Weekly Charts
Each Thursday, the MCP Research team shares two charts we are currently looking at that bring insights into the current state of the markets. This week—money.
Economists use a multitude of methods to calculate a country’s GDP. At the end of the day though, all methods attempt to answer a single question – how much money was exchanged for total goods and services. From a monetary perspective, answering this question can be done with a simple formula. GDP is equivalent to the total supply of money in the economy (money supply) multiplied by the numbers of times it trades hands in exchange for goods and services (money velocity).
GDP = Money Supply X Money Velocity
Unfortunately, despite the Federal Reserve’s efforts in growing the money supply by over 30x since 1970, the velocity of money has fallen precipitously (Figure 2). While money velocity had historically been viewed as a key indicator of economic cycles, this steady trend down has led many economists to reconsider its usefulness. Clearly, money is not moving through the economy the way it had in the past.
Figure 2, plotting the money supply against the stock market, gives us an idea of where some of this money may be hiding. Today, the proportional amount of money invested in Nasdaq stocks is as high as it’s ever been. We do not interpret this as an indicator of where the markets are headed, however it is important to be aware of the fact that money is concentrating itself in assets that are meant to reflect the real economy rather than the real economy itself, and ask ourselves how this may impact central bank policies going forward.
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