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FED: We created a sense of wealth

Marine traffic

Yes, these were the words of a FED member (I believe it was Stanley Fisher, but not 100% sure) who said that when he expressed his views on the last 7 years of FED action and monetary policy.

FED wanted to create a sense of wealth so people would be comforted and spend money which would prop the economy.

And they failed.

They failed miserably. How can we verify it? A simple economic indicator will tell you if the sense of wealth helped or not – inflation.

If people spend money and buy goods, the price of the goods goes up. If they do not spend, the merchants are forced to lower prices to attract more buyers. That’s it.

With FED pumping so much money into economy via QE programs, one would assume, wealth-enlightened consumers would be shopping like crazy and inflation would skyrocket.

It didn’t happen.

In couple of last weeks I posted a few articles indicating that we are heading into recession (if we are not already in recession) and bear market (we are already in the bear market) and I was posting my evidence why I think so.

Besides declining trend lines of my indicators clearly pointing to more selling, yesterday I wrote about divergence between a transportation index, DJ index, and S&P 500 index. This divergence made me to believe that we might see another 10% drop of the market.

I also posted a Marine Traffic website results where you can clearly see all large cargo ships on the world map crossing oceans transporting goods between continents.

Some of my readers objected that most of the commerce is between Europe and China or the US and China and so transatlantic transportation may not be that busy.

So let’s take a look at the Pacific commerce:

Marine traffic

Nothing. Absolutely NOTHING is moving even in the Pacific. All ships are docked or at the coast. And the Baltic Dry Index dropped again today to new all-time low.

There is still no life out there.

If you still believe that the US economy is “just fine” and rosy and we are in no way in recession, let’s take a look at another evidence, that we actually are in trouble and recession, crisis and market crash is round the corner.


 · A sense of wealth effect


To create a sense of wealth in the economy and prop consumers to spend, FED started pouring trillions of cash into economy thru QE programs. I want you to take a look at the chart below. It shows the interest rates over time (blue line), monetary base or how much money is in economy (green line) and the stock market total market value index (red line):

Marine traffic

The chart indicates when FED started pumping money into economy. What’s interesting on this chart is how the money supply become correlated with the stock market. Almost a perfect correlation.

Let’s zoom in a bit:

Marine traffic

In the zoomed chart you can clearly see the correlation between money in the economy and the stock market value. I think you can even clearly identify time when the FED took away the QE program and when they started another one. I bet, I do not even need to point it out.

Let’s zoom even closer to the top of the market and the end of QE3:

Marine traffic

When FED ended QE3 the market still felt the effect of the “wealth sensation” and moved higher upon its momentum. But as the money base started being choppy, slowing down, and basically dropping, the stock market violently corrected down to the base to become once again correlated with the money base.

When FED decided not to increase rates in September, the market again popped up on expectation of drug support continuation, but when FED raised rates in December and monetary supply started dropping, the market immediately corrected and is still in that correction.

Currently the market is at approx. 3930 level (adjusted), the money supply is at 3650 level (adjusted). If we assume that this market would go lower to become again correlated with money supply, you can expect another 7% drop.

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