Author Topic: Stock Market and the Money Supply  (Read 2195 times)

pecunia

  • Handlebar Stache
  • *****
  • Posts: 1278
Stock Market and the Money Supply
« on: April 28, 2018, 04:05:03 PM »
I had a question for you gentlemen last week and it was kindly answered.  My previous question was whether the stock market was as good a hedge against inflation as gold.  The answer I received was that it should be expected to be better.

Well - That satisfied me.  It seemed like a good answer.  This means that stocks are a relative constant in terms of the overall money supply.  Well - I kept thinking.  I started to look at the Dow Jones graph over the years and to see if I could discern any reasonable pattern.  It's kind of like the people who read tea leaves.  I'm always hearing about the business cycle and I've read that business cycles typically last about 8 years.  The guys who wrote this are the Wall Street guys.  They know this stuff,.......or they just want to sell equities.

So - I am expecting a big bust soon because the economy has been on a rise since 2008.  However, things don't seem all that good.  Pay isn't going up.  Lots of people are working two and three jobs and things are never exactly the same as they used to be.  The products that are sold are not the same.  I began to doubt the wisdom of the Wall Street guys.  It seems like we may be able to go up some more.  People need lot s of things.  I don't think demand is satiated.

I looked at those Wall Street curves climbing upwards out of the dark hole of 2008.  I remembered the wise advise given last week.  Stocks are a good hedge against inflation.  OK.  There's been little to no no pay increases, yet we have some inflation.  Inflation may be caused by there being more and more money printed.  We've had these periods of quantitative easing.  It's been explained to me that it's like the Fed printing more money.

If stocks are a good hedge against inflation, it means they have to track the overall money supply.  They have to keep a good enough value to keep pulling money in from the investors.  So, if there is more money out there, they would track it.  There wouldn't necessarily be a one for one correspondence because there would be a time lag from when additional money is printed and the thousands of other factors that would affect their value.

All this beating around the bush leads to this one question.  If the stocks have been tracking all of this extra money poured into the system to keep real value, does this lend some credibility that we may not be at the end of a "business cycle?" and stock values will come crashing back down again?  In fact, I'm wondering if this business cycle thing may be a bit of hooey.

I'm trying to play a little game of timing the market and I'm beginning to wonder if in real value that we won't get the big crash at the end of the business cycle.    This would be because we are not at the end of a "business cycle."

maizeman

  • Magnum Stache
  • ******
  • Posts: 3890
Re: Stock Market and the Money Supply
« Reply #1 on: April 28, 2018, 04:38:27 PM »
All this beating around the bush leads to this one question.  If the stocks have been tracking all of this extra money poured into the system to keep real value, does this lend some credibility that we may not be at the end of a "business cycle?" and stock values will come crashing back down again?  In fact, I'm wondering if this business cycle thing may be a bit of hooey.

I'm trying to play a little game of timing the market and I'm beginning to wonder if in real value that we won't get the big crash at the end of the business cycle.    This would be because we are not at the end of a "business cycle."

Don't try to time the market. It's all fun and games until you watch years of savings evaporate.

Also I think you misinterpreted the advice you received in the other thread. Investments in stocks are essentially unharmed by inflation in the long term. That doesn't mean stocks have to track changes in the money supply on a day or day or year to year basis.

However, things don't seem all that good.  Pay isn't going up.

The unemployment rate in some parts of the country is now less than 2%. I've been to medium sized cities where every restaurant and shop has a help wanted sign up in the windows. Median household income has increased from $49,000/year in 2010 to $59,000/year in 2016.

Finally: yes it is certainly true that some proportion of the long upward swing in stock prices over the last decade has been the result of both quantitative easing (which reduced the supply of investable assets while increasing the amount of money chasing the remaining assets) combined with a prolonged period of close to zero interest rates which have made stocks essentially the only game in town if you want any sort of reasonable return on investment.

The stock market may crash tomorrow. It may continue to grow for another ten years before it crashes. It may stagnate and trade sideways for ten years and then either shoot up or crash down. *shrug*

Travis

  • Magnum Stache
  • ******
  • Posts: 2631
  • Location: South Korea
Re: Stock Market and the Money Supply
« Reply #2 on: April 28, 2018, 06:25:50 PM »
"Pay isn't going up...people working multiple jobs..."

