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Weekly eLetter 2/16/2018 – Only a Correction

If I may share a personal thought with you…there aren’t really too many things in this world that I just don’t like.

For instance, I don’t much care for raw onions, or discovering that the only thing on TV at the gym is The View, or a thousand-point drop in the Dow. Indeed, I find that Dow thing very disturbing. Especially when it seems to be only a self-induced phenomenon — as it was a couple of times in recent days.

Yes, it was ‘only a correction’.

And as we’ve seen before, these correction things can occur just because it becomes the consensus among a cohort of traders that we should have one because, you know…Correction.

They also feared that valuations were over-reaching and that the employment situation might be inflation inducing.

We disagree. On both points. Valuations were not too high. And, they are even better now. Wage growth is a good thing unless it is overly broad and is separated from productivity.

Now, truth is there is some actual evidence of potential inflation. The Fed has been too accommodative for a long time and certainly excess reserves can ultimately be inflationary.

Many, dare I say most, economists believe that an expanding money supply is a contributor to inflation.

Likewise, increasing the velocity of the money already on hand can have the same effect. In the case of having an expanding money supply at the same time that we have an increase in the rate that money is being circulated, there is a compounding effect: inflation will likely appear and controlling it can easily become unwieldy.

Money supply growth is a double edge sword: It will improve profits, especially in its early stages. But, it also contributes to inflation growth – and the gap between the two can narrow. In other words — putting a squeeze on profits. This can be illustrated by seeing that the effect of rising interest rates creates the effect of a discount on future earnings. What is then happening is that there is the likelihood of a schism between numerical growth and true growth in net value. So, the question becomes, at what point is there enough cause for concern? When is it time to change your investment strategy? And most important; are we there yet?

Our friends over at First Trust have some wisdom on this very point. Their Chief Economist, Brian Wesbury, says there’s a long way to go before we get anywhere close to things looking scary.

– Read more …