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Thursday, May 17, 2012

Velocity of money

The velocity of money is essentially how fast money is changing hands.  Money changing hands creates some economic activity.  However, the velocity of money is not exactly correlated to the strength of the economy in the short run.  It seems to have more of a long term affect.  Take a look at a chart of the velocity of money vs SPX.

In the early 60s the velocity dropped below 1.7 and stayed there.  SPX kept going up for a few years, but then it went into a trading range until 1982.  There were several times in the 70s that the velocity crossed above the 1.7 threshold, but did not stay there until the late 70s.  Notice that after a few years with the velocity above 1.7 that SPX took off again to the upside.  After the mid 80s the velocity never got anywhere near 1.7 until late in the great recession.  Currently it is at the lowest level on the chart when the government started collecting data.  SPX has already been trading side ways since 2000.  With the velocity at these low levels it seems unlikely the economy is going to rock and roll anytime soon.  I think we are going to keep seeing ups and downs in both the economy and stocks.  What happens if we spend a prolonged period of time below 1.6 or the velocity keeps crashing like it is now?  It is going to be years before we know how this plays out.  I suspect this chart is part of the reason why Bernanke feels comfortable saying he will keep rates low through 2014.



Anonymous said...

Great chart!

Traderbob58 said...




The information in this blog is provided for educational purposes only and is not to be construed as investment advice.