I was bullish on the technology sector throughout 2019 and throughout most of 2020. These are some basic thoughts for what I’ve noticed in the market recently.
Back in 2019 we had low and stable money growth (% year-over-year basis). John Greenwood of Invesco cited this as the primary reason for the longevity of the bull market. The past cycles characterized with faster money growth (M2), only drop when inflation rises.
Throughout 2020 the Fed sent M2 parabolic (terms of growth, year-over-year) above and beyond anything we have ever seen. While it’s going up, is a huge buy symbol, but interesting since the DXY lost the 90 handle today (89.683, February 25th, 2021). The last time recently that the DXY fell below, was January 6th, 2021 (89.208). The Fed will have a few options; keep printing money and let the dollar collapse (not a realistic option) or let the currency stabilize, if they stop printing M2 will drop fast.
The money already put into the economy creates demand, but if the money doesn’t move through the economy, then there will not be a huge influx of demand. The increase in demand might match with a drop in M2 growth (year-over-year) this is the perfect storm for big inflation.
We’ve been hearing about pent-up demand for almost a year now. Supply constraints and consumer demand might be the major sources of price inflation.
JP Morgan economic analysts, and the Fed, don’t think we will have sustained inflation this year. Their base case is a few months of inflation and then disinflation, then some more inflation, etc.
One reason many have been wrong about inflation, is because of no money velocity (e.g., the rich “hoarding” their money, the wealth gap increasing).
Printing money doesn’t actually lead to inflation (Yes, Peter Schiff’s of the world are wrong).
It’s continued printing for months or years, and then stopping that leads to inflation.
This then destroys areas of growth (i.e., technology sector), and many people correlate the technology sector with a weak dollar.
A weak dollar is one of the ways the technology sector can relax. While the weak dollar is the result of the low Fed funds rate, the technology sector generally benefits from the low Fed rate.
The sector relies on this for the easy money and debt to grow. If the dollar falls people will buy into the technology sector.
If M2 is as high as it is, the Fed will stop printing, thus creating inflation.
The Fed might halt QE once they sustain inflation, but not only a few months of 2–3%.
In conclusion, look towards exposure to assets that are not short volatility assets (e.g., stocks and bonds) such as commodities and volatility exposure.
“And my theory was, QE; the buying of bonds by the government, would cause risk to go and thereby decrease the demand for bonds from other entities. It took about five weeks, but it worked. Then we stopped QE, and sure enough, like the day we stopped QE, bonds went up, stocks went down. Everyone blamed it on Boehner and Obama having a hissy fit with each other in the White House, but I have followed this for eight years, and it was seven for seven. When the government buys bonds, bonds go down. And stocks go up, and vice versa.”-
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