Best of the Week
Most Popular
1.London House Prices Bubble, Debt Slavery, Crimea 2.0 - Russia Ukraine Annexation - Nadeem_Walayat
2. Gold And Silver – 2014 Coud Be A Yawner; Be Prepared For A Surprise - Michael_Noonan
3.Sheffield, Rotherham Roma Benefits Plague, Ch5 Documentary Gypsies on Benefits & Proud - Nadeem_Walayat
4.Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - Jim_Willie_CB
5.Don't Miss the Boat on Big Biotech Catalysts: Keith Markey - Keith Markey
6.Gold Prices 2014: Do What Goldman Does, Not What It Says - David Zeiler
7.Bitcoin Price Strong Appreciation to Be Followed by Declines? - Mike_McAra
8.Gold Preparing to Launch as U.S. Dollar Drops to Key Support - Jason_Hamlin
9.Doctor Doom on the Fiat Money Empire Coming Financial Crisis - Andrew_McKillop
10.The Real Purpose Of QE - It’s Not Employment - Darryl_R_Schoon
Last 72 Hrs
Stock Market Bears Wrong Again, Apple to Push Dow to New All time High - 24th Apr 14
Gold Prepared for the Attack of the Short Sellers - 24th Apr 14
Weak U.S. Housing Data Supports Euro - 24th Apr 14
Killing the Maximum-Wage Myth - 23rd Apr 14
U.S. Quarterly Economic Review - Optimism at the Fed - 23rd Apr 14
Why Mohamed El-Erian Left Pimco - Video - 23rd Apr 14
QE Is A Fraud Perpetrated By Made Men - 23rd Apr 14
Gold and Miners Outperform Once Again - 23rd Apr 14
G-20 and the US Tell the Bank of Japan to End Quantitative Easing - 23rd Apr 14
How to Get in the Trading Game and Profit - 23rd Apr 14
Fed Follies, U.S. Housing Market Fiasco - 23rd Apr 14
What Will December 31, 2014 Financial Headlines Look Like? - 23rd Apr 14
Why Gasoline Prices are Surging Again - 22nd Apr 14
Cold War 2.0 - 22nd Apr 14
The JIS – Junk Ideology Syndrome - 22nd Apr 14
How to Avoid Losing All Your Money - 22nd Apr 14
Silver Up, Stocks S&P Down - 22nd Apr 14
U.S. Mainstream Media Propaganda Setting the Stage for War With Pakistan - 22nd Apr 14
U.S. Interest Rates are NOT Rising! - 22nd Apr 14
A Crisis vs. the REAL Crisis: Keep Your Eye on the Debt Ball - 22nd Apr 14
Bitcoin Implications of Lack of Price Action - 22nd Apr 14
Japan - The Twilight Of The Rising Sun - 22nd Apr 14
Is This What a Credit Bubble Looks Like? - 22nd Apr 14
The Dark Side Of The Silver Mining Industry - 21st Apr 14
Strong U.S. Dollar Rally Could Pull Rug From Under Gold and Silver - 21st Apr 14
Silver Feeble Rally Fails to Hold Breakout, Falling Back Towards Support - 21st Apr 14
Stock Market Smart Money – All Out or More to Go? - 21st Apr 14
Fast Rising Pump Prices Counterattack - 21st Apr 14
Extreme Climate Change And Life On This Planet - 21st Apr 14
Gold and Silver Stocks Sitting Tight - 21st Apr 14
Stock Market Minor Correction Imminent - 21st Apr 14
Gold and Silver - Counting Blessings and Tender Mercies - 20th Apr 14 - Jesse
The CIA Through The Looking-Glass - 20th Apr 14 - Stephen_Merrill
Gold And Silver - Gann, Cardinal Grand Cross, A Mousetrap, And Wrong Expectations - 20th Apr 14 - Michael Noonan
Nikkei Stock Market - Sell Japan - 20th Apr 14 - WavePatternTraders

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stock Market Will Crash When Central Banks Stop Printing

Stock-Markets / Financial Crash May 03, 2013 - 12:10 PM GMT

By: DailyGainsLetter

Stock-Markets

Moe Zulfiqar writes: As central banks around the world have taken money printing and easy monetary policy, such as low interest rates, as their key tools to boost economic growth, there are concerns among investors about what happens once they actually stop and bring their monetary policy back towards normalization—raising interest rates and no longer printing money like they are doing now.


For example, the Federal Reserve is printing $85.0 billion a month, and its balance sheet has already ballooned more than $3.0 trillion after the financial crisis brought the U.S. financial system to near collapse. On top of all this, the Fed is also keeping interest rates near zero. Similarly, the Bank of Japan is taking the same measures and plans to increase its money supply extensively.

Looking at all this; there is a notion among investors that the stock markets are currently going higher because the central banks are printing money—not because of real reasons, such as earnings growth. When the economy is flooded with money, it usually has to find a home; the money is flowing into the stock market. Once they start normalizing their monetary policy, the stock market may come crashing down.

This opens the floor to debate; does money supply actually dictate the direction of the stock market? Please look at the chart below:


Chart courtesy of www.StockCharts.com

The chart above consists of the U.S. M2 money supply and the S&P 500.

Before going into further details, readers should know that the M2 money supply is a broad measure of money in an economy. In addition to currency in circulation (coins and notes), M2 also includes the amount of money in savings accounts and other related accounts. This measure of money is used by economists to get a more precise idea of the money supply in a country.

Go back to the chart above; looking at the overall picture, it indicates that as the money supply has increased (red line), the stock market/S&P 500 (green line) has followed the same direction. Just by observing this phenomenon, is this enough reason to believe the stock market will head lower once the central banks stop printing money and raise interest rates?

After paying close attention, you will notice that from the beginning of 1984 to 2000, the M2 and the S&P 500 moved in a similar direction. They both trended higher, but after 2000, things changed; as the money supply continued to increase, the S&P 500 didn’t trend higher, contrary to what investors believe. It traded sideways instead.

Saying rigorous printing and low interest rates were the only cause of the rise in the stock market may be faulty, but this by no means suggests that they didn’t have any implications on the stock market at all. Consider this: if the money printing continues, the value of the currency declines, causing the asset prices to rise.

There are many factors that affect the stock market other than just money supply. Looking at the performance of the S&P 500; the main reason for the rise in the stock market may be because economic conditions are much better than they were during the financial crisis: the unemployment rate is much lower, Americans are spending, and the financial system is in much better shape than before.

Source: http://www.dailygainsletter.com/stock-market/...

Copyright © 2013 Daily Gains Letter – All Rights Reserved

Bio: The Daily Gains Letter provides independent and unbiased research. Our goal at the Daily Gains Letter is to provide our readership with personal wealth guidance, money management and investment strategies to help our readers make more money from their investments.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014