Without comparing actual numbers of population/unemployment/inflation/CPI/many other factors to remark that "pay isn't going up" is hyperbole.  Many people will always work multiple jobs, but not everybody does.  Pay was flat relative to increased spending in the early 2000s. That's part of what got us into so much trouble.  Pay in some industries has gone up while others have not.

"business cycle"

This isn't a hard/fast rule that you can mark on the calendar or set your watch to.  As you described, there's a bit of hindsight witchcraft involved in pegging a "business cycle" and talking about it as if it was something we should have seen coming.  The number of people who can predict the end of a cycle without it being dumb luck you can count on your fingers, and even then at best they're only going to predict one accurately in their lifetime.

"inflation"

Is a fact of life in an economic system that creates money as a natural effect of loaning it.  You give a bank $100 and they will loan $90 of it to someone else while guaranteeing you can still have your $100 if you want it back.  It sounds insane, but it's been a fairly stable aspect of our economics for a century.  Prior to Fractional Reserve Banking we had frequent recessions where the stability of the money supply was a cause.  Too much or too little inflation is a bad thing, but the amount of inflation we've experienced for the last 20 years seems to be in the proper range.  The government drives a lot of our inflation through the selling of bonds.  It's an instant loan that requires an increase in the money supply in order to function.  The responsible use of this is directly correlated to our economic output.  Too much money for too little economic activity is a very bad thing.  Having said that, QE was done after 2008 for a while because the largest banks were on the edge of bankruptcy and the flow of money was about to stop completely.

Bicycle_B

  • Handlebar Stache
  • *****
  • Posts: 1821
  • Mustachian-ish in Live Music Capital of the World
Re: Stock Market and the Money Supply
« Reply #3 on: April 29, 2018, 07:54:33 PM »
If stocks are a good hedge against inflation, it means they have to track the overall money supply.  They have to keep a good enough value to keep pulling money in from the investors.  So, if there is more money out there, they would track it.  There wouldn't necessarily be a one for one correspondence because there would be a time lag from when additional money is printed and the thousands of other factors that would affect their value.


Stocks are not designed as a hedge against inflation.  They don't have to "track" anything.  Money supply is not the main factor determining stock prices.  It's reasonable to say stocks are a decent long term guard against inflation because over time, their value probably exceeds the inflation rate, but in short periods such as 1 to 5 years, they could fall much more than inflation.  Whether they're useful against inflation depends on your timeframe.  The time periods in which the principle "stocks are likely to outperform inflation" can be relied on to overcome the principle "stock prices are highly variable" are probably a lot longer than the business cycle. 

Incidentally, the true meaning of the business cycle is that there always periods when business expands, so confidence rises, so people expend businesses even more, until at some point the economy cools off.  At that point confidence shrinks, but eventually business expands again anyway, starting the process all over again.  This forms a never-ending cycle. Each step in the process leads to the next, but the timing is impossible to predict precisely.  We all know stock prices will also fall at some point, but that information doesn't tell us what to do about it.

I agree with most MMM posters that market timing is generally unwise.  Generally an investor should allocate their portfolio based on long term consideration of how different investment categories are likely to meet their investment needs.  If you are an investor who saves and invests a substantial portion of their earned income, good results will follow.  Don't time the market.   Time your investing based on your stage of life.

PS. Just FYI.  I've seen a lot of people worry about inflation-and-money-supply questions. Most of them don't realize that QE in America is already over, and the bulk of the US' tactics used to overcome the "Great Recession" have been completed.  The last step is to raise interest rates, which the Fed is already doing.

https://www.bloomberg.com/view/articles/2017-09-25/sizing-up-qe-now-that-it-s-ended

https://www.nytimes.com/2018/03/21/business/fed-interest-rate.html
« Last Edit: April 29, 2018, 07:56:58 PM by Bicycle_B »

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1606
Re: Stock Market and the Money Supply
« Reply #4 on: April 29, 2018, 07:58:22 PM »
Money supply keeps growing through recessions / corrections and offers no useful information for predicting much of anything. It doesn't even predict inflation, contrary to certain economic theories. To see this, take this graph of M2 (money supply including cash and deposits) and click "edit graph" to add a line for the DJIA, CPI, PPI, or whatever.

