patrick.net

Here's another hint for the nowandfutures.com geniuses:

When you use Correlation Analysis in Excel, click the little boxes for Residuals and Probability Plot. In this case inspecting those would clearly show your regression is meaningless even if your rsq is off the chart.

They really do a disservice with their shit. When linking Here is our article on M3b, which details our work and notes the sources for the data. all they do is wave their hands (the entire content of that link is in my above comment). Where are the summary stats, data source assumptions, analyses of the error, residual plots, curve fitting, F-Test, etc.? I mean, c'mon, their formula has to be a multiple regression, as per their own description of how they computed it! Hell, I don't even see any analysis of the terms of the multiple regression showing they themselves aren't intercorrelated.

But hey, what do I know? I'm just a guy who takes the time to be skeptical of statistics, especially today's ever popular alchemical statistics.

SkiBum, The"historical" range for interest rates must be considered in the context of the historical environments. One must look at the historical level relative to inflation, GDP and the shape of the yield curve. For example 5-6% is a highly stimulative level when inflation is running higher than that (as it was during the years around 1980).

Historically the neutral and most common Fed funds target rate has been around 100 bps below the 10 year treasury bond rate. That would place the neutral rate at about 3.9% today. Generally, the FF rate has some tendency to on average be close to the growth rate of real GDP, which would suggest a rate of about 3-4% (and declining). Historically the FF rate has been about 100 bps above the CPI inflation rate, which would put it at about 4-5% right now. When everything is in balance all three of these metrics will point to about the same number.

The Fed forces the rate above the equilibrium level to cool inflation. You can see from the numbers above that setting the Federal Funds Target rate at 5.25% is in line with an effort to cool inflation but it is above the natural market equilibrium. The FOMC is in the market selling securities to push the market artificially to 5.25%. This mops up some of the liquidity which will cool inflation. Unfortunately it also cools the economy.

ajh, Long-term rates are determined in the free market (just like stock prices) and are by definition at the equilibrium level.

StuckinBA, The Fed will cut rates once it becomes apparent that the economy is in trouble. 4% by next summer is a very safe bet. Normally the Fed overshoots their rate policy (as they have again) and has to undo their damage before long. On average the Fed starts cutting within 6 months of the last increase, and cuts by about 100 bps by the anniversary of the peak rate level. So my forecast is that the Fed will do what they almost always do. Not so bold, really.

So when inflation is under control, and the economy is in a natural balance, and interest rates are in their natural equilibrium, THEN you will have the Fed Funds rate floating naturally at about 100bps above inflation, about equal to real GDP growth, and about 100bps below the 10 treasury bond rate.

Of course, we rarely have all of these things right at the same time, and in an effort to fix whichever thing is most out of balance the Fed is constantly manipulating the overnight interest rates to influence the economy.

During most of the last 30 years inflation has been abnormally high. So the Fed Funds rate has also been abnormally high during most of those years. Of course it was abnormally low during all of 2002 through 2004.

Zephyr Says:

During most of the last 30 years inflation has been abnormally high. So the Fed Funds rate has also been abnormally high during most of those years. Of course it was abnormally low during all of 2002 through 2004.

However, the Fed during the AG and BB eras seemed to have done a great job of obscuring the true rate of inflation from its decision making...

Inflation measures are just proxies for estimating what is really going on. Every method has its shortcomings. I personnally like the trimmed mean method best. But it is not perfect.

The current methods that use rent equivilence are more accurate than the old methods because it relates to the ongoing cost of ownership or renting rather than the asset value (The real cost of living in a house is the ongoing expense or rent - not the asset price of the house or the value you could sell it for). However, this tends to create a lag effect in the measurement of housing cost.

The old method overstated inflation, and also overstated the changes in inflation. If we were still using the old method for measuring inflation the current housing bubble would not look like such a big deal after adjusting for inflation.

I concur with the general sentiment from others that the Fed will begin cutting rates "soon". I doubt next meeting, probably not until 2007. For the next few meetings simply "pause" is enough to provide market stimulus. Once that wears off and all the lag Zephyr described has yet to work into the current indicators, the cuts will begin.

