The chart below shows the M2 description of the US money supply (normally an indication of business and consumer confidence) vs CPI inflation for the last five years ended in March 2023. As you can see, inflation tends to waft up and down with the amount of money in circulation and appears to have peaked. You can see the huge pandemic bump in the money supply and how it pulled inflation up albeit with a lag.
What you don't see from this short-term chart above is just how unusual the change in money supply has been vs history. Here is a longer-term chart of these same indicators. What stands out for me is not pandemic stimulus inflation, but rather that M2 is negative for the first time in over 40 years! And not just by a little.
Pandemic-related inflation has peaked. The question now is how much post-pandemic deflation are we in for?
There are many other factors, but these broad trends indicate that housing prices and interest rates are likely to come down sharply in the months ahead. Unemployment will be higher and corporate profits will be lower due to the economic pessimism that negative M2 reflects.
This chart of the Canadian Money Supply shows a similar pattern, but the data is three months older.
As we have seen, the declining money supply is rare. But these trends almost certainly point to sharp rate cuts by this time next year. This will be positive for bonds, lower mortgage rates, and possibly dividend-paying blue chip stocks and interest-sensitive tech stocks. The only question is will we get a recession or a soft landing? The balanced portfolio approach is in for a comeback!
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