Please find below our key excerpts from one of the most logical and straight to the point blog on analysis of FED's action on printing endless amount of money and its impact on capital markets and economy published by Aequitas India. Aequitas is managed by a very respected Fund manager in India - Siddhartha Bhaiya. (Emphasis Ours)
Since the global financial crisis of 2008, central banks across the world have resorted to relentless money printing. In the last decade, the United States alone has seen a 10x jump in money supply (M1). The FED increased the pace of money printing in response to the COVID – 19 pandemic.
The US money supply (M1) has increased by 300% since COVID, effectively 75% of the currency in circulation currently did not exist 18 months ago
Now with the global economy recovering and inflation rearing its head again, talks of FED tapering and interest rate hikes have again started doing the rounds.
Tapering means pace of bond purchases by FED going down. Absolute money supply isn’t likely to shrink, and it has never shrunk after we left the gold standard behind.
With such massive money printing, we should have had massive inflation but ironically over the last decade most of the developed countries have been grappling with deflationary pressures, until a year back.
Majority of the money printed went into capital assets like stocks, real estate, art, start-ups, crypto’s etc, rather than factors of production like materials and labor, which does not get captured in your WPI / CPI inflation
Now as inflation did not increase even after massive money printing interest rates kept on declining.
With interest rates near zero for most part of the decade and global markets gushing with liquidity, WACC of capital slowly kept on going down and valuations started hitting the stratosphere.
Now with inflation rearing back central banks will focus on reigning in inflation by increasing interest rates and trying to suck out excess global liquidity. However, the major beneficiaries of loose monetary and fiscal policy have been asset prices and as the FED unwinds its stimulus, the deflation will be profound on asset prices rather than on WPI / CPI.
Best bet is to hedge yourself by buying commodity and old economy stocks, as they have been starved of capital for nearly a decade. In their case the valuations are cheap, and the earnings could go through the roof!