ASX 200 Index (XJO)
Further evidence of a slowing market came this week, with the trading volume sitting at the lowest level of the year, excluding holidays. The week saw the XJO start at 7305 and as of writing, is trading at 7309. It has been a dull week for the stock market. Of course, we know that low volumes and narrow trading ranges are the precursor for high volume, big trading ranges and a large jump in fear levels.
It is a warning that the market is at the front of a change of direction. The same conditions happened in February 2020 and we know what happened back then.
Volatility Index (VIX)
ASX Sector Movements
ASX Index Movements
You may have heard the term Quantitative Easing (QE), but have you wondered what the effects on assets are when the Central Banks start inflating the money supply? There is a great deal of jargon surrounding QE. Whilst it may not be interesting to know that the purchase of bonds every month from market participants is how the Central Banks expand the supply of money, you may want to know what it is doing to your assets.
Imagine that you live on a small island with a fixed number of shells as currency. Let’s use 1,000 shells as our example. You have a fishing boat that is worth 10 of these shells, or about 0.5% of total shells in the system. You have a good asset, but then the island becomes vegan and the value of your boat has fallen to just 5 shells.
The island chief, who owns a few fishing boats himself, doesn’t like this and decrees that another 1,000 shells be found and put into circulation. This means that the money supply has doubled and your boat is still worth 0.5% of the money supply, which equals 10 shells (0.5% of 2,000 shells).
You are happy because your boat has notionally increased in value to what it was before.
The chief thinks this is good practice and adds another 1,000 shells to the money supply.
For you, this has increased the value of your boat to 15 shells as it still represents 0.5% of the money supply (0.5% of 3,000 shells).
This is the illusion of QE. The value of your boat hasn’t increased in value, the shells have decreased in value. This is what a loss of purchasing power looks like. What you could buy for $1 in the year 2000 is now costing many times more.
To gauge how big the loss of purchasing power has been, take a look at the chart below. It is the Wiltshire 5000 index, which has the most number of stocks in it, divided by the Fed’s balance sheet. The continuing expansion of the money system by the Fed has seen the value of the stocks fall in real terms.