Money Supply is Exploding

I am biased bearishly for the next 3 months, but I realize that the bulls have the most bullish factor going for them that the bears can't overcome in the long run.  The explosive increase in the number of dollars floating in the financial system.  A big increase in the supply of money and the Fed's willingness to keep interest rates at zero even as inflation increases is about as bullish a macro backdrop as you can get. 

The M2 money stock is still increasing at a 20% annual pace, much higher than the 5-10% pace that it maintained for much of the post 2008 period.  During March/April, it was increasing at a ridiculous 120% annual rate. 

That is the best argument for the stock market to keep going higher.  But that line of thinking is not without its holes.  Look at what happened to the Shanghai Composite from 1998 to 2019, as China's M2 money supply went from 10.4 trillion RMB to 193.5 trillion RMB, a growth of 1760%. 

Well, over those 21 years, Shanghai Composite is up, but less than 200%, which is less than the rate of inflation over those 21 years.  If you kept your money in stocks in China over those 21 years, you have lost money, in real terms.  And seen other financial assets, especially real estate, go through the roof. 

Now I don't see the Fed going on a money printing spree like China did over the past 20 years, but it has increased the money supply by 20% over the past 3 months, which is more than any 3 month period during China's past 21 years. 

The Fed is fomenting a bubble, we just don't know if it will be in stocks or real estate, or even commodities.  Obviously, that amount of money can't all be absorbed in commodities, so we could have simultaneous bubbles in stocks and commodities, or real estate and commodities, or maybe all 3. 

A Joe Biden presidency with a Democratic Congress is what I expect to happen, as the polls are overwhelmingly in favor of the Democrats now.  That would open the door to universal basic income and massive government spending on infrastructure, health care, and anything else they want to spew printed dollars at.  A very small fraction of that cost will be offset with corporate tax increases and taxes on the rich, but most of it will be paid with fresh dollars hot off the press.  MMT is no longer a theory, it is in practice and we'll see in real time the results of what happens when the government spends Fed printed dollars zealously with no thought to negative consequences. 

I was a bit surprised that the Democrats were even more willing than Trump to spend money during the heat of the crisis in March/April.  You would think they might be a bit reluctant to help out a Republican president in an election year but Democrats are poor political strategists, and now, more liberal than ever and looking to give money to anybody and anything to solve problems. 

The US spent the most per capita in stimulus on the pandemic and have one of the worst results in the world.  Part of it is poor government policy, but a lot of it a massive number of poorly educated people that can't think logically, scientifically, and believe in conspiracy theories that have no basis in fact. 

What can you say when you have a substantial part of the population that don't believe in vaccines and think they are harmful, don't believe masks work to prevent virus spread, and think the government is looking to control them by telling them to wear a mask.  You can't govern stupidity.  You don't get a higher standard of living by increasing the level of the S&P 500.

Some may be puzzled why the 10 year yield doesn't go higher when the stock market is going higher, and all you have to look is at the money supply.  The coronavirus stimulus package of $3 trillion was paid for completely with freshly printed dollars with not one bit of a tax increase.  All that money that hasn't been spent, which is the vast majority, is being parked either in cash, bonds, or stocks.  That is why the stock market has been so resilient despite poor earnings, high unemployment, and soaring number of coronavirus cases in the US.  That is why bonds have refused to go down and stay down even as stocks continue to go up. 

So why would anyone be bearish under this scenario?  Because all of that money is likely to stay in cash or bonds until the November election, and probably some of the money in stocks will move to cash or bonds ahead of growing uncertainty in the coming months, both Covid and the election. 

Earlier in the year, I was looking for a traditional bear market as the euphoria in the stock market in January/early February was setting up a big bear market, but the coronavirus has actually set up a situation where a big bear market is quite unlikely, because it has induced the government to print trillions of dollars, which of course, will not be taken back.  

You can't look to history of bear markets starting in 2000 or 2007 to come up with guidelines for the coming years.  The fiscal and monetary response is just too big to ignore, and they are risk asset positive factors that will prevent a 50%+ decline like you saw in the past 2 bear markets.  I even doubt that we'll be able to get back to the March lows anytime in the future.  

Longer term, instead of a bear market that provides a good long term entry for investors, you are more likely to see a range bound market for several years as the printed money flows to other less overvalued assets and corporations increase the supply of equities outstanding through IPOs and secondaries to raise capital as their debt gets closer to maximum capacity. 

If the Fed continues to print trillions per year, which is my base case scenario, that will induce another real estate bubble, which probably helps GDP growth during that time, which will set up another massive boom/bust cycle.  After all the dust settles, through the ups and downs, the prices of everything will go up, as all reserve country nations have done throughout human history, inflation will become rampant.   Overconfidence in the sustainability of their reserve currency status and the "free lunch" of printing money to solve problems eventually erodes the trust in the currency. 

TSLA is going to hyperspace and the market in speculative names is getting red hot.  Heavily shorted stocks are getting squeezed hard, short sellers are in deep pain, and are at max pain levels, as the sharks are coming after the weak hands with a vengeance.  This is stock market Darwinism, those that got too confident on the short side due to economic weakness are getting culled out,  just as the bulls and overleveraged were in March. 

Bulls are getting a bit cocky here, a comeuppance is coming soon.  Sure, there is the phase 4 coronavirus package upcoming, but I don't expect any big buying ahead of that event, as my models show that the CTAs and equity long/short hedge funds are back to above average long positioning.  The COT data also confirms this, as the noncommercial shorts have been drastically reduced since June triple witching. 

Also seeing a lot of expectations for Q2 earnings beats due to low earnings estimates. 

We have a gap up today and I am looking to short either Tuesday or Wednesday if prices are above SPX 3200.