Money Supply & Velocity Falling

This shows a few things. First, it shows that the Federal Reserve printed like mad in 2008 to offset plunging velocity, but the market didn't bottom until March. At that point, velocity actually popped up as M1 money supply sank. Quantitative easing was soon launched and velocity, while moving lower, was offset by rising money supply.

Velocity has moved lower and hasn't really had an effect. It's been offset by the money printing. But since about May, it becomes clear that the rate of money printing bears a striking resemblance to the rate at which the S&P 500 advanced. Over the past nine months or so, this association appears to have tightened and we are running on a pumped market. Every drop in money supply is registered because velocity continues to creep lower and the market tanks.

This is a market running on fumes and if it falls here, there's going to need to be another bailout or another Fed infusion of cash. Republicans are already out to an historic lead with the midterm elections five months away. Are the Democrats and Obama going to go against popular sentiment and announce another bailout plan? Will Republicans join in to give them cover, when, in all likelihood, they could ride this to victory? And even if Republicans think a bailout is a good idea, they can argue that it should be 100% tax cuts and make it an election issue.

From a purely pragmatic weighing of the evidence, I do not foresee another bailout before the election and that means that if the market goes, nothing will stop it.