It would be more helpful to compare S&P 500 vs CPI rather than M2. It's purchasing power that matters to most investors, not the comparison to how much money exists. S&P 500 gained ~40% since January 2020, and CPI gained ~18%. Even better would be comparing to the total stock market rather than S&P 500. Using something like DWCF or VTSAX
Right, this chart is the epitome of misleading statistics. It was made by someone who doesn't understand what they're talking about, and its intended audience is people who don't understand what they're reading.
S&P500 Normalized with M2
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Re: S&P500 Normalized with M2
#22Why on earth would you divide the market cap of the 500 largest companies in the US by the money supply? It's a completely arbitrary and silly thing to do. Why not divide the number of cheese wheels by the diameter of the moon? This chart isn't mind-blowing, it's straight-up meaningless. [edit] Also note the S&P 500 isn't even a consistent numerator, it's an index whose constituent companies are replaced over time at…
A common narrative lately is that a lot of stock prices are highly correlated with money supply. E.g. The only reason 2021 bubble happened is because the FED printed trillions of dollars. I wouldn't say its completely arbitrary given this has been a common discussion point. No opinions on whether it has meaning, but wanted to add the relevance.
Iirc, the fed also backstopped bonds and bought some stock
Re: S&P500 Normalized with M2
#23It would be more helpful to compare S&P 500 vs CPI rather than M2. It's purchasing power that matters to most investors, not the comparison to how much money exists. S&P 500 gained ~40% since January 2020, and CPI gained ~18%. Even better would be comparing to the total stock market rather than S&P 500. Using something like DWCF or VTSAX
Re: S&P500 Normalized with M2
#24Why on earth would you divide the market cap of the 500 largest companies in the US by the money supply? It's a completely arbitrary and silly thing to do. Why not divide the number of cheese wheels by the diameter of the moon? This chart isn't mind-blowing, it's straight-up meaningless. [edit] Also note the S&P 500 isn't even a consistent numerator, it's an index whose constituent companies are replaced over time at…
A common narrative lately is that a lot of stock prices are highly correlated with money supply. E.g. The only reason 2021 bubble happened is because the FED printed trillions of dollars. I wouldn't say its completely arbitrary given this has been a common discussion point. No opinions on whether it has meaning, but wanted to add the relevance.
Re: S&P500 Normalized with M2
#25I’m trying to click the X to close the window but won’t do anything.
Re: S&P500 Normalized with M2
#26Earlier quoted context omitted.
Why not? In the long run M2 is basically the same as inflation.
No, it's not. It's not the same thing at all. Money supply is not the same thing as inflation, which is why we have different terms for them.
- Inflation and money supply are tightly correlated.
- "Inflation is caused when the money supply in an economy grows at faster rate than the economy’s ability to produce goods and services." - St. Louis Fed
https://www.stlouisfed.org/en/education/feducation-video-ser...
Re: S&P500 Normalized with M2
#27Why on earth would you divide the market cap of the 500 largest companies in the US by the money supply? It's a completely arbitrary and silly thing to do. Why not divide the number of cheese wheels by the diameter of the moon? This chart isn't mind-blowing, it's straight-up meaningless. [edit] Also note the S&P 500 isn't even a consistent numerator, it's an index whose constituent companies are replaced over time at…
Re: S&P500 Normalized with M2
#28Earlier quoted context omitted.
No, it's not. It's not the same thing at all. Money supply is not the same thing as inflation, which is why we have different terms for them.
- He said "basically" the same. - Inflation and money supply are tightly correlated. - "Inflation is caused when the money supply in an economy grows at faster rate than the economy’s ability to produce goods and services." - St. Louis Fed https://www.stlouisfed.org/en/education/feducation-video-ser...
> Inflation and money supply are tightly correlated.
Historically, they haven't been. Since 1970 the M2 supply has increased like 36X (7% annualized) but the price of goods is only up 7X (3.6% annualized) -- this includes the inflationary period in the 70s and to the peak in the 2020s just to avoid cherry-picking. [1, 2]
Money supply is how much money is floating around, and inflation is a decrease in the purchasing power of money as measured from prices of a representative basket of goods and services over time.
> "Inflation is caused when the money supply in an economy grows at faster rate than the economy’s ability to produce goods and services." - St. Louis Fed
What they're saying is that when the supply and demand of money are in balance prices should remain relatively consistent (MV = PQ) all else being equal - but all else is not equal. You can't distill the value of money down to one sentence from the St. Louis Fed.
Being the reserve currency and having other world economies dollarized means that there is a ton of external demand for US dollars outside the US economy. That increases supply without touching prices. Taxes are inflationary. Supply shocks are massively inflationary. If we run out of oil and everything doubles in price, that's inflationary - and it happens regardless of money supply. That's just a few random things that are completely left out of the above statement.
Most money issuance in the US doesn't come from the Fed, it happens at retail banks when you take out a loan against fractional reserve, and each dollar is backed by the demand to repay that loan. As economic activity increases, so does the demand for loans, and therefore the supply of money. So generally, within some margin, the money supply tracks the economy thereby satisfying the quote.
Re: S&P500 Normalized with M2
#29dont need any financial astrology or jargon to know this
Re: S&P500 Normalized with M2
#30Earlier quoted context omitted.
A common narrative lately is that a lot of stock prices are highly correlated with money supply. E.g. The only reason 2021 bubble happened is because the FED printed trillions of dollars. I wouldn't say its completely arbitrary given this has been a common discussion point. No opinions on whether it has meaning, but wanted to add the relevance.
The Fed isn't an acronym of initialism. It's short for the Federal Reserve so it's "Fed" not "FED" - I call this out for your benefit as the conspiracy theorists always capitalize it, and this reduces your credibility for the average reader. Just as writing BITCOIN would reduce my credibility in the eyes of the, er, renowned monetary theorist Tsartoshi.