While it is necessary for the monetary base to increase during economic growth periods, as is clearly illustrated in the above chart. Since the 1987 stock market crash, it has also become FED policy to increase the monetary base during non-growth periods as well. Yet, nothing in the past compares to the surge in the monetary base since mid-2008.
This exponential rise has already been well documented over the past two years. What has not been noted, until now, is the increase in the monetary base is also unfolding in Elliott waves. We have been labeling this wave structure as three completed Primary waves I, II and III. Notice the liftoff of Primary wave I, and then the subdivisions of Primary wave III. After the Primary wave III peak of $2.2 tln in early 2010 the monetary base corrected to a bit less than $2.0 tln just recently. We are “tentatively” labeling this the end of Primary wave IV.
With the recent announcement of the FED’s new quantitative easing program, which should last until June 2011. We’re expecting Primary wave V to get underway shortly. What this suggests is the monetary base should increase to around $2.5 tln during 2011, or about 25%. Then this exponential surge should end, and monetary policy should stabilize at whatever the new normal has become. The wave pattern also suggests there is an unlikelihood of any additional QE programs after the current one ends. This pattern, incidentally, fits with our long term projection of a stock bull market top in early 2012. We will update this chart from time to time. Welcome to the new capital system.
the ELLIOTT WAVE lives on 
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Tony, H D
I concur with H D. This is great. I think what this suggests is that whether or not the FED’s actions ultimately affect long term trends, actions are controlled by the same waves of social mood the rest of society is. After all, they are people too. Please post more wave counts of other econometrics if you can find them. Great job!
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Welcome and thank you Wallace. Agree, the waves can be found in everything. All of creation is frequency and vibration which is subject to cycles.
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Hi Tony. Very interesting. Thanks! Taking into account the time lags that the Fed deals with, what’s your opinion of their timing in 2008? Did they hit the panic button too late, or were they about right? How does their current response/effectiveness compare with any other similar period in our financial history?
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Historically, the FED is usually late to react with monetary policy … in both directions. Allowing Lehman to fail and then bailing out AIG almost the very next day is typical of their tardiness. As I recall, in 2006 they continued to increase FED fund rates (three times) after what was required. They were clearly targeting the housing bubble. We’re still dealing with the consequences of that over-reaction.
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Thanks Tony. Perhaps, since the M-base data is published, the Fed is always concerned that the mkt. will overreact to a dramatic increase in M-base, so they tend to just wait and hope… In any case, it seems that they must have had some contingency plans much earlier. When Bernanke was appointed in 2006, his anti-deflationary credentials were mentioned quite a bit…which should have given everyone pause, because nobody was officially mentioning the threat of deflation in 2006… and yet they chose a supposed anti-deflation expert to manage things. Then in 2008 , it seems, they were timing things so that the collapse would happen shortly before the election and certain unpopular measures could be easily extracted from lame duck politicians. “Well done” …and very political, it seems,… and they are not supposed to be political…..well that’s what we ‘re told, at least..
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C B, Yes, BB was appointed in just the nick of time 😉 I get the impression the FED will be the new market controlling factor for the next generation. The credit cycle will still work, but it will be driven by liquidity, not consumption.
Market self-regulation has failed. Government has failed to control its spending. Politicians are almost always failures, but successful at getting re-elected.
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Tony, I so totally agree with you! And I am still trying to figure out what I am gonna do about all that failure 😉
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Toni and CB, I disagree, the Fed is now a major force distorting to an higher degree the ” free market”. Market are not free anyway (think of regulated market places, taxes, and of course monetary policy). It will take still a while for the market to absorb this new “input” but then the market as whole will re-gain a higher degree of control. We are in a massive liquidity trap. The Fed has not new weapons left, but still has ammunitions with diminishing relative power or less vibration, if you like (more printing).
On the above graphs (very well done Tony) think of a ball bouncing between the floor and a table. The table will be the “free market” saying no more printing with this level of interest rate, or even no more printing period. The bouncing ball is going to exhaust its energy sooner rather than later.
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Hi! I’m certain you have read Bernanke’s 2002 speech: http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm
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Tony, That is really genius. If a 275% increase in the monetary base only gave an 83% increase in equities I think another 25% increase may only allow for marginal gains. That 1327 pivot sure looks dead on and will bring the B wave count back into focus. We can think about that later.
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HD, My take of the chart is a bit different. It took quite a while, after the monetary base increased, to put a bottom in the stock market. I believe the market starting rising after Primary III (base) began. This suggests the market can continue to rise after Primary V (base) ends. Time will tell.
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