By Howard Wang of Convoy Investments
Print enough money and you can increase asset prices under any circumstance. The government has printed 40 cents for every dollar that existed in March.
All things equal, this would translate to 40% inflation as prices rise due to increased money supply. Of course, in reality inflation increased less than 1%...
... because economic activity slowed down so much and savings rates skyrocketed.
While it can seem like the lack of inflation gives the government a free pass to print, the printing is not without consequences. The money is flowing through to higher financial inflation and lowering the value of the dollar relative to other currencies and gold.
The combination of massive printing and historically low rates is producing bubble like behavior in many markets like crypto-currencies, much like in 2017. Of course in 2017, the Fed began to withdraw liquidity and crushed many of those asset bubbles.
This time around we are also seeing a torrent of new casual day traders, reminiscent of stories you read about the Roaring Twenties. Below I show the indiscriminate price appreciation across the board since the government rescued the markets in March.
As you can see, the 40% increase in money supply didn’t go into the real economy, but sloshed all around the financial markets. The price of anything is measured in the form of dollars per unit whether it is $/share, $/bond, $/house, $/barrel, etc. So the price of everything comes down to those two things, supply of assets and the quantity of money chasing those assets. More money chasing fewer assets means higher prices, and vice versa. This year has been an extreme example of how if you print enough money, you can increase asset prices under virtually any circumstance.
Going forward, I believe the Fed and the Treasury’s top priority will continue to be the real economy. Asset bubbles are an unfortunate side effect of massive liquidity, high savings rate and low interest rates. They’ll need to carefully manage those bubbles as recover from COVID such that the bursting won’t topple the real economy. See the deck below for a more in-depth discussion.