Aug 12, 2011
About a month ago we penned a post to refute some misconceptions about a material spike in M2, which led such luminaries as Andy Lees and Art Cashin to get confused that this may be an indication that either the government was forcing money into the population with the end of QE2, or that this was actually a confirmation that QE was working. It was neither. As we explained it was a combination of the Treasury general account on the Fed’s balance sheet soaring (from a balance sheet standpoint), and due to the repeal of Regulation Q (from an actual flow perspective), that led to the move. Sure enough, in the 3 weeks following, M2 dropped to very much unremarkable weekly change levels. Until the week of August 1, or the week in which the specter of a US bankruptcy came to life, and in which the market took its first notable leg down. In that week, the broadest publicly released monetary aggregated – the M2 – soared to an all time high $9.5 trillion, or a $159 billion weekly change. This make it the third largest weekly spike in history After the Lehman bankruptcy and September 11. Then again, this data includes the traditional seasonal fudge adjustments by the Fed. A look at the non-seasonally adjusted time series indicates that last week’s spike in M2, primarily in demand and savings deposits at commercial banks, was the highest on record! Sure enough, the bulk of this cash ended up in America’s largest depository institution, Bank of America. And yes, this was in the week prior to the massive market rout. Yet as the charts show, following every massive inflow of money into demand deposits and savings accounts, it goes right back out the next week. Which is why we wonder: is Bank of America, so flush with cash a week ago courtesy of the debt ceiling fiasco, suddenly cashless, as investors follow up with the kneejerk withdrawal of capital from the depositor bank due to worries of bank runs and other less quantifiable reasons? Does this explain why, in addition to the fact that the bank’s sale of its China Construction Bank stake is not going well, BAC may soon be forced to enter the capital markets to raise equity capital, just as we have been predicting all along?
First, observe the three highest spikes in seasonally adjusted M2 in history:
The same chart with a focus on more recent data, and broken down by core M2 components:
Although this is the kicker: a chart showing the non-seasonally adjusted weekly change in M2, to eliminate any adjustment noise. The data speaks for itself (and if it doesn’t, at $177.5 billion, the weekly spike in NSA M2 is the largest ever).
What are the implications: well for one, we know this week’s move had nothing to do with the Treasury’s cash balance or with Regulation Q: those have since normalized. What the data does show is that in the week ended August 1, everyone and their dog took their money and put it away in non-interest bearing accounts. Why they would do so is not precisely clear. And that will be revealed next week when the inevitable outflow from M2 reappears. Whether this occurs in real life due to follow on concerns of a bank run in adverse conditions, or simply due to a need to access the deposited cash is unknown. And irrelevant. What it does, however mean, is that in one week, assuming BAC got a sizable chunk of this deposit flow (and let’s further assume about $30 billion or 20%, roughly its size in the depositor TBTF pyramid), that Moynihan had absolutely no need to raise capital as early as the last week of July due to the surge in cash coming in via the deposit window.
What, however comes next? As is all too obvious above, every action of a near record surge of capital into deposit and savings accounts is almost universally met with an equal and opposite reaction. This is double true when bank run risk starts to be envisioned, like happened with Bank of America last week.
Which means only one thing: BAC may well have seen a deposit capital outflow of $30 billion in the current week… and then some. Needless to say, $30 billion is not an amount the bank can live without, and should this be confirmed, expect to see the bank trading at a modest fraction of its current price.
We hope to bring you the answer next Thursday, when the latest H.6 is released. In the meantime, is Bank of America’s latest logo: “generate a crash to feed us some cash…” And what happens if BAC’s stock has still not recovered by the time the crash is over?
Source: Federal Reserve H6 statement
This article was posted: Friday, August 12, 2011 at 3:18 am