A Market "Based" On Monetary Surreality

With macro data becoming worse and worse (more and more bullish for Fed free money) and stocks off to the races (despite earnings that are abysmal), we thought a litle reminder of just what is driving this un-reality in nominal price moves. As the following chart, inspired by UBS, shows, each time the S&P 500 shows any sign of weakness, US money grows dramatically (money defined as the sum of M2 and foreign custody repo-able holdings at the Fed). Simply put, this is the reaction function of the Bernanke Put and explains why any weakness in Europe causes problems for the US – as the foreign banks repatriate and impact this ‘growth’ support. Correlation is not causation, but it is a strong hint.


The growth in money (M2 plus the NY Fed’s foreign offocal institution’s custody holdings of Treasury and Agency debt – i.e. repoable ‘stuff’) surges (red green arrows on inverted axis) each time the S&P 500 shows any sign of stalling (red arrows)…


Which is the exact opposite of the relationship pre-Lehman…


Which is why this doesn’t matter… (and yes Macro dropped today as the terrible ISM Services and Factory Orders misses trumped the NFP beat)


Until it does…


But then again we know exactly what will happen should the ‘market’ overwhelm the money briefly… or more permanently… (and FYI – the break point in mid 2006 between macro reality and the markets coincided with Magnetar selling CDOs guaranteed to fail, Merrill’s CDO department’s dificulties in getting super senior CDO tranches off their books, and AIG and the monolines begin to stop selling CDO protection)


Charts: Bloomberg


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