Despite ballooning Fed reserves to bail out banks, money supply as measured by the growth in money supply with a zero maturity (notes and coins, check accounts, savings deposits and money-market accounts collectively) continues to slow.

The slowing growth is contra to what normally happens when the Fed lowers the Federal funds rate.

In real terms the growth rate is also slowing.

The slowing in MZM growth is a consequence of US banks’ tight lending standards. The trend is likely to continue until the banks relax these standards.

The graph below shows the historical relationship between the annual change in the oil price and the year-on-year change in the US Consumer Price Index. Should the oil price remain around current levels, the CPI is bound to rise markedly. It comes as no surprise that gold bullion and Treasury Inflation-Protected Securities, or TIPS, have been relatively solid performers over the past few months.

Source: Plexus Asset Management (based on data from I-Net Bridge)

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Gold bullion has risen by $105 (11.6%) since its low of July 9, breaching $1,000 a few days ago and now trading at levels last seen at an intraday high of $1,033 in March 2008.

Gold bulls argue that the yellow metal stands to gain from rising inflation expectations as governments engineer the biggest asset price reflation in human history. On the other hand, John Mauldin (Thoughts from the Frontline) is of the opinion the rise in gold does not really tell us anything about the future of inflation. It is his belief that if the Fed were to withdraw from the current economic battle, the forces of deflation would be felt in short order. Mauldin contends the answer to the question “Will we have inflation in our future?” is “You better hope so!” But gold may not be a bad performer in a deflationary environment either

I have written a fair bit over the past few days about the overbought level of most global stock markets and also how China - a leading market on the way up - could be the catalyst for triggering a reversal of fortune. It would seem the expected downward correction is now squarely under way with the MSCI World Index down by 3.4% and the MSCI Emerging Markets Index 5.2% lower since their respective highs of August 13 and August 3.

A summary of the movements of major global stock markets since the recent highs, as well as various other measurement periods, is given in the table below. Interestingly, none of the indices in the table have been able to withstand the downdraught, with the Chinese Shanghai Composite Index (-17.3%) and the Russian Trading System Index (-10.0) leading the way down - in not dissimilar fashion to how these

Further to my post of yesterday, arguing that government bond yields have in all likelihood bottomed (see “Is the yield curve pointing to better tidings“), I have also analyzed the Coppock indicator for a longer-term perspective.

The Coppock curve is a long-term price momentum indicator used to recognize major bottoms in financial markets. For those who are mathematically minded, the indicator uses a monthly time scale and is the sum of a 14-month rate of change and 11-month rate of change, smoothed by a 10-period weighted moving average (see skyjuice for formula).

The market will typically reverse its trend whenever the Coppock curve reverses from an extreme low or extreme high. The graph below shows the historical relationship between the Coppock indicator and the US 10-year Treasury Note yield going back 20 years. A picture paints a thousand words …

While the deflation/inflation debate rages on, the jump in US government bond yield (and stronger commodities and weaker US dollar) seems to indicate that deflationary pressures are moderating.

The chart of the US 10-year Treasury Note yield shows a clear uptrend since the end of last year, with the yield also now trading above both the 50- and 200-day moving averages.

Source: StockCharts.com

The graph below shows the relatively flat yield curve (red line) immediately prior to the first rate cut in September 2007. As indicated by the black line, the yield curve has steepened dramatically since as monetary policy kept shorter maturities at low levels while longer maturities have been in a rising trend.

Source:

The paragraphs below are excerpts from a recent report by David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates.

“The consensus says that the era of the secular decline in government bond yields has come to an end because of the very low yields and the massive reflation efforts from governments everywhere. The consensus is that inflation is going to have to show up somewhere at some point. That may well be true, but despite huge policy initiatives, long-term bond yields did not hit their bottom in the US until late 1941 at below 2% and this was a good 12 years after the initial shock.

“Nobody built more bridges or paved more river beds than the LDP did in the 1990s in Japan, and despite a doubling in the government debt-to-GDP ratio and multiple credit downgrades, the yield on the 10-year JGB did not

As often stated in my weekly “Words from the Wise” reviews, a confidence indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds.

Source: Plexus Asset Management (based on data from I-Net Bridge)

Not surprisingly, a strong historical relationship exists between the Barron’s Confidence Index and the S&P 500’s 12-month rate of change.

Source: Plexus

The raison d’être of investment or wealth management is to maintain, or hopefully improve, one’s standard of living, i.e. to earn a real return on the investment amount. This sounds easy enough if one considers that the S&P 500 Index (and its predecessors prior to 1957) delivered a nominal return of 8.7% per annum from January 1871 to June 2008. With an average inflation rate of 2.2% per annum over the period, this meant a real return of 6.5% per annum.

Yes, I can hear many readers arguing that much better returns can be generated by “playing” the market cycles, especially given the fact that the S&P 500 has made no headway since 1998. Ah, the art of market timing! Perhaps, but keep in mind that very few people have succeeded in consistently outperforming the market over any extended period of time, especially once costs and taxes are factored in.

It seems as if the spring rally has probably exhausted itself. And it is about time given the extent and rapidity of the move. The MSCI World Index increased by 45.2% from its March lows until the early June high and the MSCI Emerging Markets Index by a staggering 68.9%. Both these indices have only had one down-week since the advance commenced in early March.

Leading markets such as Russia (+137.0%), India (+89.5%), China (+54.7%) and Brazil (+50.4%) significantly outperformed laggards such as the Dow Jones Industrial Index (+27.5%) and the S&P 500 Index (+39.9%), although all markets recorded very respectable returns. The major US indices have gained for 12 out of the past 14 weeks.

Click here or on the table for a larger image.

Source: Plexus Asset Management (based