Sunday, May 24, 2009

Money Supply, CPI, S&P500, & nominal GDP

This is one of my favorite charts supplied by data that I compile. It shows nominal GDP, the True Money Supply, CPI, and the S&P 500. It provides the most truth out of any chart that I have seen regarding the economy.

It's very clear that the S&P 500 follows the money supply quite closely except for periods of the energy price shocks in the 70s and the tech bubble in the 90s as well as the recent real estate bubble. The S&P is now correcting into a period similar to the 1970s. I expect we will see prices of commodities in terms of US dollars to rise as the risk of sovereign default rises and consumption gets crowded out by government spending and an increased interest payment burden. The dollar is simply becoming a less desirable place to hold currency. The opportunities will continue to be overseas in countries that are developing businesses to serve wealthier countries. Brazil, China, India, Russia, and the Middle East will continue to prosper as we try to get ourselves out of a funk.

As far as stocks go. I would expect to see stocks stuck in a long and wide trading range as inflation continues. For those buy and holders, it would be a good idea to buy any time the S&P is significantly below the TMS as shown by this graph:

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