Gimme fuel, gimme fire, gimme that which I desire,
Can’t fight the need for speed,
I’m loose, I’m clean, I’m burning lean and mean, and mean.
Ignite the open trail,
Excite, exhale, comin on, hot from hell, yeah hot from hell.
-Metallica “Fuel for Fire”
Where has all of the money gone? We know that the world should be running out of green ink any day now due to the Treasury printing money 24/7, but with all of this money coming into the economy we would have expected runaway inflation. Up to now we have seen, for the first time in decades, steady deflation. In fact as you can see in the chart below, since 3/1/09 YoY CPI has been negative. (click on chart to enlarge)
CPI 12-Month % Change
One reason why we have not seen any inflation is due to the personal savings rate going up and private sector leverage going down. For baby boomers and really anyone who has been investing for the last 15 years, things are looking bad. From 1995 to now, investors using a 70/30 stock bond mix, rebalanced monthly and adjusted for inflation, have seen a CAGR of only 3.89%. Add to that the debt loads that most people have, and it makes sense that the personal savings rate has shot higher and from all estimates looks to be going higher still. (click on chart to enlarge)
Personal Savings Rate
So the question remains where has all the money gone? Looking at the WSBASE which defined by the St Louis Fed as the sum of currency in circulation, reserve balances with the Federal Reserve Banks, and service-related adjustments to compensate for float-it is obvious that overall money supply has absolutely exploded to the upside. (click on chart to enlarge)
So where has all of this money gone if not into the general economy? In a relationship first pointed out by Andy Kessler, the WSBASE has tracked tradeable assets like the SP500 and corporate bonds since the March bottom. If you look at the two charts below you can see that movement in the WSBASE has led the SP500 and Dow Jones Corporate Bond Index by about a month. (click on charts to enlarge)
SP500 and WSBASE
DJCB and WSBASE
When no one else wanted to own assets the Fed stepped in and became the buyer of corporate assets and has been the fuel that has driven this market higher. In a vacuum this is not a bad thing, but we are not in a vacuum. With the government putting all of the money into tradeable assets and not into the real economy, we end up with a market that could go down in flames at any moment. What happens if the Fed backs away and stops buying? If they stop buying, we run the risk of everything falling again and taking us right back to where we were.
The Fed in their infinite wisdom and bubble loving culture, continues to trade one bubble for another. This time however, it appears as thought the bubble has not only been engineered by the Fed, but they have been the driving force behind it all. As opposed to the housing bubble–where the Fed lowered rates and left them low but allowed people to build the bubble with their stupid home buying–this time the Fed lowered the rates, borrowed the money, and is spending the money. Unfortunately for us when the bubble pops “the money” is really our money, and we come out on the losing end….again.
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Title: Give Me Fuel Give Me Fire