As hits and misses continue to fight over the playing field, we are hard at work separating the signals from the noise.

Although this week’s new unemployment filings number climbed a bit (in contrast to forecasts) we think that Hurricane Laura had something to do with that. If that’s true then the data point is somewhat invalidated. Likewise, new home starts — also a disappointer – may just as well have had the hurricane blues. On the good side of the coin, the National Association of Realtors Home Index, which measures new home actual sales, came in at a record breaking high. Also sharing the good side of the coin are very good consumer sentiment numbers from this week’s Michigan consumer surveys. If Michigan’s happy why shouldn’t the rest of us be?

We think that we will probably not see much movement in financial markets until some catalyst appears, and not just any old catalyst but one that can be agreed upon irrespective of the political climate that seems to shroud everything these days.

Our best candidate for that is getting a new round of stimulus aid out of Congress. Odds of that do look better now that Madame Speaker has sworn to keep her House in session until they have a deal.

By the way, last week’s eLetter failed to meet its Friday deadline. We apologize for that. We sent it out on Monday but in case you missed it, I have allowed a copy to tag along with today’s edition. (Readers viewing this on the web can find it at the Archive menu on the right)

Ron’s Market Minute 09/18/20 — Inflation?

There’s a lot of interesting info on the FRED website- Federal Reserve Economic Data (www.fred.stlouisfed.gov).

When looking for inspiration this past week I ran across a very interesting graph, which I have duplicated below. It shows historically the velocity of M2 Money Stock in the US economy. Or, in English it shows whether the US economy is leaning toward inflation, disinflation or deflation.

You may ask ‘why is this important?’ It is generally accepted that a little bit of inflation is a beneficial thing for the health of an economy. The primary support for that argument is simply that some inflation gets you farther away from deflation, which is a much more corrosive thing than inflation.

At the risk of being elementary, let’s have a quick review of what inflation actually is. It’s “too much money chasing too few goods”. As a result, prices rise — not because of increases in the value of goods and services but because the value of money falls. Everyone knows that if the government prints more money too quickly the ‘extra’ supply of money has the immediate effect of decreasing the value of all of the money. Bingo! Inflation! But less talked about is how the velocity of money can also create the effect of increasing the money supply. Ex: If I buy something from you for ten dollars and you in turn spend that ten bucks to buy something from someone else, and she then spends it again and that goes on for say ten transactions, it’s the same effect on the economy as my having spent a hundred dollars on the single purchase I made from you. It’s only ten dollars but it got spent ten times. Economists call this the multiplier effect.

Now that we have context, let’s look at the FRED chart.

If the velocity of money is increasing, the dollars are doing more work (making more round trips) and that tends to be inflationary. In that case the graph should slope upward.  And vice-versa: if the chart slopes downward we are in a deflationary period. Through the 70’s and 80’s the work of the Fed Reserve was to put a lid on inflation as a cure for the runaway inflation that did major damage to the economy. You might remember checking accounts that paid 12% (taxable) while the purchasing power of the dollar dropped by more than that amount — truly a losing proposition. 

You’ll note however that the economy has been in a generally deflationary environment for most of this century. Now, there are plenty of people that are concerned about the possibility of too much inflation. I’d like to offer up the possibility that we’re a long way from too much inflation!  And that might not be such a good thing, either. Food for thought.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
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Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
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www.denkinvest.com

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