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Not just a frustrated book keeper like Vince Cable with a bit of creative accountancy experience.
Nor another economic illiterate like Gordon Brown
Chart of the month
The level of equity prices in any economy can be viewed as the product of
| i. | The quantity of money allocated to equity funds by investors, |
| ii. | Equity fund managers’ desired ratio of money to their total assets (i.e., their “bullishness” or “bearishness”, or indeed their “liquidity preferences”, as Keynes would have put it). |
It follows that in the long run, as long as investors’ liquidity preferences are stable (as they are in practice), changes in the quantity of money are a critical influence on the stock market. What are the latest money growth data in the USA? The main point is straightforward, that the US banking system remains gripped in a regulatory vice which has stopped it from expanding. M2 is going sideways, while M3 – which consists of M2 plus other money balances (notably the “institutional money funds” which are the main form of cash for the USA’s long-term savings institutions) – was falling by about 1% a month in the three months to April 2010. In fact the recent slide in M3 has no precedent since the 1930s. On this basis the US equity market lacks the support of ample institutional liquidity. If money is one of the key factors energizing and driving stock prices, the bull market could be described as “running on empty”. For further discussion of the implications of the money contraction for American share prices, please click here.
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Contact address: International Monetary Research Ltd., Huntley Manor, Huntley, Gloucestershire GL19 3HQ
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