Sunday, March 16, 2008

Money Supply

I'm again having trouble downloading charts from the road so no chart with this one. I'll add the chart when I get back in town.

There seems to be some debate about whether the Fed is increasing the money supply. IMO all one has to do is take look at a chart of the dollar from 01 to the present. The dollar responds to supply and demand just like anything else. Too many dollars and the value drops. It's pretty easy to see that the Fed is printing too many dollars. Notice that in Oct. when the Fed allowed the dollar to break long term support the stock market began to struggle. This is the point where I said that the fun part of monetary expansion was probably over. Recently the dollar had a chance to find support but with the recent trouble in the credit markets not to mention the swoon in the stock market the Fed has opted to again sacrifice our currency in the attempt to avoid a recession. The results so far have been the same rising commodities and fading stocks. I'm not sure if there is a point where this strategy will work or not. I suspect that stocks are going to have to get cheaper before the excess liquidity will stay in the stock market instead of draining into commodities.

There also seems to be some discussion about commodities rising solely on speculation. While commodities do from time to time get ahead of themselves the underlying reason for commodity price increase is simply supply and demand imbalance . The bear market from 1980 to 2000 made sure that the infrastructure in the commodity markets was unable to keep up with the demand from emerging markets including China & India. We still have years before the supply side of the equation catches up to the demand side. This bull market will continue until it does. 

I also notice but can't get a chart up that the Yen has now broken out above long term resistance. The next level of resistance is 80. If this level is reached it will put a lot of pressure on the markets. As I stated in the previous thread we should be able to rally from the extreme sentiment readings we've seen in the past couple of weeks. I suspect there's a lot of big money betting on the market rally at this point. If this money has to now sell then it could get ugly quick. I don't think the BSC insolvency is the only broker/dealer in trouble just the first. There is never just one cockroach. 

The XBD broke to new lows Friday. Not a good sign. Without the financials this market is going to have trouble sustaining any serious rally.