Here is the smoking gun. Note the sharp contraction in the US monetary base before the last two recessions and again in 2010. Monetary base (M0) is plotted net of excess bank reserves on deposit with the Fed, which are not in circulation. The Fed responded after the contraction had taken place, instead of anticipating it.
The long-term problem is that the monetary base should not be expanding at 10 percent a year. More like 3% to 5% — in line with real GDP growth.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
So with massive liquidity creation now, the stock market is rising but in ’07/08 the market was overpriced while liquidity was restricted. Hmmmm – so Economics101 is bunk?
2006/2007 were heady days. The market ignored a negative yield curve in late 2006 which warned of a coming credit contraction. So Econ 101 may not be all bunk — just that the market ignores the warning signs when it has its head in the punch bowl.