NEW YORK (TheStreet) -- We are now approaching a very dangerous period for the markets from a monetary standpoint, but it's not for any reason you've probably ever heard about. It started, as it usually does, in mid-April. It will extend until mid-to-late September.
According to Austrian business cycle theory, an increase in the money supply leads to booms. The booms cause malinvestment, or investment in the wrong industries. Later, when the money supply stops increasing, industries with the most malinvestment, especially banks which live on new money along with industries that require very low interest rates, crash. The market is dragged down with them, and the bust begins. The applicable central bank then increases the money supply once again, and the business cycle starts anew with a renewed boom, to our chagrin.
Tracking the money supply is easy. The numbers are published weekly on the Federal Reserve H.6 report. There are different ways to calculate it, but let's look at the weekly average of the non seasonally adjusted M2 numbers. You'll notice on the May 21 release that money supply peaked at $12.081 trillion on April 6. Three weeks later, money supply was down over 2.2% to $11.824 trillion. That's a big drop.
But the thing is, large drops in money supply generally tend to happen around mid-April. These don't pose a big threat to stocks, so long as growth recovers quickly and nothing happens to spook the markets. But if it doesn't, and some big event catalyzes a selling frenzy, like Grexit, or a rate hike, or Ukraine and Russia, then there is no new money in the system to counter hard selling. The result could be a crash.