WM2NS trade ideas
Apeish on $M2 money stock - Unlimited Potential! I'm currently taking a long position on the United States M1 And M2 money supplies. I'm not really sure how to actually take a position though, but it's good to know that if our country needs more money we can just print it because USD is the Dave and Buster's token of the World Bank.
See you Apes on the moon.
#MOONGANG
Don't use current M2 data, it has been discontinued.If you're a analyst that has been using M2, I'm here to let you know the data has been discontinued. However, FRED is still updating the data under a new ticker "M2SL" and "WM2NS". Hopefully tradingview updates M2 with the "WM2NS" data from FRED as that one updates weekly now. Thanks for interacting with the post as it'll be more likely for tradingview to see this post and update the data accordingly. Also thank you tradingview for the hard work and consistent updates to the website and app.
Money Supply, Velocity, Inflation, Rates & the Federal ReserveI was taught in undergrad that adding to the money supply is inflationary . The logic was, you print more bills; the existing currency gets diluted in buying power.
Following the ‘Crises of 2008’ the Fed launches Quantitative easing and purchases long term securities increasing the money supply and lowering rates. This activity would result in more investment and encourage lending. Keep in mind the lever the Fed historically wielded was changing the short-term interest rate, so by lowering the discount rate that banks pay on short term loans from the Fed, the Fed is able to provide liquidity and – ease. Monetary Policy's version of stimulus.
Quantitative Easing was much more potent and was a lever that enabled much more control for the Fed, and control over a longer time frame.
Keep in mind the mandate of the Fed:
Maximum Employment
Stable Prices
Moderate Long-Term Interest Rates
One can see that the Fed's tool kit was easily justified by the Board of Governors as they sought to fulfill Congress’ mandate. Not to mention the stability here is global, at least the Fed is responsible for keeping everything stable. This status for America globally is a great privilege. Many Americans are not cognizant of what this affords to us as individuals in this nation.
QE did result in in inflation, but the environment has not been unruly with any problematic inflation , and we certainly did not get any Hyper-Inflation like so many economist were shouting about, especially those grounded in traditional economic ideology.
This new environment has me wondering again how this will all play out of course as the parts at play are each so multifaceted. With that said, I would think we see inflation rise especially with the macro environment of easing and potential fiscal policy and the Federal Funds rate being this low. With that said, the biggest concern I have with this thought process is curiosity of what was stated by Jerome Powell in the last FOMC meeting – rates will be at these levels near the zero-bound (limit of 0% for short-term rates) with the Fed setting a higher target for inflation . Keep in mind the Fed has never been able to hit their recent targets for inflation for years, yet now they want the target even higher. With that thinking in mind, he seemed to indicate the reason the Federal Funds rate can be so low for so long is because inflation will not even be getting to their own target, just as it hasn't in recent memory. Again I still have a bias towards a weaker dollar and inflation – I am however readily willing to change my mind on a moments notice here as we see what actually transpires. I have an alternative to all the "deflation" vs "inflation" debates - an environment that will be stable with just modest inflation.
Please be sure to comment, debate and let me know where you think the dollar goes next.
Don't just look at M2, look at M2 relative to the Velocity of M2Looking at M2 it looks incredibly Inflationary but where exactly is that Inflation? So I had to dig deeper, if you look at M2V, the Velocity of M2 or in easier terms, the number of times that the average unit of currency is used to purchase goods and services within a given time period, you will notice a sharp decline in M2V accelerated by the pandemic crisis. Now if you look at the amount of M2 you have to consider for it to be inflationary, it also has to have a high velocity, or productiveness inside the economy. So if you now look at M2*M2V, the amount of M2 multiplied with it's velocity, the chart on the left, you see that relative to it's velocity M2 by far has not increased as dramatically as it seems if you just look at the amount. So if the amount of liquidity in the system increases but the realitve productivity of that money goes down it most likely is not as inflationary as you might think by only seeing the increased amount of liquidity. The crucial thing to watch is now if the increased amount of liquidity will increase in velocity which then very well can lead to a much higher inflation in cosumer goods. But keep in mind that there is a good chance a lot of the realitvely inactive money might has been inactive because it has positioned in equities and commodities, so if the economy now reopens some of that investments might be liquidated to consume rather than staying invested in financial assets, that not only concernes households but also small and medium businesses. So it is mostly crucial to keep a close eye on the M2V to see if actual consumer good inflation is to come or if this amount of liquidity will just keep raising the market to even more all time highs. This also coincides with yields which eventually can be very harmful for governments in huge debt, and as the fed has to rely on private banks to buy treasuries, which won't do that in the current extent, if real inflation is on the horizon, soly because they would loose a lot of money holding most liquid assets like treasuries or reserves, the fed won't be able to continue buying so much of the government debt causing the government to find someone else to buy it or to force public savings institutions into buying it by else going bankrupt out of inability to service it's debt.
