Alan's Alert 7-29-2021

 

Today is part 2 of our saga, Adventures in Money Printing.  Yesterday I looked at a couple of the big whoppers of the last 20 years in the market.  These were instances where the yield curve had signaled something was wrong.  The money supply then told the tale of the tape when it came to the crash of the stock market.  Today I’m looking at instances where the money supply was weak but the yield curve never went negative and how the market reacted. 

 

Our return to our epic tale, Adventures in Money Printing, starts in 2003.  This was right on the heels of the 2001 recession.  The yield curve was in positive territory and things should have been humming along smoothly. 

The money supply figures coming into 2003 were strong.  The high plateau at the end of 2002 which pushed the market higher in 2003, continued its strength into the middle of the year.  You can see this with the navy-blue line in the chart below.

Something went haywire at week 34.  When we traditionally see a plateau, instead we see a spike higher, then a big drop which bottoms out on week 45.  This runs well below the trend for 7 weeks.  Money supply then made a feeble attempt to push higher to close out the year.  Starting in 2004 (green line), you can see that the money supply had a rough start to the year.  By week 16, the story had changed and it had a strong showing for the rest of 2004.

 

Looking at the S&P500, twelve weeks after the money supply bottomed in 2003, the stock market stalled.

It then proceeded to trade sideways in choppy fashion until the beginning of November.  This is when it started to pick up.

The S&P500 gained over 26% in 2003.  In 2004 it gained 8.6%.  This sounds like a pretty good return despite the choppy start to the year.  In 2005, however, it barely gained 5%.

 

2005 was the light-blue year in the above money supply chart.  You can see from its lackluster activity, that it was not a good year.  The money supply dragged along the bottom at the beginning of the year.  It then had a low peak, followed by another slow-paced effort, eventually bottoming out on week 30. 

 

From this period of 2003-2005, we can draw the conclusion that when there isn’t a signal from the yield curve that trouble lies ahead, it takes several weeks of below trend data to have an effect on the stock market.  However, the effect can play out over a long period of time unless the money supply numbers pick up and run above the trend.

 

 

 

 

 

The next era I want to highlight is the post financial crisis era of 2009-2012.  This was supposed to be the big recovery after the big crash.  However, 2010 and 2011 both struggled to keep steady upward momentum.  Some of this could be tied to investor’s nerves after such a spectacular crash in 07-08.  Another factor in play was how the Fed’s new tools were going to be utilized (QE, operation twist, etc.).

A quick peek at the yield curve showed that banks had the ability to make lots of money.

The market had a different story to tell.

In two instances in 2010 and one in 2011, investors were seeing choppy action.  Do you think this could have been predicted by the money supply figures?

 

At the end of 2009 (light blue with green circle), money supply was exhausted.  It hit the trough at week 25 then hung down there for 16 weeks.  From this lackluster action, we can figure that capital goods markets would see more sellers than buyers.  From the low negative print on week 36, it took 20 weeks before problems started to show in the S&P500.  You can see it as the first dip in the green box at the beginning of the year.  The S&P500 then had a rebound but it would not last.  My second green oval, this time in weeks 4-14 of 2010, came into play.  This time around, it took 12 weeks from when the money supply went negative before the stock market showed serious weakness.

 

I also took a look at 2011.  It had similar choppy action in the market in the 3^rd quarter that year.  The money supply ended 2010 high and then showed softness at the beginning of the year (blue circles), but I think this irregular stock market action is better explained by investor’s worries about the Fed and the Eurozone crisis.  This is why relying on the money supply alone is unwise.  There are always many factors in play at any one moment.  To think that one tool can save your capital is a fool’s errand.

 

 

 

 

Our grand finale in our epic saga of Adventures in Money Printing will conclude with the 2014-2019 era.  Some of you might have been subscribers of Robert Wenzel when he called both the slowdown in the money supply in 2015 and his call in 2018. 

First off, what did the yield curve have to tell us?

From 2013-2019, it looked like the banks would have no trouble borrowing short to lend long and make a tidy profit.

 

At the beginning of 2015, Robert had emphasized how strong the money supply growth was.  By the end of May, he began to warn that the money supply had dipped and was starting a steep decline.  In mid-June, Robert said, “I have pointed out before that there is a tendency for the money growth to decline this time of year for seasonal reason, but whatever the reason, a drop in money supply is a drop.  There is a very strong possibility money growth will rebound later in the year.  However, the decline in money supply growth is so dramatic that I am advising extreme caution with regard to the US stock market.” (Daily Alert 6-26-2015). 

Then on July 17, 2015, Robert recommended risk-oriented traders to go short. “Risk oriented traders should now switch and trade from the short side. However, I caution that the potential for whipsaw action is exists both in the stock market itself and in the trend in money supply growth. For most this is a time to keep high cash levels (50% cash) and remain on the sidelines until a direction is much clearer.” (Daily Alert 7-17-2015).

 

Here’s what the money supply chart looked like:

Robert had it pegged because 4 weeks later, the stock market dropped (blue box).

I included the weakness at the beginning of 2016 in my blue box but in truth, the Chinese market hit a down phase in the business cycle at that time.  This caused a big selloff in the US market because investors panicked.  Robert had called this as a buying opportunity and he was proven correct as the market rallied through 2017 ending with a dramatic spike in January of 2018.

 

By late 2018, a new story was developing.  The stock market suffered ups and downs through the first two quarters.  This is directly attributable to the dismal growth in the money supply at the beginning of the year (orange circle) and the lower peak than previous years.  After the trough, it began it’s plateau in line with prior data.  However, something went wrong.  It began to run below trend.  Robert captured this in his Daily Alert on 9-14-2018 with, “If money supply continues this sluggish, the economy could be in real trouble at some point in 2019.  And the general stock market could start a major break at any time between now and the first half of 2019.”  

Then on October 5^th, Robert’s Alert led with this headline:

He had nailed it again.  Over the next three months, the market searched for support.  It didn’t find it until Christmas Eve, when the plunge protection team was called in to get to work, causing the market to rally through the next quarter.

 

 

 

Reflecting back to our current money supply situation, we are in a different era.  The spectacular increase in the money supply in 2020 and the hot start to the year in 2021 have turned up the heat on the stock market, the housing market, and the bond market.  This has also led to increases in all the inflation indicators such as the CPI, PPI, and PCE.  Once the market gets adjusted to the increase in the supply, it becomes dependent on it to reach new highs.  We have run above trend for a long time.  At some point, we’ll need to come back into the fold or the Fed will risk running much too hot on the inflation front.  

Some disclaimers; I’m not currently predicting a crash.  I’m not trading on the short side.  I am keeping a close eye on the money supply, the yield curve, and margin debt.  These will be signaling, in advance, of a change in the market.  Right now, I’m neutral on the general market and have no positions in the S&P500.  I’m continuing to hold positions that would benefit from price inflation.