SGV, I do think that housing is heading down either way. Easy credit and other fundamental factors fueled the run up. All those factors are flat or reversing now. But the biggest wall housing hit was affordability. No bubble can outgrow the maximum ability of new buyers to buy. The "greater fool" theory is self limiting. As the pool of fools shrinks, the foolhardiness of those remaining buyers must also increase. Eventually you run into a level where the foolhardiness required to be the next buyer is so great that said fool is unable to find enough money to buy -- even though he wants to.

SGV, The credibility ofthe Fed is being questioned now for not raising further. However, by 2007 it will be clear that they raised rates a little bit too much (not as bad as prior cycles, but a little too far). Accordingly they will need to cut rates to counteract their overdose. Of course, to counteract too much you have to balance that with too little. So look for rates to decline to a level that is too low by 2008. By 2009 this will begin to pump the cycle again - and by 2010 asset prices will on the rise again.

Tightening will cause risk spreads to increase for a while, and (30 yr) mortgage rates may actually rise a bit while the Fed Funds rate and treasury rates decline.

Housing prices should fall to a level that is below the long-term trend line by 2009. By 2010 I expect prices to be rising (modestly) but still below that fundamentally supported long-term trend line.

The buyers still exist, but as a group they have recently bought too much, and the psychology has turned, so they are waiting. This will return to normal in a while. Remember that nearly every seller (other than flippers) also become buyers as soon as they sell, because they are selling to move up.

Remember that nearly every seller (other than flippers) also become buyers as soon as they sell, because they are selling to move up.

Or selling to trade down in the case of the increasing proportion of empty nesters. Maybe there'll be demand for MiniMcMansion attached homes after all.

Randy,

I'll leave it up to the math/statistics geeks here to rebut your null correlation arguments in how M3 was reconstructed. Residual plots, curve fitting, F-Tests, multiple regression, et al. is obviously not my area of expertise. However, I do find it somewhat bizarre that you can (a) be so skeptical and (excessively?) critical of the nowandfutures.com methods, and yet buy the Fed's very unlikely stated motives (not to mention the timing) for discontinuing M3 without question:

M3 was discontinued because the Fed themselves couldn’t create accurate data. But now, low and behold, these guys have used data from the Fed to recreate data the Fed discontinued because it was inaccurate and largely irrelevant?

So you actually believe that the Fed, with all the computing resources and brain power it has at its disposal cannot accurately calculate a broad measure of the money supply? Exactly how many math geniuses and supercomputers does it really take to input data into a formula and then plot the results? You make it sound like this is advanced rocket science, when in reality M3 is just M2 + non-M2 CDs, Eurodollars + repurchase agreements (T-Bills & corporate bonds).

How hard can this really be? Come to think of it, if you're so sure the nowandfutures.com method is badly flawed, why not create your own more accurate M3 index? Call it "M3(rh)". I'd love to see the results.

Sometimes, Randy, I get the feeling you assume everyone out there is as rigorously data and accuracy-driven as yourself, and that politics *never* plays a role in how government indexes are calculated. These indexes directly impact hundreds of billions in government spending and future liabilities, so I don't think it's really that much of a stretch to assume foul play when one index conveniently "disappears" or another is hedonically adjusted in the direction most beneficial to incumbent politicians.

HARM,

I never stated that the Fed produces perfectly accurate data, nor that it is not politically influenced. I believe that just about everything is politically influenced in this era.

1) I am absolutely positive that nowandfutures.com's "study" regarding reconstructed M3 is absolutely valueless. I cannot demonstrate this to you if you're not willing to engage in any math or stats. How about this alternate line of reasoning:

* There are no shortage of academics studying M3 et. al. at a level of detail that would confound us both.

* Many of these academics are no friends to any current political administration or political ruling party.

* Said academics are quite willing to publish contrarian views, and even to sensationalize these views, as it helps them get published.

Therefore, where are these studies showing that M3 is right under our very noses? It is so exceedingly unlikely that some agenda-driven bloggers discover a mysterious memo, then add a few published numbers together, and viola, we have M3, that it is pretty safe to say it's not true.

2) If the Fed's own data is so flawed or fudged, then these guys' "synthetic M3" must also be equally or more flawed. How can the output of those inputs be more accurate than those inputs?

3) M3 is just M2 + non-M2 CDs, Eurodollars + repurchase agreements (T-Bills & corporate bonds).

