And yes, one of the “mysteries” of the stock market is how valuations during delusions are completely ignored by everyone. We all know it doesn’t matter.

Well, Mr. Market and all that.

I see the market as a repository for excess funds. When there is a lot of money with no place to go it winds up there, inflating values and the market in general.

Yes, I’ve been making this point for some time, when people make what are, in my view, erroneous statements about income inequality. Although it’s obviously true that the 1% have been storing up wealth on their personal balance sheets, the size of the wealth they’ve stored up is only large compared to the other 99%. The REAL wealth is being stored up in the stock market and in the asset accounts of the megacorporations.

If you look at the graph you can see just how bad it is. Follow the graph back and you can spot good times and bad. See if you agree with me about it being a key problem to our economy.

I hadn’t thought of it that way, but I think you’re on to something. Notice how velocity immediately picks up at the same time a recession ends, which illustrates the Keynsian idea that recessions end when animal spirits (e.g., consumer confidence) rises again. There’s only one exception to that rule on the chart, which is the dot-com recession, which can be excused perhaps because it was concurrent with 9/11.

In several cases, however, there the increase in velocity was short-lived, resulting in a longer and deeper velocity downturn. And of course the big elephant in the room is that the downward slope after the short uptick following the events of 08–09 is ominous.

Dammit, now you’ve got me interested. So I downloaded the dataset from FRED and redid the graph to show period-over-period behavior. Looks like this:

Image for post
Image for post

No great surprise there, I guess, but it’s clear that there is a long term trend afoot, that interestingly didn’t start with the dot-com bust, but actually started while it was underway.

Then, I ran a regression between the year over year changes between velocity and the inflation rate, S&P 500, and GDP growth.

  1. No correlation between velocity and the stock market. Thankfully, I guess.
  2. Some correlation between velocity and the fed funds rate (R=39) and inflation rate (R-27). It’s there, but nothing that you’d hang your hat on.
  3. Best correlation (R=43) is between velocity and GDP.

However, if I filter the years to measure only the last 25 years (which is kind of the smallest sample I think would be indicative of anything) the correlation between GDP and velocity jumps to R=71. The other values don’t change much.

So, velocity didn’t used to be very well correlated to GDP growth……but now it is. That’s kind of interesting.

So, now that we can show correlation……we have to consider the cart/horse problem. It’s intuitively logical that if the consumer is starting to spend their money rather than hoard it, GDP will rise to meet demand.

So, now we’re left with the problem: with consumer confidence hitting highs we haven’t seen since the dot-com boom was booming…….why’s everyone still sitting on their money?

Go figure.

Written by

Data Driven Econophile. Muslim, USA born. Been “woke” 2x: 1st, when I realized the world isn’t fair; 2nd, when I realized the “woke” people are full of shit.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store