Under-the-radar trend may provide relief from runaway inflation fears

on Jun29
by | Comments Off on Under-the-radar trend may provide relief from runaway inflation fears |

A longtime market bull sees an under-the-radar trend that should calm runaway inflation fears, and it has nothing to do with Federal Reserve policy.

According to The Leuthold Group’s Jim Paulsen, private money coming from individuals and companies has been acting as a “very encouraging” market mechanism to help curb inflation.

“We make decisions about whether we save or spend. We make decisions on whether we borrow money or not. And, those all affect the rate of growth of the money supply,” the firm’s chief investment strategist told CNBC’s “Trading Nation” on Monday. “While we’re still debating when the Fed may start tapering … the reality is the money supply in this country has been tapering now for the last four months.”

Paulsen, who oversees about $1 billion in assets, highlights the trend in a special chart. It shows the relationship between consumer price inflation and money supply since 1990.

“The real M2 money supply [total amount of dollars held by the public] peaked at the end of February year-on-year at 26% rate of growth,” Paulsen said. “As of the end of May, it’s down to about 8.5%, and it’s probably lower than that when the June numbers come out.”

Paulsen estimates it dropped the rate of growth and real liquidity by about a third.

“When you overlay that real money supply chart on top of the inflation rate, it’s not a perfect relationship,” he noted. “But there is certainly a strong relationship where periods of significant declines in the money supply often lead into the future to slower rates of inflation.”

What a difference two months makes.

On “Trading Nation” in April, Paulsen ranked runaway inflation as his biggest risk to the market and put the probability of runaway inflation at around 40%. 

‘Yields are about done going down’

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