Here are some things I am noodling about lately. I format them as facts, but they are just my opinion.
In early 2020 the money supply was dramatically increased by pandemic stimulus. Most of this money found its way into assets such as stocks. The rise in stock prices closely tracks the rise in the money supply.
Many said that so much money being injected into the system would cause inflation, but it did not seem to do so. Some said that this was because the velocity of money was low.
The stock market reached all-time highs and was said to be grossly overvalued, but was actually not overvalued if you used the Fed balance sheet as the denominator. Basically the stock price value was tied to the money supply.
Inflation finally started. Maybe the velocity of money increased. Some are now saying that the high prices and the impending recession are now reducing the velocity of money. Maybe that will cause the rate of inflation increase to slow down.
The Fed is raising interest rates and doing quantitative tightening. This should eventually reduce or claw back the massive amount of stimulus injected into the money supply.
If the money supply decreases, the stocks need to be repriced based on the lower money supply. See above, money supply pushing stock prices. Maybe we are seeing this now.
This makes me wonder if stock prices need to be evaluated in terms of their fair value in early 2020 before the stimulus. This would assume that all of the stimulus would be clawed back and the stock prices would need to be recalculated. Some feel that it will not be possible to claw back all of the stimulus or that the fed will need to pivot and resume stimulus either in response to the recession or due to the pending 2022 election.
The recession is likely to have a negative effect on corporate earnings, cash flow and margins. Some feel that this has yet to be priced in by the analysts. If that is the case it would be a second hit to prices after the repricing to account for reducing the money supply.
So, one question is how will the recession, velocity of money etc. affect the actions of the fed going forward. I guess it is a coin toss.
Today I am going to analyze my high tech growth stocks in terms of how close their beaten down prices are to the early 2020 fair value prices and maybe try to access the potential effect of the recession on the earnings and cash flow of each one.
Thoughts?
In early 2020 the money supply was dramatically increased by pandemic stimulus. Most of this money found its way into assets such as stocks. The rise in stock prices closely tracks the rise in the money supply.
Many said that so much money being injected into the system would cause inflation, but it did not seem to do so. Some said that this was because the velocity of money was low.
The stock market reached all-time highs and was said to be grossly overvalued, but was actually not overvalued if you used the Fed balance sheet as the denominator. Basically the stock price value was tied to the money supply.
Inflation finally started. Maybe the velocity of money increased. Some are now saying that the high prices and the impending recession are now reducing the velocity of money. Maybe that will cause the rate of inflation increase to slow down.
The Fed is raising interest rates and doing quantitative tightening. This should eventually reduce or claw back the massive amount of stimulus injected into the money supply.
If the money supply decreases, the stocks need to be repriced based on the lower money supply. See above, money supply pushing stock prices. Maybe we are seeing this now.
This makes me wonder if stock prices need to be evaluated in terms of their fair value in early 2020 before the stimulus. This would assume that all of the stimulus would be clawed back and the stock prices would need to be recalculated. Some feel that it will not be possible to claw back all of the stimulus or that the fed will need to pivot and resume stimulus either in response to the recession or due to the pending 2022 election.
The recession is likely to have a negative effect on corporate earnings, cash flow and margins. Some feel that this has yet to be priced in by the analysts. If that is the case it would be a second hit to prices after the repricing to account for reducing the money supply.
So, one question is how will the recession, velocity of money etc. affect the actions of the fed going forward. I guess it is a coin toss.
Today I am going to analyze my high tech growth stocks in terms of how close their beaten down prices are to the early 2020 fair value prices and maybe try to access the potential effect of the recession on the earnings and cash flow of each one.
Thoughts?