In the past two weeks, one of the curious development in monetary aggregates, in addition to a spike in the Adjusted Monetary Base (discussed previously here), was the $88.7 billion surge in the M2 for the week ended July 4, the third largest jump in the broadest tracked monetary aggregate in history. Some have speculated that this number may be indicative that the money multiplier has once again started working as bank reserves after 2 long years, finally start making their way into the broader market. Unfortunately as Stone McCarthy explains this is not the case at all (sorry Fed: QE is still a failure) but merely has to do with the repeal of Regulation Q (explained here) which has resulted in a surge in small tie deposits inclusive of money market deposit accounts, which have jumped by $110 billion in the past two weeks, coupled with an accelerating shift of dollar deposits back to banks domiciled in the US. In other words: regulation explains the entire move. There is, however, a kicker, and it goes to another indicator of "economic growth" - the leading economic index, which is actually driven by M2. This means that the fake surge in the M2, will result in an all too real jump in the LEI, which in turn will push the market higher as vacuum tubes interpret the data as positive for the economy as opposed to merely driven by a regulatory forced shift of money from Pile A to Pile B. Expect stocks to surge once the next LEI reading is announced as a result.
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