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Courtesy of Scott Martindale, Sabrient Systems and Gradient Analytics
Bulls found fresh legs on Wednesday with support from the FOMC, despite the reluctance of Greece to “play ball” with its creditors, which has been depressing investor sentiment. Everyone seems to agree that the unresolved debt crisis in Europe is the main thing holding back global economic recovery and the snorting stock market bulls. To be sure, the situation in Europe is not good.
The worry is that Greece might be too far gone to save, and then others will fall in a domino effect. To comply with the European Banking Authority’s stress tests, European banks must raise capital and deleverage their balance sheets, so they are unloading their government debt holdings–but this hinders credit and economic growth. It’s a catch-22.
Nevertheless, the “risk-on” trade continues, as emerging markets, Nasdaq, small caps, and commodities are the leaders, while U.S. Treasury bonds are lagging. Among the 10 sector iShares, Basic Materials (IYM) and Technology (IYW) have been the leaders this week–with IYW getting a big boost from Apple Inc. (AAPL) after its incredible earnings report on Tuesday. Apparently, investors believe that the U.S., Asia, and emerging markets can weather whatever storm that emanates from Europe.
The release of the FOMC Policy Statement gave stocks and gold prices a boost, while knocking down the dollar. Although they projected somewhat slower GDP growth, they also indicated that the fed funds rate would like stay rock-bottom at least through 2014, and they left open the door for further policy action, assuming inflation remains low and unemployment high. “Don’t fight the Fed” was the mantra that goosed the bulls.
However, economic growth will continue to be sluggish until the dollars that have been printed by the Fed actually makes it into the economy.
The M1 Money Multiplier (MULT) is the ratio of M1 to the St. Louis Adjusted Monetary Base. It essentially reflects the amount of money individuals and businesses have for consumption or investment relative to the money available for banks to lend. Since the bull market in equities and fixed income began in the early 1980s, MULT has steadily declined from around 3.0 to below 1.0 today (0.833 on 1/11/2012). But when the financial crisis hit in 2008, MULT fell hard even as the Fed expanded…
