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US Dollar Bears Get Ready -- Inflation is Back!
Monitoring the money supply can be a useful tool in understanding "the big picture" of what is going on in the economy. Towards the end of the summer/early fall of 2008, we saw money supply indicators, like MZM, contract. This was the result of deleveraging; in our debt-based economy, in which all money originates out of debt, paying off debts reduces the money supply -- while the issuance of debts increases money supply. Thus, the combination of deleveraging (paying off debts) with a decrease in bank loans resulted in the money supply contracting, the dollar strengthening, and asset prices falling -- all characteristics of deflation. These trends seem to be reversing. The chart below tracks MZM; note the recent spike upwards. [IMG]http://www.informedtrades.com/images/charts/mzm122808.png[/IMG] Likewise, the TED spread -- an indication of fear and risk in the market, and whether or not banks are lending -- has been declining. A lower TED spread means less fear and more lending. The increase in money supply makes sense with a lower TED spread. Both run contrary to reports from much of the media that banks are still unwilling to lend. The chart below illustrates the TED spread; note it has declined significantly from its peak in October, when the psychology of fear was at its peak. [IMG]http://www.informedtrades.com/images/charts/tedspread122808.jpg[/IMG] In terms of financial markets, we've seen the dollar weaken of late, while gold has been rising. This is consistent with the behavior of MZM and the TED spread. [I][B]Disclosure: [/B]Long gold. [/I]
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