Dwindling Monetary Supply to Ignite Stock Market Crash, Analysts Warn

Journalist:
Kiril Nikolaev @kirilnikk123
October 9, 2019

Stocks tend to move with global liquidity. In other words, if there’s an abundance of money in the system, it is very likely that stock market prices climb higher. After all, many investors will look into assets that can help them quickly grow their capital.

On the other hand, a liquidity squeeze is likely to drive equity prices lower. That’s because buyers are needed to push prices higher. If market participants become illiquid, selling pressure builds and sends prices into a free-fall.

Economist Holger Zschaepitz elegantly captures this market dynamic in a tweet.

Tightening money supply has pulled down global equities. | Source: Twitter

This is why we’ve been warning our readers that we’re facing a global dollar squeeze. Follow the money and you’ll likely know where the stock market is headed. Our research revealed that the money supply has been declining for years.

Monetary Base at Levels Not Seen Since 2013

The S&P 500 is currently struggling to breach its all-time high. According to Twitter user Downtown Josh Brown, the index has been flat over the last 18 months.

The SPX is going nowhere. | Source: Twitter

While this behavior might be seen by bulls as consolidation in preparation for new highs, it can also mean that the market is running out of steam. If you consult the monetary base, you will realize that the latter appears to be the case.

A Federal Reserve chart illustrates how the monetary base has plummeted since 2014. | Source: Twitter

The chart above shows how the S&P 500 soared in tandem with money supply from 2012 to 2014. However, towards the end of 2016, the two showed signs of divergence. The SPX continued to climb while the monetary base dwindled.

Currently, the gap between the two is so wide that it no longer looks sustainable. Either monetary base expands or the stock market has some catching up to do.

Top Economist: ‘Lower Money Supply Translates Into Lower Stock Prices’

We spoke to economist Alex Kruger to confirm our stance. Apparently, we’re on the right track. The analyst said,

Lower money supply translates into lower stock prices whenever it doesn’t reduce inflation / create deflation. When it does, it can go both ways, though it usually does lead to lower stock prices.

He added,

A growing economy has a positive demand for money. In a well functioning economy, money supply growth should satisfy the growth in the demand for money. Starve the economy from money, and this should result in diminished growth. Real growth is one of the drivers for stock prices.

It appears that the growing American economy is no longer producing the required monetary growth. Thus, there’s evidence to suggest that it’s likely that the stock market may crash.

This article was edited by Sam Bourgi.

Last modified (UTC): October 9, 2019 12:54

Tags: S&P 500
Kiril Nikolaev @kirilnikk123

Kiril is a CFA Charterholder and financial professional with 5+ years of experience in financial writing, analysis and product ownership. He has a bachelor's degree with a specialty in finance and lives in Canada. Kiril’s current focus is on cryptocurrencies and funds, as he does his own crypto research and is a Product Manager at Mitre Media. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. He owns Bitcoin, Ethereum, and other cryptocurrencies. He holds investment positions in the coins but does not engage in short-term or day-trading. Follow the author on Twitter @kirilnikk kirilnikk123@gmail.com