Chart of the Day: Dow Jones vs Monetary Base

By Prieur du Plessis, on September 26th, 2009 posted in: Investment, Markets, Money

The chart below comes courtesy of Andy Kessler and shows the strong relationship between the movement in the Dow Jones Industrial Index and the monetary base. The monetary base data is defined as the “sum of currency in circulation, reserve balances with Federal Reserve Banks, and service-related adjustments to compensate for float”.

The extraordinarily loose monetary conditions will not last indefinitely and the main head wind for stock markets to look for will be a tightening monetary policy, eventually followed by an inverted yield curve.

Source: Andy Kessler, September 25, 2009.

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Read more on Dow Jones Industrial Average (DJI) at Wikinvest

dave inglis

September 28, 2009 at 2:45 am

Interesting chart, but to be convincing it should be longer term (e.g. – the last two major cycles going back to 1990), and it should include a plot to the inversion (or not) of the yield curve (if that’s important). As it is, I’m not sure what confidence limits can be put on the predictive value of the monetary base based on simply eyeballing this chart…