https://fred.stlouisfed.org/series/M2#0

The funny thing about the internet is that it is very hard to get a feel for what was in the news in the past. What were all the pundits, experts, and people on forums saying in 2006, 2009, and 2012? Tracking this stuff down is painstaking. Well, based on my memory, here's a rundown:

2006: "Despite recent gains and rising interest rates, housing could go even higher in red-hot markets and become a bigger percentage of the economy than ever before. Fossil fuel companies will also do well, as oil went from $45 to $65 just last year! The fact that rising housing costs and higher gas prices have not reduced consumer spending speaks to the strength of the economy, which will recover losses from the dot-com crash within a couple years at this pace."

2009: "We're pretty sure stocks are going to keep going down. We're seeing waves of bankruptcies and an entire generation of investors may never touch the markets again. It's unclear whether the recovery will be L shaped or W shaped, but only a fool would think it would be V shaped after all we've been through. Foreclosures are going to bleed the economy for the next five years. Joblessness could hit 40% soon. These factors build upon each other and mean one thing - lower stock prices. Remember the bull trap during the great depression?"

2012: "Whoever managed to hold their stocks through 2008-2009 has been handsomely rewarded, but these imaginary gains are about to disappear as the national debt skyrockets due to bailouts and QE. We expect inflation to hit 5% in the next quarter and 15% by 2017. Plus, holy shit, Greece is about to default and collapse the entire EU house-of-cards economy with it! We recommend investing in gold - not ETFs that the government will confiscate within the next couple of years - but solid pure gold coins sold on Fox News. Experts predict gold will hit $10k/oz in the next five years. Get ready for the next wave down!"

TL;DR: The internet is a machine that cranks out bad advice and gets 100,000 people to repeat it to themselves over and over again in a quest to feel confident.

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1804
Re: Stock Market and the Money Supply
« Reply #5 on: April 30, 2018, 06:39:53 AM »
Some ideas about how to invest are based on decades of stock market data, and I'd recommend you learn from those sources.  I like "A Random Walk Down Wall Street".

Another reason to educate yourself is that right now you don't have a lot of data, but you're still trying to come up with a theory.  Before it was inflation hedging, and now it's something about the money supply or finding patterns in the DJIA.  You'd be better served by reading up on ideas that have worked for decades.

A nearby library probably has a copy of "A Random Walk Down Wall Street".

Systems101

  • Stubble
  • **
  • Posts: 167
Re: Stock Market and the Money Supply
« Reply #6 on: April 30, 2018, 07:56:29 AM »
If stocks are a good hedge against inflation, it means they have to track the overall money supply.

No, it doesn't mean that.  You are incorrectly equating money supply and inflation.

Consider: If I have $100 in a pile on my desk it's a lot different than if that $100 went to a baker and he paid the miller and the miller paid a farmer who paid me to repair his equipment.  In both cases, there is $100 of supply, but in the latter case there was $400 of economic activity (vs $0 in the pile on my desk). 

Stocks will track economic activity which will track the money supply multiplied by the velocity of money.  The supply by itself is meaningless to determine economic activity (or inflation, or much else).

The reason the supply shot up in the great recession (see post by @ChpBstrd ) is that many folks started to hold onto their money and spend less (not to mention less trust of loaning money).  Overall economic activity went down while supply increased because the velocity of money basically crashed (see: https://fred.stlouisfed.org/series/M2V ).  In many ways, the change in supply was an effect, not a cause.  It was intentionally increased by the government (by facilitating cheap lending to banks) in order to avoid an even worse slowdown in economic activity.


pecunia

  • Handlebar Stache
  • *****
  • Posts: 1278
Re: Stock Market and the Money Supply
« Reply #7 on: April 30, 2018, 09:10:36 AM »
Quote
Some ideas about how to invest are based on decades of stock market data, and I'd recommend you learn from those sources.  I like "A Random Walk Down Wall Street".

That's probably a good idea.  I've had that book out of the library twice, but never cracked it due to time constraints.  I should gather more data before coming to conclusions, but that is why I am asking you guys questions.  I do see some dissimilarities in the response.  In addition to clarify, the stocks I was looking at were index funds.

