Market Review Q219: Dollars and Nonsense, Part 1

If there was one message to be taken away from the first half of 2019, it was that the Fed still reigns supreme in the minds of investors as to what drives markets. After a remarkably strong first quarter during which the Fed flipped its position on rate increases, performance remained very respectable in the second even though fundamentals began eroding and the yield curve inverted.

Such attention to plans for rate decreases belies another reality that is far more important for long-term investors. The global financial system has grown in complexity and this complicates the Fed's ability to control US dollar liquidity. High levels of government debt further impinge on its ability to nurture economic growth. Now, after ten years of interventionist monetary policy, it is a good time for investors to turn their focus away from the nonsense of short-term machinations and to start considering the longer-term consequences.



For many investors and analysts, money is a dull subject that wreaks of tedium and only serves to distract from more interesting investment analysis. As Chris Martenson describes in his Crash Course, "Money is something that we live with so intimately on a daily basis that it probably has escaped our close attention."

This is potentially a blind spot for many investors. For those who may have learned about money and money supply in a college economics class years ago, things have changed a lot and the global financial system has evolved considerably. For those who never paid much attention to the subject, liquidity has become a more important component of the overall investment equation.

In order to fully understand some of the changes, it helps to refresh the basics. For starters, Martenson captures the essence of money with a practical notion: "Money is a claim on human labor."
​"With a very few minor exceptions, pretty much anything you can think of that you might spend your money on will involve human labor to bring it there. I say it’s a claim rather than a store, because the human labor in question might have happened in the past, or it might not have happened yet."

Wikipedia provides a good account of how those claims come into existence with a definition of money supply:

​"The money supply of a country consists of currency (banknotes and coins) and, depending on the particular definition used, one or more types of bank money (the balances held in checking accounts, savings accounts, and other types of bank accounts). Bank money, which consists only of records (mostly computerized in modern banking), forms by far the largest part of broad money in developed countries."