A Few Stock Market and Economic Charts to Study

Charts can be misleading, or they can tell you a lot. You have to study them carefully and understand why the data develops the way it did before concluding that the chart shows something meaningful. Otherwise, the chart is simply data mining. It might show a correlation between items but not necessarily a causation.

The bloggers at ZeroHedge recently put up some interesting charts in separate posts. The first set of charts shows the relationship between gold and interest rates. It shows five distinct periods, with the two behaving differently relative to each other. Sometimes they move together; sometimes they move in opposite directions; and sometimes there seems to be no relationship between the two.  Since 2006, they essentially moved in opposite directions. But since March they’ve been moving in the same direction with both declining. Does that indicate a new trend, or is it a blip in the longer-term trend when they move in the opposite directions?

I suspect they’re going to start moving in the same direction. A strong deflationary pattern is present in the global economy. That brings down both factors. At some point investors will fear inflation more than deflation, especially if the central banks begin pumping up money supplies again. Then, they both should increase. Alternatively, the two don’t have much in common. They respond to different things and coincidentally appear to have a relationship at different times.

The next chart attempts to show how much the Fed’s easing strategies have boosted the stock market. It’s actually a chart prepared by the Fed staff. This one is consistent with what we’ve been saying for some time. We live in a period of manipulated markets, and the Fed is doing the manipulating. The Fed’s also been quite explicit that this is what it’s trying to do. It’s theory is that boosting stock prices has a wealth effect that flows through to the rest of the economy. The theory is far from proven. But it is clear that the Fed can boost the stock market when it wants to, though the data also show it’s less effective at that with each blast of new money.