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Guest Post: As M2 Money Supply Rolls Over, The Stock Market Will Follow
Submitted by Charles Hugh Smith from Of Two Minds
As M2 Money Supply Rolls Over, the Stock Market Will Follow
M2 money supply rose sharply, driving the stock market higher. Now it has peaked and rolled over. That does not bode well for the Bull market.
Our Chartist Friend from Pittsburgh kindly shared a chart of M2 money supply and the S&P 500 stock market index (SPX). The correlation between expansion of the money supply and the stock market is worth studying.
The primary point is that “real growth,” i.e. rising wages and profits powered by increases in productivity, does not require massive growth of M2.
Here is Chartist Friend from Pittsburgh's explanatory commentary:
"He who controls the money supply of a nation controls the nation." President James A. Garfield
Except during periods of exceptional earnings growth like we had during the pre-internet computer boom when companies like Microsoft, Oracle and Intel were improving business productivity by leaps and bounds, the trend of the stock market (and economic growth in general) tends to closely follow changes in Fed controlled money supply growth.
The outlier earnings growth of the 1980's and early 90's PC and database revolution was so strong that the Fed was able to take its foot off the monetary accelerator without causing a corresponding drop in stock prices. Once every business was fully computerized in the mid 90's the Fed floored it again to support stocks and create the Internet Bubble. Since then every time the Fed has taken its foot off the M2 accelerator the market trend has turned negative and the economy has gone into recession.
That appears to be what is happening right now.
Note the clear correlation of the 1987 crash and the breakdown from a 20-year dome-top of M2 growth that occurred during the late 80's. The two downtrend lines are parallel on the chart.
Thank you, Chartist Friend from Pittsburgh. As many observers have noted, you can expand the money supply but if that money ends up stashed as bank reserves, it never enters the real economy, nor does it flow into household earnings. The velocity of that "dead money" is near-zero.
M2 declined in the housing bubble as the velocity of money skyrocketed: everyone was pulling money out of housing equity via HELOCs (home equity lines of credit) and spending the "free money" on cruises, furniture, big-screen TVs, boats, fine dining, etc. The recipients of that spending also borrowed and spent as if the "free money" would never end.
If M2 expansion is the only thing propping up an artificial market, what happens to the stock market rally as M2 rolls over?
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M2 is a good statistic, but what's M3 doing?
Oh, right -- the government stopped tracking and reporting it as soon as it became inconveniently negative.
Wanna fly? Gotta buy.
Exactly, it's the same when they constantly change how they track inflation when if can't get the results they desire.
Wiki says
"Money supply," from what I understand of currencies, is supposed to be an indicative measure of the amount of money circulating and actually available for deposit/withdrawal in the physical. When it is tainted with credit, as ours is, it is no longer credible. I call horseshit on our "money supply."
John Williams still estimates M3 on his site, if you're interested:
http://www.shadowstats.com/alternate_data/money-supply-charts
Fiat is not money. It is currency. Money must maintain its wealth. It must preserve itself. This on a molecular level.
Precious metal is money, and nothing lse is. On this Friday, the 13th, take back the money supply.
Buy Silver!!
precious metal is not money/wealth either. In certain situations I wouldnt trade you a pound of food for a pound of gold.
two idiots here, any others want to vote down a truthful statement? have at it hoss. fucking idiots.
How is it that people think that if the banking system fails, people will stop producing food? It is like without the banks we will curl up and die.
For tens of thousands of years we did not use fiat currency, nor did we have Central Banks, nor did we have banks. We traded in gold and silver, because it is money, and we did great. We had some great socities.
So when I go to trade you silver for a meal, and you say "No", I will find someone else. And besides, who says I want to trade you my silver for your food?
Why only food? I would happily trade numerous items for silver and vice versa:
Coffee/Tea
Sugar
Spices
Ammunition
Shoes
Rope
Seeds
Clothes
Shelter
Fuel
and whatever else I might have available!
Sex.....?
We can mark that one under labour...
would you trade seeds for rope? how about clothes for shelter? In certain situations, barter takes over and silver/gold may be used or it MAY NOT be needed. My point
Parasitical Bankers need people to believe the world can't get by without them.
If the banking system fails, that would a crises. Could it be martial law carried out by brownshirted Homeland Security. In the president's most recent (Friday the ^th- July, states in a crises, The POTUS would controll the food supply and communications. Let that sink in.
Take your fear mongering elsewhere, let them come try!
It's just the race to the bottom that will end without the banks.
They have the world in a ridiculous competition for their usury.
silver and so forth are but ONE commodity used for barter. It isnt the only one, or even a universal one, same with gold. That is my point. You act as if it is some sort of universal currency, it is not.
