Inflation or not? A Quantity Theory Approach

www.markmeldrum.com

[@repeastside88]

I get really excited every time I see a new upload of yours hit my feed. Love your work Dr. Meldrum!

[@CBCWang]

I never clicked so quickly to a video in my recommended

[@mukul1310]

Never have I understood the big picture behind inflation so well until today

[@mrxwalker4479]

This stuff is gold and unique on youtube! Thank you Sir

[@yanbowang4020]

I thought this week won't have one. I am so glad the series keep going even on holiday.

[@kenshinhimura5906]

I am forever grateful for the day I found this channel. It really is helping me develop as an aspiring analyst. Keep up the good work.

[@commanderkeynes7314]

Not studying for the CFA but love your content. You are very knowledgeable and its great that you share these videos with the world. Would love to see a video from you about MMT economics. Kind of a heterodox topic so maybe you think its not worth your time but personally I would love to see your view.

[@michaeldobing2691]

I think that velocity has decreased because money doesn't move multiple times between main street businesses but only once to large corporate companies. Largest companies in the SP500 make up 1/4 of US GDP growth. Hypothetical - What happens to velocity if a family only buys everything from Amazon or Walmart in the future? I know that the number of business's I purchase goods and services from has decreased over the years as I look for convenience and efficiency. I'm fascinated by the current circumstances of the economy because I don't see velocity ever coming back in at a level where we see any inflation. Thoughts?

[@shayaslani7959]

Great video, like always. Thanks

[@1234doawee]

Great video Mark. Love. This. Channel.

[@monikavanilla9]

Mark, thank you so much for all your hard work 🙂 this is incredibly useful and educational ☺️

[@jesustralee]

Awesome Mark - thanks for the video

[@manuhrios]

Holy smokes!!! What a lesson, thank you!!!

[@jordanumphress9555]

thanks mark! extremely helpful framework for thinking through inflation

[@evanlebzu1]

52:20 How do you plan your moves and allocation? do you maintain some kind of a planner? a spreadsheet? a model?

[@eduardov7376]

Dr. Meldrum. We already have the policies you exactly mention in this so interesting video. Inflation ahead for sure, uh? A future video on that with its relationship with the 10 year yield recent evolution would be much appreciated. Thanks!

[@viniciusdilinskir9855]

👏👏 Great Video!

[@Bayar1010]

Thank you for providing us your view on this. Are you planning on releasing a new video on this topic?

[@HPmagic1000]

Thanks MM as always for applying the theory from the CFA program into practice as usual! Hope you had a merry xmas!

[@Luke-nh5tu]

you are gold!!!!

[@prithviraj1080]

Thank you

[@brownie8395]

Thanks Mark, are you able to please provide your views on Bitcoin in another video?

[@georgepeter8194]

Hi Mark - would love to see an updated video on Inflation based on what has transpired in 2021

[@ivanapanosova4081]

Awesome, extremely informative. Thank you.

[@xiangpengxiang6636]

thanks before watching

[@xMohJeex]

What would say are the best books to read to learn about investing/trading?

[@yiminhuang4183]

Damn, it’s 1 o’clock in the morning and I watched all the way to end

[@srinivasatejan]

Hi Mark - I loved your analysis. What sort of publications/authors do you follow? I'm wondering if you have any favorites (such as some Goldman Sachs analyses).

[@TimmyTimFTW]

Mark, any names of specific commodity ETFs your looking to get exposure to? I was looking for some with the qualities you mentioned awhile back, but had trouble finding any...

[@johnt.882]

professor, enjoyed the video. You spoke about direct payments to individuals and a way to circumvent the banking system in order to increase money velocity, and alleviate the liquidity trap we are in. What is your stance on CBCD's as a quasi-fiscal, compliment to cash? Thanks.

[@yousefkamhiyah2536]

Fantastic content! Watched the entire thing, and I learned so much

[@monikabogusch6017]

Thank you Mark for the good Video! Is there a reason why you do not illustrate the Austrian view? As I remember it is part of the L1 readings.

[@MarkMeldrum]

Austrian view is simple - get rid of the central bank. Done.