Macroeconomics 101: inflation, bonds, interest rates, stocksHello fellow traders and dear padawans. The equities market has been hit very hard the past 3 weeks or so, specially growth stocks. I think it is important to address what is happening behind the scenes that caused the selloff in the equities market so that many of you can better understand what is going on.
This is a very basic explanation of macroeconomics and by no means thorough but I know that many of my followers would benefit from it at times like these. To establish a common ground I will start with some definitions of terms. I wanted to keep things straight forward so I am getting these definitions from investopedia.com because they did a much better job than I would, defining terms thoroughly yet concisely. Keep in mind these are short definitions of concepts that deserve in-depth study if you want to understand them fully. However, for the purpose of this discussion what follows is enough (you can always read full articles on investopedia.com or somewhere else). If you are well versed on those you can certainly skip ahead (or use this as a refresher).
DEFINITIONS
Inflation : Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed a a percentage means that a unit of currency effectively buys less than it did in prior periods. Inflation can be contrasted with deflation, which occurs when the purchasing power of money increases and prices decline.
Bonds : A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debtholders, or creditors, of the issuer. Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually includes the terms for variable or fixed interest payments made by the borrower.
Treasury Notes : A Treasury note (T-note for short) is a marketable U.S. government debt security with a fixed interest rate and a maturity between one and 10 years. Issued in maturities of two, three, five, seven and 10 years, Treasury notes are extremely popular investments, as there is a large secondary market that adds to their liquidity. Interest payments on the notes are made every six months until maturity. Treasury notes, bonds, and bills are all types of debt obligations issued by the U.S. Treasury. The key difference between them is their length of maturity. For example, a Treasury bond’s maturity exceeds 10 years and goes up to 30 years, making Treasury bonds the longest-dated, sovereign fixed-income security.
Federal Fund Rates : The federal funds rate refers to the interest rate that banks charge other banks for lending to them excess cash from their reserve balances on an overnight basis. By law, banks must maintain a reserve equal to a certain percentage of their deposits in an account at a Federal Reserve bank. The amount of money a bank must keep in its Fed account is known as a reserve requirement and is based on a percentage of the bank's total deposits. They are required to maintain non-interest-bearing accounts at Federal Reserve banks to ensure that they will have enough money to cover depositors' withdrawals and other obligations. Any money in their reserve that exceeds the required level is available for lending to other banks that might have a shortfall.
Note: although the Federal Fund Rates are charged to banks, banks pass them down to clients' personal/auto/student/mortgage loans and credit card interest rates so these interest rates cascade down to society as a whole.
With those out of the way we can start discussing the relationship they have with one another as well as the equities market and understand what is happening with the stock markets.
RELATIONSHIP BETWEEN INFLATION AND INTEREST RATES
In general they have inverse correlation, meaning when one goes up the other goes down. The inverse correlation happens because when interest rates are low people feel encouraged to borrow money, which leads to more spending thus creating more demand of goods and services than supply. When demand is bigger than supply prices will increase to both slow down demand and also (perhaps more importantly) to increase profit margins, which leads to inflation. Because the Fed can manipulate short-term interest rates via the Federal Fund Rates they are able to somewhat control inflation. When interest rates are high the process is inverse to the one described above: people feel discouraged to borrow and spend money; instead they prefer to invest in a fixed income instrument such as high yield savings accounts, CD, or bonds to take advantage of the high yields. It is therefore the job of the Fed to keep inflation and interest rates in balance.
Although not everybody agrees, it is understood by economists in general that some inflation is good for economy because it encourages consumers to spend their money and debtors to pay their debt with money that is less valuable than when they borrowed it. Thus some inflation drives economic growth. One of these economists is John Maynard Keynes, who believed that if prices of consumer goods are continuously falling people hold off on their purchases because they think they will get a better deal later on (who doesn't like a good discount?).
Another important element that factors into inflation is how much liquidity is injected in the economy (cash, or money supply). More money would translate into more demand and rise in prices.
