The Velocity of Money: Do we have inflation, deflation, or both?
M1, M2, and M3 are measurements of the United States money supply, known as the money aggregates. M1 includes money in circulation plus checkable deposits in banks, M2 includes M1 plus savings deposits (less than $100,000) and money market mutual funds. M3 includes M2 plus large time deposits in banks.
Never before in our country’s history have we had such a confluence of economic factors pulling and pushing the USA: A sovereign debt crisis is underway in Europe and will migrate to the USA over the next 2-4 years; a monetary crisis is underway with the failed Euro experiment overseas; COVID-19 crushing GDP; the Obama administration changing international real estate disclosure laws, making it much more difficult for foreign capital to purchase real estate in America; capital flowing in from Europe and parking in US assets like the dollar for preservation; the US treasury issuing trillions in fresh debt most likely approaching $30 trillion nationally by 2021. Yet money remains cheap with interest rates near zero. All of these factors make it confusing for the average person to see where various asset prices are headed the next 3-5 years.
Inflation is not quite here yet, but is certainly on its way. The most applicable inflationary indicator is the M2 money supply. The velocity of money is simply how fast money is changing hands within a country. It is impossible to have real inflation without an increasing M2. For those who remember the 1980's, the country experienced true runaway inflation which caused gold to rocket (loss of confidence in government) while home mortgage rates jumped to 18%. Gasoline prices rocketed as well as virtually nothing was spared. You can see from the illustration above we had a sharp increase in M2 in 1980. You can also see that this past year the money supply was already trending down, but once February 2020 hit the M2 collapsed along with GDP.
We will breakdown individual asset classes below and give our inflation/deflation projections. For every action there is a reaction. Expect a violent rebound in the M2 from the 2020 low, lighting a fire for an inflationary surge into 2024. 2022-2024 will be the strongest impacted years from this inflationary trend. All asset classes will be impacted.
Equity markets - They have been helped to excess by artificial monetary policy injections via the Federal Reserve and the US Treasury expanding its balance sheet and debt load. After 2000, the Fed and Treasury learned a valuable lesson. You can hold off recessionary influences on the economy by propping up US equity markets via cheap money policy and low interest rates. This strategy comes with a price of course. Natural corrections that have been building and not allowed to occur will always end up in a crash events, i.e. 2007, 2020. We crashed in March due to excessive leverage by major banks and funds in equities - the level of complacency for leverage was huge. And finally when a crisis hits where leverage needs to be unwound, massive quantitive easing comes to the rescue with drastic capital infusions to the system helping re-inflate assets. So while we have not had inflation, the equity markets have risen due to easy money policy. However, more recently we are seeing a shift away from public debt of all sovereign countries, and government bonds and into the technology sector via Nasdaq, the new DOW. The tech sector is set to lead this bull market via robotics, artificial intelligence, biotech, and nanotechnologies for the next 10 years and big money knows it. As the DOW use to be the diamond of the equity markets, we are now seeing Facebook, Apple, Microsoft, Google, and Amazon take the lead. They have balance sheets like fortresses that will continue to grow. Combine the coming expected inflationary trend over the next 4 years and the stock markets of the USA will be propelled upwards.
Real estate is headed lower overall into 2030 based on higher interest rates and increased property taxes as local governments are broke and underfunded from current pension fund liabilities. Their main source of revenues are property taxes. There will be pockets of real estate that will be buoyed by safe haven tax buying in Florida, Texas, and New Hampshire amongst others. A short term bump into suburban real estate surrounding major cities from the Covid exodus. Expect the most pain to come from the commercial real estate space. Working from home via modern technologies will become more popular for the next few years. Throw in the devastation of retail shopping heading more and more online, and the commercial real estate space is headed for a catastrophic fall and depression. Low to middle-end residential will hold value as people look to downsize, but don’t expect any significant appreciation. We are looking at a lost decade in real estate.
Government Debt - There is a reason why junk bonds currently pay a 5%-7% return. The risk of default is significant for many of them. Investing into junk bonds is always best done through a fund where default risk is diversified and hedged. The erosion in confidence in sovereign debts across the globe is a process and the US will not be exempt. Euro bonds already pay negative interest and are mostly bought back by the eurozone itself. Picture you borrowing more and more and continually applying for new credit cards to pay old balances as your debt mounts. How long would that last? Expect bond prices to start to drop and interest rates to rise into 2024 as the people rise up and revolt against endless spending by their governments. If you look back at thousands of years of empires no civilization’s result was different. When empires die, their sovereign debts drop, inflation soars and they go bust. The eurozone will fall first followed by Asia, then finally the nicest house in a bad neighborhood, the USA. As rates explode upward and bond markets implode look for sovereign nations to introduce the idea of converting all debt to “perpetual bonds” as a way out. These will have no maturity and will pay more interest than people have seen in 15-20 years.
Commodities - Commodities are the easiest of all to answer and analyze. As the dollar continues to decline, look for all major commodities to increase in price into 2024 until our debt bomb blows. We follow a 20 year commodity cycle and it is screaming for higher prices across the board. Look for agricultural commodities to increase - especially due to cold weather patterns killing off many crops, increased population demand, and pandemic fallout forcing farm bankruptcies. Other hard and soft commodities will see rapid price acceleration across the board. Oil and gas will attack the highs of 2007 into 2024 regardless of the green agenda. And finally, gold and silver are set to soar into 2024 and beyond as a preserver of wealth and hedge against government. Silver in particular, with its increased industrial demand in semiconductors, nanotechnologies, biotech and AI will shine for the coming tech age the next 10 years.
Whether we experience inflation or deflation, all roads lead to gold and silver into 2024. We plan on harvesting large profits in this once in a lifetime move in the metals complex for our short term portfolio into 2024.
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