In short, it depends on what you think the Fed will do. Below the aforementioned chart is the adjusted US monetary base from the Federal Reserve Bank of St. Louis. One can observe the jump in correlation in mid 2008, as it moved to near perfect during the crisis. For when everything is crashing, assets will then probably correlate, but after the bottom and bounce the correlation continued. Maybe one can deduce from history that when the balance sheet of the Fed starts to shrink, assets will return their true, economically driven, prices.
The ‘tapering’ talk is probably what the market needs given the unsustainable nature of QE. This jawboning is perhaps preparing market participants for the end of QE. Introducing this talk earlier than later is arguably better and healthier for the market, because investors start mulling over the repercussions.
The repercussions perhaps include a less than impressive economy. Given the economic and financial importance of oil, maybe it is appropriate for it to move first. Looking at other commodities however, it oil hasn’t been the first. Adding lumber and copper into the mix, the chart against the S&P 500 may give even the most bullish of investors pause, at least. Never the less, it is interesting.
