Inflation made simple: More money More problmes

FRED:WM1NS   M1 Money Stock
On March/April 2020 we hit irrational market conditions due to the abrupt halt in the economy. We can blame the pandemic as the trigger, however there were indicators that were already flashing a slow down in the economy. Then "Magically" the so called "V Recovery". Sharp , strong, "back to normal", unemployment spiked to unprecedented levels and went back to a fast recovery.

A while ago I published an article about the disconnection between the economy and the stock market. Several articles pointed out the inflation issue, at the time it looked like something that was neglected and even ignored. The Fed called it a "transitory" inflation . The Fed is responsible for watching over inflation and employment. This Fed has disregarded the inflation issue.

Magic doesn't simply occur. After the economy stalled due to the virus lock down, the oil tumbled, the stock market wiped off the gains and took it back to 2016 levels, the unemployment spiked, and there were two emergency calls, one to put interest rates to Zero, and the second to increase the debt ceiling to unprecedented levels. We have two main factors to eye, the near Zero interest rates, plus the M1 metric (Money supply) spiking like never before. This means TONS and TONS of bill notes were freshly printed and put out in the market. It is not new to know that the ships at the California ports and the supply chain disruption contributed to inflationary pressures, but they were not the root reason for the 7% inflation we're seeing now, those were more the excuses to divert the attention from the root problem, we have an excessive amount of free money in the market, a Piñata was broken and everybody have cheap mortgages, cheap credit, cheap margin, cheap everything. Supply/Demand in action, a lot of easy money plus a lot of buyers => increase of prices.

A lot of bills in the market dilute their value, so now we need more bills to buy the same stuff this equals to inflation , and after these levels shown in the M1 + Interest rates charts, it means a lot of it. Now the FED has changed the tone and it doesn't call it "transitory". They say they will increase the interest rates in 2022, but so far the things are just exactly the same, nothing has changed. The market doesn't understand intentions, it understands numbers.

SPX : The index has made fresh all time highs and it's in an uptrend, weakening momentum, but I wouldn't be too worried about it. The market needs a correction to buy cheaper, so this is normal to be expected at some point. As long as things are kept the same I would expect to see the 21st century version of the "Roaring 20's"

US30Y : It made a rally from July 2020 to April 2021, then it started to make LL-LH. Something that has to be paid attention to.

VIX : The fear indicator is around 17, which signals a bull market. A couple of spikes which showed up during the weeks when the market was testing the trend and the market continued to "buy the dip".

DXY : The Dollar index went down after the flood of dollars put out in the market, it tested its lowest at 90 and it went back up to 95.

GOLD: Gold is a hedge for inflation . In 2016 it found a support level a little above 1000. Since then it started a rally that took it to 2000. The market was already forecasting some troubles in the economy and when the pandemic hit harder it was when gold took its last rally to 2000. Once the dust was settled it just started to consolidate between 1700 ad 1800. This market is in a wait and see pattern. Cryptos are being eyed as the virtual Gold but still they are in a roller coaster with high volatility , not for the faint at heart.

OIL . This is a fundamental economy indicator. The pandemic made the future market participant pay up to 40 to get rid of the contracts, unprecedented. After that historic milestone oil started a recovery rally that followed the "V Shaped" recovery, and it went from a closing 17 level to the 80's level we see today. The pace at which it's been growing has decelerated lately, so basically it is in an uptrend with lower momentum. The economy is reaching an equilibrium where the demand for energy is not the same as the amount needed to jump start the economy. Oil is still making HH-HL, until that changes it's still in an uptrend.

Conclusion: Nobody wants the party to be over, so we keep on adding more to it. However this has taken us to the irrational exuberance where the economic indicators already show signs of high levels of stress. A problem has been created, and apparently it will be left alone until it explodes, just like it has happened in the past.

There are two ways to deleverage the economy the easy way and the hard way, the longer it takes the Fed to start increasing interest rates, the bigger the problem will become. The housing market is very hot, the used car market, the credits, the spending in general accelerated too much. We risk to see another 2008 when the interest rates will start to go higher and will catch the general public with a lot of debt ... and higher prices.

A very good economy educational video that's one of my favorites is from Ray Dalio, and it explains in a very simple and understandable language the economic cycles. I strongly recommend you to watch it.
How The Economic Machine Works by Ray Dalio