You think that's easy? I suggest you have little idea what goes into the econometric and statistical aspects of running an economy. It is orders of magnitude more difficult to produce this data deterministically than it is to do a simply non-statistical population census, and we don't do so well with those numbers, gathered only once every 10 years. The Fed gathers their data DIALY.

One last thing. If computing M3 is so easy, please enlighten me with the following apparently simple question that seems to allude not just me, but the thousands of very smart people working for the Fed:

M3:

The category of the money supply that includes M2 as well as all large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets.

What is the difference between a Demand-Deposit, in M2, and what I noted above. (Hint: Keep in mind that billions of dollars are now held in accounts that can be considered BOTH M2 and M3, with no way to determine the intent or use of those funds).

I should clarify that Demand Deposits are a component of M1, that have bled into M2 because of the ability to link previously segregated electronic bank accounts. The "debit card" effect. So effectively you had M3 bleeding all the way down into M1 at an increasing rate. Not only was there double-counting between M1-M2 and M2-M3, but triple counting between M1-M3.

Soon, there may be only M, so we really needn't worry too much.

Final piece of rebuttal.

The now&futures.com guys themselves state:

There is only one missing element that is apparently no longer available (Eurodollars) and I’ve applied an adjustment to generate it. Its only about 3% of total M3 so should not have a material effect on the total

They don't seem too worried about Eurodollars (for those who are unfamiliar with the term, it is only "Euro" for historical reasons; it means all USD denominated assets held outside of the jurisdiction of the Fed).

That US Gov't bills and notes are increasing is no great revelation. It also isn't the Fed's direct responsibility, but the other side of the equation: FISCAL. Maybe you should direct your suspicion at Congress and the Whitehouse who seem to be able to spend without due accountability on the dime of these USD debts?

I am 1000X more confident in Fed data than I am in Congressional budget data. The Fed never paid $5,000 per for hammers and hid it for over a decade from their own GAO, after all. I'll bet I can tell you more accurately how much money the Fed is printing than you can tell me how much taxpayer money Halliburton is spending in any given year.

Summary from an online report by 'MKM Partners' at Barron's (subscription required)

- Leading indicators say liquidity at global level remains high
- Unit labor costs will remain high, end result in higher inflation of 3% YOY
- Fed will be forced to raise rates making 2007 a challenging economic environment
- Fed funds rate will reach 6% in 6-18 months

Although I have said that Fed will desperately search for an excuse to start easing, I am still perplexed by statements that they WILL INDEED ease.

My question is what would be the reason given ? I believe stagflation is what is in future. So no matter what the reason is, can the Fed dare to ignore inflation ? I don't think they will.

The inflation indicators (real or fudged) need to moderate. Else, easing is not an option.

Stuck,

I think there is a big global economic component to the equation. I do think you're right, and the Fed will eventually be FORCED to raise rates to battle inflation. I also agree with Zephyr that their actions will be time-distorted.

The other dimension to all this is the capital outflows/trade imbalance. By inflating under control the Fed is trying to participate in a global "soft restructuring". All the other major CBs are cooperating with this as well, with the exception of China. I look for future easing to put increasing pressure on China to continue with their staggered revaluation.

The Fed doesn't care about the dollar, but they do care about the balance of capital. Elected officials care too. And it's a race to see if the Fed can engineer a soft restructuring before Congress turns over and starts erecting trade barriers and blows up what's left of the WTO.

Randy,

Alright, as a non-statistician, I'll concede you may be right about there being some double-counting going on between M1, 2 & 3. If the scale of over-counting is significant, then, sure, it's a valid concern. Even so, why not just "mend it" vs. ending it? There's a considerable amount of skepticism about the Fed's stated "costs outweighing the benefits" explanation out in the financial blogosphere --and it's not just Trilateral Commission/PPT/tinfoil hat conspiracists that are asking such questions:

Money Supply and the End of M3
http://bigpicture.typepad.com/comments/2005/11/money_supply_an.html

Oregon Economics Professor Mark Thoma noted that having M3 available makes it easier to track movements “into and out of M1 and M2 over time.” While not having it available “is not a huge loss, it was nice to know it was there to look at when it was needed. Thoma would have preferred that if M3 goes, “some improved measure of highly liquid assets beyond M2 be constructed to take its place.”

Given the computing power at the Fed’s disposal, and the already incurred expense of compiling the data components, it essentially costs the Fed nothing to create the M3 data. Compared to CPI, this is one of the most steady data points the Federal Government generates. It seems a shame to lose a series that has been reported (and in such a consistent manner) for so many decades.

