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Most of the time, the money supply numbers are boring and mundane. However, these days, nothing seems to be boring and mundane. The unprecedented bout of capital destruction we've witnessed over the past year, along with the unprecedented cut of the Fed Funds rate to a level that is effectively zero, has finally made itself felt in the M2 data.
A year ago, M2 was growing at a rate of around 5.5%, which is generally consistent with a modest rate of inflation. The capital destruction endured by the financial sector as everything mortgage-related collapsed slammed the brakes on M2 growth. By last summer, M2 growth had dwindled to 1.2%... a level that's usually associated with extreme deflationary risk.
The last 3 rate cuts have sharply turned around the M2 numbers. By September, M2 had grown over the past quarter at an annualized rate of nearly 7%. For November, the figure was 13.9%. And now, with the most recent data being release, we see that M2 for the fourth quarter of 2008 grew at an annualized rate of 17.4%
You can probably draw the following conclusions from this data:
(1) The Fed has achieved it goal of avoiding a 1930's style deflationary spiral,
(2) There should be a decent rebound in economic growth this year, probably some time around the 2nd or 3rd quarter, and;
(3) Yields on long-term Treasury Bonds are completely irrational given this surge in the money supply data.
Treasuries have already dropped significantly since I first initiated a position against them. However, there is still a long way for bonds to fall. I now expect to see the yield on the 30-Year exceed 4.5% before year-end and I wouldn't be surprised if they broke the 5% barrier.