From Turbulence to Triumph
As a financial advisor deeply embedded in the analysis and interpretation of market dynamics, I've often highlighted the uniqueness of our current economic era. We are indeed living in historic times—an epoch marked by unprecedented challenges and transformative opportunities. This period is characterized by intense fluctuations in inflation rates, dramatic shifts in investment valuations, and a reevaluation of economic norms that have stood for decades. These changes are not just mere footnotes in economic journals; they represent a seismic shift in the way investors, policymakers, and financial professionals approach the concepts of risk, value, and growth. As we navigate these turbulent waters, it becomes increasingly important to understand the forces shaping our economic landscape and to adapt our strategies to meet the challenges of today and the uncertainties of tomorrow.
Central Banking Decisions Have Fueled Economic Turbulence and Paved the Way for a Major Market Correction
The rate at which money is circulating in the United States is increasing at a rapid pace, which may indicate that inflation will continue to rise. The M2 money supply, which includes currency, savings deposits, and retail money-market funds, reached its highest level in over a year according to data released on Tuesday. It has risen by 0.8 percent compared to the previous year, marking the first year-over-year increase since it started decreasing after interest rate hikes in 2022. This recent increase has brought the money supply to its highest point since March of last year. In the past six months, M2 has expanded three times and in the last five weeks, it has expanded four times. This upward trend suggests that the Federal Reserve's efforts to combat inflation are losing momentum. In March, the consumer price index increased by 3.47 percent compared to the previous year, which is a higher rate of inflation than the 3.17 percent recorded in the previous month. This is the highest inflation rate since September of last year.
The trajectory may be delayed, but the exact timing remains uncertain. The increase in M2 indicates that there may be more inflation in the future, possibly later this year or even next year. As a result, the Federal Reserve may further postpone a rate cut or even consider raising rates. However, the current market prices suggest that this possibility is completely disregarded on Wall Street. Currently, M2 is 36 percent higher than its pre-pandemic level but still around four percent lower than its peak in April 2022.
The Federal Reserve's favored measure for tracking inflation indicates a significant increase in prices.
In March, the Federal Reserve's preferred measure of inflation revealed a significant increase in prices, signaling a halt in progress towards achieving the Fed's two percent target. The Department of Commerce reported a 0.3 percent rise in the personal consumption expenditure price index for the month of March, with a year-on-year increase of 2.7 percent, slightly higher than the 2.6 percent forecast by Wall Street.
Similarly, core PCE inflation, which excludes food and energy prices, also saw a 0.3 percent increase from February to March. Over the past 12 months, the core PCE index rose by 2.8 percent, slightly exceeding the expected 2.7 percent. The release from the Bureau of Economic Analysis also included upward revisions to the estimates for January and February. In January, the figure was revised to show a 0.423 percent increase, while the February revision indicated a rise of 0.338 percent. The core figures for January and February were also revised upwards to 0.502 percent and 0.266 percent, respectively.
Inflation, measured over a three-month period and annualized, has surged to 4.4 percent in March, marking a significant increase compared to the previous three-month data of 3.4 percent in February. More here
Does The FED Really Think Inflation Will Get To 2%
Although there has been a significant decrease in inflation measures since the peak of 9% in June 2022, the Federal Reserve is not completely free from concerns. By examining the inflation trend using a more consistent and trustworthy approach, such as the 16% trimmed mean CPI, which reached a slightly lower peak of 7.2% in 2022, we can see that the year-over-year gain of 3.7% in January is only halfway towards the desired 2.00% goal.
The trimmed mean CPI has experienced a significant increase in its three-month rate of change, reaching 4.0% already. In January, the annualized rate was a remarkable 5.7%.
The fact is inflation isn’t and won’t be contained even at the Fed’s specious 2.00% target. And the last two decades have proved beyond a shadow of a doubt that aggressive money printing does not spur domestic investment and productivity, and therefore overall economic growth either.
What it does do is cause a rise in the value of assets on Wall Street because extremely low interest rates supposedly justify higher price-to-earnings ratios. And that has been the justification all along for increasing the Federal Reserve's balance sheet from $300 billion when Greenspan faced the Black Monday crash in October 1987 to a peak of $9 trillion a few months ago.
However, financial asset bubbles cannot be sustained indefinitely. This was evident on Wall Street when NVIDIA nearly reached a market capitalization of $2 trillion, which is equivalent to 30 times the sales of chips that enable Google's generative AI. Read more
