US Money Supply Plunges at 1930's Pace and Housing Index Dives

By Sol Palha   Jun 28 2010 11:58AM www.tacticalinvestor.com

Advice is what we ask for when we already know the answer but wish we didn't -- Erica Jong

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history. The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of institutional money market funds fell at a 37pc rate, the sharpest drop ever. "It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

Well, we can’t say we did not warn everyone; for a long time now we have been stating that this recovery is all smoke and mirrors. Worse yet we proved that the Dow has not put in one single new high in the past 52 weeks in our article titled Dow's new highs, all lies. When priced in other commodities such as Gold, the Dow is in a clear down trend.  

We also stated that the housing recovery was all humbug and unemployment levels would remain at lofty levels for years to come. High unemployment coupled with a terrible housing market is cause for concern.  The housing market index dived 17 points indicating that the small uptick was mainly due to the $8000 tax credit which has now expired.

The housing market index dived to 17 in June from 22 in May, the NAHB reported.

All three components of the index fell in June, and home builders were more discouraged in all four regions of the country. "The recovery in home building will be slow due to the elevated level of unemployment, tight credit conditions, high rates of homeowner and rental vacancy rates and the high level of homes available for sale," wrote Gary Bigg, an economist for Bank of America Merrill Lynch. The index was lower than the 21 that was expected by economists surveyed by MarketWatch, and was the lowest since it hit 15 in March. The five-point drop was the most since November 2008.  full story

Then on Wednesday it was announced that new home sales fell twice as much as was expected. 

The plunge by nearly a third in new home sales to an all-time low annual rate of 300,000 reported by the Commerce Department was a "shocker" even though a decline had been expected after the expiration of the first-time home-buyer's tax credit on April 30, said Harm Bandholz, chief U.S. economist at Unicredit Markets.

"Sales fell almost twice as much as expected;" he said, and what makes it "even more concerning is by far the biggest public support for the housing market is still in place." The government continues to insure or guarantee nearly every mortgage in the U.S. through the Federal Housing Administration, Fannie Mae and Freddie Mac.

"Housing could be in for a double-dip downturn," said Sung Won Sohn, economics professor at California State University Channel Islands. The abysmal performance of home sales since the tax credit expired shows "how dependent the fledging housing recovery is on government help" and is forcing the Fed to be more cautious about withdrawing support, he said.

If one combines the above factors with a rapidly contracting M3 money supply, we have the perfect recipe for a disaster. Double dip recession is not what these chaps should be worrying about; the term they should possibly be thinking of is depression.    

Conclusion

We are going to repeat what we have been saying for the past few years; avoid the housing. A better option would be to use pull backs to open up positions in Gold and or Silver; if you already position then use strong pull backs to add to them.  Investing in precious metals and various other commodities makes more sense than throwing money into real estate; the only exception being good farmland.

Sol Palha

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Sol is a self-taught market guru, having read widely conventional and non-conventional texts on all aspects of technical analysis and market timing.