The FED released June's money supply numbers this afternoon. M2 increased again, while M1 declined slightly. Retail money funds, which are a component of M2, have increased by six percent since the first of the year. Institutional money funds have increased by 10.5 percent over the same period of time. Ironically, the Dow has increased by 11 percent since the first, nearly identical to the increase in institutional funds.
Since we can't count on the FED to corral the money supply, we have to estimate where these funds will be allocated. Currently, a heavier proportion is being placed in the stock market; thus, the Dow broke another record today. It doesn't matter if all the stocks deserve their current pricing or not. If there are extra funds laying around, institutional investors will place them somewhere. They buy the stocks, increased demand causes upward price pressure, and viola: record breaking numbers.
What I've been betting on this whole time is that the funds will be moving from stocks to commodities. It's just a little hard to believe that despite all the bad news in the housing sector and the subprime mortgage market, coupled with the increasing trade deficit and federal deficit and the consumer deficit, the stock market continues its upward trend. When will it end?
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