Dwindling Monetary Supply to Ignite Stock Market Crash, Analysts Warn
The global liquidity crunch could ignite the next major stock-market selloff, analysts warn. | Image: Don Emmert / AFP
Stocks tend to move with global liquidity. In other words, if theres an abundance of money in the system, it is very likely that stock market prices climb higher. After all, many investors will look into assets that can help them quickly grow their capital.
On the other hand, a liquidity squeeze is likely to drive equity prices lower. Thats because buyers are needed to push prices higher. If market participants become illiquid, selling pressure builds and sends prices into a free-fall.
Economist Holger Zschaepitz elegantly captures this market dynamic in a tweet.
Tightening money supply has pulled down global equities. | Source: Twitter
This is why weve been warning our readers that were facing a global dollar squeeze. Follow the money and youll likely know where the stock market is headed. Our research revealed that the money supply has been declining for years.
Monetary Base at Levels Not Seen Since 2013
The SPX is going nowhere. | Source: Twitter
While this behavior might be seen by bulls as consolidation in preparation for new highs, it can also mean that the market is running out of steam. If you consult the monetary base, you will realize that the latter appears to be the case.
A Federal Reserve chart illustrates how the monetary base has plummeted since 2014. | Source: Twitter
The chart above shows how the S&P 500 soared in tandem with money supply from 2012 to 2014. However, towards the end of 2016, the two showed signs of divergence. The SPX continued to climb while the monetary base dwindled.
Currently, the gap between the two is so wide that it no longer looks sustainable. Either monetary base expands or the stock market has some catching up to do.
Top Economist: Lower Money Supply Translates Into Lower Stock Prices
We spoke to economist Alex Kruger to confirm our stance. Apparently, were on the right track. The analyst said,
Lower money supply translates into lower stock prices whenever it doesnt reduce inflation / create deflation. When it does, it can go both ways, though it usually does lead to lower stock prices.
A growing economy has a positive demand for money. In a well functioning economy, money supply growth should satisfy the growth in the demand for money. Starve the economy from money, and this should result in diminished growth. Real growth is one of the drivers for stock prices.
It appears that the growing American economy is no longer producin ...