M2 is the Force

The most important variable for asset markets is the supply of money.  Monetary policy is important, but its fiscal policy which can really ignite M2 supply growth.  We had QE1, QE2, and QE3 that were nearly the same pace as that of the past 12 months, but the money supply didn't grow much because of fiscal tightness brought on by the combination of a Democrat president and Republican Congress from 2010 to 2016.  Also, politicians actually thought about the deficit back then, unlike now when deficits don't matter.

Take a look at the M2 supply growth for the US, Euro Area, Japan, and China for the past 5 years.  The US sticks out like a sore thumb.  The firehose of free money was unprecedented and the pace is still double what you are seeing in Europe and Japan, and pre-2020 US.  

Here is China vs US M2 supply for past 10 years:

China, which is notorious for printing huge amounts of money to paper over debt problems, has printed at a much slower rate than the US over the past 10 years, and especially since 2020.  Usually emerging markets are supposed to print a lot of money because there economies are growing faster, and the demand for money is greater.  But its the other way around, with the US going into bazooka mode and staying there.  And most of that money is not going to productive use or investment.  Its just a money spew, which ends up being recycled into the stock market, cryptos, real estate, etc.

It used to be China that had an inflation problem, now its the US.  Its not rocket science.  The more money in circulation, without a concurrent increase in production, increases prices.  All these 5 minute macro takes about Covid and supply chain problems leading to high inflation ignore the most important factor.  The massive increase in M2.  Like a knucklehead, I ignored this for most of the past 18 months.  But there is a reason that the SPX, bitcoin, commodities, etc. keep going up.  The rate of M2 growth is much faster than new equity/crypto/commodity supply growth.   As long as the M2 is growing at these rates (still 12%/year in the US), all dips in stocks will be buyable, and its going to hard to make money on long term short positions.

With the Covid stimulus mostly wearing off and the Fed reducing the pace of QE, the M2 supply growth should slow down considerably in 2022.  And with the horrible poll numbers for Biden, even with SPX at all time highs, the Dems look like they are doomed in November 2022 midterm elections.  That assures gridlock in Washington for 2023 and 2024, which is like an eternity for the stock market.  A Fed that is going to end QE and start hiking in summer/fall of 2022, with fiscal stimulus expected to be shut off for the next 2 years will definitely have a big impact on the money supply growth rate.  I expect M2 growth to go back down to 5-6% by the end of next year.  At that pace, the SPX becomes vulnerable to quick drops and waterfall declines, like 2011, 2015, 2018. 

SPX is back to being a boring market, as we've found a stabilizing level around 4700, where supply and demand seem fairly balanced.  I see no edge for either side here, but would take the other side on a 2-3% move.  Especially on the long side.  Buying dips is a much more effective strategy than selling rips.  With the market up huge this year, and the combined effect of portfolio window dressing and reluctance to sell at year end due to realizing capital gains 1 year earlier, the wind is at the bull's back.  

The bond market seems to have found a support level around 1.65-1.70% 10 year yield.  But the sentiment on bonds is poor, and there just isn't the demand to push it to much lower yields.  On the other side, speculative positioning is somewhat short, which means there isn't much weak handed money in bonds to push the yields much higher than 1.70%.  We're probably in a 1.40%-1.70% range for the next few months in 10 year yields.  Unless you get the unlikely event of the Fed speeding up the taper and pulling rate hikes forward, I see almost no chance of 10 yr going above 1.70%.