This week’s “Outside the Box” submission from John Mauldin brings us an interesting essay on money, money supply and inflation from regular contributors Van Hoisington and Lacy Hunt. Touching directly on our macro theme of positioning for inflation or deflation, it is recommended reading for those who don’t already subscribe to John’s letter. They attempt – successfully, I think – to show why the current inflationist concerns over Fed policy are misguided, and why there is no evidence of general price inflation in the actual data.
Tying separate strands together, yesterday’s remarks by Fed Chairman Bernanke on credit creation fit with this explanation particularly well. To reiterate a theme I have been stressing throughout the financial crisis and putative recovery, the Fed has exerted enormous effort to produce a little inflation, and so far has found little success – they have been pushing on a string. This is already, I believe, starting to be reflected in the price movements of financial assets since Q2.
While we’re on the subject of Q2, markets were extremely quiet Monday ahead of earnings reports, with the volume down dramatically. The major averages were up slightly, but stock market breadth turned negative as the SPX approaches the upper boundary of the price channel.