How to Form a Long-Term Trading Outlook (Part 3)

11/19/2008 12:01 am EST


Timothy Morge


I don’t trust government-produced economic numbers. I have no interest in them. The US government shows inflation running at roughly five percent on an annualized basis right now. While at the University of Chicago’s Graduate School of Business, I was privileged to study under, and then call Nobel Prize winner Dr. Milton Friedman, one of my mentors. Dr Friedman was the “founder” of the “Chicago School” of economics, a form of economic philosophy that stressed the advantages of the marketplace and the disadvantages of government intervention and regulation. He taught that a steady expansion of the money supply was the only wise governmental policy. Steady money supply growth means a stable rate of sustainable economic growth, with a low rate of inflation. In a nutshell, monetarists like Dr. Friedman (and myself) believe that large increases in the money supply lead directly to large increases in inflation experienced by the individuals in any economy.

Before the recent bailout madness, inflation, as measured by the growth of the widest form of the money supply, M3, was running at roughly 17-20 percent in the US on an annualized basis. And given the increases I have seen week in and week out at the grocery checkout, the soaring price of all forms of energy, and the double-digit increases in my health care and health insurance bills each year, I think this number has been just about right. Three years ago, my grocery bill for our family of four was always under $150 a week—now we celebrate if we leave the same grocery store with a weekly bill under $300!

“Bailout mania” has hit our lawmakers. Some of you may feel the bailout package was a good thing, others may think its more government madness. Here’s a very scary statistic: Since the bailout bill was announced, the US money supply has surged an additional 38 percent on an annualized basis! This will translate directly into a tremendous amount of inflation. There are plenty of forecasters telling people the worst is over…The sad truth is that we haven’t even begun to feel the pain yet. We are headed for massive unemployment and a significant dose of inflation, unless the recession turns into such a deep depression that the country’s demand for goods literally collapses—heaven help us all if that is the outcome of this mess.

Let’s take a look at the recent run away growth of the money supply, courtesy of a fascinating web site,


I keep my own version of M3 on hand-drawn charts, but like all my hand-drawn charts, I keep them private and do not publish them. At some point in 2006, with M3 growing at over nine percent (even after the Fed had massaged it lower through their meaningless seasonal adjustment process), the Federal Reserve decided to abolish the measure and literally forbid the regional Federal Reserve banks from publishing the seasonally adjusted components of M3, as well as the actual M3 number—probably because the government was currently putting out CPI and PPI numbers that showed inflation was in the two or three percent range. Luckily, once you know how M3 is constructed, it’s relatively easy to create each month’s M3 number yourself, unless you also want to use the government’s seasonal adjustment factors—those numbers are not published, nor are they available to the public. I personally do not work with seasonally adjusted indicators—I prefer the raw number series.

More in Part 4 tomorrow…

I wish you all good trading!


Timothy Morge

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