Don’t Fight The Fed

Published on: 05/18/2021

In this video commentary, Tony Ogorek and Jeff Viksjo explain why you don’t want to fight the fed when it comes to inflation.





Hi I’m Tony Ogorek, I’m here with Portfolio Manager, Jeff Viksjo, and today we’re going to talk about why you “Don’t Fight the Fed” when it comes to inflation. Jeff, let’s take a look at this chart, what is it saying to you?



The red line is the money supply, so how much money is in circulation, and the blue line is the S&P 500, and this goes back all the way to 1959.  In 1959, they are indexed together, so they are equal.  What’s striking is that 60 years later, they’re at exactly the same point. What that tells you is the money supply is very correlated with the stock market, that’s what’s driving it.  The other thing to note, is that the money supply, it took 50 years to go from 0 to 30, and it’s gone from 30 to 70 in just the last 10 years.  So, a tremendous increase in the money supply, supported by the Federal Reserve’s policies, and we haven’t had inflation.


So the interesting thing people have been taught, and Milton Freedman was big on this, is that if you have more dollars chasing a fixed basket of goods, the price of that fixed basket of goods will increase.  We’re finding here, obviously, we’ve got significantly more dollars chasing things, but really with all that excess supply of funds out there, prices are not being driven up. Now, why might that be?  Well, we’re looking at e-commerce, which allows for price comparisons and it just ends up driving down prices.  We’ve got tremendous efficiency pushes across all aspects of the economy.  The idea that if we just flood the system with money, we’re going to have hyper-inflation just hasn’t been proven.  And like Jeff says, if you just look at the past 10 years, we threw everything at it from a stimulus standpoint and still couldn’t get above 1.5% inflation.



Yeah and Tony, a lot of clients can’t believe the markets rise since COVID.  They’re higher today than they were even before COVID started.  And the answer is the money supply, it’s what the Fed did.  You can see the red line jumping when March 2020, all the liquidity they pushed into the market, the red line, that proceeded the market’s decline.



Yeah, and let’s face it Jeff, typically you’re gonna have two buckets here.  One’s gonna be stocks, one’s gonna be bonds.  When stocks start to do poorly, people flow over to bonds for safety.  When the market starts to move up and rates move down, which the Fed typically does, stocks begin to pick up. Right now, you’re not going to make any money in the bank.  You’re not going to make very much, at all, in bonds.  Where else is it gonna go?  It goes into the equity markets, and you’re seeing that right here.

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