27 May M-2 IS NOT AN ASSAULT RIFLE
Equities and crude both rose on speculation the worst of the economic hit from the pandemic has passed. Value and small caps led the advance, the inverse of the last several weeks where it was all about mega sized tech.
Tomorrow preliminary first quarter GDP is released. All must remember this is backward looking data. Moreover, the economy continued to deteriorate for another eight weeks thus suggesting the nadir will occur in the second quarter. Analysts are expecting the economy to contract in the first quarter by a 4.8% annual rate.
JP Morgan’s Dimon sees “pretty good odds” of a fast-economic rebound starting in the third quarter thanks to government’s stimulus programs.
Thirty years ago, everyone was focused on money supply…i.e. M-2. Today if a market participant googled M-2, the majority of the hits would be on the M-2 assault carbine and how it must be banned to protect society.
M-2 is essentially the amount of cash in the financial system, defined at savings and checking accounts, CDs and money market accounts. Since March 10, M-2 is up an astronomical 65% plus percent from year ago levels. During the Great Recession M-2 was around 7%.
Theoretically, M-2 tracks inflation. Most monetarists believe a sharp contraction in M-2 will produce a slowdown and vice versa.
Several times I have opined the economy may experience inflationary growth. Real GDP would be around 25% but nominal GDP closer to 40%, partially the result of the massive increase in M-2 and the from wage inflation where approximately 65% of recently fired workers via unemployment insurance are making about 134% of what they were making when they were working.
This may be the ultimate cost-push and demand-pull inflationary environment. Inflation is defined as too much money chasing to few goods fearing higher prices tomorrow. It is a psychological and monetary phenomenon.
Both real and nominal inflation has never increased by this amount. [Note: JP Morgan is forecasting 25% 3Q GDP] How will the markets respond?
Last month the Federal Reserve discussed “yield curve control” which essentially is capping yields on government bonds of a chosen maturity. Japan began experimenting with it in late 2016 and is generally regarded as a failure.
Perhaps an understatement of the day is that tomorrow will be indeed challenging and interesting.
What will happen today. SpaceX launch is still set for 4:33 PM.
Last night the foreign markets were mixed. London was up 1.31%, Paris up 1.94% and Frankfurt up 1.89%. China was down 0.34%, Japan up 0.70% and Hang Sang down 0.36%.
The Dow should open nominally higher as the EU is proposing more stimulus funded by EU debt. The 10-year is off 6/32 to yield 0.72%.