The money supply hits record highs…
The great irony of the Bitcoin price…
Dear Reader,
I have long maintained that inflation will prove a lingering migraine.
Not necessarily an acute migraine, mind you — yet a lingering migraine.
In evidence thereof, I refer you to the continual expansion of the M2 money supply.
The M2 money supply encompasses “immediately available” money such as cash, coins and chequing deposits.
M2 likewise includes “near money” such as savings accounts, money market accounts and certificates of deposit beneath $100,000.
These monies are but one step removed from immediately available monies.
And the M2 supply presently exceeds its April 2022 zenith.
Don’t Expect the Fed to Keep Prices Down
Economist E.J. Antoni:
Annual M2 growth has been accelerating for a year and is poised to continue… The Fed allowed M2 to grow yet again in Apr, and it blew past the previous highwater mark set 3 years ago in Apr ’22; expect new records each month from here on out and no help from Powell & Co. on keeping prices down.
Here, in graphic form, is your evidence:
It’s a Global Phenomenon
Yet the engorgement of the M2 money supply is not confined to the United States.
It is — evidently — a global engorgement. Thus Binance Square informs us that:
Global M2 money supply — the broadest measure of money including cash, checking deposits and easily-convertible near-money — is growing at a rapid pace. Central banks around the world are loosening monetary policy to support slowing economies. As a result, trillions of new fiat units are entering circulation, pushing the total money supply to unprecedented levels.
This surge in liquidity… has massive implications for asset markets… Over the past year, Bitcoin’s price movements have closely tracked M2 growth curves.
Yet here is irony…
From “Stick it to the Fed!” to “Come on, Fed!”
Bitcoin’s drummers held it out as a free market alternative to the evil fiat system.
Yet we find that Bitcoin’s value is tethered to the very fiat system it rose against.
Here the picture talks its thousand words:
Source: LSEG Datastream — Global Macro Indicator, Julien Battel
Thus Bitcoin investors must pound their tom-toms for monetary inflation of the fiat sort.
Thus “Stick it to the Fed!” has evolved — or devolved — into “Come on, Fed!”
But I let it pass.
Stock Market Investors Don’t Care Why the Market Rises
Stock market investors confront no similar contradictions.
The stock market has marched largely in step with money supply.
Not precisely, not perfectly.
There always exists competing currents, swirling eddies and random fluctuations that disrupt even the stoutest trend.
Yet stocks have marched largely in step with money supply.
And with them, investor appetite for risk.
As Morgan Stanley’s Michael Wilson has observed:
When money supply is accelerating, the more speculative/riskier assets tend to outperform and when it’s decelerating these assets have more trouble.
Yet investors do not blush before the claim that their success owes less to sagacious stock-selecting… than to an expanding money supply.
It does not embarrass them, and they do not care.
So long as the stock market enriches them, that is enough.
As, indeed, it should be enough.
A Rising Money Supply Doesn’t Lift All Boats Equally
Yet does an expanding money supply equal broad stock market surges?
The answer is… not necessarily.
The money supply plummeted from 2023-2024 — the largest plummet, in fact — since the Great Depression.
And as The Motley Fool explains, a constricted money supply favors market kingpins such as NVIDIA.
Yet an expanding money supply favors yesterday’s second fiddles over today’s top violins:
While the money supply is tight, mega-cap stocks with tons of cash on their balance sheets stand at a huge advantage. They have the money available to invest in growth and improve their technologies.
The tightening money supply happened to coincide with a major breakthrough in artificial intelligence (AI) in late 2022, which required massive amounts of capital to take advantage of. This enabled the world’s largest companies to spend heavily on AI, leaving smaller companies with far less capital.
However, accelerating growth in the money supply is historically correlated with broadening stock performance. As smaller companies have easier and less expensive access to capital, they can invest more in their own growth initiatives. That leads to stronger returns investors typically expect from smaller companies in normal economic environments and more S&P 500 constituents outperforming the overall index.
Damned if I Do, Damned if I Don’t
Is it time to invest in smaller companies?
If I say yes… the answer will likely prove no.
If I say no, the answer will likely prove yes.
Thus I refuse to tempt fate. Thus I say nothing.
I mention — merely in passing of course — that The Motley Fool recommends so-called equal-weight index funds.
These funds weigh equally each component of the index.
Thus they negate the index leaders’ overweighted preponderance should they stagger. And these funds spare you outsized losses in case they do stagger.
Again, this I mention merely in passing.
Perhaps you have sold in May… and gone away.
Alas, the presently expanding money supply suggests that inflation has not gone away in May.
Perhaps, if the gods are kind, inflation will go away by next May.
Perhaps.
Brian Maher
for Freedom Financial News