Shadow Capitalism

Two charts, both courtesy of Now and Futures, sufficiently explain why today’s deflationary deleveraging gorilla (tomorrow’s inflationary sovereign debt crisis) is of a different nature and magnitude than the post-dotcom crash environment, which was easily reflated by Greenspan for a 5-year bull.

Without money velocity (which is suppressed by the Fed’s incentivized sequestering of bailout/stimulus liquidity as “excess reserves”), injected liquidity does not reach the lending & spending level, and valuations signify future cash flow that never manifests. Notice the lack of any stabilization at all in the M3 aggregate, even since March 2009 lows in equities.

Without Fed/Treasury liquidity, the risk asset rally has no juice. The annualized rate of change of the total money supply of the Fed & Treasury didn’t breach 20% during the dotcom crash and subsequent reflationary bull market. During this financial crisis, however, the YoY change breached 100%. However, as QE draws to a close, the annualized rate of change is back to normalized levels, indicating a lack of marginal liquidity to allow for incremental gains in risk asset values from the demand side. This suggests, barring future announcements of an uncharacteristically proactive nature, equity (and other risk) markets will rely on organic growth for future returns.