What about M1 and M2?

by Shelby Moore, January 27, 2008

Most of us analysts correctly predicted that the US Fed would accelerate the growth of M3, in response to a deflating credit bubble. We correctly predicted that gold and silver would benefit. In my current opinion, we were too bullish on mining stocks near-term, because we ignored the definitions of M1 and M2. The following chart tells the story:

Speculation in all things in America has been declining since mid-2006, because M1 has been declining since mid-2006 bounce, both on it's own and even more so if relative to accelerating M3 (divide M1 & M2 by M3 in your mind to get plunging M1 and M2 curves).

Understand from the following definitions of M1, M2, and M3, that Americans for the most part only speculate with M1 and margin credit (with M1 needed to service margin speculation), in large part Americans invest for perceived "safety", the portion of M2 not in M1, and of course Americans have no accounts with access to the portion of M3 not in M2:


Although the US and EU central banks are providing increased liquidity, it is mostly ending up in M3, not in M2 or M1. The fact of many defaults and writedowns is indicative of a deflation of M2 and M1 relative to the long-term buying power of the dollar (long-term buying power driven by M3). So we have a deflation of actual spendable/investable value, simultaneous with an accelerating dilution of the value of the dollar via M3. In short, the government must be the borrower for the people and dole it out via stimulus and government spending, and the largest Fed member banks (the owners of the Fed) are being given liquidity to buy up the distressed assets in the economy for pennies on the dollar. The US government's TBill rates are declining as Fed cuts rates, while Libor and consumer credit rates go higher because private enterprise has declining real M1 and M2. I had described in the past this mechanism of how the masses use of fiat insures an ever increasing socialism, where financial power becomes concentrated:


Most of the domestic US economy (M1 and M2) is being deflated. And we are only at the tip of the iceberg of the deflation of the $600 trillion in credit derivatives.

Boomers have (in their ignorance of M3 dilution and real inflation rates) moved their M2 to perceived "safety" of fixed interest (and to a small extent precious metals):


Because the total value of the precious metals markets are so small relative to the bond markets, it only takes a very miniscule percentage of the M2 moving to true safety, to get the gold and silver price action over the past several months. This is nothing compared to what we will see in gold and silver ongoing, as the public slowly awakens from their ignorance. We are only at the tip of the iceberg.

To get an outlook for mining stocks, I first note that the odds of a small decrease in the rate of growth for the world economy is very probable for 2008. Gary North explains this well, although I think he is a bit too pessimistic on globalization long-term for reasons I will explain:


The declining real rates (even if only accessible to the government and large Fed member banks) means a movement of capital to emerging markets where real returns are still possible:


However, I am pondering that this dollar-carry trade effect will be on a lag, with the near-term 2008 result to be a slight global slowdown-- more severe in the USA. Maund pointed out that gold and silver also become more attractive with declining real interest rates:


Given the relative sizes of the total value of the gold and silver markets, versus the total GDP of emerging nations, I don't have to tell you which has more leverage to declining real interest rates and the awakening from ignorance of the masses as their buying power dries up. Metaphorically, globalization and emerging markets are already more than a sapling oak tree compared to the acorn of the silver market.

So I think this is definitely not the time to buy base metal juniors which have forward p/e ratios which are not that much better than precious metal juniors. Given I am the programmer of Miningpedia.com, I have access to data on 700+ juniors, and I have not found any base metal junior with a lower forward p/e of about 1-- meaning one year's forward production will equal the current fully diluted market cap. Whereas, there are a few precious metal juniors lised at the top of Miningpedia with forward p/e of less than 2.

Due to the money aggregates realities I explained, I see gold and silver continuing to rocket up in 2008. I don't want to project prices, because the situation is an ongoing firecracker that could fathomably send gold north of $1500 and silver north of $30. No one knows, but prices are going up.

Thus at some point, the producing gold and silver miners will start to spend their excess cash flow hoards to acquire near-term gold and silver producers that are extremely undervalued. I think they will buying these for cheap and fast expansion of their production. This will re-ignite the speculation into precious metal juniors. Mainstream investors of major gold producers will take note that their company just bought a junior that they could have bought prior, and greed will return to the precious metals junior market. With base metal juniors, the outlook is more murky for the reasons I enumerated above, so I think "safefy" mentality will override greed for some time.

Kind Regards, Shelby Moore


Comments by Jason Hommel

I feel that the base metal explorers, developers, and miners, are bottomed out, and that now is not the time to sell, but rather, buy. But that's what makes a market, and if even the programmer for miningpedia is feeling a bit cautious about the base metal stocks especially given their low forward P/E ratios, I take that as a confirmation about how bad sentiment is in our sector at the moment, which, again, is a sign of a bottom. Thank you Shelby for the commentary!

I think I'm also more bullish on the continued growth of the global economy which will continue to demand resources. The natural resource boom will, in my opinion, last more than 20 years, and we are still at the beginning stages.

As an example, I just read in the "Money and Markets" letter by Sean Brodrick about a new car in India that will sell for about $2500, the Tata Nano, which seats 4 people, has a 33 horsepower engine, and gets 61 miles per gallon.

The Nano car will be made by Tata Motors, a $7 billion company that trades on the NYSE, TTM. I decided not to invest in this company, as there are also two other very cheap cars also being planned by competitors. "Bajaj Auto and Mahindra-Renault have plans to launch cars in this price range.[8] "

India's current most popular car is the Maruti Alto, which sells for about $6850 .

The Nano, or other cars, seem poised to dramatically increase travel among the people in India, and reminds me of what Daniel, the Prophet, wrote:

Daniel 12:4 “But you, Daniel, shut up the words, and seal the book until the time of the end; many shall run to and fro, and knowledge shall increase.”

Speaking of Travel, I hope some of you in or near California can attend my Fundraising Dinner this Friday for my brother Theodore Terbolizard, who is running as a "Ron Paul" Republican for an open seat in the 4th District in California.


    Jason Hommel

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