- Frank Byrd and Steve Korn
Fun Fact ... Serious Consequences?
Everyone’s favorite topic lately is how much housing prices are up ... or how much the stock market is up. But guess what's gone up more than either the past 20 years? The money supply. People don’t talk about money supply as much. They should, though. Just since COVID, the Federal Reserve has grown the money supply by 34%. Should it surprise us to see that housing prices and the S&P 500 are up roughly the same amount (34% and 36% respectively)?* We believe there will be consequences. Your personal balance sheet should be positioned for them.
Fun fact: Since 1961, the money supply is up roughly the same as the S&P 500.*
Money Supply vs. S&P 500*
This is hard to believe at first glance. How can this be? Consider that the money supply is up 63-fold in just the past six decades. This means that there is 63-times the amount of money chasing goods and services ... and assets. It thus shouldn’t surprise us to see stocks worth over 63-times more over this period.3 You can see a similar relationship between housing prices and money supply. The following chart shows that housing prices have appreciated roughly in line with money supply, though they have yet to make up for lost ground post the 2008 crisis.4
Money Supply vs. Home Prices*
The money supply has grown, not by accident, but by design. Thank our Federal Reserve for that. There have been consequences – some intended, some unintended. Inflating asset prices, such as homes and stock markets, are definitely intended. This is often portrayed as a bad thing, though historically that has not always been the case. It’s kind of like intentionally buying donuts. They sure taste good. While donuts may not be healthy, buying them is not necessarily a bad thing if done in moderation. Likewise, money supply growth in moderation over time won’t kill us. And like donuts, it can even help getting through those occasional bad days a bit easier. The problem is unintended consequences. Addiction, for one. Just last week the Federal Reserve promised to cut back on the donuts. Hopefully, we’ll be positively surprised. However, every time the Fed has tried to significantly cut back since 2008, they have reversed course in response to markets selling off. We are thus skeptical of the Fed’s willpower. If it cannot ultimately break its addiction, it could lead to more serious consequences. Consumer price inflation is a serious unintended consequence of money supply growth. So far we have only benefited from the intended consequence of ASSET inflation. At some point, homes and other high-need assets become too expensive for most people. It should concern us all that wages have not kept pace with money supply growth since the 2008 Financial Crisis.
Money Supply vs. Employees’ Wages*
We are thus watching money supply growth carefully and looking for signs of unintended consequences. For example, will wage inflation moderate or accelerate and ultimately lead to higher consumer prices? Doomsayers like your grumpy uncle are premature in predicting the End Times are here. Magnitude matters. There is a credible possibility that the economy and markets boom despite higher consumer price inflation. Historically, modest inflation of up to ~4% has often coincided with a healthy economy and stock market returns. Yet, when modest inflations turn into high inflations greater than 4% (as happened in the 1970s), that has been bad for markets historically.** Knowing the above, how should we be positioned? Fielder continues to guide our clients' portfolios to have at least some exposure to assets that would benefit from higher inflation – both the intended and unintended varieties. Importantly, this cannot be limited to owning stocks. There have been long stretches where stocks have underperformed Treasury Bills (which themselves suffered in real value versus inflation):***
2000-2012 (13 years)
1966-1982 (17 Years)
1929-1943 (15 Years)
To be truly insulated requires balance across multiple types of assets, such as certain precious metals and commodities, TIPS, and perhaps even crypto assets. Balance is everything. Our mandate is to help clients balance their assets in a way that contemplates different potential future paths. We think about potential downside, while seeking to maximize exposure to the serendipity of human innovation and progress. Because inflation can be such a threat, we have dedicated a great deal of time professionally to studying past inflations that have afflicted different nations over centuries. The one lesson from history that scares us the most about inflations is that they’ve typically been a surprise – even to the pros like economists. It pays to remain humble, watchful, and prepared.
Yours in the Field,
Frank Byrd, CFA Steve Korn, CFA
*Money supply is defined as M2, which is the total volume of money held by the public (essentially cash, coins, travelers checks, and most bank deposits and money market accounts). The period "since COVID" is from February 1, 2020 to July 31, 2021. Granted, the starting and ending time periods matter. Over many shorter time periods, the S&P 500 has been up much more than the money supply. The above is presented in good faith for educational purposes. We are merely trying to convey that theoretically and empirically a rising money supply over very long periods has consequences for asset prices. The simple comparison between money supply and price levels assumes all else is held constant. Other important factors, such as output and velocity, have not held constant. The same goes for stock valuation multiples. Date range of the first chart is from 07/31/1961 to 07/31/2021. Second chart is from 07/31/1968 to 07/31/2021. Last chart is from 07/31/1961 to 07/31/2021. All data is per FactSet. **Inflation up to 4% has historically been favorable for equities according to research by Russell Napier. (Macro Voices interview, January 28, 2021)
***Larry Swedroe, “Is It Really Stocks for the Long Run?”, May 11, 2020.
IMPORTANT DISCLAIMER: This note is for educational purposes only. It is not a recommendation to invest in any particular security or strategy, since anything mentioned herein may be completely unsuitable for some investors. Speak with your financial adviser before investing. While the information presented herein is believed to be accurate, Fielder Capital Group LLC (Fielder) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this email or any attachments. Fielder is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Fielder’s employees are not attorneys or accountants and do not provide legal, tax, or accounting advice. Financial planning and investment strategies have the potential for loss. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Fielder makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Investing involves risk, including the potential of complete loss of principal amount invested. Fielder offers no guarantees or promises of success. Nothing herein should be construed as a recommendation to buy or sell any securities. Fielder or its employees may have an economic interest in securities mentioned herein.