Minyan Mailbag: How To Calculate M3
M3 tracks what the big boys are doing with the money.
Great stuff on the site, I always read your commentary with great interest. I have two questions and I hope you can address the community or at least me for that matter. The first is how do you calculate M3, now that it is not reported? For the last several years I have been watching M3 with great interest, because I believe it was the root cause the stock market bubble. If memory serves me correctly, the year over year growth in the late 90's was over 12% in M3 and with 3 to 4 GNP the money quickly found itself into the market.
My second question is more of a concept on how you structure your hedge fund between sectors and what rules you apply. For example do you put 10% into the Oil sector, 10% into technology or do you even have sector limits. I manage some family money and am doing very well this year but would be interested in your sector allocation thoughts and how you hedge for any downside that might hit the markets.
M3 includes all of M2 (which the Fed publishes and which includes M1) plus large-denomination ($100,000 or more) time deposits, balances in institutional money funds, repurchase liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the United Kingdom and Canada.
In other words, M3 tracks what the big boys are doing with the money. This includes US dollars held in banks in Canada and the UK (called Eurodollars) not to be confused with the Euro.
But note: what cannot be 'reverse engineered' through other, still available reports are 1) repurchase liabilities (repos) issued by depository institutions and 2) Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the United Kingdom and Canada.
So we can get a good idea about M3, but we can't get the last few components. These last few components can be very important however given the close "cooperation" between the world's central banks in offering and coordinating liquidity. For example, under the first factor, the Fed can do a repo with a U.S. bank. This we see and measure. But the U.S. bank could then take that credit and do five times that with a broker dealer and that we cannot measure.
So we can despite the greatest efforts significantly under-estimate M3. This is not increased transparency and in fact the Fed has told us to mind our own business.
As far as my fund goes, we have no hard allocation between sectors. We look for mis-priced volatility in all sectors.
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