No end to US stimulus in sight

Abraham George Macro View

Logic would tell us increasing the money supply should create inflation. The average year-over-year growth in M1, (the most highly liquid assets, cash and coins in circulation plus demand deposits) dating back to 1995 is a little better than 5%. The growth in M1 over the past year alone has been about 350%, because the various stimulus programs so far have been unprecedented.

So why hasn’t inflation gone up? We get inflation only if the recipients of the money spend it. That hasn’t happened. For the amount of stimulus, the velocity of money has been very poor. Apart from the $1.9 trillion stimulus program, the Fed and Treasury are dreaming up much more stimulus program. You may be surprised to know that the White House is now discussing plans for another $2.5 trillion in deficit spending. They are labeling it as “infrastructure” spending. That’s code name for clean energy transformation.

On top of this there could be a transfer of one trillion dollars into the economy from the TGA (treasury general account). All this is pointing to a tsunami of stimulus which can create runaway inflation.

Through all this, the Fed is adamant that inflation is not a concern. To be honest, the Fed Chairman in most part is arrogant that inflation is not a worry for the Fed. This complacent view towards inflation sounds a lot like “this time is different.” Historically, when people say “this time is different” in the markets, it doesn’t end well.

If inflation is our real concern, hard assets is where you want to be. If so a super cycle in commodities could be emerging. Silver especially could become interesting. It is the only commodity that has not gone above its 1980 highs. In fact, it is currently half its highs of 1980.

Equities

Technically stocks are at a serious inflection point. Today marks some serious market tops in history. 21 years back in 2000 on Mar 10 the NASDAQ composite topped out and crashed 78% . It did not recover above its previous highs until 15 years later. Similarly, on the same day in 1937 the Dow made a top which it did not recover until 1942.

I am not saying we will see a similar crash today but I am bringing to your attention of a bubble that is building up which probably may last much longer than many of us can fathom due to the crazy stimulus plans that I have stated above. The chances are that this excess liquidity in the US can find its way into other markets and I am expecting India will be one of the biggest beneficiaries of this.

As for the latest price action it is mind boggling. Tesla rallied 20% day before yesterday. That’s a rise of 100 bio in market cap. But the pattern in Tesla argues for much lower prices going forward.

The NDX could carry prices to 13,300 to 13,400. However a move below 12,300 will diminish these odds. There are divergences in all the major three indexes. The Dow has made new highs but the Nasdaq is well below its Feb peak. The S&P which is a hybrid of the Dow and Nasdaq is showing signs of tiredness.

Bonds

There is no change to the analysis in bonds from the last report. Resistances at 160 to 161^25 could be formidable.

Euro

The Euro is in the process of making a five wave decline from its highs of 1.2243 on Feb 25. Once it is complete we can look at possible low risk options for entry.

Gold

After meeting a confluence of trendline supports as expected gold rallied up to 1727 yesterday. It can still rally to 1750-1765 before it starts to show weakness again.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.