Friday, October 10, 2014

The Dow Jones Industrial Average and Money Supply Growth

No one is really watching money supply growth these days, not even Fed chair Janet Yellen. She has not yet, since becoming Fed chair, mentioned it in any of her Fed speeches or during her press conferences.

This is very different than during the years Paul Volcker headed the Federal Reserve. Everyone watched the money supply numbers back then and markets would react to the weekly release of changes in the data.

Now, hardly anyone does, although it is a cornerstone of the EPJ Daily Alert.

Money growth is only a rough guide. The specifics of any move in the stock market and the overall economy are impacted by many macro and micro factors, but according to Austrian School Business Cycle Theory is the primary driver of the business cycle.

There is a natural lag between changes in money growth and the stock market, but there is an impact for sure. Even the current downtrend in the stock market shouldn't come as a surprise to anyone who has noted the slowed money growth over the last 12 months.

Here's falling money supply growth over the last 12 months .

Almost on cue in July, with a roughly 6 to 8 month lag from the declining money growth, the stock market has started to deteriorate.

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