Money of Zero Maturity (MZM) paints an interesting picture

Mind unemployed is mind un-enjoyed.
Christian Nevell Bovee,1820-1904, American Author, Lawyer

MZM stands for money of Zero maturity. It is a measurement of the total amount of money that is easily accessible for one to use immediately. MZM measures all the money held in hard currency, checking accounts, savings accounts and money market accounts.

Generally speaking MZM is becoming the more preferred measure of money supply because it provides a better representation of the money readily available for spending and consumption. The first chart illustrates the absolute liquid amount of money in the system.

This chart illustrates just how much money the Federal Reserve has been pumping into the system to stimulate the economy. In contrast, the Feds did not pump much money into the system during the recession of 80’s and perhaps this was a smart move for it enabled the system to heal. They pumped money in the 2001 recession and have gone ballistic during the current great recession.

The above chart shows the year over year rate of change, and interestingly it is declining. Thus even though the Feds left interest rates unchanged it appears, they are stealthily sucking cash out of the system. After growing at an annual rate of roughly 4.5% in 2009, it is now contracting and falling at a rate of 2%.

The era of easy money appears to be coming to an end and perhaps the markets are sensing this: the increased volatility maybe a result of traders reacting to the withdrawal of cash from the system. The chart suggests there is less money for traders (hedge funds, etc) to borrow and if there is less money to borrow it suggests that brokers will soon start charging higher rates.

The market now has to deal with the fact that money could be becoming more expensive to borrow, the economy is stating to sputter, the housing sector is falling apart again, unemployment remains at lofty levels, states are facing huge budget deficits, the potential fall out from the BP oil spill (the derivative part of this could be even worse then Lehman Brothers), etc. Markets hate uncertainty and they certainly have a lot to be uncertain about right now.

Conclusion

No one indicator or tool can predict what the markets will or will not do, however, a confluence of indicators usually provides a very accurate picture in terms of market direction. When we couple MZM with the fact that the Dow has put in 37 new highs on unusually low volume, that in general the Dow sells off on higher volume, housing sector is in still in trouble, unemployment is high, consumer sentiment is dropping, that the majority of the states are experiencing huge budget deficits, etc., the outlook going forward does not look too bright.

We have stated several times over the past few months that the second part of this rally appeared to be suspect and advised traders to use very strong rallies to short the markets. It now appears for all intents and purposes that the Dow might have peaked in April 2010 and that all subsequent rallies will most likely lead to lower highs.

We have stated several times over the past few months that the second part of this rally appeared to be suspect and advised traders to use very strong rallies to short the markets. It now appears for all intents and purposes that the Dow might have peaked in April 2010 and that all subsequent rallies will most likely lead to lower highs.

Traders willing to take on a bit of risk can use strong rallies to open up short positions via put options on some of the big name stocks (JPM, CAT, BAC, WFT, etc.) and or short via ETF’s such as DOG, SSG, SKF, QID, etc. Traders seeking higher leverage can use ETF’s such as FAZ; super leveraged ETF’s should not be held for long periods of time as one can actually lose money on them, even if the market’s trend lower. In order to make money on these funds the markets need to move down rapidly in a short period of time. We will be writing a follow up article on the potential dangers of using super leveraged ETF’s. If used wisely and for short term moves one can still lock in rather large gains using these ETF’s.

Uncertainty and mystery are energies of life. Don’t let them scare you unduly, for they keep boredom at bay and spark creativity.
R. I. Fitzhenry

Disclosure; we have positions in SSG and SKF

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