The Monetary Inflation Crash Continues

Aug. 03, 2021 4:40 AM ETTLT, TBT, IEF, UUP, VGK, SHY, FXE, YINN, EDV, IEI, TDF, TMV, TMF, GXC, FEZ, VGLT, YANG, VGSH, UDN, EUO, CXSE, TBF, HEDJ, BIL, SHV, GSY, VGIT, PGJ, EZU, GOVT, RINF, CYB, KGRN, SCHO, TTT, ZROZ, IEV, FXP, IEUR, CHN, TLH, CN, USDU, EURL, SCHR, PST, EPV, XPP, TYD, GBIL, CNY, FLCH, UBT, PLW, YXI, TYO, SPEU, UST, FCA, ULE, TBX, VUSTX, DRR, DBEU, EEA, HEZU, BBEU, EGF, EUFX, URR, FEP, KESG, UPV, DFVL, TAPR, DFVS, FIBR, FLEE, DTYL, DTUS, GSEU, PTEU, RAYC, FPXE, DTUL, UEUR, DBEZ, FEUZ, RFEU, DLBR, FIEE, FEUL, FIEUX2 Comments

Steven Saville

1.62K Followers

Summary

As mentioned in previous TSI commentaries, the monetary backdrop will stop being supportive for the US stock market after the annual TMS growth rate drops below 6%.
All else remaining the same, the relatively small amount of monetary inflation in China over the past 16 months would pave the way for China’s economy to be relatively strong over the next few years.
We’ve written previously that the H1-2021 global monetary inflation reversal probably won’t be a major driver of prices over the balance of this year.

Inflation written newspaper — CasPhotography/iStock via Getty Images

Editor's note: Originally published at tsi-blog.com on August 3, 2021

[This blog post is an excerpt from a report recently published at TSI]

The spectacular rise in the money supply growth rate that began in March of last year predictably led to an equally spectacular decline after the effects of the central banking world’s initial frenzied response to the ‘coronacrisis’ dropped out of the year-over-year calculations.

Displayed below are charts showing the spectacular declines over the past few months in the monetary inflation rates of the US, the eurozone and the G2 (the US plus the eurozone).

Note that the steep declines probably will continue for one more month, after which the year-over-year growth rates should level out. Also note that the vertical red lines on the G2 monetary inflation chart indicate the starting times of US recessions.

As mentioned in previous TSI commentaries, the monetary backdrop will stop being supportive for the US stock market after the annual TMS growth rate drops below 6%. This could happen as soon as the first quarter of next year, but a lot will depend on commercial bank lending.

For example, if commercial banks ramp up their lending then the US monetary inflation rate could stay in the 7%-10% range for a long time even if the Fed ‘tapers’. Something along these lines happened during 2014-2016.

The monetary situation in China is very different. As illustrated by the following chart, the year-over-year growth rate of China’s M1 money supply is close to a multi-decade low.

All else remaining the same, the relatively small amount of monetary inflation in China over the past 16 months would pave the way for China’s economy to be relatively strong over the next few years.

However, all else isn’t remaining the same, in that the Communist Party of China (that is, Xi Jinping) is becoming increasingly dictatorial and heavy-handed in its dealings with the private sector.

We’ve written previously that the H1-2021 global monetary inflation reversal probably won’t be a major driver of prices over the balance of this year. This is due to the time it takes for a change in the money supply growth trend to ‘ripple through’ the financial markets and the economy.

However, unless the Fed and the ECB generate a new monetary tsunami over the next several months, the G2 monetary inflation rate could become low enough by early next year to set off a boom-to-bust transition.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

Steven Saville

1.62K Followers

I graduated from the University of Western Australia in 1984 with a degree in electronic engineering and from 1984 until 1998 worked in the commercial construction industry as an engineer, a project manager and an operations manager. I began investing in the stock market 2 months prior to the 1987 stock market crash and thus quickly learned about the downside potential of stocks. Only slightly daunted by the rather inauspicious timing of my entry into the world of financial market investments, my interest in the stock market grew steadily over the years. In 1993, after studying the history of money, the nature of our present-day fiat monetary system and the role of banks in the creation of money, I developed an interest in gold. Another very important lesson soon followed: gold may be the ideal form of money for those who believe in free markets and a wonderful hedge against the inherent instability of the government-imposed paper currencies, but it is not always a good investment. By mid-1998 the time and money involved in my financial market research/investments had grown to the point where I was forced to make a decision: scale back on my involvement in the financial world or give up my day job. The decision was actually quite an easy one to make and so, at the beginning of 1999, I began investing/trading on a full-time basis. My major concern in deciding to pursue a career in which I devoted all of my time to my own investments was that I would miss the personal interaction that had been part and parcel of my business management career. The Speculative Investor (TSI) web site was launched in August of 1999 as a means for me to interact with the world by making my analysis/ideas available on the Internet and inviting feedback from others with similar interests. During its first 14 months of operation the TSI web site was free of charge, but due to the site's growing popularity I changed it to a subscription-based service in October of 2000. Its popularity continued to grow, although I remained -- and remain to this day -- a professional speculator who happens to write a newsletter as opposed to someone whose overriding focus is selling newsletter subscriptions. My approach is 'top down'; specifically, I first ascertain overall market trends and then use a combination of fundamental and technical analysis to find individual stocks that stand to benefit from these broad trends. This approach is based on my experience that it's an order of magnitude easier to pick a winning stock from within a market or market sector that's immersed in a long-term bullish trend than to do so against the backdrop of a bearish overall market trend. Fortunately, there's always a bull market somewhere. I've lived in Asia (Hong Kong, China and Malaysia) since 1995 and currently reside in Malaysian Borneo.

Summary

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