My favorite economist, Ed Yardeni, pointed out last week that the money supply has exploded and "M2 Is Off the Charts." He said that we are in "The Twilight Zone of monetary policy." (M2 consists of basic money, or M1, which is cash and checking accounts, plus savings accounts and money market funds.)
Ed says M1 is up $2,943 billion (+74%) and M2 is up $4,069 billion (+26%) in the last year. Where did all this money come from? Ed says "Uncle Sam is our Daddy Warbucks, thanks to his digital printing press..." The Fed has purchased $3 trillion in Treasury securities and mortgage-backed securities, which in turn has dramatically boosted M2. Essentially, when this much money is sloshing around, it tends to get spent, especially as uncertainty comes to an end and the economic outlook seems brighter. Clearly, the Fed and the U.S. Treasury are working together to provide "whatever it takes" to fuel this recovery.
In addition, our new Treasury Secretary Janet Yellen is no fan of cryptocurrencies and has been calling for more regulation of Bitcoin, so it will be interesting to see, in the wake of Tesla (TSLA) announcing last week that it invested $1.5 billion of its cash in Bitcoin, if this trend toward "crypto" balance sheets triggers any proposed regulations. Naturally, as cryptocurrencies proliferate, it can undermine the federal government's ability to control both monetary policy and taxation, since many cryptocurrency holdings are not fully disclosed to the federal government with a tax ID number. As a result, it will be fascinating to see if the Treasury Department will impose new tax identification requirements on cryptocurrency transactions.
Eventually, all this new cash sloshing around from M2 and possibly from growing cryptocurrencies will likely continue to stimulate inflation. The Fed has purposely been trying to get headline inflation up to its target rate of 2%, but productivity enhancements continue to keep inflation below the Fed's target. As a result, the Fed has its hands full, and I, for one, will be watching if M2 continues to rise as a result of this seemingly endless quantitative easing as well as the Biden Administration's upcoming stimulus programs.
Federal Reserve Chairman Jerome Powell on Wednesday said that the Fed will continue to be especially accommodative in order to bolster U.S. economic growth. Interestingly, Chairman Powell also implied that U.S. unemployment might be higher than the 6.3% level that the Labor Department reported for January, explaining that "Published unemployment rates during Covid have dramatically understated the deterioration in the labor market" and "we have been concerned about its longer-term effects.
Powell added that "Extended periods of unemployment can inflict persistent damage on lives and livelihoods while also eroding the productive capacity of the economy. And we know from the previous expansion that it can take many years to reverse the damage." Translated from Fedspeak, I think we can conclude that the Fed may never raise key short-term interest rates during the Biden administration!
The Latest Inflation and GDP Numbers at Home and Abroad
Speaking of inflation, the Labor Department announced on Wednesday that the Consumer Price Index (CPI) rose at a 0.3% monthly rate (3.6% annual rate) in January, which was in line with economists' consensus expectations. Energy prices rose 3.5% in January, led by a 7.4% increase in gasoline prices. Excluding food and energy, the core CPI was unchanged. In the past 12 months, the CPI and core CPI both rose 1.4%. The Fed is still struggling to get to its 2% inflation goal, so inflation is still under control.
Interestingly, China's consumer prices declined 0.3% in the past 12 months. Food prices rose 1.6% in January, while non-food prices declined 0.8%. Economists believe the current round of deflation in China will be short-lived, since consumers tend to spend more freely heading into the Lunar New Year festival (February 12-26 this year). Wholesale inflation in China, based on the producer price index, rose 1% in January and 0.3% in the past 12 months, according to their National Statistics Bureau. As industrial production and demand continue to steadily improve, wholesale inflation is expected to rise in China.
The Wall Street Journal reported last week that private economists now expect 4.9% U.S. GDP growth in 2021, up from 4.3% in January. The Atlanta Fed on Wednesday lowered its first-quarter GDP estimate to an annual rate of 4.5%, down slightly from its previous estimate of a 4.6% annual pace. The rate of Covid-19 vaccines remains the key to boosting consumer confidence, so the news last week that it may take until Thanksgiving to reach "herd immunity" was not welcome. Hopefully, a single-shot vaccine will become available at major drug chains in the upcoming months, since that would expedite the process.
Speaking of GDP growth, Britain's Office of National Statistics announced on Friday that their GDP contracted at an annual rate of 9.9% in the fourth quarter, which is the largest slump in over 310 years, since the 1709 "Great Frost," which marked a 13.4% GDP contraction, and the 1706 "War of Spanish Succession," causing a 15.3% GDP slump. By comparison, Italy, France and Germany's fourth-quarter GDP contracted at an annual rate of 8.8%, 8.3% and 5%, respectively. Britain is now effectively leading Europe into a "double dip" recession, since the Covid-19 lockdowns persist throughout Europe. Negative interest rates now envelop Britain, so we'll see if these negative rates stimulate an economic recovery.
Interestingly, Britain is vaccinating its citizens far faster than any other European country. So far, almost 20% of Britons have received at least one vaccination shot, compared to 4% in both France and Germany.
The other interesting news last week was that The Wall Street Journal reported that Hyundai's (HYMLF) talks with Apple (AAPL) over possibly building the Apple car have broken down. Nissan (OTCPK:NSANY) has also signaled its willingness to possibly work with Apple. I still believe that VW Group (OTCPK:VWAGY) will be the company Apple ultimately picks to make an Apple car, since a key executive has moved from Apple to VW Group to lead its development of electric vehicles. On Tuesday, VW Group introduced its electric Audi e-tron GT, which is built on the same platform as the Porsche Taycan. VW Group should pass Tesla as the largest EV maker later this year and is already the largest seller of EVs in Europe, which is the world's fastest-growing EV market.
Navellier & Associates owns Tesla (TSLA) in one account, and a few accounts own Apple Computer per client requests in managed accounts. We do not own VW Group, Hyundai, or Nissan. Louis Navellier and his family personally own Apple Computer in a personal account but does not own Tesla, VW Group, Hyundai, or Nissan.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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