Everyone is talking about how overextended the markets are. How a crash has been imminent and well overdue since the covid runup began. We look at the spy and compare it to the dot com bubble of the late 90s.
Yes, asset prices have become somewhat overpriced in the past two years, and the spy has held it’s upward trend until recently, however behind the scenes many leading stocks have already given back huge percentages of their gains since the peak of the stimulus fuelled bubble, most easily represented by ARKK which peaked in early 2021.
Much of the market has deflated back down to more reasonable valuations at this point, which is not to say we have reached a bottom but that the fearmongering of huge further downside and a prolonged bear market is overstated, and fails to take into account a key factor – the huge increase in the global monetary supply.
Total assets of central banks globally
Here we see the total assets of the major central banks of the world, sitting at around 19 trillion at the start of the pandemic, now up to around 31 trillion. This gives us a 50% increase in the base monetary supply of the world.
This shocking figure is what kicked off the great bull run of 2022, and has now manifested itself in rampant inflation across the world, but the full effects of these drastic measures have not yet been felt. Markets are not 100% effective, there is a delayed reaction to these economic changes which is going to continue to manifest itself in the coming years.
M2 is a measure of the money supply in the economy, including cash, checking deposits, and easily-convertible near money. Looking here we see a representation of asset prices against the expansion of the money supply in the country.
While the conventional SPY/USD chart shows the markets ripping to new all time highs, we can see here that all we’ve really done is revisit the highs of the start of 2020, before the pandemic crash. Relative to the amount of money that exists, we’ve just worked our way back up to where we were in terms of asset valuations, and now we are seeing a correction as we’ve approached this level, around 0.22.
$ Corporate buybacks (4 week average)
% Corporate buybacks (4 week average)
Since 2018 there was a decline in corporate stock buybacks, in which the asset markets followed suit. There was less new capital in the economy, however since 2021 we are seeing stock buybacks remaining hugely elevated, at all time highs, and assets have continued to rise in value.
There is enormous amounts of capital which has been injected into the system, trillions of dollars in the US alone, which has to go somewhere. As inflation continues to rise, the FED faces the not so difficult decision of feigning an attempt to tackle it while continuing to kick the can down the road.
This pullback started following the talk of the FED suggesting measures tightening monetary policy. The market has responded pricing in the potential gradual rate hikes, the easing of QE, the reduction of the FED balance sheet. The January FOMC meeting comes around and this talk is, still just that.. talk. How many times has the FED talked the talk only to go back on what they say?
No-one wants to go down in history as having caused the next recession. Until inflation really gets out of hand, we will likely continue the same pattern we have leading up to each midterm election. Yeah this time it’s different, but that’s what they always say.
Let the Bull Market Continue.
– SPY looked overextended
– Corrections have already largely taken place, little downside left
– Huge increase in global money supply not yet fully priced in to assets
– FED unlikely to want to upset the markets too much
Submitted January 28, 2022 at 12:37AM by dt33th
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