[@majedti4126]

this is 10000% more useful than the economics CFA section. Contemporary analysis that just makes SENSE. And its actionable too. Bullish!

[@azntbooi]

You are THE BEST

[@phillipnguyen5428]

Yes

[@Bogdanbmm]

Hi Mark, Any basic materials ETFs where we could start our own DD ? Same for Canadian REITs be it residential and/or mortgage. Thank you !

[@kunaalsingh510]

Thank you Mark. What are your thoughts on a UBI of $1k (Andrew Yang) per month as a mechanism to generate inflation in the US economy to go around the banking system?

[@geoffreycleminson3957]

Love this content and it couldn't come at a better time given lock downs here in Ontario. Question for your Mark: Where do get your financial info from (where will you be looking at policy plans/decisions? Where did you discover NVU.UN?) ... In other words, what content have you/are you consuming to form these thesis? Also being based in Canada, I'm currently reading the Globe and a little bit of barons but honestly do not find it that insightful - seems to be mostly 'click-baity' headlines with nothing-ness filler paragraphs. Thanks!

[@BlakeeBlue]

If massive infrastructure projects are announced what do you think would be the most profitable exposure to pursue? Commodities, basic materials companies, infrastructure ETFs, short dollar? Thanks for another great video, highly appreciated 👍

[@kwonhyucktae9548]

Dr. Meldrum. Can we get an update of your thoughts on this subject? One thing to see interestingly is that the money velocity is still in a very low level but the trend of 10-year breakeven rate is going up. Also wondering what if FED starts tapering how that can effect the MV = PQ equation? Thank you in advance.

[@marcopanzera8572]

Thank you for this amazing informative video, professor. Min 45:00, you mentioned using synthetics risk reversals to capture Beta, would you advise any reading/book in particular to improve my understanding on this and options in general? I have heard about 'The Bible of Options Strategies' by G. Cohen, would that make my time worth it or would you advise anything else?

[@MarkMeldrum]

That is a good source.

[@raz8772]

Views on bitcoin? Would you invest in it or in gold to hedge against inflation?

[@zakariaa4507]

Dr Mark, what are your thoughts regarding the bitcoin bubble ? relation with Biden presidency ? ...

[@richardgordon]

Wow, this stuff is really interesting. Well explained and topical. Thanks a bunch.

[@ishaantehlan7378]

Would like to know your view on current inflation scenario

[@mitchgriffith6400]

This is a good explanation of the two schools of thought although i would like more mainstream discussion to include Austrian theory.

[@MarkMeldrum]

The Austrian approach advocates no interference at all - no fiscal and no monetary. That is not going to happen, so any discussion would be purely academic and could not be useful in any asset allocation decisions.

[@edonbabameto7652]

There's more value here than in an entire MBA. How many of you guys see the risk that things turn out so good during the summer, that the velocity simply gets out of hand with all the policies and pandemic end... (we could add there also a lot of liquidity leaving asset-inflation and going to the real world). How much would you value the risk of having a big wave increase of velocity and not incrementally? (most of the policies see an effect 6 month in anyways, and it could all accumulate together in 6-9 months period).

[@ilya.rabota4578]

Dr. Mark, regarding SPY synthetic /risk-reversal. Sp500 2021 projections range from 3800 to 4400, implied P/E 23-26. What is yours? what lower/higher strikes for short put and call legs in your opinion are more appropriate for one year expiration options. Is there rationale for -20% protection (you’ve mentioned before) on the downside? Thank you.

[@ilya.rabota4578]

On the second thought , if the answer will be “don’t be a pig” I will totally understand )

[@marcbmerrill]

Hi Mark, thanks for doing these videos. The one thing I want to ask you about is while normal inflation hasn’t been going up a lot we have seen huge inflation in the real estate market with prices and rents over the last 5-10 years as well as inflation in the stock market with huge multiples. In particular, housing is most people’s largest cost. What are your thoughts on inflation in these two markets? And what inflation will be going forward in housing and the stock market ?

