Money Supply is About to Explode, Time to Buy Commodities

Federal Reserve watchers tend to pick apart every word Janet Yellen says these days. Comparisons are made between the exact wording of the previous Federal Open Market Committee (FOMC) statement to that of the present one to try and get an angle on what the Fed Chairwoman is going to do next. If she sets even the vaguest timeframe for raising interest rates or sets even the most nebulous employment target for tightening monetary policy or restarting quantitative easing, the markets react violently any which way.

But something is happening now that isn’t written in or even hinted at in any of the FOMC statements since QE1 began in 2008. That is, excess reserves are starting to come down and flow into the economy faster than ever before.

Excess reserves are inert money stored entirely outside the banking system in excess of reserve requirements set by the Fed for demand deposits and time deposits held at financial institutions throughout the country. They sit there rather than circulate because banks would rather earn 25 basis points from the Fed on those excess reserves rather than risk loaning them out.

The faster these reserves flow out of excess and into the economy, the quicker the money supply expands. Excess reserves hit a peak on August 6 this year of $2.71 trillion, the most in all of history. They are now down to $2.48 trillion as of November 12. That is an equivalent of a $229 billion fall in excess reserves over 3 months, which translates to a $917B annual rate.

But what does that mean for the money supply? $917B coming out of excess reserves can in theory be ultimately loaned out at a factor of 10, not immediately so, but asymptotically given 10% reserve requirements. We can take a look at the last two epochs of declining excess reserves to see generally how a fall in these reserves affects the money supply over time.

Excess Reserves

As you can see from the chart above (updated by the St. Louis Fed only through September), the last two times excess reserves trended downward was between February and November 2010, and from July 2011 to September 2012, the respective hiatus periods between QE1 and 2, and QE2 and 3. From February to November 2010, excess reserves dropped $226B counting from February 24 until November 17. In that same timeframe, M2 went up $264B. This indicates that while the money was soaked up by the first tier of the banking system in order to satisfy reserve requirements, not much of it was loaned out down the financial food chain, given that the money supply increased on nearly a 1:1 ratio with the drop in excess reserves at the time. The rate at which they were falling was also only $282 billion per year.

However, something very different happened the next time excess reserves dropped temporarily after QE2 ended. In the 15-month time period between July 13, 2011 and October 3, 2012, these reserves dropped $263B, only a $210 billion annual rate. Despite the lower rate of fall in that timeframe between QE2 and QE3, money supply as measured by M2 on those dates increased a whopping $938B (all numbers taken from Federal Reserve Money Stock Measures), a factor of increase of 3.56 over the decrease in excess reserves. What that means is at that point, the reserves were starting to be loaned out through the economy.

Why the sudden increase of M2 to excess reserves to a factor of nearly 3.6 from the excess reserves drop of 2010 which only led to an increase of M2 on a 1:1 ratio with the drop? Because it takes time for banks to loan out high-powered Fed money using the 10% fractional reserve ratio. The more time goes by, the faster the ratio of reserves to money supply approaches the 10:1 maximum set by the Fed’s 10% fractional reserve requirement.

To give an idea of how long it takes for the 10:1 ratio to max out, the $226 billion drop in excess reserves that ended after QE1 by November 17, 2010, resulted in a 10:1 increase in M2 by February 10, 2014. The M2 money supply between those two periods increased by exactly $2.26 trillion, a tenfold increase over $226 billion that took just over three years to complete.

Now we come to what is happening now, during the most recent excess reserves drop since QE3 ended. First of all, it is notable that those reserves are dropping faster than ever before. As mentioned, from August 6, 2014 until the most recent data release of November 12, excess reserves have dropped $229 billion, or an annual rate of $917 billion, over 4x the rate from July 2011 to October 2012. Given that this drop only started three months ago, that $229 billion has yet to be loaned out extensively. So far, M2 has only increased by about the same since August.

However, if what we saw between July 2011 and October 2012 repeats itself, and at the current annual fall rate of $917B of excess reserves, M2 could increase by $3.3 trillion by next year. If we assume the same timeframe to reach the maximum 10:1 reserves to money supply ratio, we are talking about nearly a $10 trillion increase in the money supply by November 2018, or nearly double the current money supply in four years.

None of this takes into account possible increases in the rate of fall of excess reserves, but one thing is for sure. Excess reserves cannot stay in excess forever. They have to eventually enter the economy, and they are, with $2.48 trillion of them left to go. In a word, a torrent of dollars is making its way into the US banking system as we speak, regardless of the fact that QE3 is officially over.