When country is stable fiat is fine
when country is becoming unstable silver/gold are a decent hedge against future inflation
When the shit hits the fan bad, BARTER takes over. SOme may trade for silver/gold some may not. Suddenly seeds, food, bullets become more precious than some basically useless metal.
Thats my point.
Without a functioning credit system, yeah agricultural production yields will go down the toilet and collapse especially given how capital-intensive modern farming has become in most of the world.
Your statement was nonsensical and worth junking.
And it was about as far away from factual as you can get.
How is it that you cannot see that?
Silver and gold are the only honest, non counterparty risk forms of money available, double down voted!
thousands of years of bartering and values in various commodities prove you wrong.
I would never ever ever sell a pound of gold for a pound of food. There has never been a period in history where valuation reached to that point. If you're worried about a complete collapse, then you should have already prepared and secured your food supplies...
you are ignorant on history, as it seems many are.
If you have to give away a pound of gold or silver for a pound of food you are in a position to die soon anyway.
If you "save" your gold when starving, instead of buying food, Darwin will be proven correct again.
So what you are saying is that there is no money/wealth except for food!
Do you think about what you write or just post whatever moronic thought enters your head.
I guess you would trade that pound of food for a pound of fiat.
Or just what are you trying to say?
Do you vote,, that might be the problem with our once great country.
Until the industrial revolution, money was simply a stored value of food. Ergo, that is why for the first 120,000 years of human existance before civilization, gold and silver ment very little. A pound of food is priceless when 1 out of 7 Americans waddles into Mall-Wort to use their SNAP benefits to buy a few days of food at a time. One supply chain disruption could starve a large part of America, as most people are terminally obese, and couldn't survive a phase where they have to walk, work, etc. I might not eat people, but I'll use blubber for lamp oil........
I am saying there is many commodities other than just silver and gold, as circumstance would dictate.
AS for your voting remark, you cant even grasp a simple concept yet you try to insult. You are an idiot. The typical ignorant arrogant ass that is too ignorant to know how stupid he really is.
I agree it's not money but it is a store of wealth
exactly, one of many, real estate, fine art are others.
but but ...Cramer says its about earning... He cant be lying can he?
If only he had a Chartist Friend he could call his own.
bingo baby... its deflation time, we have been living in it for a few years now, I wonder how long til the genius ( I mean computer algos) on wall street catch on
They won't catch on....that is why a massive crash is inevitable...
Well, there´s many times more debt than money and staggering amounts in insurance contracts where this system somehow insures its own sustainability. Meanwhile we´re in a long and rising wave of productivity increases and decreasing demand for labor. It´s difficult to see a benign end game in economies that are mostly dependent upon consumer spending.
F**k me. We are all monetarists now. Thank's uncle Milton :)
When the PPT has no money they can not play the game.
The PPT will always have fiat money. They can print as much as they want.
Blasphemy!
They will always have "more" paper or electronic money (even if of significantly & increasingly lesser grade, diminished value & affect than their prior batches).
http://www.clker.com/cliparts/S/F/y/h/G/9/ctrl-p.svg
OT
It is easier for politicians to claim bankruptcy then to admit to their mistakes...politically, the politicians don't want to cut spending so they will ask a judge to do it for them...
CA is fucked because their tax system is so fucked up. They have the most incredible stupid unfair property tax laws in america.
Don't worry about them. They will be saved by the thousands of good union jobs generated by the recently passed High Speed Rail project. Everybody gets a chicken in the pot for rainbow stew. I fear ultimatly, the taxpayers in the flyover regions will be on the hook to bail them out.
A unicorn in every pot.....
CA is 'fucked' because their citizens got the government they voted for.....watch the dominoes fall.
They were good times. Let's cancel the debt and get the free money flowing again. Noone died.
...except a few brown people in Durkadurkastan.
M1s and M2s are alright,
Challenger 2s are better though, ;-)
Ok so we know theres absolutely no reason stocks should do anything but collapse in half from here.....so S&P 1,700 next obviously?
Can't see much of any correlation in the chart above. Maybe the smart chartist could have added the lunar phases for further enlightenment.
Oil and copper seem to hold their 20 day averages, while the slow stochastics is near a buy signal. Natgas and coffee look good, too. Time to go long resources?
Try this one:
http://nowandfutures.com/images/m3b_long_term.png
No new money in a fiat/debt based system means debts go bad. Debts are what back the currency. Bad debts mean the currency becomes just little pieces of paper with no demand on them to pay debts any longer. It is more an argument for QE to get debt off banker books than anything else. The Fed will not be able to loan enough money to JPM to stop them from going under if their counterparties, who don't get fed loans, start going under. The situation will spiral fast. They were stupid to try and pretend the banks didn't need massive QE for this long. If they want to play teh paper debt money game, they need to stop pretending the money was ever intrinsicly worth anything.
