Over the last several years, many analysts have argued that QE isn’t inflationary because the money that the Fed has printed has been locked up in reserve balances. I don’t personally share this view, but it’s worth noting that recently reserve balances have been contracting and currency in circulation has been growing as banks have chosen to convert reserves to currency. Currency in circulation is now growing at nearly a 10% annual rate.
Even as the Dow looks like it could post back to back 200 point increases, there are signs that equity markets are still structurally quite ill. Aggregate volume in S&P 500 component stocks continues to decline. While summer is always a light volume period seasonally, each of the last three summers have seen lower lows. Price doesn’t necessarily need volume for confirmation, but it is worrisome that there are fewer and fewer participants in the equity markets.
Today the S&P 500 was up 1.65%, but considering that the dollar was down 1.26% vs. the Euro, if you were a European investor in the US market, you hardly realized any gains–such is the power of currency. Much like how perception of physical motion is defined by one’s frame of reference, motion in financial markets only meaningful relative to the value of the currency of reference. Gains and losses in markets, measured in currency, can be completely illusory based on the change in value of the currency itself. To illustrate the point, the chart below is a chart of the S&P 500 as viewed by a European investor, measured in Euros. It’s a completely different picture than the one that we’re used to seeing, primarily because 2007 never reached the peak of 2000. Bull and Bear markets happen over different time frames. Technical levels become completely different. Simply rebasing the unit of measurement can alter the interpretation completely. YTD the S&P 500 is up 15% in Euro terms compared to 8% in USD.
Citigroup reported strong earnings this morning as did JP Morgan and Wells Fargo last week. All three banks also reported strong deposit growth as well. Systemically, despite low interest rates, US banks have been growing deposits at an above average rate. Y/Y, savings deposits grew by 11.5% as of the week of July 2. On average, since 1985, savings deposits have grown by 8.4% Y/Y. The higher than average growth in deposits since ’09 suggests that Americans are more comfortable saving via deposits rather than capital markets.
Reposted here from zerohedge is a stunning chart of cumulative flows to bond and equity funds since 1996. It shows that total fund flows into equity funds are negative over the last 16 years. Considering that US households have saved $5.4T over this time period (according to the BEA), the fact that equity funds have not seen positive inflows is staggering.