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A Drunk Man In The Snow: The Random Walk Of Interest Rates

Mar. 04, 2021 8:00 AM ET1 Comment
Scott Minerd profile picture
Scott Minerd


  • The increase in leverage and decrease in interest coverage in 2020 was almost entirely driven by the decline in earnings.
  • Although we are not avoiding any sector entirely, including transportation and airlines, there are many opportunities in the middle of the stack of fundamentals and valuations without extending risk significantly.
  • History shows there is more room for credit spreads to compress against Treasuries, and that spreads can persist at low levels for several years.

In the more obscure corner of the money market and banking statistics is the arcane data around bank reserves and money supply. One of the most important metrics in monetary theory is the money supply gauge referred to as M2. In its simplest definition, M2 represents the amount of money in currency, demand deposits, and checking accounts in the economy (the more narrow aggregate called M1) plus “near cash”—retail money market fund balances, savings deposits and small-denomination time deposits.

Now to the even more arcane world of the Federal Reserve’s (Fed) balance sheet, the liabilities of which include paper money, bank reserves and the U.S. Treasury’s general account.

The foregone conclusion today is that long-term rates are on an uninterrupted trajectory higher. History tells us something different.

As a hangover from the prior administration’s cash management, the Treasury currently holds about $1.6 trillion in its general account at the Fed, an amount far in excess of its pre-COVID cash balance target of roughly $400 billion. The Biden administration has decided to use more than $1 trillion of this excess cash to pay for stimulus rather than borrow new money. This is causing M2 money supply growth to soar at a rate of 25 percent over the past 12 months, more than five times the average annual growth rate going back to 1960.

The spike in M2 money supply can be explained by the massive fiscal stimulus deployed by the federal government, which was financed in large part by the creation of new money by the Federal Reserve. This stimulus has facilitated a surge in cash holdings throughout the economy from increased precautionary savings by households, businesses, and state and local governments.

As the stimulus checks go out, that cash moves into private sector checking accounts, causing M2 to balloon. Some of the

This article was written by

Scott Minerd profile picture
As Chairman of Guggenheim Investments and Global Chief Investment Officer, Mr. Minerd guides the Firm’s investment strategies and leads its research on global macroeconomics. Prior to joining Guggenheim Partners, Mr. Minerd was a managing director at Morgan Stanley and Credit Suisse. He is involved in leadership roles at a number of civically-minded organizations, including Cedars-Sinai Medical Center and Strategic Partners Among Nations.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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