Gekko - monetary policy - Column

National Review, June 3, 1996 by John Dizard

I've just seen a movie called The Craft in which teenaged California girls pay a terrible price for casting evil spells. I couldn't help thinking of portfolio managers, many of whom are educated to about the level of teenaged California girls, and who may also pay a terrible price as their wishes are answered. In The Craft, the girls wish ill on their stepparents and high-school classmates, who lose their lives, or, worse, their hair and popularity through the magic of witchcraft. In The Economy, the portfolio managers wish their fellow citizens would lose their jobs through the magic of monetary policy. The girls want money, dates, and beauty, the managers want year-end bonuses.

Part of the problem the Craft girls have is that their understanding of witchcraft is pretty superficial. The same could be said about the managers and monetary policy. Back in the Seventies and early Eighties, we used to await the weekly M-1 or M-2 numbers with awe and foreboding. My then-wife, who traded in the Eurobond market at the time, actually went out of her way to get invitations to eat in the Fed cafeteria. She came back physically ill from the food and the contemplation of some of the Fedlings' table manners, but the chatter about money supply was worth it.

In recent years, though, the Temple of Money Supply has gradually emptied, and the Number worshipped by the market has become the monthly non-farm payroll statistic. The market had noticed that the traditional M-1 and M-2 figures weren't really very good at predicting how the economy would perform. The problem, in part, was that rising interest rates, and the increasing ease with which money could be transferred from non-interest-bearing checking accounts to various types of interest-bearing accounts, severely disrupted the continuity of the statistical series. So nowadays, many a moneyperson has been up in the still, dark hours on the Thursdays before Non-Farm, looking into his soul and counting the cost of a long or short position. The fewer people employed, the better, an irony not unremarked on by working people and politicians.

Lately, though, there's been a revival of the old religion. The faithful ladies in the pews of the Money Supply Temple have been joined by an increasing number of young, well-educated speculators who have decided to follow MZM, which I believe will displace the non-farm-employment payroll number. MZM, or Money of Zero Maturity, has been put together by monetary economists from the shards of the M-1 and M-2 series. When you draw a graph of MZM as a time series, and shift it two years into the future, it has a very high correlation with the real growth of Gross Domestic Product. Like a better than 75 per cent correlation. You can do the same thing with the Fed Funds rate, by the way.

So, I hear you asking, what does time-shifted MZM tell us about our future? Say, the future just before the next elections? The answer is that growth follows the path of a wounded bird in the second half of the year. That will be a consequence of, inter alia, the Federal Reserve tightening that caused the 1994 bond crash. The effects start showing up now. But while the bird generally has an idea that something is wrong on a real-time basis, there is a significant lag before economic news, good or bad, is absorbed by the public. And since the semi-official Sunday-morning Washington talk-show hosts have decided that the economy is rapidly improving, the Dole campaign (such as it is) had better get on top of the issue: the Clinton slide that comes after the crunch.

Well before the election, though, there'll be another crisis to rock the political world, one just as predictable and just as unanticipated by those people. That is the grain shortfall.

You may recall that I started talking about this last year, back when wheat was selling for $4.43 a bushel. As I write this, July wheat just closed at $5.80 in Chicago, after falling 17 cents on an overly optimistic Department of Agriculture report.

I have found Tom Waldeck of Northwood Financial in Greenwich, Conn., to be far and away the best analyst of the grain markets. We talked over the USDA report and its suggestion that we -- meaning people who have to eat -- don't have too much to worry about.

''The impression you get from the Department of Agriculture is totally wrong,'' said Tom. ''The production numbers they are using are far too optimistic. For example, they are relying on a Canadian Wheat Board estimate of 29 million tonnes of production in their country that I know is not achievable because of weather.'' Crops are also being overestimated in the U.S., Eastern Europe, and the former Soviet Union. The real problem, Waldeck believes, is that production for this year is falling short at a faster rate than demand is declining because of higher prices.

Take corn. The corn harvest starts coming in at the end of September. The U.S. consumes and exports between 600 million and 700 million tonnes of corn a month. At the end of August last year, we had a low, but workable, reserve or ''carryover'' of 1.558 billion bushels of corn. At the end of this coming August, we will have a little over 300 million bushels, some of which is unavailable for us.