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Discount Rate Hike Might Not Affect Markets Too Much

2010 - February 19, Friday

I’ve been thinking. Is it that bad for the discount rate to increase? The FED is simply starting to slightly control or, specifically, reduce the money supply. But the money are still in the banks: Banks haven’t increased their lending. This is why we don’t have inflation. As long as the money is not spent or as long as the velocity of money stagnates, we’re not going to have inflation. There’s an equation Money_Supply + Velocity = Price_Change + Output_Change. Do you see what the FED is starting to do? Money_Supply is decreasing while the velocity is increasing. Search for velocity and inflation if you want to know more or I’ll edit this post when I have more time.

There’s going to be selling because money has become slightly expensive. For example, margin trades have indirectly become expensive.

In the markets, I think we might see a small dip and another rise. There’s so much money that people have been saving on the sidelines. There’s cash to be spent on equities. I think some of those money will come in when we test the lows again like the ones we had last week.

You’d be questioning why?

When the velocity of money increases, that means people are spending or money is changing hands faster than before. This hints that our economy is on a recovery path. More spending, more demand, more future inventories, and more raw materials. I feel a faint heat. I think the furnace is heating up once again. Look at Australia as a good example. Look at how its markets are doing despite rate hikes. The US situation is different from China’s. I think US is more attune to what’s happening in Australia.

That’s just my thought … =p

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