Saturday Musings on the Economy and Markets….

Saturday Musings on the Economy and Markets….

Posted On February 13, 2021 9:00 am

I get a lot of questions asking me my thoughts on what is going on in the economy as a whole. 

What I predict regarding money printing, low rates, monetary policy in general, etc.

I normally don’t talk about my opinions on this stuff because Jerome Powell, Janey Yellen, President Biden, et al don’t listen to me or care what I say…

So expressing my opinion is useless as far as effecting any change in policy. 

On top of that, I openly acknowledge that they have access to information I do not have access to, and so their opinions are more informed than mine. 

That’s not to say I would agree with them if I did have access to all of the information they have access to.  I am just pointing out that their opinions are more informed than mine. 

All that said, what are my thoughts about what is happening. 

First, I think some intervention was necessary and healthy in 2008.  I just think it went on too long.  

They should have pulled back on QE and started raising rates in 2015.  The economy was strong enough to absorb a slow normalization, even though there would have been some pain involved.  

However, they didn’t start back then and when Powell tried to raise rates in 2018, the stock market dropped and he had to reverse course and start raising them again. 

Basically, the markets had been going up so long because of low rates that the Fed risked a bear market if they didn’t start cutting rates again. 

Today, we have near 0% rates again and some incredible money printing.  

People are wondering, “where is the inflation?”

In the stock market for one.  And we know anecdotally that we are seeing some increase at the grocery store, etc. 

But nothing like someone might expect.  

We aren’t seeing a lot of price inflation because the Velocity of Money is at an all-time low.  

That’s not an exaggeration…

It’s the lowest it’s ever been. 

Velocity is the number of times a dollar turns over.  You tip a waiter, the waiter buys a cab home, the cabby buys an ice cream cone, etc.  

So price inflation is calculated by taking the amount of currency in circulation and multiplying it by the Velocity.  If there is no velocity, there is no price inflation. 

With that in mind, look at this chart:

velocity of m2 money stock

You can see that money velocity has been in an overall downward trend since 1997 and moving lower in earnest since 2008.  

Today we are at record lows. 

Arguable had we seen this level of money printing in 1997 Prices would have gone to the moon. However, today price inflation is tame even with the massive printing. 

There are countless theories as to why the velocity is so low…

However, the theories don’t matter.  What does matter is that velocity is extremely low and that it WILL not stay low forever.  

Look here:

velocity of m2 money increase chart

You can see that since 1959 velocity has always come up after it dropped.  

And I am worried that when it does start up we might see unbelievable hyperinflation.  

I’m not prone to hyperbole or fear-mongering, but look at this:

currency in circulation chart

In 2007, we had about $800 billion in circulation.  Now it is around $2.1 trillion.

This is what that number looks like: $2,100,000,000,000.00

That would be fine if other metrics were in line.  For example, if the population had grown by 250%. Then the money expansion would not turn into price inflation because there is still around the same number of dollars per person.  

However, we all know the population hasn’t increased by 250%. 

And not to pile on, but look at this chart:

total assets wednesday level chart

In 2007 the Fed’s balance sheet was about $800 billion.  Today it’s almost $7.5 trillion!

Ok, this email is getting a bit long in the tooth.  Here’s my point…

If the velocity of money picks up before the amount of currency and the Fed’s balance sheet shrinks, we could be facing disastrous inflation.  

Of course, maybe they know something I don’t.  

Either way, none of that matters because none of it is going to make you a successful trader.    

However, the recommendations and training you get in Options360 can make you a successful trader.   

You have to trade the market you have, not the one you might have next week next month, or next year.  

To Your Success,


PS. As I mentioned yesterday, we put on a bearish butterfly trade in Riot Blockchain this week.  

It’s a longer-term trade, however, I expect that we might see a sell-off in the crypto markets over the next few months…

So I am looking for the trade to pay off nicely.  

You can find out more about RIOT and our other trades by taking a trial subscription to Options360 for just $19.  


About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.