Sunday, March 18, 2012

Inflation, Oil, U.S. Treasury Yields and the Velocity of Money

Last week, as equity markets rallied, U.S. Treasury yields climbed (which negatively affected many Last week, as equity markets rallied, U.S. Treasury yields climbed (which negatively affected many interest rates sensitive investments) and market commentary about inflationary fears significantly increased.   Additionally, while oil prices dropped last week, concerns about high price levels persist with Wal-Mart Stores Inc.’s chief financial officer Charles Holley recently stating, “the one wildcard, though, is going to be gas prices. If oil continues to go up, I think that could be a drag on economies around the world”. 

MY TAKE  
A mix of unprecedented monetary intervention by central bankers and limited budgetary changes by government leaders continues to present an uncharted economic environment.  This point is illustrated in the chart  Velocity of Money in the U.S.: March 1959 – Dec. 2011, with an all-time low during December 2011. A reversal in the current down trend that is not accompanied by strong economic growth may signal the start of inflation.  In markets -  sometimes momentum begets momentum; with inflation - sometimes the simple expectation of inflation can trigger a trend that will challenge the best efforts of central bankers. 

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