With the dollar supply set to double in the next four years, the S&P (SPY) at all-time highs, the Nasdaq (QQQ) at 14-year highs and approaching all-time highs, the dollar index (UUP) approaching 10-year highs, and long term US Treasuries (TLT) within 8% of their highs, the place to be during this turbulent monetary storm will be in real assets at their lows rather than paper assets at their highs. The US oil fund (USO) is approaching its 2009 lows, gold (GLD) is down below $1200 an ounce, and commodities in general (DBC) are approaching their 2009 lows.

Commodities and other real assets cannot stay down for long once the money supply really starts to accelerate. If buy-low-sell-high is what investors must try to emulate, the time to buy commodities is now.

Advaxis-Logo – Nobel Financial Reiterates Buy Rating of Advaxis, Inc. Based on a Review of Recent Data Presentations and IND Submissions

November 24, 204 – New York, NY – Market Exclusive announces that Nobel Financial has reiterated a Buy rating of Advaxis, Inc. (Nasdaq: ADXS) with a 12-month target price of $12. The Buy rating is based on a review of recent data presentations and IND submissions.


According to the Nobel Financial Capital Markets report, “the biggest investment driver is the HPV/cervical cancer program that has completed Phase 2 trials and has completed an End of Phase 2 meeting with the FDA- Phase 3 plans ongoing.”


Advaxis is a clinical-stage biotechnology company developing multiple cancer immunotherapies based on its proprietary platform that is being investigated for redirecting the immune system to kill cancer.



About Market Exclusive

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Misad Shazi

Cannabis should be treated as an agricultural commodity, not a biotech investment

While the future of cannabusiness is certainly bright, one controversial yet crucial caveat must be made. Pot stocks should be treated as an agricultural commodity investment rather than as a biotech investment. This is not to say that cannabis cannot be used as a pharmaceutical. It certainly can. Rather it should not be invested in as one would invest in a pharmaceutical. Taking a biotech strategy with pot stocks is the wrong road to take.


While this may be difficult for some to accept, the reasoning is as follows. The current hot case under discussion in the world of pot stocks revolves around GW Pharmaceuticals (GWPH) and Insys (INSY), which are squaring off in a race to develop the first FDA approved cannabidiol compound. Cannabidiol, otherwise known as CBD, is a cannabinoid compound found naturally in some marijuana strains that has medicinal properties without the accompanied psychoactivity of THC. Both companies have received orphanstatus from the FDA, and both are going after rare indications Dravet and Lennox-Gestault syndromes, two forms of childhood epilepsy together totaling a 20,000 US patient population.


The buzz surrounding these two companies is understandable considering the astronomical movements in their share prices since 2013. Insys has increased by 528%, and GW 868% since its IPO in May 2013. The move in Insys is more reasonable considering the company rocketed into profitability with its revenues exploding to over $40M quarterly from just over $15M in all of 2012. As for GW, it seems to be all hype and projection, coupled with some excitement over the possibility of approval for Epidiolex, the company’s CBD candidate for which it was granted Orphan status. GW has never been profitable nor does it expect to be within the next decade as it continues to incur high drug development costs.


And herein lies the problem of seeing pot stocks as biotechs a la GW. The rise of Insys is fundamentally due to the success of Fentanyl, a synthetic opioid – not a cannabinoid – used to treat cancer pain. This is a drug that has succeeded and continues to succeed for the company, and is not easily reproducible like cannabinoid compounds. GW, however, is exclusively focused on cannabinoid products, its main product being Sativex, a sublingual cannabinoid spray that has never brought the company into profitability as of yet, and is only approved for MS spasticity.


For a number of reasons, it is unlikely that a company focused exclusively on cannabinoid pharmaceuticals will ever achieve profitability. Taking the broad view, the expenses involved in getting a drug FDA-approved are extreme, and each indication must be separately approved each time through the gauntlet. This strategy makes sense if a drug is both patentable and exclusive and a company is reasonably assured of its return on investment in the event of an FDA approval. With cannabinoids it’s not so simple, because while synthetic cannabinoids can be patented in principle, the practicality of a synthetic cannabinoid patent is very questionable. Patents are not much use when a patient can simply acquire the same natural cannabinoids in concentrated cannabis oil form or via smoking or otherwise ingesting, at much cheaper prices in most medical marijuana states, or recreational states like Colorado and Washington.


