Money Supply And Why It Could Threaten The Market

In market terms, what threatening factors have come out of hiding?

A term I have not heard used commonly for 40 years is money supply.

In fact, I have not even thought about M1 and M2 since the days of trading commodities on the NY Exchanges.

Back in the day, traders waited patiently for money supply numbers to come out.

The definition of money supply is the total value of money available in an economy at a point in time. M1 includes money in circulation plus checkable deposits in banks. M2 includes M1 plus savings deposits (less than $100,000) and money market mutual funds.

From 1979-1982, Paul Volcker changed monetary policy to control inflation. Hence, we in the pits, checked M1 and M2 to see if Volcker added to or subtracted from the money supply. That, in turn, would impact the price of gold and silver.

Fast forward to the present:

Over the last three weeks, the M2 money supply has exploded by a whopping $532 billion. The money supply is expanding at 26x the rate of QE1 during the 2008 financial crisis.

Many wonder, including myself, what happens to all these trillions of dollars in new money, once the economy comes back?

With $300 billion of the recent stimulus heading to consumers, the price of basic commodities has to rise.

The longer the economy is shut down and with the immediate risk of deflation, the more likely it is that the FED will print even more money.

With the economy essentially closed, the demand for goods will rise, while the supply diminishes.

This will cause inflation to rise in the intermediate-term.

Not only will food and metal commodities rise, but the Fed may have to ultimately use the bond market to hedge against a potentially out of control inflation.

And if they raise rates, well, that is not good for the economy or the market.

On Friday, the FED cut its pace of Treasury buying from $75 to $60 to $50 billion a day. For now, that means the FED sees a lesser need to counter the excessive selling pressure.

Continue to watch the credit market, treasury bonds, gold, food commodities and how the inside weeks that were left in many instruments reconcile.

S&P 500 (SPY) 3 days of relatively tight ranges. I say down, under 244, up over 258

Russell 2000 (IWM) Inside week. 101.60 support and 112.56 resistance

Dow (DIA) Inside week. Support 190 resistance 216.35 then 225.87

Nasdaq (QQQ) 3 days of relatively tight ranges. I say down, under 181, up over 190

KRE (Regional Banks) Inside week. 27.26-34.73 range to watch

SMH (Semiconductors) Inside week. 122-99.22 range

IYT (Transportation) Inside week 145.52-117.18 range to watch

IBB (Biotechnology) 105.25 pivotal 110.25 resistance

XRT (Retail) Inside week 31.63-26.29 range to watch

Volatility Index (VXX) Inside week-59.01-39.00 range to watch

Junk Bonds (JNK) Inside week. 95.98 resistance 83.18 support

LQD (iShs iBoxx High yield Bonds) 120 pivotal support