The Velocity Of Money Is The Key To Economic Prosperity

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In his Daily Market Notes report to investors, while commenting on the velocity of money, Louis Navellier wrote:

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Inflation remains hot, the market less vulnerable.

The Consumer Price Index for January was reported this morning and was higher than forecasted: The annual rate of 7.5% was the highest since February 1982, above the 7.2% average estimate. Sequentially January was up 0.6%, for both Total and Core inflation, also above expectations of 0.4%. Consumer inflation is now running at the highest rate in the past four decades. Overall, inflation persists on the consumer level and is not expected to abate until possibly the second half of 2022 when some supply shortages diminish.

Interest rates rose on the news with the US ten-year Treasury rate touching 2% for the first time since November 2019. Equities gapped down on the news, the Dow fell 300 points, but 45 minutes after the open the Index had clawed back to green briefly.

The Fear Of Missing Out

Similar moves are seen in the other indexes as optimism over the fledgling reopening from the pandemic, along with generally decent earnings announcements and forward forecasts, seem to be swaying investors toward less fear of higher interest rates than the fear of missing out (aka FOMO) of a market recovery back to all-time highs.

Last night's report by Walt Disney Co (NYSE:DIS) saw not only strong streaming subscriber growth, unlike Netflix's results, it also had better theme park results than pre-pandemic, reinforcing the expectations for robust consumer spending in the summer and year ahead.

While valuation issues remain in flux until some sort of equilibrium is reached with inflation trends and interest rates, investor enthusiasm appears willing to keep buying until things get more challenging on those issues than they are already. Companies with pricing power to pass on inflation costs remain the most attractive, as are oversold growth companies.

Velocity of Money

There is one other reason that Wall Street is suddenly optimistic, which is the mask mandates are increasingly being lifted in many states, which should help to stimulate economic growth since folks are now more likely to get “out and about.” The key to economic prosperity is the velocity of money, which is how fast money changes hands. Naturally, if we get out and about more, which we naturally do more in the Spring as the weather improves, then prosperity should rise!The economic news this week is positive. The Commerce Department on Tuesday announced that the trade deficit rose to $80.7 billion in December. In December, exports rose 1.5% to $228.1 billion, while imports rose 1.6% to $308.9 billion. Since the December trade deficit was better than economists’ consensus estimate, some economists may revise their fourth-quarter GDP estimate a bit higher.The Labor Department on Thursday announced that new weekly unemployment claims came in at 223,000. Continuing unemployment claims came in at 1.621 million. Overall, weekly unemployment claims were better than economists’ consensus expectation of 230,000, but continuing claims were higher than economists’ consensus expectation of 1.615 million. Frankly, there remains some “noise” in the unemployment statistics, but the trend bodes well for a continuing low unemployment rate.

Ford Chip Problems

Ford Motor Company (NYSE:F) announced this week that it had to cut the production of its two most popular trucks, namely the Bronco and F-150 due to an ongoing semiconductor chip shortage. Also notable is that other vehicles, including the popular Mustang Mach-e, are also impacted by these production cuts. Ford has a bit of a conundrum with the Mustang Mach-e since it requires approximately double the semiconductor chips of the company’s vehicles with internal combustion engines. I find it interesting that GM says that it now has enough semiconductor chips, but Ford has not apparently secured enough chips.

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