The media is full of noise from talking heads debating the merits of TARP, bank bailouts, gov’t debt buybacks, foreclosure prevention, stimulus checks, Wall Street bonus babies, etc. It’s impossible to turn on the television and not find someone who is an expert on what the Treasury and Fed should be doing.
I don’t think anyone knows how things are going to play out, and even Bernanke is making this up as he goes.
So I take what most people say with a grain of salt. But I do like to listen to statistics. And there is one statistic that tells us a lot about how a portfolio should be constructed over the next few years. That statistic is the M2 money supply.
M2 is generally regarded as the best measure of the total amount of money in our economy. And there has historically been a relationship between long-term money supply growth and price inflation.
The Fed publishes the weekly money supply at its website. As of last week, the seasonally adjusted level of M2 was growing at annualized rates in excess of 15% over the previous 3 and 6 month periods. 15% is a big number and should tell an informed investor that they should include some inflation hedges in their portfolio.
So don’t get too caught up in the daily debates on TV, including whether or not we are going into a deflationary spiral or headed for inflation. Keep an eye on M2. Don’t be surprised if it starts to acclerate.
