In our writings we use terms that are often unfamiliar to many but which are important in understanding what we are saying and how this should be interpreted. Many of these terms are included in headings of charts that explain key predictive relationships.
Key terms include the following:
AMS. This is Adjusted Money Supply and is our proprietary definition and calculation of the money supply of an economy. When we use the term “money supply” we are meaning AMS. This includes the monetisation of the national debt and thus embraces the monetary impact of fiscal policy.
Excess Money Supply (aka Liquidity). This is the excess of money supply growth over money demand growth. Money demand growth is nominal output growth.
Inflation Leading Index (CPI or PPI). This leading index is used to predict the course of annual CPI or PPI inflation for a country or bloc. It is the money supply growth rate of the country and combined with those of its main import trading partners as these will impact the prices of domestic goods.
AMS Momentum Index. This is used in our prediction of PMIs for a country or bloc. It consists of the standardised money supply growth rate of the country and also its major trading partners.
Real AMS Index. We use this index in forecasting real variables such industrial production growth and real GDP growth. This is mostly domestic AMS growth but on some occasions may also include a smaller weighting of foreign monetary conditions (with logic as per the above). This index is also adjusted for inflation (CPI).
AMS Differential Leading Index. This is used in forecasting movements in exchange rates. It is the excess money supply growth differential between two countries. If the excess money supply of one country is rising faster than that of another country then the former country’s currency momentum should weaken. This is akin to PPP theory but driven by relative excess money supply growth rates.
Individual Leading Indices. These are used for individual markets e.g. the Gold Leading Index. This index includes the money supply growth rates of all of the major countries associated with that market either from a demand or supply perspective.
Liquidity. As described above. This is used for forecasting yield curve changes as well as the annual returns to stock indices.
All the indices above (except the Inflation Leading Index) are standardised against their moving average and standard deviations, typically over the past couple of years. The logic is that the relative rate of money creation determines the strength of forthcoming movements. For example, if China’s annual AMS growth rate is currently at 20% this might sound very bullish but if in the previous three years the average growth rate has been 40% then the current rate is bearish (at least in terms of the bubble activities which emerged and adapted to a 40% growth rate).