[@MarkMeldrum]

That is called asset inflation, not price level inflation. Any increase in the money supply will find its way into financial markets first. that is how the rich just get richer - the central bank does it for us.

[@bigworm3886]

The move to CECL from the Allowance to Loan losses method has probably been one of the most ill advised accounting pronouncement of the past decade. It has lead to unnecessarily high reserves (way above the levels of the previous method). Back tested data shows that CECL has countercyclical properties where in bad times banks forecast a much higher need for reserves in the future and each bank is left to their own devices to predict when a recovery is coming ahead.

[@be2keen]

I think a lot of the money flows overseas as a result of our hugely massive amount of imports. Basically, the money goes to China, Japan, etc. and that's where the inflation shows up. I'm not saying that accounts for all of the disappearance of inflation but for a lot of it. Also, productivity is a factor.

[@ishansgyan8665]

Professor want to know your thoughts about Bitcoin bubble. Is the dollar decline creating a pull towards crypro ? for anything to be a money it need to have medium of exchange,unit accounting, value storage. Gold fits most of these criteria which makes it Fiat currency. Can crypto store value in an unregulated environment. If not why is there a believe and investor pull? is it a giant ponzi scheme where the only reason buyer is paying a price is because he believes the next buyer will pay higher price?

[@daneomegan]

Would love to hear you pull apart a system where the money supply is fixed at $21m bitcoins...

[@robaustin3013]

Hi Dr. Meldrum. re: AGNC In a prior video you spoke about writing options on AGNC for extra income based on differentials from book value . As a large holder of AGNC in a taxable Canadian account, would it be wise now to liquidate my position based on the forecast of a weaker USD. The call/put writing has been a source of extra income and I am reluctant to give up a strategy which has been working great. Thanks Rob

[@MarkMeldrum]

That is leaning to investment advice - so I will pass on that.

[@mikecogan5428]

47:07 is "corporate tax provision primarily affecting cash flow." Does that imply "minimal effect on Net Income" or something? Level 2, Book 3, Capital Budgeting we talk about depreciation schedules affecting cash flows but not tax incentives. Could you cite some example? Thanks sir!

[@MarkMeldrum]

Acceleration of depreciation, 125% deduction for R&D, tax credits for hiring students, etc...

[@clemenswittmann4852]

i agree with your long term USD thesis, however in the short term I believe we can see a sharp spike and squeeze. There is a record short position on the dollar right now, and its the most crowded trade around. Alongside that, when all these loan provisions wear off in the US in Q1 2021, people will have to pay back large sums of debt. Couple this alongside record low loan growth, and you have an environment in which dollars are being destroyed daily at a large scale.

[@Prediculous]

Agreed, but wont happen yet. Maybe later half of Q1 21.

[@RT-bs3zg]

What's an example of a basic material etf?

[@Bogdanbmm]

Good q

[@carlosarostegui3272]

Wow this is absolutely fantastic! So, if I understand correctly, a key theme in 2021, for inflation, is money velocity. It seems that fiscal policy will be the biggest indicator of how steep of a slope we have in terms of velocity growth. Is policy more important than seeing an increase in lending and consumption? I would assume that as things normalize with a vaccine, lending and consumption would increase and thus money velocity as well. This is simply heuristics as I haven't done the detailed analysis but hoping someone could shed some light on this?

[@MarkMeldrum]

An organic increase in aggregate demand would do it - but that would be slow and not be inflationary for some time due to current slack in the system. You need a big shock - that is fiscal policy. Georgia will tell us everything.

[@carlosarostegui3272]

that makes sense. Thank you for clarifying.

[@gailmargret23]

Great video. I dont understand why we want more Inflation though. I though low and predictable Inflation is good. Also with rates low for the future what are you supposed to do in retirement? Invest in equities and hope there isn't a bear market?

[@MarkMeldrum]

Low and stable is good. But with a lot of debt, higher is better for governments. And yes, saving for retirement means taking on more risk. And people are upset with hedge funds?

