Contracting money supply – potential headwind

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I have often referred to the removal of the monetary “juice” that will eventually cause a serious headwind for stock markets. Although I do not see the Fed funds rate in the U.S. rising any time soon, the poor U.S. money supply growth – 1.5 percent on a year-over-year basis – is causing concern. The situation in Europe is even worse with money supply actually contracting.

In the context of last week’s trading action, John Derrick, Director of Research at U.S. Global Investors, commented: “These short-term factors often just distract from the bigger and more important macro issues. We really shouldn’t be too concerned about a ‘fat-finger’ trade, but money supply, however, is something to worry about.”

Source: Investor Alert – U.S. Global Investors, May 7, 2010.

“We like to equate this phenomenon to trying to run a marathon using only one lung – it will both slow you down and leave you gasping for air,” said Derrick. “The struggling economies in the eurozone – Spain, Ireland and Greece among them – carry more than $2 trillion in external debt as a group. Generating the kind of growth needed to get out from under that collective burden is not impossible, but it is certainly more difficult when money supply growth is negative.”

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1 comment to Contracting money supply – potential headwind

  • jein

    hello mr duplessis,

    are there any shadow banking mechanisms, eg derivatives, that can make a liar of these money supply figures?

    kind regards.

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