Bank Reserves and Stock Prices

View Postspecie, on 07 October 2010 – 01:21 PM, asked:

Do you have a minute to comment on net free reserves as a leading indicator of stock market

You mean the trillion the banks have on deposit at the Fed? I’ve never seen any correlation between that and the stock market. In fact, the market collapsed as reserves were blasting off in September October 2008.

AHA, I get it! It took me a while. So there should be an inverse relationship. The stock market should rise as reserves come down? No, it doesn’t work like that. The fact that they went in opposite directions in 2008 wasn’t coincidental because of other things that they were doing simultaneously, but it was not a cause and effect relationship. I would not expect falling reserves to necessarily go hand in hand with rising stock prices. It would depend on the circumstances causing the reserves to fall. Could be that stock prices might do something as a correlative, or they might not.

There are other things which do directly correlate having to do with certain components within the money supply. I won’t go into detail, but here’s a chart which you see every week in the Fed Report.

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