Singapore M3 money supply growth vs STI stock index
Posted by lowem,
Sat Apr 12 00:45:00 UTC 2008
With the benchmark Singapore Straits Times Index, the STI, down well over 20% from its previous high of 3,906.16 back on 10 Oct 2007, and M3 money supply growth slowing, it is time to take another look at the causal relationship between the M3 and the STI :
For this chart, I took a slightly different approach from my earlier study which used the rate of growth based off May 2005, which was an arbitrary starting point. For this study, I am comparing the percentage year-on-year (yoy) change for both M3 and STI, and plotting it on a time axis. The time series has also been extended back to Jun 2004.
As can be seen from the chart, the STI has been doing quite well since Jun 2004, giving investors a very respectable rate of return of 10% to 20% from year to year, with the M3 money supply growth rate hovering below 10%. GDP growth was starting to recover from the period of the SARS outbreak. With increasing GDP growth and a rather stable M3 money supply, it was a rather benign environment for inflation then and economic prospects looked like they were getting better.
However, as far back as 2004 through 2005, I was already watching out for inflation. My blog post dated 2 Feb 2005 noted that "economists say there is little threat of inflation or other serious damage to the economic recovery". Watching the oil prices rise, I did not agree with that assessment, and on 30 Mar 2005, in a post titled "Oil prices starting to affect everything else", I observed the rise of oil prices to over $50 per barrel and said "when these price increases start to hit the rest of the economy, it's going to hit people hard".
Things started taking off together with the May 2006 general elections. The view of the contrarian community is that generally, elections tend to be inflationary. But leaving the politics aside, let's observe what happened after that. M3 money supply growth shot above 10% for the first time since the Asian boom and subsequent Asian financial crisis of the 1990's and continued accelerating through the end of 2006, then it powered above 20% y-o-y for nearly every single month in 2007. That was when I wrote my noted 23.62% M3 money supply growth blog post, and commented that "this is highly inflationary".
With such an outpouring of money supply into the economy, the stock markets responded, and the STI had an outstanding performance through the end of 2006 into 2007, growing at 30% to well over 40% year-on-year. I continued to observe the rise of inflation, while investors cheered the markets on.
And then the credit crisis struck in Aug 2007. You can see it on the chart as the point where M3 actually started to slow down and dipped below 20%, dragging down the STI with it. The sorry tale continued into 2008 where all the past gains of 2007 have been wiped out, as evidenced by the negative year-on-year figures for the STI. Housing prices started to soften especially on the high end, a process that is now filtering down the real estate food-chain.
But the billion dollar question now is, what next? Given the lack of a working crystal ball, I can only speculate that inflation will continue to be a persistent problem through 2008. The credit crisis will be papered over with increasing injections of liquidity into the system and this will lead to continued double-digit increases in the money supply globally. M3 may approach 10% for a while but the flood of unleashed liquidity leading up to the Nov 2008 U.S. elections and beyond will boost stock markets into Q2 and Q3 2008 (ie. Jim Puplava's "Oreo cookie theory") after the tough times they have been giving investors in Q1 2008. Towards the end of 2008, inflation strikes back with a vengeance.
The last paragraph above is pure conjecture and in all probability, I am as likely to be way off the mark than correct. Do not make investment decisions based on anything I write here unless you have also done your homework, and whatever you do, I am not responsible for any losses that you may incur. Standard disclaimer and all :)
See also :
1. Singapore STI versus M3 money supply
Re-post from lowem.log
Singapore M3 money supply growth vs STI stock index