A declining money supply typically indicates deflation because there is less money to be spent, which causes prices to fall. But despite all of the quantitative easing, money printing and deficit spending, the velocity of money has been declining steadily since the credit crisis.
The gravitational pull is truly strong if the U.S. Federal Reserve is printing money at record levels and yet the velocity of money is declining.
Does the stock market reflect the economy?
The stock market is making all-time highs. But where is the celebration? Where are the Dow 18,000 hats on CNBC? The stock market used to reflect the health and strength of the economy, but this may also be distorted by an impending investment black hole.
Stocks are going up at a record pace, earning investors more than 17% per year since the credit crisis, well above the 10% historical average. This is largely due to investors buying stocks for their dividend and the lack of other attractive options in the low interest rate environment. With so many investors going all-in on equities, it is no wonder most are a little uneasy with the new highs.
The economic event horizon
A place where the stock market is at all-time highs, bond yields are at record lows and no one is happy? That’s as close to an economic black hole as the market has seen in decades.