Gulp! The Money Supply Is Drying Up

The Fed is out of bullets for now and it raises a very important question… Without the addition of new money into the market can it continue to trend higher?

Today I will show you what the inside info is showing and where I think stocks are headed…

From the very beginning Power Income and being an #Income Hunter has been all about Trading the Fed

So far, it has worked like a charm… We had full confidence the Fed would keep printing money to create inflation so be long equities, especially equities in the energy and commodity sectors…

Inflation is now here and it removes the ability for the Fed to print new money for now… So, let’s take a look at where money supply and S&P stack up against each other….

You can see from the graph below how tight the S&P tracks money supply… They have converged with S&P at 4,200 and M2 at 20 trillion… The S&P must now stand on its own merits of value… 

That may be a problem because during this powerful 10-year uptrend when money supply was neutral or even worse going lower the S&P went down…

I have a few other important signposts to show and then look at the technicals and trades to consider…

Where is All the New Money Going?

As I’ve said for months, for inflation to really explode, we not only need new money injected into the economy — but it also needs to be spent on goods and services.

Our measuring stick for the spending activity is velocity (or the number of times a dollar is spent).

The Fed graph below illustrates that velocity continues to languish at the lowest levels in decades. It is barely above 1!

 

The Fed could ultimately be right about inflation being temporary if velocity stay’s down throughout the reopening recovery

Precious Metals Win in Inflation or Deflation

We’re at an inflection point for an allocation shift. If growth slows, industrial metals — which are driven by economic needs — could go through a drawdown phase.

However, silver and gold are monetary metals, so they will track interest rates and the dollar more closely than they would a strong or weak economy. 

A case in point is the copper/gold ratio below. The calculation used is copper divided by gold.. An uptrend is copper outperforming gold and vice versa. Copper has outperformed gold since COVID hit and the trend recently turned.

 

This could be an indication of a shift in perception that the economy is expected to weaken in the second half of the year while inflation remains high… 

The Three Possible Scenarios for Precious Metals:

      • During this down period for stimulus, the Fed’s hands are tied. But if the stock market corrects, the Fed will jump on an opportunity to increase quantitative easing (QE)  or work with the Treasury to inject money directly into the economy. That is bullish for the metals and all commodities.
      • If interest rates rise due to ever increasing inflation, the Fed would step in and implement yield curve control — basically QE on steroids — to buy enough bonds to hold rates down. That would be mega bullish for precious metals.
      • The only scenario that would be bearish for precious metals is if the Fed did nothing and just let the economy melt down, creating massive deflation in which all assets had to be sold in order to remain solvent. That would be a 1929-style depression.

I am confident the Fed won’t let No. 3 happen, so at this point I believe institutional investors will allocate money away from stocks and into precious metals on any signs of economic weakness.

Bring It Home

This is the first fork in the road that we have reached since COVID hit. It is a very difficult one for the Fed, because they know they need to keep feeding the market new money, but they need  a reason…

That reason will most likely be a significant correction in stocks, and I will continue to monitor for signs that give us an edge.

 Until then…

Live and Trade With Passion My Friends,

Griff

 

 

 

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