Mark Hulbert’s analysis led him to the same conclusion: relief rally, yes, market bottom, probably not.


Money supply isn’t growing
No matter how you define it, money supply growth has been anemic. Macro and TAA quants know that money supply growth is correlated with equity market returns. The premise is really simple. You throw money into the system, some of it make it into the stock market in the short term and the market goes up.

The chart below from the St. Louis Fed shows MZM updated to 19 Sep 2008. Despite the Bear, Fannie, Freddie and AIG bailouts of the recent past, the narrowly defined MZM money supply isn’t growing at all. Using a different metric, the broadly (reconstructed) M3 growth has also been falling off a cliff.


Here is a puzzle. If there has been all these bailouts but no growth in the monetary base, where is it coming from? Brad Setser’s analysis suggests that it is coming from foreign central banks and sovereign funds. There is anecdotal evidence of foreign central banks lending in US Dollars. In writing about the massive intervention last Thursday, Reuters reported that:

In Europe, there were signs that the stress was easing. The cost of borrowing dollars overnight fell back towards the Fed's 2 percent target, and three-month borrowing costs slid.