M3 Measure of Money Discontinued by the Fed
http://www.financialsense.com/editorials/conrad/2005/1122.html

This is just not credible in my opinion as the Fed has so much money that they routinely turn in $10 to $20 of their excess profits back to the rest of the government. They earned the $20 B as interest on the huge stash of Treasuries that are bought to keep interest rates low, and are the backing of the paper dollars they issue. There are buildings of economists at the Fed that could do the job.

The discontinuation of M3 reports is a relatively minor matter compared to growth in areas of the U.S. payments system that are not regulated by the Fed and not well monitored by them. But it is unsettling. It detracts from the transparency the Fed preaches and adds to the suspicion that the Fed wants to hide anything showing money growth high enough to fuel inflation, just so people won't know how bad it is and possibly react and thus make it worse.

For links to economists and analysts from BOTH sides of the argument, check this out:

M3, "Moneyness", and Conspiracy Theories
http://themessthatgreenspanmade.blogspot.com/2005/11/m3-moneyness-and-conspiracy-theories.html

I have no doubt in my mind that within 20 to 30 years the United States will rank third or fourth and possibly fifth as a financial world power behind China, Japan, India, Russia and Europe.

I'll take that bet, and even give you 5:1 odds. You should at least rethink Russia. They don't exactly have a long history of creating sustainable economic power; but they do have a great talent for destroying potential.

HARM,

At least one of those links does present logical, reasonable arguments.

You are attempting to shift the context of this debate from now&futures.com is full of shit to reasonable people reasonably debate Fed centered econometrics.

I have never raised objection with reasoned critics. I will continue to object to bullshit, regardless of its particular flavor or affiliation. I point out that I took "The Futurist" (aka Juku) to task over his "$100 Oil is Good for the US" model, which included lots of equally flawed graphs and charts.

Randy,

You seem to be convinced now&futures.com's methodology is "full of shit", so I'll leave it at that. I am not a professional economist or statistician --as you are-- so it is highly doubtful I can create anything better or debate you on the specifics of whether or not they achieved their claim of "five nines 9999946 correlation" to the real index. Perhaps they should have just said "this is a pretty good guess" and left it at that.

I still doubt that compiling historical Fed data to create a rough reconstruction of M3 using a "best guess" of the Fed's (presumably secret) formula is entirely crazy or beyond ordinary human ability. However, I'll concede there may be much better models out there. If you know of any, please share them with us here.

HARM,

I and others have been and will continue to search for such models. I'll happily share anything I find, of course.

The second link you posted above:
M3 Measure of Money Discontinued by the Fed
http://www.financialsense.com/editorials/conrad/2005/1122.html

is very reasonable. The third link is a bit of a polarized discussion, but also not without some interesting perspective and information.

Recreating a "guess" at M3 isn't really all that hard. But it's useless. What is hard is figuring out how to measure real money growth in aggregate, which is ultimately what you're after I assume.

No one reasonable denies that we have been awash in global liquidity. I'm just saying that the one particular site you used as support is illegitimate.

And, for the record, I am not a professional economist, econometricist, or statistician. I do not have a PhD in any of those fields.

I do not have a PhD in any of those fields.

I thought you were a CBA (Certified Bubble Analyst)?

aided and abetted by a man who is a born ex-bankrupt loser by the name of George W. Bush

correction: a born-AGAIN ex-bankrupt loser...

@DS,

Actually I think he had it right the first time :P .

@goober,

According to the Economist:

To bring the ratio of prices to rents back to some sort of fair value, either rents must rise sharply or prices must fall. After many previous house-price booms most of the adjustment came through inflation pushing up rents and incomes, while home prices stayed broadly flat. But today, with inflation much lower, a similar process would take years. For example, if rents rise by an annual 2.5%, house prices would need to remain flat for 12 years to bring America's ratio of house prices to rents back to its long-term norm. Elsewhere it would take even longer. It seems more likely, then, that prices will fall.

Of course, this was calculating it for national prices, not CA's --which are much higher, and will naturally take longer. And it all depends upon what you think the "real" inflation rate is, and whether or not rents will track this rate long-term. Two very big "ifs".

