If you look at the S&P500 index (TVC:SPX) chart, you find that it has reached, and even surpassed, the previous high at 3393.5 which occurred just before the CV19 drop in March 2020. The last close on 31 December 2020 was at 3760. However, many attribute the recent V-shaped recovery to the Quantitative Easing scheme by the Federal Reserve, which makes a lot of sense. Printing money accelerates inflation and raises the prices of everything including stocks. If you haven't yet, look at the M2 Money Supply (FRED:M2) (chart below) to get a feel for the scale of the increase in money supply during 2020 relative to the past 20 years.
Below is the chart of SPX for the past 20 years.
Below is the chart of M2 money supply for the past 20 years. Notice the jump in the last year.
This analysis looks instead at the chart of SPX divided by M2. That gives us an inflation-adjusted look at SPX. We notice that the index has not yet achieved the V-shaped recovery. It is 2/3 of the way there. What's more, even the Feb 2020 high is not higher than the 2007 high that was just before the house mortgage crisis, and the latter is not higher than the dot-com bubble high in 2000. This simply means that making money through the S&P500 is not really making money, not really increasing the value of your holdings, but it is rather a mere hedge against inflation; and a failed hedge at that. It hasn't even achieved previous highs.
With all that being said, I do not believe that the March 2020 correction was anything to be scared of. I think we will achieve the high that occurred just before that drop. I say do not fear a major correction, let alone a recession, before we reach the top of the parallel channel as the arc arrow indicates. And keep your eyes only on the inflation-adjusted chart of SPX.
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We're right on track, and still more room to grow.
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This drop coincides with the top of March 2020 as well as the top of 2008.
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We are now above the 2008 top and actually appear to be using it as support. We have to wait for the candle of January to close in order to confirm this.
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My initial prediction when I published this a year ago was that SPX/M2 hits the 1.0 Fib line, gets rejected, and heads to the 0.5 Fib line. Right now, we are heading to the 0.5 fib line with no obvious support in the way.
Hi,
Great chart as always. Do you see further upside going to .28 levels? If so What would drive that ? a massive money printing?
Thx
TechNerdOmar
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Hi @kkandru. Thanks for your comment. Let's refer to the parallel lines in my chart by their Fib level. You're anticipating price breaking the 1.0 Fib line and reaching the 1.618 line. The 1 Fib line has resisted price many times. I would accept the thesis that it will break, if we consider this chart in a bull market. I'm reluctant to call bullish because we touched the 1 Fib line and I'm looking for a reversal. But honestly, I can't find a bearing for either the bullish or the bearish case.
Many things are different in today's environment, and I'm doubting whether I can compare the top today with the top in 2008. I don't know what these numbers mean anymore, what SPX represent, what M2 money supply really means... How should we measure economic growth? Does this chart have anything to do with economic growth? Is it possible that SPX falls over the next decade, but NASDAQ and tech stocks rise? What about the amount of leverage the financial institutions are taking and are encouraged by the Fed to take? What about that a big portion of the GDP (>30%, not sure) is attributed to expenses of servicing existing loans. There is no real growth when the economy is this much debt-based. How much can the US leverage its world hegemony to continue to make money out of thin air? How will low interest rates affect these charts? So many questions that I have been studying in the past few months to answer. And it's not getting easier. I will have to study more before I come back with a solid macro look.
Long message, but the conclusion is I don't know and I need to look for many more factors.
kkandru
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@TechNerdOmar, As you indicated earlier, money should be made from innovation and and not by debt rotation.
But one interesting thing I'd noticed. Look at DXY. Every time when money printing happens, DXY goes down and all other inflationary assets go up as usual.
So FED using rate raise weapon to prop up DXY giving impression to markets that a deflation is happening in lieu of inflation. Do you see my point here?
This gives Govt endless power to money printing and FED does this to rinse and repeat. So in my view SPY is the best investment forever. DXY is a beautiful tool to make this happen.
TechNerdOmar
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@kkandru, From what I learned so far, raising the rates is not in the benefit of the Fed. Macro analysists agree that rates reaching up to 2.5% for example is disastrous (I guess the reason is that it slows down the economy beyond what's bearable). On top of that, the Fed's goal is to lower DXY, not to raise it. The reason of course is to make US exports cheaper, and thus more competitive. There is inflation of course, but there are more deflationary pressures on the dollar. There is technological innovation which the US is leading. Technology is deflationary. There is dollar-denominated debt owed to the US by many countries around the world.
I think the problem of the Eurodollar is also related. To explain, the Eurodollar refers to USD stored in banks outside the US. When the Fed makes more USD available inside the US, through QE, and keeps rates low, they encourage the circulation of money inside the US (I think); and at the same time, they lower the utility of the Eurodollar. In effect, what this does is makes USD inside the US, much more useful (thus valuable) than USD outside the US. This puts pressure on everyone around the world to acquire more dollars to pay their dollar-denominated debts. That is deflationary.
So the thesis is that deflationary effects are stronger than inflationary ones. However, economists on either team (inflation vs deflation) cannot tell you when DXY will rise, or when it will fall. There are prominent investors on both sides of the trade. And there is 30 times more money on this trade (that includes bonds too) than money in the stock market. That's significant. What I expect is that the DXY keeps falling in the next two years, but after that, the deflationary pressures take over and DXY goes up to record levels for the next decade. This happens with a lot of volatility too, relatively speaking of course.
Great chart as always. Do you see further upside going to .28 levels? If so What would drive that ? a massive money printing?
Thx