As M2 Money Supply Rolls Over, the Stock Market Will Follow (July 11, 2012)
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
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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We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.
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