Recipe for a 'dark and stormy'
Like 1996, US money shrinks alarmingly while markets enjoy a bout of 'irrational exuberance'.
Recipe: combine dark rum, Bermudan ginger beer and lime juice to make a classic ‘dark & stormy’ cocktail.
The great thing about macro is the endless scope for delayed gratification in forecasts. In early October I wrote of US narrow money "it is highly unlikely that such a rapid contraction can be sustained. Even the Fed cannot continue with such extreme monetary behaviour without really upsetting the American economic applecart. Already the decline in M1 implies declines in future inflation and economic activity."
So far, gratification on that prediction has been delayed. In other words, I was wrong on all counts. Or, I am not right yet.
M1 (author’s calculation) has continued its depressing path, defining a new low of year-on-year growth for the last 20 years (-3.72%) at end-December 2022, recovering a little in early January (-3.04%). The official Fed M1 measure is useless for long-term historical analysis due to definitional changes made by the Fed in 2020. But year-on-year growth of the official measure is now useful again. To 2nd January the Fed’s own M1 measure is at an even lower rate (-4.4%).
The lowest ever year-on-year reading for the official measure of M1 was -5.6% in mid-October 1996. That low-point occurred just before Alan Greenspan’s famous ‘irrational exuberance’ speech to the American Enterprise Institute in December 1996. Famously, his words made no difference to the exuberance in markets and shortly afterwards, the Fed chairman confirmed investor optimism by deploying the ‘Greenspan put’ to combat the Asian Financial Crisis. Maybe markets sense a ‘Powell put’ will be revealed shortly.
Or perhaps there is more than a little ‘irrational exuberance’ about - especially as Jerome Powell seems determined not to go down as the Fed chair who undid all the hard work of Paul Volcker.
