Till Inflation Do Us Part

The NASDAQ hit yet another all time record high yesterday.  As I've mused over the years, as the stock market embarked on a historic rally from 2009, what if the next recession triggered  higher stocks prices not lower ones?  Sure enough that is exactly what has happened.    My reasoning was the next recession would see the FED act even more aggressively than in 2008.

The response to the worst economic disaster of our lifetimes from the  FED was far beyond the markets wildest expectations.  We went from billions in 2008/2009 to trillions in 2020.   For all those claiming the FED was out of tools for when the next big crisis hit..... they were wrong again.

I've also noted that the crisis in 2008 involved the FED opening the 'Pandora's Box'.  QE, ZIRP and an assortment for three  and four letter asset price protection programs were just the beginning in 2008.

With all these actions helping to fuel record corporate debt... what did the FED do this time around besides the massive multi- trillion dollar response?

Why they back stopped that debt by becoming investors in the corporate bond market.  The FED began  buying corporate bonds and ETFs?  Yep.

And don't tell me they are out of ammo come the next recession.  They are never out of ammunition... but what if they don't get to fire it next time?

What if the FED is ready to launch a new bazooka into the markets but they are filled with trillions of gallons of gasoline?

What do I mean by that?

Let's face it... the FED and almost every other central bank in the World has been operating in a virtual nirvana.    Inflation has remained low.. and stubbornly so.

Every single tool in the FEDs belt can be used when there is no inflation.

Massive balance sheet expansion?    Outright buying of ETFs and corporate bonds.  REPO market assistance?  Every assortment of 3 and 4 letter asset price protection programs under the sun?    All of these are welcome when prices remain low.   No inflation... or even outright deflation almost dictate that the FED does all it can to try and give a lift to inflation.

And for 12+ years.. inflation has yet to rear its head in a meaningful way.

Sure if you are buying artwork, sports cars, collectibles,  paying a professional athletes salary, purchasing your 5th summer home in the Caribbean, scooping up some  Apple  or most any stock for that matter.. or you need health care, education...  prices have been soaring.  But overall inflation according to the government remains muted... and stubbornly so.

And this flies in the face of conventional wisdom.  That the billions and then trillions of dollars of QE and other asset price protection programs would lead to massive inflation.  The opposite has happened.

Sure the amount of $$$ continues to grow.  And in theory if money supply is growing quicker than supply prices should rise.  But that isn't that case.

Money supply has exploded to record levels...

...prices have yet to move.

The recent virus induced recession and subsequent  historic FED response has seen the money supply surge like never before.

And yet... despite this money supply surge... inflation remains muted.


All that money is being.... put away?

Stunning.  An absolute collapse of the velocity of money.    All that money entering the money supply in 2020 is being saved not spent.... as crazy as that sounds.

Case it point.  A record spike in the personal savings rate.

And now we have the government ready to dole out more stimulus checks to Americans.  Wow.  Are we going to see even more saving?

The Money supply is set to take another spike to the upside.

Picture all this money... all this savings as kindling being thrown into a giant barrel.    It's just waiting for a match.

The money supply has more than doubled since 2009.   And folks were expecting a massive inflationary event back then.... it never happened.

And yet here we are some 12 years later.  The proverbial money printer is smoking from over use.  Gold and silver are starting to show what lies ahead.

We are one day closer to that breakout for inflation.  And I think its a lot closer than most think.  Another set of stimulus checks... more unemployment bonuses.

We are paying people more to stay home and do nothing than they were getting paid going to work?  What does that mean for wages going forward?

I also think so many jobs aren't coming back or aren't coming back 100%, perhaps 50% or less.  Like airlines and cruise-ships.  Are we nearing a point of universal income?

If we go from billions in 2008 to trillions in 2020 with zero inflationary implications.. than why not go to quadrillions and see what happens?

Clearly there must be a cost for handing out trillions of $$$ in 2020?

The Modern Monetary Theorists believe that there is no debt.  That government spending is akin to keeping score at a basketball game.  Spend... add numbers to the score...  tax... take way numbers from the score.

My rough scoresheet.

FED  7,000,000,000   Inflation 0

No matter what theory you believe in if spending trillions upon trillions of $$$ is not inflationary... than we might as well hand out thousands of $$$ to every American every month until it is.... for over 10 years the FED has FAILED its dual mandate.  And they've tried... oh boy have they tried.  Usually to the complaints of those short the stock market since 2008.

Be careful what you wish for.  While on one hand inflation may help inflate away the record FED backed corporate debt bubble,  high inflation will limit the effectiveness of the FED.

The endless balance sheet expansion will have to stop.  Interest rates raised?   Bond  ETF buying halted?  When inflation comes any additional support of asset prices from the FED will have to stop.  All of it.

And what will that mean f or corporations with massive debt that needs to be refinanced at higher interest rates?

We'll get to that soon.  The opening bell cometh.

I think stocks will initially keep inflating.  And the SPY is setting up for that $350 test in the future.

One thing to keep in mind.

Interest rates have been in a down trend for 40 YEARS!

its no coincidence that Corporate debt has grown exponentially over the same period of time.

I'll leave you with this....

What if inflation forces the FED's hand... and we see for the first time in 40 years interest rates trending higher?

What does that mean for corporate debt trend?


Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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