A giant spike in M2 in 2020, and yet at the same time the S&P 500 dropped. M2 has been on a downward trend since April 2022, and the S&P 500 bottomed in ~October 2022, but has been rising since then—while at the same time M2 has been dropping.
you're missing the investor preferences bit. You could print $7T or whatever crazy amount Sam Altman wants, and if everyone puts that money under their mattress instead of stocks or spending, there will be no observable effect on the real or financial economy. In short, the transmission mechanism of money creation to real effects is laggy and and somewhat unpredictable. e.g. why NVDA and not gold?
> you're missing the investor preferences bit. You could print $7T or whatever crazy amount Sam Altman wants, and if everyone puts that money under their mattress instead of stocks or spending, there will be no observable effect on the real or financial economy.
If you go through my posting history you'll see I've more than once mentioned that velocity is much more important than simple quantity.
A good analogy from Cullen Roche that I often use:
> But also – why do so many people insist that inflation is an increase in the money supply? This makes zero sense. Here’s why – our economy is mostly a credit based economy. So, if I take out a loan for $100,000 then the money supply has technically increased by $100,000. But what if I don’t actually tap that loan? What if I borrow the money because, for instance, house prices just went up 25% and I want to have some cash around for emergencies? This doesn’t tell us anything about prices, living standards or really anything. But this is what so much of the money supply represents – money that has been issued and is just sitting around unused. Why is this useful? It’s like calculating your weight changes by counting how much food you have in your refrigerator. No. That’s potential calories consumed and potential weight gain. The amount of food in your fridge tells you little about your future weight changes just like the amount of money in the economy tells us little about the actual price changes in the economy.
It's the amount of money in the economy, and its growth is one measure of inflation. GP may be commenting that the "good times" of super-high valuations are about to come back thanks to inflation.
That isn't the financial datum that really matters, though - what matters for P/E ratios is the risk free rate (which establishes the discount rate for the time value of money), which is still very high.
> what matters for P/E ratios is the risk free rate
Where's the research showing the empirical relationship between P/E ratios and the risk free rate?
Also, we are living in a a time of unprecedented monetary aggregate growth (for the US at least). I posit his why the yield curve has been inverted for so long and yet there is no recession in sight. The predictive power of asset prices seemingly no longer exists.
There's a ton of it: here's one person's regression. You can find the same in academic papers (although economics papers don't exactly deserve that label).
It's not 1:1, and only fits over long periods of time. Furthermore, none of those studies encompass the great money printing period of COVID, and post COVID. And most of those studies model the 10Y rate vs stocks. The 10Y rate is not the risk free rate.
In 2000 the SP500 PE was 40, and fed funds was 6%. it's low 20s now, and fed funds is 5.25%
studies over more recent times have shown this correlation break down. It's probably the reason Ray Dalio retired.
That's not true at all. The "risk free rate" is a theoretical concept that represents the rate of return that you can get on capital without taking any risk. No bond alone is the risk free rate. Neither is the reverse repo rate or the rate of a money market. All of these are proxies.
"Risk-free rate" is a theoretical concept that represents the rate of return you get without taking any risk. T bill rates, reverse repo rates, and money market savings rates are a practical proxy for it, but it's not any one of these.
https://fred.stlouisfed.org/series/WM2NS