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Saturday, May 22, 2010
For reasons unknown, I've never really liked the term "bubble", but due to a lack of a better term, I'll use it today to illustrate a point. I've always liked the phrase "overshoot and collapse" which is used in the biological realm to explain the rapid growth and subsequent crash in the population of a given species. That's a subject for a later post.
I thought it would be interesting to analyze the impact of the money supply through time on various "bubbles". The chart below illustrates quite beautifully how the money supply (M3-black dash) impacts the rise and fall of all markets. The chart compares 5 asset types: technology, financials, oil, homebuilding, and wheat. These all have experienced drastic "rise and falls" since the mid to late 90's. Many commodities followed the exact pattern, but I used oil and wheat as two examples. Click on the chart for a larger view.
Observations that can be made:
M3 (money supply) rises in the early 80's (Reagan), flattens in late 80's (Bush I), rapidly accelerates in 1995 (Clinton), and keeps rising rapidly after 2000 (Bush II).
Reagan pulls us out of the doldrums not by magical things called "trickle down" or "supply side", but by turning on the "money supply accelerator" in the early 80's. Note the M3 Rate of Change curve on the bottom. A trending up curve indicates a rapidly increasing money supplly while the downtrend is decelerating.
The Great Maestro, Alan Greenspan, pulls off the accelerator in 1988 and Bush I loses re-election.
Note that during the "flat" M3 from 1988-1995, the markets are aligned and flat.
In 1995, Clinton leads the public to believe that he magically makes the deficit disappear and balances the budget. Meanwhile, the money supply starts a significant upward climb. Note the M3 Rate of Change on the bottom of the graph. It rises rapidly.
Subsequent with the rapid rise in M3 in 1995, the markets go into "chaos" mode. The money supply drives the financials and technology through the roof. Note the steepness of the curves after 1995 in all sectors. The end result is the DotCom mania. Now we understand where all of that crazy investment and venture capital money came from!
DotCom crashes only to see the "credit bubble" move into financials, homebuilding, and commodities (oil/wheat). 2001 marks a "new beginning". Same game, but different sectors.
The markets all align in late 2008 subsequent with the steepest rise in M3 Rate of Change. Then they ALL come crashing down. As Robert Prechter with Elliott Wave International has stated, "all the same". Equities and commodities crash together in perfect synchrony.
Money supply has significant impact on the markets. While the Federal Reserve was supposedly created to help "nudge" the market when it needed assistance, the contrary is presented from this 30 year history. After 1995, it looks more like a heroin junky flying up and down.