Your captain is back for more adventures. I feel 2022 is going to provide more turbulence than my stomach after my mother in laws compulsory zucchini pie. I hope everyone is feeling well fed as to borrow some biblical narrative after years of feast come years of famine. Before I get ahead of myself let’s look at the numbers responsible for the largesse. A note of caution, don’t look down if you are scared of heights.
The combined fiscal and monetary stimulus efforts of the US, China, euro zone, Japan and eight other developed economies caused their aggregate money supply to rise $US20 trillion over the course of 2020 and 2021 to a record $US100 trillion, according to data compiled by Bloomberg.
Let that sink in: The amount of money sloshing around the global economy and financial system surged by 25 per cent over the course of two years. That’s unprecedented in modern times.
One thing you can be assured of with that amount of stimulus, similar to the flatulence one is assured from the said zucchini pie, too much money chasing too few goods is your recipe for inflation – capeesh?
In December 2020 the average daily usage of the Feds RRP (reverse repo program) was zero.
In December 2021 the average daily usage of the Feds RRP averaged $US 1.6 trillion.
The facility is where institutions go park their money and earn something because there is nowhere else attractive enough to park their money. There is so much money sloshing in the system that bond yields were driven to negative as institutions became desperate for places to park their money.
If you are one of the many who have been shaking their heads in disbelief at the levitation of all assets despite the fact that we are living through a pandemic where many countries have been effectively shut down for months you can start to see how such things are possible. Take Apple which became the worlds first trillion dollar company in August 2018, just over 3yrs later it hit the $ 3 trillion mark.
While we are throwing trillions around lets unpack what excess money supply growth does to assets.
Take a look at the crypto market. In 2020 it was sitting around $250 billion, just multiply by a cool 1000x and you get the current size of the crypto market. No you are not a genius if you bought crypto 5yrs ago, perhaps astute to the perils of currency devaluation but no genius.
I would like to share how far we have become unhinged from any sense of fair value with this chart by John Hussman. Never have I seen brilliance be so right but so wrong over the last few years. I am very happy to hitch my wagon to this kind of stupid, even if my wife keeps telling me to keep quiet, you sound stupid, nobody asked your opinion.
In the chart below Hussman takes the classic Shiller CAPE (cyclically adjusted PE Ratio) which looks at the last 10yrs of earnings to get a more smoothed look at valuation and he does what any self respecting genius does, he normalises for profit margin. Margin is mean reverting so extremely profitable margins need to give some back over time – touche maestro. What do we have here, oi vey we have the most expensive market in the history of the last 100yrs. Didn’t the Sage from Omaha advise we should be buying when their is blood in the streets.
I have to admit looking at the forecast GDP growth for the world over the coming year I had to pinch myself. This feels like the go go years of the 1980’s not the post pandemic tepid fragile economy I thought we were in. I really need to get out more as I seem to be missing a good game. 5% GDP for the big boys feels like 3% of the naughties.
Market specific commentary from tomorrow but I just needed to share this chart of the long bond US Treasury market. Ouch down 2.6% for the day. I think this is a serious indicator of the impending inflation worries. Make sure you have your life jackets on this is going to get wild.