Watch velocity
EDITOR'S NOTE
Did you know that surging prices can actually be deflationary?
Just think about it. If something costs more than you expected, you have two choices. You can either not buy it, or pay the higher cost. Either way, you're worse off. You either didn't get the thing you want, or you have less money left in your bank account after buying it.
And yes, I'd extend that analogy to everything that's surging in price right now--at least, all of the goods. Lumber, copper, oil, rubber, plastics, you name it. We had a pandemic. Supply shut down, now demand is roaring back, and it's causing all sorts of weird shortages and price spikes. But look at the charts and you notice something: markets are expecting these commodities to have lower prices in the future. When the charts look like that, it's technically called "backwardation." Point being: it's not inflation. Inflation is when prices go up 30% and then keep rising year after year.
I was texting a friend about this last night, a brilliant local entrepreneur. "Production costs are skyrocketing," he lamented. "There is a backlog of containers, there is a shortage of labor in [overseas] factories." But then he added something interesting: "Companies are going to go belly up because they simply have no product to sell."
Exactly. That's how shortages and price spikes become deflationary. Think of it like a 30% pandemic tax that was slapped on everything overnight. Obviously, no one would react to that by screaming "here comes hyperinflation!!!" They'd be saying: this will destroy businesses.
But of course that's not the whole story. Because there's also been a massive cash infusion to help the country get through the pandemic. So normally, all of these price hikes would be deflationary. But today, consumers might actually have a little extra cash to pay for these higher costs--nearly $2.5 trillion in excess savings, in fact. So yes, they can pay a little extra for now, but not forever.
(And what if the government keeps handing out stimulus checks year after year after year, as seems increasingly likely? Even that, at some point, will replace labor income--as we're starting to see already--as opposed to adding money overall into the economy.)
And yes, I've seen the M1 scare charts that are making the rounds on TikTok. A couple things to note. First of all, the M1 money supply--which basically measures cash in circulation--surged last spring because people were literally taking tons of cash out of their bank accounts "just in case." The amount of physical currency spiked, but it's not like we all became millionaires overnight. The Fed also relaxed restrictions on tapping savings accounts, which appears to be shifting "M2" dollars into "M1" (more here).
What about the Fed's massive and ongoing "QE"? Well, I'd say the real thing to watch is not the money supply, but its velocity. This is quite simply how many times money changes hand in a given period, and it's collapsed even beyond its pre-pandemic collapse. It hit a record low the same time money supply was surging last spring, and it's still parked there.
Tons of cash, parked in bank accounts, is basically the U.S. economy right now. So long as that's the case, nothing the Fed or even Joe Biden can do will make a big difference. But if velocity starts picking up because of the reopening (or millennials entering their family-forming years), that's a different story.
To summarize: (a) the price level seems to be experiencing a major one-time reset; (b) it can only keep doing so if velocity jumps or people get persistent annual raises; and (c) at some point the Fed is likely to clamp down on that if it has to. I can see how these scenarios play out poorly for stocks and even for the overall economy, but I don't see it resulting in a runaway inflation cycle that people have to prepare for by snapping up real estate investment properties or the latest fad "coin" which is highly correlated to asset prices anyhow.
In other words, even if this Fed is willingly late to the game, I wouldn't bet against it.
See you as soon as I'm released from quarantine!
Kelly KEY STORIES
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