Inflation Trade: Game On?

This rally looks like its got some legs.  While I suppose a short term mild sell-off or sideways move as speculators unload financials (equity) in the weeks ahead in advance of further equity dilution is likely, the stability being pronounced by Bernake and Geitner  will certainly attract buyers whoever they are.  That said today’s M2 data came in wildly higher (+41.6B) than last week’s negative (-4.4B).  I suppose one could infer that the trillions being spent by the government is translating into nickels into the economy.  Nonetheless, earlybirds have been short credit, short the dollar, and long risk assets.  Today’s 30-year treasury auction disappointment only helps to bolster that fact that the market is beginning to shun duration risk in favor of this beta rally.  Inflation traders come one, come all.

Money Supply (M2) Weekly Data

Money Supply (M2) Weekly Data

YOY money supply growth is finally rising, sharply.

M2 (Money Supply) YOY Growth

M2 (Money Supply) YOY Growth

Will be important to keep an eye on the velocity of money.  Remember that GDP = Velocity*Money Supply.  While velocity has been decreasing, Uncle Ben has been printing greenbacks to flood us with supply (quantitative easing).  If velocity does not pick up (we don’t spend more), poor Ben will probably have to clear-cut South American Rainforests to make enough paper for the amount of money he’ll have to print.

Velocity of M2 (Velocity of Money)

Velocity of M2 (Velocity of Money)

These are certainly interesting times.

Source:
Charts via Bloomberg.com

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