Expert Commentary

A Vaccine! Hurrah!! Cue Monetary Deflation

The big news on Monday this week was the announcement of successful vaccine trials for Covid 19. Stock markets ripped higher on the news only to end the day well off their highs as the news faded.

Price action on Monday was interesting because the knee-jerk reaction appeared as an attempt to go against the trends seen since the start of the pandemic. Airline stocks soared whilst virtual meeting stocks like Zoom declined. Big tech stocks, which have outperformed over the past few months, underperformed badly yesterday and bond yields rose.

All of these trends were caused by the push and pull of social mood, not by the pandemic. To conventional analysts, though, all of these trends have been caused by the pandemic and particularly the response from governments and central banks. We have been told by financial media since March that stock markets have recovered so well because of the incredible amount of stimulus which has been injected into the system. That stimulus (creating money out of thin air) is defined as monetary inflation, as the chart of the annual change in U.S. M2 Money Stock shows.

So, here’s the questions we should ask our funnymental colleagues: “If central bank monetary inflation has occurred because of the pandemic, then surely the discovery of a vaccine will lead to monetary deflation? And if the stock market has advanced because of monetary inflation, surely it should decline under monetary deflation?”

Conventional analysts have a rationale for everything and so we’re not holding our breath waiting for someone to state that a vaccine discovery should be bearish for stocks and the economy. But we know that markets don’t peak on bad news, they peak on GREAT news. As always, we will objectively follow what the Elliott wave structures are telling us. Stay tuned to Elliott Wave International and deflation.com to navigate the chaos.

M2 Money Stock 112020