Downunder Daily : If Money Makes the World Go Round...
Some investors live and die by money supply. I'm not one of them.
But, coincidentally or not, bad things tend to happen when money supply measures
are tight. So it's also worth noting that some money supply measures are now
extremely tight. With the financial system at the centre of economic problems,
tight money supply may be a symptom of distress - or it may be a signal of worse
to come.
I'm bearish enough without relying on money supply, an indicator I don't usually put a lot of weight on. But I've put together a few charts to show how money supply has historically correlated with financial variables. If you like this stuff, it may be of interest.
Exhibit 1 shows OECD money supply growth, and 'excess' money supply growth (whether money supply is growing above or below nominal GDP). Money supply growing less than nominal GDP has coincided with inauspicious market periods: 1990, 1997, 2000 (1995 may possibly have been an aberration due to structural change that lowered US money supply). Nominal money supply has been below GDP since early 2007, and is falling farther behind at the margin.
One reason that money supply may matter is that much of what's in money supply is deposits, which provide funding for lenders. Historically, the connection between money supply and credit (the assets on lenders' balance sheets) has been loose. That link can be loose due to use of wholesale funding and securitization. But both those areas are under stress - which means that we may see credit and money supply measures become more correlated. Given the gap between measured credit and money supply (Exhibit 2 shows the US situation), tight money could lead to sharply lower credit provision.
Exhibits 3-6 show the correlation between OECD excess money supply and several market variables.
Exhibit 3 shows the correlation with the yield curve (Lehman's 1-3 year yield relative to the 10+ year yield). Tight money supply is usually associated with flat curves.
Exhibit 4 shows the correlation with the relative performance of equities versus Treasury bonds. Risky assets out-perform when excess money supply growth is strong, and under-perform when it contracts. The message now is for continued under-performance by risky assets.
Likewise, Exhibit 5 shows the performance of emerging market equities. Not a perfect link, but again money supply is now sending a warning.
A 'proper' monetarist would show money supply and inflation, but Exhibit 6 shows the correlation with a narrow price measure: commodity prices (with excess money leading by 12 months). This suggests significant further downside.
Of course, if you believe that inflation is always a monetary phenomenon, the deceleration in OECD money supply is a reason to think that inflation will not be a problem, at least on a cyclical basis.
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END OF RESEARCH ABSTRACT
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(as of July 31, 2008)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight to hold and Underweight to sell recommendations, respectively.
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Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
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Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.
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I'm bearish enough without relying on money supply, an indicator I don't usually put a lot of weight on. But I've put together a few charts to show how money supply has historically correlated with financial variables. If you like this stuff, it may be of interest.
Exhibit 1 shows OECD money supply growth, and 'excess' money supply growth (whether money supply is growing above or below nominal GDP). Money supply growing less than nominal GDP has coincided with inauspicious market periods: 1990, 1997, 2000 (1995 may possibly have been an aberration due to structural change that lowered US money supply). Nominal money supply has been below GDP since early 2007, and is falling farther behind at the margin.
One reason that money supply may matter is that much of what's in money supply is deposits, which provide funding for lenders. Historically, the connection between money supply and credit (the assets on lenders' balance sheets) has been loose. That link can be loose due to use of wholesale funding and securitization. But both those areas are under stress - which means that we may see credit and money supply measures become more correlated. Given the gap between measured credit and money supply (Exhibit 2 shows the US situation), tight money could lead to sharply lower credit provision.
Exhibits 3-6 show the correlation between OECD excess money supply and several market variables.
Exhibit 3 shows the correlation with the yield curve (Lehman's 1-3 year yield relative to the 10+ year yield). Tight money supply is usually associated with flat curves.
Exhibit 4 shows the correlation with the relative performance of equities versus Treasury bonds. Risky assets out-perform when excess money supply growth is strong, and under-perform when it contracts. The message now is for continued under-performance by risky assets.
Likewise, Exhibit 5 shows the performance of emerging market equities. Not a perfect link, but again money supply is now sending a warning.
A 'proper' monetarist would show money supply and inflation, but Exhibit 6 shows the correlation with a narrow price measure: commodity prices (with excess money leading by 12 months). This suggests significant further downside.
Of course, if you believe that inflation is always a monetary phenomenon, the deceleration in OECD money supply is a reason to think that inflation will not be a problem, at least on a cyclical basis.
Back to Top
END OF RESEARCH ABSTRACT
Disclosure Section
The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited and their affiliates (collectively, "Morgan Stanley").
For important disclosures, stock price charts and rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Equity Research Management), New York, NY, 10036 USA.
Analyst Certification
The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Gerard Minack.
Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.
Global Research Conflict Management Policy
Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies.
Important US Regulatory Disclosures on Subject Companies
The research analysts, strategists, or research associates principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.
STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight and Underweight are not the equivalent of Buy, Hold and Sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.
Global Stock Ratings Distribution
(as of July 31, 2008)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight to hold and Underweight to sell recommendations, respectively.
| Coverage Universe |
Investment Banking Clients (IBC) | ||||
| Stock Rating Category | Count | % of Total | Count |
% of Total IBC | % of Rating Category |
| Overweight/Buy | 909 | 42% | 290 | 45% | 32% |
| Equal-weight/Hold | 913 | 42% | 270 | 42% |
30% |
| Underweight/Sell | 348 | 16% | 83 | 13% | 24% |
| Total | 2,170 |
| 643 | ||
Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.
Analyst Stock Ratings
Overweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months.
Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months.
Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, on a risk-adjusted basis, over the next 12-18 months.
More volatile (V) - We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst's view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner.
Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below.
In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.
Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.
.
Other Important Disclosures
Morgan Stanley produces a research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in this or other research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com.
For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks.
Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities/instruments discussed in Morgan Stanley Research may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them.
Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities or derivatives of securities of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities or derivatives of securities of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons
Morgan Stanley and its affiliate companies do business that relates to companies/instruments covered in Morgan Stanley Research, including market making and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis.
With the exception of information regarding Morgan Stanley, research prepared by Morgan Stanley Research personnel are based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.
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The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. Unless otherwise stated, the cover page provides the closing price on the primary exchange for the subject company's securities/instruments.
To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. Information on any securities/instruments issued by a company owned by the government of or incorporated in the PRC and listed in on the Stock Exchange of Hong Kong ("SEHK"), namely the H-shares, including the component company stocks of the Stock Exchange of Hong Kong ("SEHK")'s Hang Seng China Enterprise Index; or any securities/instruments issued by a company that is 30% or more directly- or indirectly-owned by the government of or a company incorporated in the PRC and traded on an exchange in Hong Kong or Macau, namely SEHK's Red Chip shares, including the component company of the SEHK's China-affiliated Corp Index is distributed only to Taiwan Securities Investment Trust Enterprises ("SITE"). The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments.
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