Will Money Become Scarce Again?

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Financial Research and Commentary March 25, 2022

Maurice StouseBy Maurice Stouse, Financial Advisor and Branch Manager

It seems that these days everywhere you go there is a shortage of service, a shortage of product or a shortage of labor, or people to help you. Americans have never been in stronger financial shape, savings have never been higher, and it seems like jobs have never been so plentiful. The jobless claims number just reported this week shows the lowest number of claims since 1969 (of course the labor market and population are much larger now). Americans are flush with cash more than ever before. And that has shown up in housing prices, stock prices (in 2020 and 2021) and other asset prices except perhaps for investment grade bonds.

Inflation is a much bigger consideration in investing today than it has been in past decades.
The Federal Reserve and the federal government applied massive stimulus and relief going back almost two years ago as America and the world plunged into the pandemic. Almost 25 million jobs suddenly went away. Restaurants and businesses across the land had to close until further notice. That massive stimulus came in two forms: 1) new spending bills passed and signed by the President and 2) the lowering of interest rates and the buying of Treasuries and mortgage backed (and other) bonds by the Federal Reserve. The latter unleashed almost $5 trillion dollars of new money into the financial system. That more than doubled what the Fed had done in history to date. And the Fed “printed” about 30% of all money created in the US for over the past 200 years in that short two-year time. That eventually (adding to the supply chain problems) unleashed monetary inflation: Too many dollars chasing suddenly fewer goods and services. When considering an investment, we encourage individuals to look at the real rate of return (after inflation) as they make their evaluation.

The Fed is acting.
Now the Fed is, very carefully, moving to address inflation and has raised its shortest-term rate, known as the Federal Funds rate from 0% to .25%. That is also known as the overnight rate. Banks are an immediate benefactor of this because any funds they park overnight with the Fed start receiving this, vs zero or close to zero. Investors are also seeing an immediate benefit as the yields on money market funds have also increased. We therefore continue to be encouraged by long term opportunities in the banking industry, which is part of the Financial sector of the S&P 500. We think that clients should consider the top 40 largest banks (measured in terms of total deposits) in particular.

The Fed’s balance sheet
The greater impact, we believe, on inflation, and asset prices of all kinds, will be when the Fed begins to reduce the size of its approximately $9 trillion balance sheet. We feel that has much more impact as it makes money scarcer. The Fed is being, in our opinion, very practical and tactical as it tries to slow the rate of inflation without harming this very strong economy. With the Fed not competing to buy Treasuries and mortgage-backed securities, that could mean less price support and yields could continue to rise. Not good for bond prices but could help slow the rate of inflation. The Fed has indicated that action on the balance sheet could come by May or by summer.

The question becomes, will those two major components increase by the same amount in 2022? We don’t think so. We think money will slowly become scarcer and that will mean a lowering of prices for just about everything. We do believe inflation will range from 3-5% by year’s end.

The First Wealth Management is located at First Florida Bank, a division of The First Bank, 2000 98 Palms Blvd, Destin, 32541 with branch offices in Niceville, Mary Esther, Miramar Beach, Freeport and Panama City. Phone 850.654.8122.

Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC, or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc.

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