![\"MZM](\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2021\/2021-04-20-mzm2-w5000.png?w=525&ssl=1\")
<\/p>\nThe chart below compares the Wilshire 5000 broad market index (light blue) to the money supply (MZM or “at call” money). The previous two recessions show a surge in the money supply (green circles) as the Fed injects liquidity into financial markets to forestall a deflationary spiral. In both cases, stocks took more than two years to react, with the low-point reached 8 quarters after the Fed started to inject liquidity in Q1 2001 and 9 quarters after liquidity injections commenced in Q3 of 2007.<\/p>\n
<\/p>\n
It took almost 13 years for the index to make a new high after its Q1 2001 Dotcom peak and 5.5 years after its Q3 2007 peak (values are plotted relative to GDP).<\/p>\n
The recovery in 2020 was quite different. The index formed a low two quarters after the Fed started to inject liquidity and had recovered to a new high in the next quarter.<\/p>\n
While the recovery from the Dotcom crash took an unusually long time — because of the extreme valuations — we can still conclude that the latest recovery was exceptional. Record government stimulus caused a surge in disposable incomes, rather than the fall seen in previous recessions.<\/p>\n
![\"Disposable](\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2021\/2021-04-20-dpi.png?w=525&ssl=1\")
<\/p>\n
The surge in disposable income combined with a sharp fall in consumption caused a massive spike in personal saving, much of which flowed into the stock market.<\/p>\n
![\"Personal](\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2021\/2021-04-20-personalsaving.png?w=525&ssl=1\")
<\/p>\n
Huge inflows caused a surge in stock prices, which in turn led to similar exuberance to the Dotcom bubble of 1999-2000.<\/p>\n
“This is the only time in my 88 years when I saw technology stocks go to 100 times earnings; or, when there were no earnings, 20 times sales. It was insane, and I took advantage of the temporary insanity.” ~ Sir John Templeton, in 2001.<\/p><\/blockquote>\n
Conclusion<\/h2>\n
While the government attempt to prevent a fall in personal disposable income during the pandemic is laudable, their overreaction caused a massive spike in personal saving — spreading the contagion to the stock market. Stocks are now trading at precarious levels relative to earnings, with no easy way for authorities to engineer a soft landing.<\/p>\n
We are not sure how long the Fed can prop up the stock market but are certain that it will end badly for investors who ignore the risks.<\/p>\n
Notes<\/h4>\n
Sir John Templeton (1912-2008) was an American-born contrarian and value investor, banker, fund manager, and philanthropist. He founded the Templeton Growth Fund in 1954, which averaged more than 15% p.a. over 38 years. In 1999, Money magazine rated him as “arguably the best stock picker of the century.”<\/p>\n","protected":false},"excerpt":{"rendered":"
The chart below compares the Wilshire 5000 broad market index (light blue) to the money supply (MZM or “at call” money). The previous two recessions show a surge in the money supply (green circles) as the Fed injects liquidity into financial markets to forestall a deflationary spiral. In both cases, stocks took more than two … <\/p>\n