The Benjamins: Equities react to Money Supply, Currencies and Interest Rates. More than anytime in recent memory, these monetary factors are having a very significant impact on the markets. On top of these broad monetary adjustments, significant fiscal changes are about to be enacted (again) through wide changes in the tax code. This is the second major tax cut in as many years.
As we noted back in November, intervention in the marketplace creates crosscurrents: Ultra low interest rates (now at 45 year lows), deflating U.S. Dollars (also at a multi-year low), and on top of it all, the biggest weekly gain in M2 in 15 years. In fact, since 1999, MZM – the supply of all Money and equivalents (Money with Zero Maturity)– has increased by 50%, from $4 trillion to over $6 trillion. It has doubled in only 7 years, since 1996. The previous doubling (from $2T to $4T) took 11 years from 1987 to 1998.
Some commentators have suggested that this increase in M2 is reflecting an increasing demand for money, possibly pointing to a rebound in the economy. That’s a chicken and egg argument, however, as the economy’s statistics have yet to show any meaningful increase in demand. Perhaps this is more accurately reflects the wishful thinking of optimistic practitioners of the dismal science.
More alarmingly, money growth may actually be reflecting how anemic the underlying economy is. More than responding to demand, it may be force-feeding fuel to a market with little horsepower of its own. There’s a problem with turbochargers: in trying to wring maximum performance from an engine, they tend to, on occasion, blow them up.
That’s a danger: The Fed is trying every trick in the book to get this Economy moving; They’ve cut interest rates to half century lows, cranked up Money Supply dramatically, while the White House has encouraged the U.S. Dollar to drop precipitously while cutting taxes (soon to be twice).
The cure for a deep bubble is time. The danger of all this broad intervention is that if it fails, it will make the recession worse, and only take that much longer to heal.
While we are still constructive on this rally – the internals are better than all the previous bear market bounces, and we would use the imminent 50% retracement to buy stocks – the Macro picture continues to give us pause. As said previously, Mr. Market will give the economy two quarters to show signs of a recovery. Without signs of a recovery by Fall, we would expect to revisit Bear market lows.
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Quote: “”Wisdom is the power to put our time and our knowledge to proper use.” –Tom Watson, IBM Founder.