[@Kitman0304]

11:56 One of the arguments I heard about why we do not see inflation even though we increase money supply is that we've used CPI to measure inflation. The bucket of goods we used to measure CPI ten years ago is different than the bucket of goods we use today. By definition, CPI is a measure of the average change over time in the prices of consumer items-goods and services that people buy for day-to-day living to maintain a standard of living. However, they change the definition of standard of living over time. For example, ten years ago, having a steak as dinner might be a standard of living but now we have cheaper meat to substitute so having a cheaper meat instead of steak is the new standard now then we can replace the expensive steak and put a cheaper meat in CPI bucket (maybe plant meat in the future. Beyond meat lol) If we keep replacing cheaper items in the CPI bucket because cheaper items can still maintain a standard of living but not the quality of living, how could we see inflation even with massive amount of money supply? If we look at the price of steak alone, it does show inflation in the past decade. When we look at CPI, no inflation. What's your take on that? Thanks!

[@MarkMeldrum]

The CPI also no longer counts lantern oil and wagon wheels. As it shouldn’t.

[@Kitman0304]

@@MarkMeldrum Good point! Why we choose CPI as a proxy of inflation but not the change in price level of the whole economy to measure inflation? It seems to me by selecting the goods in the CPI bucket, we are kind of manipulating the inflation

[@monicas2539]

I was wondering why the government wants to increase inflation in the first place. We talked a lot about how to increase inflation, but why is that the goal? Thanks for the video Mark. I really benefited from your CFA Level 2 videos.

[@manojtoke9067]

Because disinflation or deflation is worst for the economy, in which supplier lack motivation to sell goods due to lowering goods prices(revenue reduce). As wages are sticky they didn't reduced(fixed input cost). Output prices dropping and fixed or slight increase of input cost results in reduce in profitability due to which industries cut thier production.production cut results in labor lay off. Unemployment rises-Consumer spending decrease-GDP decrease. Standard of living drop. Hence government always try to maintain some inflation(2-4%) in the economy. Japan was trying to bring its economy out of deflation from last 2 decade. Right now it's inflation rate is at 0.5%.

[@monikabogusch6017]

Inflation yields to higher taxes collected. When higher taxes collected they can spent more to buy votes or play in some other way king and vaste the wealth for which other peoples have worked for. And think on fixed rate long term government bonds which will be devalued. And nominal GDP that will grow where they vcan celebrate their 'success'.

[@mikecogan5428]

@@manojtoke9067 That's the theory behind it. I am not sure I buy it though. Eventually, my car will die and I'll need a new one. People need to eat every day. What do you think? I am kinda cynical like Monika on this thread.

[@manojtoke9067]

@@mikecogan5428 firstly, I think proportion of repurchaser of goods ( like your's new car buying due to existing car damage) is very small compare to new purchaser, so it didn't affect the demand that much. Secondly, whenever we talked about inflation it's always the Core inflation (except food and energy price fluctuations). Food and energy prices are very price sensitive hence they does not counted in Core inflation. Right now core inflation of USA is 1.2% ( food inflation=3%).

[@majedti4126]

i had a quick question @Mark Mledrum - What do you say to people that are noting that CPI is a gamed figure and doesnt take into account real inflation that is affecting prices of healthcare, education and housing?

[@MarkMeldrum]

CPI does include those components - with weights that the average household purchases. If you are a student buying a house who is often sick, then the weights you have are more than that reflected in CPI.

[@majedti4126]

@@MarkMeldrum didnt think about the differential weighting point. i guess each has a perspective and a central figure cant possibly reflect each person's reality. Thanks again Mark. You really are a wonderful teacher.

[@christianl5787]

Hi, it seems my comments are being blocked here for some reason. Let's try with a simple question from my initial comment. Divisia M1 and M2 rose in 2009, M3 and M4 dropped in 2009. Last year they all exploded. First, why? And what does it tell us about the medium term future?

[@itsilcapitano84]

Outstanding content as usual Mark. So now your saying that we could control inflation by monitoring velocity and now money supply? If so then how we do counter the classic argument that higher money supply compared to available resources directly increases inflation?

[@MarkMeldrum]

Well, it has not worked for Japan after almost 30 years. With lots of money printing and an older population, they have no velocity. Money is not inflationary unless it actually circulates.

