More On The ‘Bubble’

  • June 16, 2003
  • Edward Allen

Today, the Empire State Manufacturing Survey, which records business
conditions for manufacturers in the New York area, posted an all time high
reading–doubling from 10.6 last month to 26.8. As a result, the S&P 500
surged to eleven month highs and Treasuries sold off across the
curve. Notably, however, the price of the July Fed Funds Future contract
stayed put and continues to price in an 80% chance of a 50 basis point rate
cut by the Fed when it meets on the June 25 –and based on the way it has behaved
in the past, the FOMC is even more likely to accommodate market expectations
as the date of the meeting nears. The reason for the intransigence in the
futures contract is that the prices paid component in today’s manufacturing index
slipped below zero for the first time in more than a year. As such, many market
participants are now growing more and more concerned that continued easy
monetary policy coupled with easy fiscal policy (as witnessed in the chart
below) is creating a bubble in the US stock markets, similar to the one in
2000, but anecdotal evidence on several fronts suggests otherwise…


image src=”https://tradingmarkets.com/media/2003/Ed/MON1.gif” width=”533″
height=”357″ />


Money Flows Into Bond Funds

Investors continue to diversify their financial holdings into other
instruments, namely fixed income mutual funds. Year to date, bond funds have
witnessed inflows totaling $84 billion dollars. Conversely, equity funds have
only taken in $26 billion during this same time period; whereas, these same
investors allocated $62 billion to stock funds during the first half of last
year.


image src=”https://tradingmarkets.com/media/2003/Ed/fund1.gif” width=”550″
height=”375″ />


Money Supply vs. Market Capitalization

When one considers the current relationship between the Wilshire 5000
(the broadest measure of the US equity markets), and the money
supply (measured by Money with Zero Maturity–MZM) the equity market is
clearly no where near the bubble proportions reached in 2000. In fact, MZM as
a percent of the equity markets is at historically high levels–62% to be
exact, which is the same level seen in the late 80’s, as evidence in the
chart below.


image src=”https://tradingmarkets.com/media/2003/Ed/mzm.gif” width=”542″
height=”386″ />

Edward Allen