Thursday, 3 December 2015

This Ratio Is Now Predicting A Stock Market Crash

Junk bond yields are surging and have now more than doubled from the 7.91% reported last summer to the current 16.61% (here). At the same time, the y/y growth rate of the combined value of the money supply and the monetary base has stagnated during the last year. 

Dividing the money supply plus the monetary base by the junk bond yield spread gives us the following chart with a ratio that has plunged 54% since hitting a high in July last year (named DVMS for lack of a better name). 

In theory, and based on the 2008 stock market crash, these developments are hardly good news for stocks which thrive on low(er) interest rates and an expanding money supply and monetary base. Adding developments in the U.S. stock market (Wilshire 5000 index) to the above chart shows how the DVMS ratio turned down ahead of the stock market last time around.

Will the DVMS correctly call a crash this time around as well? I explained the reasoning behind these charts more fully in Issue # 10 of The Crank Report back in October. 

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