[@itsilcapitano84]

@@MarkMeldrum So M effect on inflation is entirely dependent on its velocity. In other words increasing M effects inflation only if it reaches the economy. Which then makes the real focus should be on Velocity. The quality of this one hour video is priceless.

[@janukamra1798]

Hello Mark, I request you to please update , if possible, L1 free videos as per 2021 curriculum. It would be of great help. Cheers.

[@MarkMeldrum]

2021 content is available at www.markmeldrum.com under a paid subscription.

[@davidmarmolejos5944]

UBI would bring velocity higher and in a more predictable manner long term

[@Kitman0304]

17:15 what caused the velocity to decrease so dramatically from 08 to 20?

[@MarkMeldrum]

As I point out, an increase in M but banks simply keeping it as excess reserves. Print all the money you want, but if it does not go into people;s packets, it does nothing.

[@RT-bs3zg]

what's the difference between keynsean and post keynesian?

[@demolitionman8276]

Do you mean Neo Keynesian?

[@yojmb9]

New video from Mark? I'm in. This is a topic I'm greatly interested to hear your opinion on.

[@garyobrien8387]

Is window guidance a policy tool? The BOJ employed it ...re The Princess of the Yen

[@jacobmccord1409]

Hello Mark, Quick question. If the fed decreases interest rates wouldn’t that speed up velocity therefore increased inflation? If the goal is to keep inflation under control at a time they increase the money supply wouldnt the fed want to increase interest rates? I remember back in April or so they decreased rates and home prices shot up.

[@MarkMeldrum]

The Fed has decreased rates and velocity has decreased along with it.

[@lblanc8107]

@@MarkMeldrum Do you think there could be a case now of an inverse relationships to the common belief that raising rates is deflationary in this world where velocity has constantly slowed down in the last ten years in parallel with these extraordinary low rates?

[@JoshOlawale]

You were really on your game in this one! Fantastic video. Re: the risk reversals on SPY instead of an ETF or futures contract, is this to capture some volatility skew? I'll likely add a lump sum to my RSP before Feb so may look at adding some US REITs as an income strategy. Cheers!

[@MarkMeldrum]

It's more about limiting the USD investment required to minimize the currency risk. A risk reversal can be done using CAD margin and $0 USD required. Plus it gives me considerable convexity.

[@xavlar4144]

Hey Mark, thank you for all you do and your immense hatred towards lawyers that you can diverge from any topic just to bash em. Had a weird question for you. There’s a lot of trade offs into renewable energy that you can consider. I’m getting a little more educated into the field but was wondering what you thought about this EVs/biofuel craze. Not so much about stock price but if the new administration goes this way, are they trading one bad for another? Is Tesla worse than we think for the environment given the deforestation needed to scale? Can a similar thing be said for the biofuel companies? Is their bad better than the really bad fossil fuels we have now? Just wanted to get you initial thoughts

[@bobseger6535]

Mark, let me start off by saying thank you. From a Canadian standpoint if the USD continues its drop and we have a rise in commodity prices this should drive Canadian wages in Oil, Uranium, Metals, etc. It also seems like our government is pushing the MMT narrative that will lead to UBI. Would both of these increase money velocity enough to drive inflation throughout the provinces. Tuning in from Sask.

[@MarkMeldrum]

I don't see rising commodity prices in USD as necessarily meaning rising commodity prices in CAD. I also don't see rising commodity prices as necessarily being shared with workers through wages unless the labour market is tight. As for UBI - no opinion there - I am sure that is Jagmeet's thing and Trudeau is just going along to get along, but I doubt this has legs.

[@bobseger6535]

@@MarkMeldrum Thanks Mark.

[@itstaimoor]

🤴

[@evanlebzu1]

Mr. Mark, are you originally from Russia? or that area?

[@MarkMeldrum]

No

[@seanmclaughlin1061]

Can you revisit your comments on the the digital trend from a few videos ago. Is 2021 going to be less digital than 2020...? Do you have any thoughts on epicenter names delivering alpha moving forward?

