflation, the attached chart must be rather troubling.