Inflation!Oh yeah, inflation... Just how much though???
One of the main "benefactors" for inflation is money supply. Printing money fast and not managing it to create growth, is bad... unsurprisingly. For the last 2 years, an astronomical amount of money was printed. But have we seen it's effect?
To figure out these HOT questions, we use charts. Opinions don't do us any good for important issues, facts do.
First: M2SL (Money Supply)
Specifically the rate of change. We use the ROC indicator, set in 24 months.
This chart above, the ROC is looking familiar...
It looks like the rate of change in money supply, follows the inflation rate. So we might have something.
I hear you say, on the far right we see an explosion in money supply ROC, and we witness the explosive inflation rate we had this year. Thankfully, ROC is now almost turning negative, and inflation is showing signs of slowing down.
Not so fast.
Look at the following chart.
In this chart we have 3 lines, blue is money supply ROC, orange is time-synced inflation rate, and the faint white line is inflation moved 2 years earlier. I tried to match the money supply ROC peaks with the inflation peaks of 1970s.
Do note that the M2SL ROC for a specific date, takes the average ROC for the past 24 months (2 years). So the delay between money printing and inflation showing it is at least 2 years . The ROC chart is delayed by itself, and it shows inflation change 2 years before the official inflation rate changes.
Alarmingly, the chart above shows us that we are in the middle of inflation explosion.
A magnified view.
I hear you say again, but inflation is rapidly dropping, so it is peaked. This chart above does have an indication of scale as well as timing. It is obvious that the rate of change stood much higher for long, more than any other time in history. So inflation should be quite substantial. Perhaps more than 15% we had in 1970s. We need to prove that it is higher though...
Second: Total money printed
I tried comparing the cumulative money printed in the decade before the inflation peak, this led me to a dead end. Percentages are identical.
It looks like an inflationary shock today, too much was printed too fast.
This is a key difference between the two periods.
Third: What is the "fair" amount of money we should have printed?
So what if, we try comparing money supply with the total GDP. The ratio M2SL/GDP. If you saw my previous idea, I learned that the GDP/M2SL ratio is basically the money velocity.
The idea behind the M2SL/GDP (which is 1/M2V) is simple, just how much excess money have we printed for the gross domestic product we have? I hastily explained in my previous idea, and I will try to explain it again, comparing these two different periods.
During the period of stagflation (1970s) we had money velocity in a slow but steady growth.
Now we have the complete opposite.
We have too much money printed for how much we produce. I don't have the knowledge to pinpoint how much of an increase this could cause to inflation though. I tried some things in my previous idea.
And finally, fourth: Yields
This are disappointing. Markets don't want high yields, and they refuse to price-in higher yields.
It could take many months before this barrier is broken. This is a 3M chart, so timeframes are quite long.
Market's yield is preceding FEDFUNDS. While I am not experienced on the mechanics of how the FED and the market are reading/predicting/using yield rates, this chart shows us that FEDFUNDS always follows US02Y.
Keltner channels show us the opposite side of the EMA Ribbon. If we trust the one, we trust the other.
We are almost inside the top Keltner channel, a bearish phenomenon.
Unfortunately for the low-inflation-dream, we might have reached a top for now. FEDFUNDS is poised to grow a little more, and US02Y shows signs of weakness.
Like 2008 (and every other rate-hike-era), we may have reached a top.
And an extra: Inflation predictions for other countries
I talk about the US, but I am from Greece. Right now, we are voting for next years budget. This budget is presented as a great one (let's not get into politics). Everything is good regarding it. Curiously, on the first paragraph basically, it states that "this budget is made considering an average inflation rate for 2023, 5 points higher than this year.
(I am paraphrasing, I don't present an official transcript)
Inflation reached a high of 12%, a 30 year record. Europe countries like mine, are bracing for higher inflation for next year. The problem is nowhere near to a solution.
Tread lightly, for this is hallowed ground.
-Father Grigori
