The Federal Reserve Discontinues the M3 Chart: How To Profit from the Fed Ban

by Mark Skousen

The Federal Reserve Discontinues the M3 Chart: How To Profit from the Fed Ban, plus an M3 Money Supply Forecast

By Dr. Mark Skousen, Chairman, Investment U

Thursday, December 8, 2005: Issue #493

Last month, the Federal Reserve quietly issued a statement that it would no longer publish the M3 - the broadest measure of the money supply. Behind the scenes, this spells trouble. Here's why

While attending the San Francisco Gold Show last week, my friend Van Simmons (a rare coin dealer) and I had lunch with famed monetarist Milton Friedman, who is 93 years old, but still very alert and knowledgeable about current geo-politics.

"I don't know why the Federal Reserve discontinued the M3 chart," he said. "But inflation is clearly a problem right now."

I'll go further than Friedman. I've studied M3 for years and found it to be the best road map of major economic trends. M3 is the broadest definition of the money supply: It includes coins, currency, checking accounts, money market funds, time deposits and institutional money market accounts.

The M3 does a better job of showing long-term trends by central bankers than either M1 or M2.

Look at the M3 chart below, data courtesy of James Turk of GoldMoney.com.

The M3 Chart: Annual Growth Rate, January 1975 through November 2005

  • Inflationary 1970s: M3 was volatile, but grew at double-digit rates, sparking an inflationary era that was bullish for hard assets and a difficult period for traditional investments in stocks and bonds. This was the era of "buy gold, buy silver, buy Swiss francs" and real estate.
  • Disinflationary 1980s: Under Reagan, M3 slowed down remarkably, reflecting a long period of slowing inflation and sparking a strong recovery on Wall Street. Gold and silver topped out and began a major bear market; meanwhile, the economy recovered, interest rates fell and stock and bond markets roared during the Reagan era. 

  • Booming 1990s: Under Clinton, M3 was reignited, the economy was reflated, and with the collapse of the Soviet socialist model, global output soared, interest rates stayed low and Wall Street had its best performance of the 20th century. 

  • Troubled 2000s: Under Bush, a slowing economy and terrorist attacks caused M3 growth to fall sharply. The technology-laden Nasdaq crashed over a three-year period, and interest rates fell to their lowest levels in 40 years.

My M3 Money Supply Forecast

What is M3 saying now? What does the future hold? M3 has started to rebound, which is bullish for both stocks and hard assets. Despite the Fed's raising of short-term rates, long-term bond rates have been relatively stable at 4.5%.

It therefore does not surprise me that both the Dow (at 11,000) and gold (at $500) are hitting new highs this year.

Here's How To Profit from the Federal Reserve Discontinuing the M3 Chart:

1. Buy into the Santa Claus Rally this month. Stocks are likely to move higher.

2. Buy hard assets, such as mining stocks and oil / gas stocks. They, too, are rallying. Gold and silver, either bullion or rare coins, are also good buys.

Good trading, AEIOU,

Mark

comments powered by Disqus