The long-term growth in money supply (M2) and the long-term level of inflation (CPI) do track together. Money supply over long periods of time has grown about +5%. That level of growth can be thought of as being made up by about 3% growth due to inflation and another 2% growth driven by the global demand for US currency. When we got hit by COVID, the growth of money grew by +25% for two consecutive years as stimulus and a record level of money was printed in response to the pandemic. Too much stimulus led to a spike in inflation in late 2021 and half of 2022. That’s not a newsflash. But M2 money supply growth is now CRATERING. M2 money supply is growing at -2%, the lowest level in more than 80 years. A contraction in money supply will and is translating into a contraction in inflation. Red line money growth in chart below down A LOT. Blue line inflation growth in chart below trending down and trending down quickly. This is all positive and consistent with our view that every crisis eventually ends, including this one the Fed created in 2021/2022 by sleeping on the job with regards to early signs of inflation.
The Fed will hike rates by +25bps at 2pm EST tomorrow. Maybe one more Fed rate hike after that – maybe +25bps in March. Strangely, what the market is waiting for most is a BAD labor report that shows monthly job growth at <100,000 new jobs. That moment is coming and coming soon. That moment will “cause the pause” in further rate hikes.
“PAUSE=GO” for risk assets, especially coming off a base of record poor investor sentiment. You don’t come this far just to come this far. Markets are the same. #PAUSE
Chief Investment Officer
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