Everything is a derivative of the money markets. When the money supply is increasing, prices of everything tend to go up, and vice versa. As an investor, the first thing I want to know for the medium term is whether the wind is at my back or against it.
After a couple of years of spectacular growth, we’re finally seeing an inflection point in the unsustainable money growth that has fueled the wild ride in stock prices since the pandemic started. All other things equal, this will reflect in the markets and the current correction that began in November can probably be traced back to the slowing that started over the summer. I watch 3 numbers to get a sense of where the money supply is tracking:
M2NSA money supply hasn’t really broken the trend but printed it’s first reduction last month and must be watched closely:
Margin debt has taken a bigger nosedive as of January with a 9% dip in one month:
The 10 year vs 2 year treasury spread continues to trend towards negative territory, which generally is a precursor of recession, as short term borrowing expenses rise higher than longer term:
These charts spell caution to me going forward in the next 3-6 months, but with the doubling of the stock market in 18 months, a correction was overdue and looking for any reason to start. It’s not necessary that a recession and further crashing occour right away. There are positive external factors, primarily the sudden end of covid. Anytime the economy has a sudden relief like that, you would expect a boom. We also may see another inflationary boom soon due to the Ukraine/Russia war, as governments ramp up spending, and printing presses, on the next big fear.
Today the Fed meets for their first rate hike in years, which will be announced tomorrow. I expect the market will be right, we will get a tiny 0.25% rate hike which will remove uncertainty and send the indecies higher. Perhaps any good news out of the war front and we could break the downward trendline and see a retest of the 200 day moving averages again (blue line).
I might buy a few call options today with expiration over 1 month out for a quick trade…