Money Talks
Published January 2021
M2 money supply is a measure that includes all actual currency, coins, bank deposits and all holdings in money market accounts. First Trust reported this week that M2 money supply has grown 26.3% the past year – the fastest annual growth in U.S. history, and double the pace of the 1970’s. In the same report, it was noted that Americans saved $2.9 trillion in 2020 – double the previous record high. But actual production of industrial goods is still down 3.3% from pre-COVID levels. So…record liquidity, record savings, less production, and a nation of people pent-up to spend!
What will be the outcome of this, plus the ability to borrow money at record low rates? Very simply, demand will exceed supply. The easiest place to see this currently is the residential real estate market. Homes throughout the country are selling extremely fast. What happens when you have cash buyers, or borrowers with cheap credit, ready to buy anything that comes on the market? PRICES GO UP. Lumber prices increase substantially (as they have), plumbers, electricians and other trades increase their rates, you can’t get appliances, and quickly it costs a lot more to build a home than it did a couple of years ago.
Imagine if that happened across many sectors. Imagine what happens if nearly $2 trillion of additional stimulus is applied to this very liquid situation. Imagine what it does to the stock market. Record high liquidity and record high demand, but production cannot keep up. Sales and profits of publicly traded companies rise quickly because they can charge more, and people will pay it. They will pay more and more for stocks, and more and more for everyday goods. This has been occurring for the past six months, and bulls say this is what will continue to occur the next six to twelve months.
All that said, inflation could really bounce up and hit us at some point. We are seeing costs go up in a lot of areas, and still, they can’t keep up with demand. Things that do very well in inflationary periods are real estate, commodities, and materials. But most stock sectors improve. Traditional fixed income (longer term bonds) might do very poorly if we see inflation and interest rates rise.
We must own stocks when there is record liquidity. But let’s keep an eye out for inflation, and how it will impact your long-term plan.
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