Mainstream media coverage of inflation — and the forces that drive it — tend to be superficial and limited. That’s why I want to highlight three recent stories. They all revolve around inflation in some way. And together they emphasize the need for every investor to have some hedges in their portfolio. Let’s get started.
First, let’s talk about the country’s M2 money supply. M2 is a measure of how much money is circulating in the economy. It includes cash, checking accounts, money markets and other forms of liquid dollars. And current M2 levels are at incredibly high levels — the highest we’ve seen since the 1970s. M2 growth is up 25.8% year-over-year right now.
That’s unprecedented in recent history. Inflation would likely be a lot higher if not for the fact that the “velocity of money” is quite low today. Monetary velocity measures how quickly cash moves throughout the economy. The higher the velocity, the higher inflation can be. But monetary velocity is low right now. So even though we have huge M2 growth, inflation remains somewhat muted — for now.
However, I have no doubt that we’re just getting started in terms of money printing and “creative” Federal Reserve policies. Eventually, more harmful levels of inflation seem nearly certain.
A recent Bloomberg article by John Authers questions whether increased bitcoin adoption is hurting gold’s status as an anti-inflation hedge. Here’s an excerpt.
The Joshi argument is that bitcoin has risen as an alternative anti-fiat asset. It has been popular because of the libertarian anti-government ideas that have accompanied the digital currency since its inception. Bitcoin’s increase in scale to become better known and much easier to obtain now makes it a much more viable competitor for the shiny metal.
I agree that Bitcoin has dampened demand for gold and silver over the last year. But I think this is only a temporary situation. Gold and silver have been money for many thousands of years. I don’t expect bitcoin to damage their status long-term.
Over the next 10 years we will almost certainly see unbelievable amounts of quantitative easing from central banks around the world. I think there’s certainly room for multiple inflation hedges in most portfolios.The question of gold or bitcoin is a false choice.
The Producer Price Index (PPI) jumped 4.2% year-over-year in March, according to newly-released Labor Department data. PPI rose 1% from February to March — twice the expected rate of 0.5%.
Noted economist Mohamed Al El-Arian said the following on Twitter.
The notable jump in the March PPI — up 1.0%, or twice the consensus expectation — will place an even bigger spotlight on the prospects for inflation, Fed policy, and the government bond markets.
Indeed it will. My view remains the same: The Fed and other Western central banks have painted themselves into a corner. Their key weapon against inflation — raising interest rates — is a no-go at this point. There’s too much debt to raise rates. And further, I believe they actually want inflation to run hot. It would help erode some of our massive debt pile.
Needless to say, I continue to believe serious inflation looms — and that everyone should have some hedges in their portfolio. I recommend growth startups, gold, silver, miners and of course, some bitcoin as well.