How to Predict the Price of Goods

Includes: DIA, QQQ, SPY
by: Andy So

While everyone is focused on stagflation and the possibility of recession, I’m looking past that and toward an eventual recovery. In order to avert the possibility of a systemic economic collapse, the Fed is currently printing money at an alarming rate. The increase in the money supply means more dollars competing for the same goods.

I caught the chart below from It clearly shows the dramatic increase in money supply from the Fed.

The chart above illustrates MZM, or money of zero maturity. MZM is essentially all of the money available for spending not in time deposits or money market funds. The chart is also linked to an interesting article discussing the subject of money inflation.

Taken from the article:

p> Then in early January 2008, the global stock markets sold off aggressively. Fears of an impending US recession drove heavy selling overseas. This worldwide selloff was so extraordinary that we are unlikely to see anything resembling it again for decades. But instead of reining in monetary growth, the Fed accelerated it. Absolute annual MZM growth peaked at a staggering 16.7% in March 2008!

You read that right. There were 16.7% more US dollars available for spending this March than last! This is incredible, especially during challenging times when the US economy was barely chugging along around 2.2% growth for all of 2007. Sooner or later all this excess money will eventually bid up prices. Some of this inflation will be perceived as good, primarily the part that flows into stocks. But the part bidding up scarce food and energy is not going to make Americans very happy.

If we look at the past effect of increasing money supply, we can see that it lead to the recovery of the recession brought on by the .com crash. Without the ability to earn a rate of return exceeding the actual rate of inflation, we are losing money each year. We can combat the effect of a growing money supply and inflation by owning the goods that are in competition for our money.

While overall prices will rise, earning a greater rate of return means second guessing whether you think the price of oil, agricultural goods like rice, stocks, or a fixed asset like property will rise the most. It may seem counterintuitive, but my primary guess is that property will rise the most as we emerge from a recession.

Looking back at the money supply chart, we can see MZM reached 21.8% at the end of 2001. In the period between 2001 and 2005, we saw property prices double and sometimes triple in certain locations. During this period, the Fed also steadily increased interest rates to the point where deposit rates were over 5%. By the time deposit rates were so high, it was too late for property investors to jump in the market. I made a dear mistake at this time, purchasing an investment property nearly at the market's high.

Pessimism will undoubtedly keep property from being a favored asset class in the short-term. I believe the second half of 2007 marked the beginning of opportunity for property investors holding on to cash. This opportunity stems from the combination of cheap money from falling interest rates and money supply growing at over 16% so far this year. I’ve taken the Fed’s interest rate cuts to nearly 2% as the key indicator to look for new opportunities.

Here is another quote from the ZealLLC article:

But all this excess cash had to go somewhere too. Eventually all money the Fed creates will bid on something. Greenspan’s massive monetary growth in 2001 directly led to the housing bubble that he brazenly tries to accept no responsibility whatsoever for today. The torrents of excess money, which the Fed refused to take back out of the system after 9/11, flooded into real estate. And then that bubble started crashing in late 2006.

See the pattern here? The Fed gets scared because some speculators might actually lose on their bad bets so it floods the system with money to help them. But all of the money created in these huge surges eventually has to find a home somewhere, so another bubble is born. And then that bubble pops, scaring the Fed more. So it ramps money growth again, birthing a new bubble. It is a nasty vicious circle.

As a value investor, I’ve learned to disregard my emotional response to market gyrations. I see pessimism as opportunity. I see broad-based sell-offs as the easiest time to profit. I’ve learned from my own previous mistakes that it’s much easier to profit by buying and holding onto oversold conditions than to try and catch an investment opportunity when it may have reached a top. We are currently in a strong buyers' market and value investors should consider purchases when no one else wants too.

I have confidence that the housing market will recover as we emerge from a recession. Having a chance to purchase highly desirable properties, such as a park view apartment or ocean front property in a buyers market may be a one-of-a-kind opportunity.

Kudos to author Adam Hamilton for writing such a clear article on money inflation.