Take the case of GW’s Epidiolex for the Orphan epilepsy indications. The rationale behind developing any Orphan drug for a rare disease is the ability to charge exorbitant sums for it after approval in order to make up for the development costs. While some are trying to compare GW’s Epidiolex with Alexion’s (ALXN) $440K a year Soliris for a rare blood disorder or Vertex’s (VRTX) $300K a year Kalydeco for cystic fibrosis, attempting to sell synthetic CBD for anywhere near that amount sounds nothing less than ludicrous. The only way people are able to pay such wild sums for Orphan drugs is that insurance companies pay. They pay because these rare drugs are absolutely exclusive to the companies that manufacture them and cannot be obtained anywhere else by any means. However, there is no way insurance companies would hand over that kind of money when access to natural high-CBD cannabis strains are readily available, almost ubiquitous. One can even get CBD paste for free, legally, at sites like run by activist volunteers.


Patients and/or insurance companies paying a modest sum for the convenience of CBD in pill or spray form is one thing. But there is simply no way anyone will pay the fantastic sum necessary to recover the costs of Orphan drug development through the necessary bureaucratic pathways for readily available cannabinoids. With medical marijuana regulations being relaxed state by state and even recreational use being legalized slowly but surely, cannabinoid compounds will cease having any appeal as investible pharmaceuticals whose profits are normally obtained through real and tight-fisted exclusivity. Cannabinoids should instead be considered as agricultural commodities that happen to have medicinal uses.


Let’s not forget that Marinol, the very first synthetic THC cannabinoid to be developed by AbbVie (ABBV) and approved in 1985, only peaked at sales of $100M in 2007 22 years after its approval before going generic, hardly anything close to blockbuster.


That being said, the money to be made in pot stocks will be in the companies selling it as a mass-produced commodity rather than as an ultrarare Orphan drug, as well as in the satellite companies serving that industry.


The Cannabis Security Option


It is too early to tell which companies will succeed at growing and supplying cannabis on a mass agricultural scale, and excitement in the early stages is often misplaced, as happened with Growlife (PHOT) back in March. The litany of legal barriers getting in the way of entrepreneurs freely supplying the market, coupled with the notoriety of marijuana that generates emotional excitement, can be a dangerous combination for investment purposes.


Nevertheless, restrictions on the market are being cleared very slowly but surely, and while these restrictions still exist mainly on the Federal level but also on the State level as well, it will be difficult for any publicly traded company to outperform. Public companies need to strictly comply with statutory authority or else risk being delisted. Such is the nature of going public. However, there is one way to use the rocky legal landscape to your advantage, and that is by way of cannabis security companies helping all manner of cannabis producers through the regulatory minefield and the abnormally high security requirements involved.


Nearly all pot stocks except GW are microcaps, as are the security companies serving the cannabis industry. Therefore, in order to spread out risk, it makes more sense to invest in the security companies that serve both the public and privately held companies all the way down to the smallest cannabis coffee shop retailer in Colorado.


The number one public company specializing in cannabis security by market cap is Blue Line Protection Group (BLPG). Blue Line is just starting out, but is already operating in 3 states including Colorado where it has 52 clients, Washington, and Nevada. The grey nature of the cannabis industry necessitates a cash-only environment and virtually no banking services, as credit card companies and banks are regulated by the Federal government according to which cannabis is illegal, through the interstate commerce clause of the Constitution. Meaning, credit card companies and banks cannot legally service marijuana dispensaries, necessitating a very high level of security with cash filled safes, armored transports, and tax compliance. As long as the Feds consider cannabis a schedule I drug, the all-cash environment of the business will persist and companies like Blue Line will be in demand.


On the banking front, Blue Line has developed a proprietary method of regulatory compliance for its medical marijuana clients in Nevada through the First Security Bank of Nevada, which could open the door to Blue Line being the exclusive middleman facilitating much-needed banking services to the marijuana industry.


Blue Line’s publicly traded competitor is a nanocap called DirectView Holdings (DIRV), which has recently targeted the cannabis sector but is materially behind Blue Line in terms of a client base.


The further marijuana expands as a commodity, the higher the dissonance will be between Federal and State law on the issue, and the higher that dissonance, the more necessary companies like Blue Line will become. While it is difficult to know which of the pot stocks will come out on top in the end, almost all cannabusiness will need enhanced security.


Given that GW is barking up the wrong tree treating cannabis as a pharmaceutical and the stock is severely overbought, and given that almost all others in the pot stocks sector are high risk development stage companies, the nature of Blue Line’s business plan applying to all cannabusiness spreads the risk out much more evenly than any one pot stock.



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