Saturday, October 4, 2014

When The Monetary Base Didn't Push Up The Stock Market - The Deflationary Death Cross

During this cycle, critics of the Fed have repeatedly shown that the increase in the S&P 500 has been solely due to the increase in the monetary base via the Fed's liquidity injections (QE). And it is hard to refute that view. I mean, look at the positive correlation since early 2009. Also, keep in mind that the Fed's QE program is set to end this month, which has historically fueled corrections.

Source: Ycharts.com

However, here's a chart that the critics of the Fed and the critics of the Fed critics don't want you to see. When the Fed started QE1 at the end of 2008, it had no effect on the stock market and asset prices in general. The negative feedback loop in the market was so powerful that printing money couldn't prevent a deflationary collapse at that time. This goes to show that the Federal Reserve, or central banks in general, can't always backstop deflationary forces in the economy, or mainly asset price and debt deflation, at least initially, which are the main drivers of reflationary economic recoveries and employment gains.

I present to you the deflationary death cross.

deflationary death cross spx vs. monetary base
Source: Ycharts.com

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