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T2 Asset Management

Sep 2021 Market Commentary

We hope that everyone has been having an enjoyable summer. It has been largely more of the same in the financial markets as they grind relentlessly higher despite the questionable economic backdrop. We certainly field a lot of calls on this topic and we remind everyone that financial markets can and will be an emotional herd from time to time. Really what this particular point in time comes down to is an example of what happens when endless money is thrown at a problem.

Since the start of the Federal Reserve in the early 20th century to 2019, what we call M1 or actual cash money supply has not exceeded $4 trillion. The amount in circulation today? Over $19 TRILLION! You read that correctly, $15 trillion has been added to the money supply in the last 18 months. Want to see the result?

We are all now part of an experiment called Modern Monetary Theory (MMT) which states that as long as you still have ink and paper, you will never run out of money. This then leads to the second part of the equation that we highlighted in our last commentary, inflation. As everyone is currently experiencing, inflation is here and is unlikely to be temporary. It is one of the oldest principles of economics. If you have more and more money chasing around the same amount of goods and services, the prices will go up. Now a little inflation is a good thing, maybe 1-2%. Depending on where you look, current inflation is somewhere around the 5% mark and that could lead to trouble for the economy and the stock market.

Speaking of the economy, numbers have been decent. Gross Domestic Product (GDP) for the month was up 6.5% missing expectations of up 8.5%. Non-farm payrolls increased by 943,000, better than expectations of 870,000. Finally, retail sales came in 0.6% higher, better than expectations of a 0.2% drop. Certainly things have improved, but that should be expected when this much money is thrown around. The problem is what happens when inflation really takes hold. There are some really scary examples of what can happen to economies when this occurs. I currently have on my desk a 100 Trillion Dollar note from Zimbabwe. That did not end well.

Let’s hope that we have a better ending than some of the inflationary episodes of the 20th century (including our own in the 1970s). Time will tell, but for the meantime, we continue to advise a bit of caution. There may be money to be made in these markets, but we do not advocate getting greedy as we inch closer to a change.