Let me introduce you to a term called "Money Velocity". Its not something very hard to understand. Here's an Illustration from Wiki
Theek hai? Samajh aa gaya what Money velocity is? In short, the more the money moves around, the more the business activity resulting in economy improving.If, for example, in a very small economy, a farmer and a mechanic, with just $50 between them, buy new goods and services from each other in just three transactions over the course of a year
- Farmer spends $50 on tractor repair from mechanic.
- Mechanic buys $40 of corn from farmer.
- Mechanic spends $10 on barn cats from farmer.
then $100 changed hands in the course of a year, even though there is only $50 in this little economy. That $100 level is possible because each dollar was spent on new goods and services an average of twice a year, which is to say that the velocity was .
Now lets look at something shocking.
This is the Money Velocity Chart of the US economy since 1957. It recorded its lowest reading in history in the first quarter of 2012.
Ok.. so you would say "So what! Why should I be concerned!" And here's why you should be
This chart peaked in the second quarter of 2006 indicating the impending financial crisis.
So what did the Stock market do from 2006-Q2? Here..
It just continued to go up till 2008! The trend turns negative in Spring of 2006 and the Market lags to reflect till the start of 2008 - about 21 month before the market realized.
Now lets look at the recent developments
Turnning negative in the fall of 2010, about exactly 24 months ago. And now the figures are showing numbers lowest since they started creating keeping record!
So what has the Stock market done since Q2 of 2010?
Its clearly continuing to trend upward.. But for how long...
Conclusion: The markets can stay irrational longer than you can stay liquid. But I feel we are getting closer and closer to a major major movement and volatility.