Some are true believers in the business cycle.  When the world is so interconnected, it seems like one place may be at the beginning of their business cycle whereas one may be at the waning period.  Don't different business sectors sometimes have their own business cycle as well?  So if the money is spread among a broad index fund, wouldn't there be another averaging effect for the different cycles?



Financial.Velociraptor

  • Handlebar Stache
  • *****
  • Posts: 1476
  • Age: 47
  • Location: Houston TX
  • Devour your prey raptors!
    • Financial Velociraptor
Re: Stock Market and the Money Supply
« Reply #8 on: April 30, 2018, 10:26:40 AM »
The OP's question(s) strike me as being very much about how the monetary base (and by extension credit growth) effects the economy as a whole and asset prices.  OP might find some reading on the Austrian school of Economics enlightening.  https://mises.org/

The Austrian school of thought remains controversial even today but where it shines brightest is on study of the monetary base.

pecunia

  • Handlebar Stache
  • *****
  • Posts: 1278
Re: Stock Market and the Money Supply
« Reply #9 on: April 30, 2018, 08:46:47 PM »
Quote
OP might find some reading on the Austrian school of Economics enlightening.

Well - I did listen to a couple interviews with Friedrich Hayak and watched Milton Freedman's TV show a few years back.  It was something like, "Free To Choose."  It is very interesting the conflict Hayak had with Keynes but they were very good friends.  I got started listening to his lectures after the music videos illustrating the conflict.  His book, "The Road to Serfdom," is another of those books I've taken from the library but have had to return without reading.  Your suggestion is a good one.  He was more liberal than I would have thought.

I had very strange job interview a few years with a Koch brothers company and the interviewer spent quite a bit of time explaining that the Koch boys followed the Austrian model of economics.  I didn't argue.  They've done well for themselves.  I didn't get the job.

Quote
The business cycle is a real thing as the attached unemployment rate graph shows.

cycle definition 1 - a series of events that are regularly repeated in the same order.

Economic cycles seem a bit irregular to fit the definition.  However, they do follow a pattern from a prescribed sequence of events so I guess if you are not very constrained with a rigid sense of time it works.

Which brings me back to wondering where we are in this cycle.  Business seems to be good.  People still need a lot of stuff.  The country has a lot of infrastructure to be rebuilt.  People are starting to finally get a little money in their pockets again and they will spend it on needed goods and services.  Makes me think there is still some time left for times to be good.  Price of oil has gone up, but that will just bring out other sources like to tar sands to go great guns.  This will spur further North American domestic growth, etc.

Guess I need to do more reading.

sol

  • Walrus Stache
  • *******
  • Posts: 8492
  • Age: 42
  • Location: Pacific Northwest
Re: Stock Market and the Money Supply
« Reply #10 on: May 01, 2018, 01:11:46 AM »
Money is all fake anyway.  It's just artificial score keeping, numbers in a ledger.  They are created and destroyed according to arbitrary rules that have little or nothing to do with value.  The score doesn't represent a real thing, despite our entire lifetimes spent thinking about it that way.

In the case of the stock market, prices are determined by the balance of willing buyers to willing sellers.  The recent tax bill was designed to cause government deficits by returning tax revenue to rich people, on the supposition that they are already too rich to spend it so they will instead invest that money in the stock market.  That's increasing the supply of buyers, which should drive up stock prices.

And don't confuse stock market investment with the "allocation of capital" the way so many economic textbooks do.  Unless you're investing in an IPO or a new issue, no company makes any money at all when you buy their stock.  You're just paying some previous Joe for his stock certificate, which he also bought from some previous Jane, who at some point in ancient history gave money to the company so they could raise capital.  How often do you think a DJIA company has an IPO or a new issue?  Is it clear yet how ridiculous the whole idea of stock prices is as a gauge of economic progress?

"The Money Supply" is an almost meaningless term.  Every time you write a check, you are literally creating money out of thin air.  You are exchanging the promise of future payment for goods and services rendered immediately, and it doesn't matter if there's any money in your account when you write the check or not, because you have still effectively caused economic activity to happen.  Even if there IS money in your account, the check could go a week or a month before it is deposited and shows up on the ledger, so you have effectively created a week or a month's worth of free money.  Collectively we do billions of dollars worth of this imaginary float money at any given moment.  It doesn't exist as cash or gold or even ones and zeros, it's just based on trust.

