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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: fedhead who wrote (45259)	4/6/2000 7:35:00 PM
From: pater tenebrarum	Read Replies (1) \| Respond to of 99985

Anindo, generally speaking when the money supply grows faster than the economy, excess liquidity is created in the system. when industrial capacity is constrained, this will drive up the cost of goods and services. however, due to the increases in productivity and global industrial overcapacity, the liquidity finds its way into financial assets, i.e. inflation is redirected into same. this is a fact that doesn't disappear just because someone knows about it. as long as confidence remains largely intact, this relationship will persist. you can observe a certain degree of 'front-running' on big repo or coupon pass announcements, but usually it takes a little lead time for the increased liquidity to affect the market. the relationship is undeniable. overlay a chart of the S&P with a chart of M3, and you will see that they correlate almost perfectly. there is an ongoing debate over the role played by the non-bank financials, mainly the chartered agencies, in influencing credit creation. actually they are strictly speaking influencing the velocity of money and not necessarily the supply. however, their balance sheet expansion, which has occurred at an absolutely breathtaking pace in recent years no doubt plays a big role in perpetuating the bubble. Japan, which is a big exporter of capital also plays a pivotal role. so does Europe, as the Euro has become the preferred vehicle for the 'carry trade'. the money supply data are released with a delay , so you can either observe the FOMC's activities on a daily basis (you have to keep in mind though how much is rolling off in old repos) and try to get a feel for the pace of credit creation that way, or simply buy index futures or calls on indices whenever a big increase in the money supply is reported. by the time it is reported, you can rest assured that the money is well on its merry way into the market. a 1920's Fed governor called the repos a "coup de whiskey for the stock market" which they indeed are. note that you will have to keep an eye on the level of the dollar at the same time, as it gauges foreign sentiment towards US based paper assets. as long as foreigners don't balk at financing the current account, the Fed can, and will, essentially print as much as occasion demands. of course in today's complex world of derivatives and leverage upon leverage, one has to be aware of credit spreads and the price of gold as well. both are liable to become the focal point of a liquidity crisis at any time. regards, hb