Car racing up a hill going at a very fast rate. Engine blows a cylinder. The mometum continues, but the car is still broken.
With sufficient M2 rate {not M2} you push the US FED bond market, and the corporate bond to lower yields {they move in parallel}. This creates a higher PE value on equities, and makes capital inflows into the USA plausible. Thus you have a create a self fulfilling cycle. As long as the M2 Rate continues, than the US dollar will continue to appreciate. And at the same time you put downward pressure on other currencies. Some currencies can withold a large pressure, other fracture immediately. Wonce you remove M2 rate pressure, you cause liquidity to dry up. The BOND market is much larger than the equity market.
With liquidity down, the currency which are deflated relative to the US also loose liquidity. And than the downward spiral starts. Currency fail, and the USA seems to be a safe haven. Bonds yields continue to drop, but the yields no longer support the PE's values. And thus equity, and yields move in opposite direcctions {decoupling}, and down falls the markets. Up goes the USD, down goes gold {For many reasons}
Yes the markets were suffering from securities inflation, and M2 masks that. Now they are reflecting the truer deflationary trends. Once Disinflation goes to deflation the US dollar will drop. Yields will fall, and the markets will follow. The markets are telling you something... SELL certain equities.
Trace the DOW, Russell, S&P 500 against the M2 rate and you'll see that it all comes back to 04/22/98 {or so} when the MACD of the M2 started downward. {A change in rate, removal of liquidity} There is no bull here, you can check for yourself.
This analysis is called Monetarist. |