RELATIONSHIP BETWEEN BOND PRICES, BOND YIELDS (or INTEREST RATES), and INFLATION
Bond prices and yields also have an inverse correlation: if the bond certificate price (AKA face value , or what the bond certificate is worth) increases the yield decreases and vice-versa. To make things simple and to better illustrate how bond prices and yields are related the example below uses what is known as ZERO-COUPON BOND, where the yield is derived from the relationship between the coupon payout and the bond face value (back in the day the bond certificate--a piece of paper--had small coupons that investors would rip off and present to the borrower to redeem their yields. That terminology is still used to this day although these coupons are not used anymore).
Example: if the bond price is $1,000 and the borrower receives $1,100 back at the end of one year, the so-called coupon rate (the yield paid for each bond certificate throughout the lifetime of the bond) is 10% . So the formula to find the coupon rate is: COUPON RATE = ANNUALIZED COUPON VALUE/BOND FACE VALUE; in this case, 100/1000, or 0.1. That formula helps to understand why the bond price and bond yield (coupon rate) have an inverse correlation. It is important to keep in mind that bond yields reflect genereal interest rates. Like interest rates they can move up or down
Like other asset classes such as options, a bond certificate holder can sell that certificate back to the market (known as secondary market). If the current bond yield is lower than when the bond holder "bought" their bond it may be interesting for them to consider selling it because it is now more valuable than when they bought it due to the inverse correlation discussed above. So for bond holders, decrease in interest rates is beneficial.
Hopefully it is also clear that a rise in inflation that results in higher interest rates affects bond holders negatively. Who would want to sell a bond that is now less valuable than when they bought it? However, higher bond yields are attractive to new bond investors because it gives them more return for their investment overtime.
THE IMPORTANCE OF THE 10-YEAR TREASURY NOTES AND ITS YIELD
The government sells Treasury Bills/Notes/Bonds via auction. The yield of bonds is determined by investors' bids. The 10-year-yield's importance goes beyond the rate of return for investors; mortgage interest rates are derived from the 10-year yield for instance. But for the purpose of this text, it is important to understand that the market relies on the 10-year to gauge investors's confidence. Here we see another inverse correlation: if confidence is high, the 10-year yield rises and bond prices drop and vice-versa. Any change in the 10-year yield is closely watched by the markets and has enormous impact in other asset classes.
PUTTING IT ALL TOGETHER: BOND YIELDS, STIMULUS, EMPLOYMENT NUMBERS, STOCKS, AND THE FED
When Treasury bond yields rise bonds become an attractive investment because it is a safer than stocks--specially growth stocks where investors are placing their money on future success as opposed to present profits--since it is backed by the US government and provides fixed returns. While bond investors don't enjoy the big rallies of the stock market they also don't expose their capital to volatility and crashes.
With the reopening of the economy in clear sight due to vaccination, and the better than expected job reports investors started fearing higher inflation. That is a simple math: more people making money and out on the streets will boost consumption, which will lead to rise in prices. As explained before, higher inflation causes the Fed to adjustment interest rates, which causes bond prices to fall and yield to rise. Despite what Jerome Powell has said last week--that inflation rise is going to be temporary--investors didn't feel much confidence, which caused the recent sharp rise in the 10-year yield Treasury. With that, bonds became a good alternative to the stock market, causing investors to reallocate some of their capital into bonds. That and the fear caused by falling prices and the media (most of the media fuels panic--one month later everything is green again) resulted in the huge selloff we have seen the past weeks.
CONCLUSION
Phew, that was a lot. As I wrote on the preface of this text this is an overview of the subject matter so you can always read up on each one of the areas covered here to get more in-depth knowledge. However, I think this provides a good summary of what is going on on the markets right now. Hopefully you will have filled some gaps on your knowledge and will start making more sense of the interrelationship of the many aspects of economy covered here. This is a difficult subject to write about so I apologize if any idea is unclear. I can always clarify anything on the comments.
Bottom line: when things are clearer (inflation + interest rates) the markets will most likely stabilize and follow its due course. Growth stocks will continue growing (perhaps at a slower pace) and you will continue making good returns on good companies. I am using this selloff as an opportunity to lower my cost basis and enter positions in stocks that were too expensive before. Sometimes a pullback is all you were looking for even if you lose money in the short term. And hey, one can always buy put options to hedge against their long positions.
Good luck and safe trades!
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***The ideas shared here are my opinion, not financial advise to place trades. Please do your own research before buying/selling stocks***
🔥BREAKING: House passes $1.9 trillion Covid relief bill .The House passed its $1.9 trillion coronavirus relief package, which will head to the Senate.
Democrats in both chambers aim to have the legislation passed and to President Joe Biden’s desk before March 14, when unemployment aid programs expire.
