Thursday, February 05, 2009

Money Printing and Asset Valuation Lag



Studying the above chart shows that there is a lag between money supply creation and the resultant asset price increases. This lag appears to be about 3-5 years. In the 1970s the printing presses were slow to roll and asset prices didn't catch back up with money supply until the late 80s. The Fed caught on to the asset price deflation around 2000 and you can see the money printing that went on then. I have the most up to date True Money Supply data that I can get my hands on, but I suspect we will be seeing massive money supply increases shortly. Soooo... if you want to keep up with inflation, but not beat it, it would probably be a good idea to start dollar cost averaging into assets over the next year or two. I would expect to see prices drop over the next year or two before they hit a bottom. Industry is in a wait and see mode while Obama decides to control our country's destiny now that he's our chosen messiah.

I still don't see how we'll match recent highs until 10-15 years down the road. There's a lot of room to make up, and unless the Fed prints money like its toilet paper, we won't see absolute numbers like Dow 14,000 any time soon.

On a side note. I think stock investing is a terrible way to invest. To me, investing is a cash flow and leverage game. Stocks are difficult and expensive to leverage. Unless you have millions of dollars in a margin account, it's difficult to make decent cash returns. It's just my personal opinion from seeing where rich(>$10 million) people invest. Most of the very wealthy people whose tax returns I analyze do not invest a substantial amount of money paper assets.

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