And the biggest asset most of us own is real estate, which is arguably the least liquid but most real asset anyone can think of, is just as bogus.  If zillow says my house goes up by $20k this year, did I actually make any money?  I can spend that $20k, by taking out a home equity loan or refinancing, but it's also not based on anything except the expectation that in the future someone will pay a larger sum for my property.  Did I create wealth with my property just because someone else thinks it is more valuable now?

The more I think about this topic, the more solidly I become convinced that the entire global economy is basically a shell game, a useful sham designed to incentivize our hard work.  We can't have everyone out there watching sunsets and holding hands, we need worker bees sitting in cubicles!  Money is just the little white numbers in the corner of your NES screen that tells you you're doing a good job, and it's basically just as artificial.  Inflation and business cycles and interest rates and stock prices are just quirks, wrinkles in the matrix which is ultimately based on a larger unseen lie.  Money isn't real!

EscapeVelocity2020

  • Handlebar Stache
  • *****
  • Posts: 2449
  • Age: 46
  • Location: Houston
    • EscapeVelocity2020
Re: Stock Market and the Money Supply
« Reply #11 on: May 01, 2018, 02:00:06 AM »
I mean, are we talking Money Supply MB, or M1, or a more tangible  M2?

Sure, the stock market was bolstered by QE (and declining interest rates), because that's what QE was voted on to do.

It's a little odd that I couldn't find anything on the internet on the recorded voting that failed in  Congress which ultimately passed on the second round for the 800B vote, back when the market really took that first nosedive in the fall of 2008...
« Last Edit: May 01, 2018, 02:03:26 AM by EscapeVelocity2020 »

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1804
Re: Stock Market and the Money Supply
« Reply #12 on: May 01, 2018, 06:53:43 AM »
Active mutual fund managers try to outguess everyone else in the market, with regard to each stock pick they make.  They denigrate index funds by calling them "average", but that's a very unsophisticated answer from a biased party that benefits from denigrating the competition.

Take an oversimplified case of two experienced managers with lots of funding and a full time staff.  One spends a lot of money and determines that Apple stock should be sold at it's current price, the other reaches the opposite conclusion while also spending time and money.  An index fund accepts that this competitive price multiplied by it's number of shares is the best approximation of Apple's value in the stock market, and then buys Apple in proportion to it's weight in the market.  If another company should be given more weight, experts should bid up the price of that other company until it's (price x stock) exceeds that of Apple's.  The index fund reaches about the same conclusion as the active managers, but with much less money spent.

I guess in theory index funds should be just a little better than average.  But in practice, the cost of buying/selling, cost of taxes, and cost of research add up quickly.  And in practice, about 80% of active funds fail to beat their benchmark (according to SPIVA).  You could try to outguess the market with your ideas about money supply or the business cycle, but you aren't likely to be better informed than active fund managers who already fail to beat their benchmarks 80% of the time.

pecunia

  • Handlebar Stache
  • *****
  • Posts: 1278
Re: Stock Market and the Money Supply
« Reply #13 on: May 02, 2018, 07:28:02 PM »
Quote
You could try to outguess the market with your ideas about money supply or the business cycle, but you aren't likely to be better informed than active fund managers who already fail to beat their benchmarks 80% of the time.

So - I guess other than gut feel, you really don't know when this business "cycle" will end.  It could have a couple more years left in it.  Holding back and waiting for the market dip is probably not the right thing to do.

maizeman

  • Magnum Stache
  • ******
  • Posts: 3890
Re: Stock Market and the Money Supply
« Reply #14 on: May 02, 2018, 07:31:04 PM »
Quote
You could try to outguess the market with your ideas about money supply or the business cycle, but you aren't likely to be better informed than active fund managers who already fail to beat their benchmarks 80% of the time.

So - I guess other than gut feel, you really don't know when this business "cycle" will end.  It could have a couple more years left in it.  Holding back and waiting for the market dip is probably not the right thing to do.

Yup. Was this point previously in dispute?