The party is likely to pass the plan on its own, as Republicans have questioned the need for another massive spending package.
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Total Market Index Significantly Outpaced the Money SupplyIt seems like good deals are to be had when the total stock market increase is below the increase in the overall money supply.
The green is the M2 money supply and the yellow line is the VTI total stock market index.
You can see you got a good deal in March when stock prices fell below the increase in the money supply. The same for 2019 and 2016.
There might be something of a bubble as current prices significantly outpaced the growth in the money supply.
Money Supply and Stock Markets: A Semi-Scientific Approach :)))Although one should prefer "panel data analysis and more data" to estimate the relationship with these variables, Based on the 30 day data, we can say that there is a significant positive relationship among the money supply and these there stock market indexes.
So according to results we can expect that as long as money supply continues, altough these three indexes retrace at one point, could probably go even higher.
Why Interest Rates Will Go Down| M2-M1 ; M2/MonetaryBaseI hear the saying "Money printer go brrrrrr" often but, I think people have the wrong idea. When the Bank "prints" money it can only buy assets/securities or in other words "provides liquidity for existing debt". They are not creating new debt. Do you see the difference? One leads to deflation the latter leads to inflation. THE ONLY WAY THAT MONEY CAN BE USED IS IF IT IS LOANED OUT BY BANKS . This money pretty much just adds to the reserves which is included in the calculation for MonetaryBase. We see from M2-M1, Banks are not Lending. We see from M2/MonetaryBase that the so called money that was "printed" is not moving through the economy (ex. Keisha takes out a loan to start a lemonade business, she pays a carpenter to build a stand, a farmer for lemons and sugar, etc..; the carpenter and farmer bought see money in their account from Keisha's loan).
Background:
I will link previous ideas that explain M1 and M2. I want to focus on the very interesting relationship with M2/MonetaryBase. The Monetary Base can be defined as currency held by the public and in vaults of depository institutions plus their reserves. In other words pretty much all the money in every ledger.
M2-M1 estimates Bank Lending and M2/MonetaryBase estimates the money multiplier.
Analysis
We see steep declines in both these metrics indicating that financial conditions are tight. Banks still cannot afford the risk-premium to lend money out. The Banks realize that the money they are lending out does not have a high probability of generating income for them when, their balance sheets are already operating on low margins. The Banks are forcing the Fed's hand to lower rates even lower.
Explain why M2 Money and DXY shrank while SPX remained high?An interesting thing happened in the last 2 weeks of November.
Money Supply: United States people fled to cash by converting M2 money stock (savings, investments, money market) into M1 (checking and cash).
Dollar: Foreign investors presumably sold off dollar assets bringing DXY down around 2% in the month.
To recap: The money supply indicates that US people sold stocks and bonds. The Dollar decrease indicates that foreign investors sold stock and bonds.
Explain to me, then, how SPX remained elevated? How is it doing that?
Risk assets and money printing. SPX tracks the FED printing. Market has it's fractals of course, but overall this tracking is pretty tight. None of the FED money appears to be getting into the real economy. It did so when the stimulus checks were cut, showing as a small upswing in the M2V. This is not meant as a market timing graph, just as an overall graphic of the current situation with risk assets and inflation. Clearly M2V is a deflationary factor though as it continues it's long downward trajectory. The bottom line is asset inflation is a result of money printing, but as it is currently implemented not a factor in consumer price inflation.
This assumes that the FED is in full control of the US dollar money supply.
SPX via Equation of ExchangeHi everyone, I am doing some self study and have created the graph above.
using the equation of exchange M*V=P*Y I have calculated 1/Y.
M = Money Supply
V = Money Velocity
P = Price (S&P index value)
Y = Real Output/Value
Keeping the above in mind I calculate 1/Y (inverse because chart is easier to look at)
1/Y = 1/(M*V/P)
Adjusted Value = 1/(M2*M2V/SPX)
With the math listed here we can see that the recent volatility (past 2 years) may have been the result reaching the previous dotcom peak.
We are now resting on top of that peak as support. The trend is consistent and the Fiscal/Monetary response is firmly in control of the market.
If we were to break down from here this chart could be interesting to gauge where the bottom is without as much noise.
Please leave your comments and correct me if you see anything I can improve upon. I am still learning and not a financial advisor/professional so please do not make any trades on my advice.
If you do not look at this as 1/Y and instead just Y it could indicate that real output is falling over time however I would like to discuss this further if anyone has opinions.
Personally I am interested in Asain markets and Gold going forward.
- Salty
