Economists Puzzled By Surge In US Money Supply

Submitted by Danielle DiMartino Booth, of Quill Intelligence

Summary:

  • Uncertainty incites a dash to cash, which we’ve seen at an accelerated pace beginning about five months ago, amounting to $887.4B; In the two weeks ended September 30th, MZM rose by $158.1B, a figure that has only been eclipsed in the immediate aftermath of 9/11

  • Declining inflation expectations have netted record levels of households expecting rising real income gains; and yet, consumers are less confident about economic growth with a third anticipating rising unemployment captured in the continued rise in the fear of the unknown

  • Those aged 45 and under expect annual income gains of more than twice households as a whole; this corroborates the top-third of income earners’ (managers’) higher unemployment rate expectations vis-à-vis middle-income-earners’ (worker bees’) job market outlook

We Americans are drawn to nicknames that evoke our cities’ characteristics:  The Big Apple, The Windy City, Hotlanta. But those passionate Italians demand their cities be identified by the vividness of color, an element that played right into the logo design of the world’s most iconic sports car. As for the horse, that image was painted on the SPAD S.XIII flown by Francesco Baracca, Italy’s World War I flying ace who recorded an astounding 34 kills before being killed himself in 1918. As recounted by Enzo Ferrari, fate stepped in as such, “In ‘23, I met count Enrico Baracca, the hero’s father, and then his mother, countess Paulina, who said to me one day, ‘Ferrari, put my son’s prancing horse on your cars. It will bring you good luck’. The horse was, and still is, black, and I added the canary yellow background which is the color of Modena.”

With this special Daily Feather opening on this Columbus Day that celebrates another famous Italian, we must say it was more the speed of Ferraris that drew us to the theme. As you can see in the spike in the smaller inset chart, MZM, for money supply, it has galloped away of lateIn the last 23 weeks, the surge has been almost entirely accounted for by:Savings deposits at commercial banks ($336.0bn), Institutional money funds ($270.0bn), Retail money funds ($111.3bn), and Demand deposits ($74.6bn).

Add it all up and the last 23 weeks add up to $887.4 billion.  We would add that the race into cash has picked up speedThe $158.1 billion, two-week surge ended September 30 was only eclipsed in the immediate aftermath of 9/11.
 
So why is MZM para-scaling a wall of worry? If you’ll forgive the deeply dissatisfying honesty, we can’t say for sure. There are simply too many divergent messages coming from households. We refer to the preliminary October read of the University of Michigan (UMich) Consumer Sentiment report.

Here’s one side of the story being told. Quickly declining inflation expectations in the year ahead have collided with consumers anticipating larger income gains. The result: the proportion of those who expect net real (read: inflation-adjusted) income gains was the highest since this question was first posed in the UMich in 1974 (blue line above).

And here’s where things get confusing, with the relaying of the other side of the story. Expecting good tidings inside their own checking accounts did less than nothing when it comes to the prospects for the overall economy. Growth is still expected to slow alongside a rising unemployment rate, at least according to a third of those queried, (orange line above) which is plenty higher than the 20% who expect the unemployment rate to fall.

As for all the hoopla surrounding the Chinese “acquiescing” to buying the same agricultural products they did two years ago but desperately need more today, spontaneous negative references to tariffs were cited by 29% in early October, down from 36% last month. (A QI aside, we humbly classify truly good news on the trade war front as cancelled tariffs in place, but what do we know?)

And in what can only be seen as a refutation of the story mainstream media would like to paint, the GM strike was negatively mentioned by 5% compared to the 3% who expressed angst about the impeachment inquiry.

As for that unquantifiable, impossible to articulate fear, that of the unknown captured in the UMich data we featured a few Feathers back, it keeps blazing a trail to the 20%-line that was last hit when the economy was entering recession. Recall that this fear gauge is a good predictor of credit spreads which have stubbornly refused to follow stocks’ lead by coming in. Credit investors and households are united in their fearing something they can’t put their fingers on.

QI’s Dr. Gates seemed the right fellow to ask about the perplexing disconnect. But even his sound reasoning left us a bit lost, and he makes perfect sense: “A record number of households said they expect incomes will rise more than prices. Critically, these expectations are rooted in what is already happening to their paychecks. At the same time, more households fear they will lose their jobs and are getting defensive by raising cash.”

There is one explanation that squares the circle. 

Overall, households expect their incomes to rise by 2.4%, less than half the pace of those under the age 45, who anticipate annual income gains of 5.1%. We recently wrote of the top-third of income earners expecting a higher unemployment rate vis-à-vis middle-income-earners for seven months running, a 99th percentile event. You might agree that those with the greatest means to hoard cash, as fast as a Ferrari at top speed, are one in the same with the highest income earners. We’d be remiss to omit that they also dictate the unemployment rate.