Oops, forgot the source: http://www.economist.com/finance/displayStory.cfm?story_id=4079027

Using 2000 prices as a "pre-bubble" benchmark:
CAR 2000 median price: $241,250
(source: http://realtytimes.com/rtapages/20001207_carsurvey.htm)
CAR June 2006 median price: $575,800
(source: http://www.car.org/index.php?id=MzE3ODY=)

575K / 241K = 239%

If we assume:
(a) the current CPI (~4%) is an accurate measure of inflation
(b) housing prices will stay perfectly flat long-term
(c) rent increases will roughly track the CPI long-term

Then it would take approx. 22.5 years for inflation alone to bring rents back into line with prices: 1.04^22.2 = ~2.39

If we assume "real inflation" is closer to the pre-Clinton CPI (7.5%), then it would take only 12 years for inflation to bring rents back into line with prices: 1.075^12 = ~2.39

All I will say is that if Rents don't "track inflation", then there won't be inflation. It's a circular iterative equation.

Same is true of incomes, with lag. There is no free lunch. It all depends upon how much more 'slack' you think can be taken out of the average consumer before (s)he gets upset enough to finally vote their own best economic interests.

goober Says:
I’m beginnig to think a plateau is possible…

if it plateaus, it will still put ridiculous demands on the income of the next generation, so there will be housing stress for years to come.

NYC council has announced the creation of 165,000 affordable housing place to be built or made available over the next 10 years... that would help to alleviate the problem by bringing down market prices both directly and indirectly by govt intervention... prices for these places would obviously be lower, and there would be a flow-on effect into uncontrolled prices due to lessened demand... both rents and purchases, i guess...

https://pbs.twimg.com/media/FCKAodrVEAYDfvE?format=png&name=small

The stagflation we saw looming on the distant horizon back in the mid 00s has finally arrived. It only took a global debt market financial collapse, the Fed printing so many 0s that it's easier to state their balance sheet in scientific notation, and a 2.5 year long undeclared state of global martial law, to finally release it upon us.

Now that we're here, it could take a decade or longer to just get back to anemic growth.

That is, unless another one of those formerly rare black swans decides to join the gaggle.

Randy H says

Now that we're here, it could take a decade or longer to just get back to anemic growth.

Actually all it takes is just one quarter with a President that really gives a good greasy rat fuck shit.

Trump proved that Democrats and RINO establishment creeps are nothing but grifting greedy retarded creeps, that has no business deciding or dictating monetary policies.

Randy H says

The stagflation we saw looming on the distant horizon back in the mid 00s has finally arrived. It only took a global debt market financial collapse, the Fed printing so many 0s that it's easier to state their balance sheet in scientific notation, and a 2.5 year long undeclared state of global martial law, to finally release it upon us.

Now that we're here, it could take a decade or longer to just get back to anemic growth.

That is, unless another one of those formerly rare black swans decides to join the gaggle.

Our glorious MIC is pumping on all cylinders now (thanks, Puton!) and will be the engine pulling us out back to growth.

Eric Holder says

Our glorious MIC is pumping on all cylinders now (thanks, Puton!) and will be the engine pulling us out back to growth.

The MIC is what is destroying, and will ultimately destroy the United States. That's why I'm "anti-war" - I do dislike the senseless killing, but more than that, it's destroying our country and obviously it. In 50 years, this flag:



May be synonymous with this flag:



Now I'll be dead by that time, however, there's much of the United States worth preserving, most of it in fact. The problem is we have a FEW criminals that have complete control over the system, and a bunch of dupes, like you who are providing cover for these criminals out of a perverted sense of "patriotism".

richwicks says

I'm "anti-war" - I do dislike the senseless killing

Bullshit. You've never, not a single time condemned Russia and Putin for their emperial war of expansion. Your words ring hollow.

richwicks says

The MIC is what is destroying, and will ultimately destroy the United States.

Nope. Our MIC is the glorious engine of innovation and provider of security for everyone. If you want to see what happens to a country hell-bent on disarming for 30 years in exchange to some "memorandum" look at what happening right now across the pond. Peace through superior firepower is the only kind of peace that lasts. UN and bullshit "security agreements" aren't worth the paper they are written on.

Of course that's just one of Biden's many inflationary crimes against American people. Other inflation-stoking crimes were lockdowns, shutting down the Keystone pipeline, and paying off student loans with money stolen from people who paid their own way.