Your linked chart is more impressive, thanks for that, although it bears no relation to stock/asset prices.
Seems the money supply is growing more slowly than expected by so many, so chances are the printer-in-chief will be ready at a moment's notice to ride to the rescue of his bankster buddies.
As long as printed money means merely empty promises, real asset prices will have a place in any serious investor's portfolio. Be it gold or silver, corn or coffee, shares or jewelry for one's wives.
I doubt the stock market will lose its PPT support any time soon.
"The velocity of that "dead money" is near-zero."
And when that changes, watch the inflation rip through the economy.
spot on analysis
jb
What would be the catalyst for that to change? Serious question
Watch inflation rip thru a bankrupt country....oh that should be real good.
you think the average american is suddenly going to see huge spike in take home pay? really?
Inflation is a monetary (Fiat currency) phenomenon.
Remember the song: "...mama were all crazy now..." from the 70s?
Well, welcome to loony tunes UK. This is not a joke:
"According to a memo from the London Organizing Committee of the Olympic Games, any fish and chips vendors at the Olympics who don't have golden arches will be disallowed from selling chips alone as reported by the Guardian. "
Yes, no fish and chips for you sucker. MickyD own the french fry world! You can't make this shit up.
If we take this post together with this one earlier today
Chart Of The Year: The Fed Has Doubled The S&P Admits... The Fedwhat do we have? Well, our worst fears have been confirmed. It seems like the only important factor driving the stock market is monetary policy. I think if we suddenly remove easy money then we will see a huge market panic. Eventually, the market will adjust, and fundamentals will become the most important driver in the market.
What are the limits of monetary policy? When I was in school, we had one formula for figuring out the effects of money creation. Nobody bothered adjusting the formula for additional rounds of monetary policy.
That is the problem in a nutshell. We know that monetary policy is doing less and less, but we do not have enough information to show why this is happening and how it is happening...yet.
"everyone was pulling money out of housing equity via HELOCs (home equity lines of credit) and spending the "free money" on cruises, furniture, big-screen TVs, boats, fine dining, etc."
Since those HELOCS were bundled into Credit Backed Securities, all is well, right? Write off the debts of the homeowners no need to reposses their pools. No fuckin' CDS of any type seems to ever "trigger" anyway, banks will be fine, just go to the FED's discount window, use the newly separated HELOCS as collateral. No trail of ownership for the banks? No Problem! This is America....capitalism(?) for all(except J6P!?), baby! Introduce 4.5% auto loans for all! Result/ Chevy VOLTS for all! I may win a Nobel! Feeling a bit Patriotic here!
http://www.youtube.com/watch?v=sWS-FoXbjVI
After all the hardballing that Meredith Whitney received, is the Muni crisis now coming to a boil ?
San Bernardino Goes Bankrupt - Business Insider
Charles Gasparino: Why Meredith Whitney's Muni Prediction Doesn't Add Up
A Guide To Profiting From Meredith Whitney's Muni Meltdown Scenario - Business Insider
So as 2012 matures who is writing the true story on the muni bonds wall?
I feel sorry for anyone who is "hard balling" Meridith Whitney, that would a large "bond" to get into disclosure.
Cities In Financial Trouble - Business Insider
chart doesn't support the thesis. i don't disagree with the thesis, but this chart does not show the correlation
"The velocity of that "dead money" is near-zero."
And when that changes, watch the inflation rip through the economy.
Thats kind of contrary isn't it?
Funny Money on the run comes to a full stop.
And prices go on a buckaroo rodeo rampage ride!
why will it change? its call deflation and noone knows how to change it. Just ask Japan.
Primary wave 3 will take the SP500 down below 600.
http://bullandbearmash.com/index/sp-500/weekly/
M2 Velocity is dying and the housing market is NOT recovering.
http://confoundedinterest.wordpress.com/2012/07/11/mortgage-purchase-applications-rise-a-bit-refi-applications-fall-again-hud-secretary-donovan-goes-live/
I gotta say it...this guy is worse than Graham
no idea, but I think market is going down because last time when we hit the top trend line and came down to too only a few days to get back to baseline. this time it's endless, everyone knows where we have to get to, so shy are the alog's taking so long, it's a joke.
at the rate we are going it will be july 18th before it happens!!! when we get to the trend. I don't know what happened the past week. but it's more fucked up than usual
it took two days to get to teh qual drop two weeks ago that it took 5 days to do so far as of yesterday
What are the underlying mechanics that (supposedly) link M2 and equity index values? These charts show correlations, which may or may not have anything to do with one another..