[@MarkMeldrum]

Next week is economic growth. So I will revisit digitization and automation.

[@be2keen]

Just open the economy, protect the elderly. Problem solved.

[@vossli1074]

When you say you can hedge out currency risk from investing in US equities how exactly do you do this? Is it possible to use the same mechanism to increase returns for american investors?

[@MarkMeldrum]

If I buy $100K US equities, I sell 100K USD using a futures contract. Or I just borrow USD from my broker and invest in US assets paying more than the cost of borrowing, hopefully. Futures work better.

[@IvanTheFencer]

so velocity of money keeps falling yet we're seeing all this demand push inflation manifesting. bank reserves are pretty much still at/near all time highs as well. Obviously something else happened

[@sue7899]

Nice Haircut

[@MarkMeldrum]

They are hard to come by these days.

[@Game-yl2lh]

CFA is no coffee to go!

[@Owenlol100]

Mark, when you trade options on US equity, is it necessary to hedge for currency?

[@MarkMeldrum]

No really. The exposure is a small fraction of the value of the underlying.

[@Owenlol100]

@@MarkMeldrum Thank you!

[@JustKingsKK]

I think that tech is deflationary. They low the P!

[@yojmb9]

Mark, you mention in multiple videos a lot of reasons to see interest rates staying low w/ accomodative monetary policy. Yet also mention cap rates are too low. Isn't it relative? What reasons do you see for increasing spreads btwn risk free and cap rates? From my perspective, 5%+ looks pretty good compared to a sub 1% treasury yield. Bruce Flatt from BAM is of the opinion that rates will stay low a long time and in an interview has said he thinks that should double the value of their existing real estate assets.

[@MarkMeldrum]

g. g will be flat to negative. Low rates are for risk-free assets. Commercial property is not risk free, it is levered equity. The debt cost may be low, but any property decline is a hit to equity directly. Low rates good for housing prices, sure. But income producing property prices are a direct function of their ability to generate cash flow, not utility.

[@tuanmai1235]

You said “basic materials ex energy”. Why are you bearish on energy? Wouldn’t it mean more demand for all materials, including energy (aka oil) when more consumption from individuals and govt invests more in infrastructure?

[@MarkMeldrum]

Material ex energy, means no energy exposure. So I am not bullish energy.

[@tuanmai1235]

@@MarkMeldrum Sorry. I meant bearish.

[@MarkMeldrum]

There is plenty of oil. No shortage there.

[@tuanmai1235]

@@MarkMeldrum Thank you for your input.

[@IcyDeath91]

Inflation seems to be showing up now

[@riojimatsuoka]

Doesn't inflation pushes V up automatically? It becomes more expensive to hold money after all.

[@MarkMeldrum]

Hyperinflation - absolutely. But this will not be the issue. If inflation shows up it will not be uncontrolled.

[@riojimatsuoka]

@@MarkMeldrum thank you!

[@IndianOutlaw1870]

When I was a kid, a Big Mac was 65 cents and a new midsize car was 3000 USD. We have had inflation for the past 50+ years in the U.S.. When I hear people say there is little price inflation, I just shake my head. One visit to the Taco Bell drive-through menu is enough to rattle my nerves.

[@MarkMeldrum]

You have to put things in perspective. In 1970 minimum wage could buy 2 Big Macs in the US, same as today. So per hour of labor, there has been no inflation at McDonald's. A car today would have cost much more than $3000 in 1970. You have to consider improved fuel efficiency, improved technology, improved safety - its not just the quantity that money could buy, you must consider the quality (google Hedonistic price index). You also cannot pick and choose - inflation is a general price increase, not a specific price increase. A 50 inch LED TV in 1999 was $20K, not is $399 at Best Buy. Not once did I say there was no inflation - nobody is saying there is no inflation. Clearly there is. Including wage inflation. Average wages are far higher today than in 1970. The price of something is not proof of inflation, the purchasing power of an hour's wages is on the other hand. The point of the video was not to argue that inflation does not exist, only that the increase in the money supply will not, on its own, lead to inflation.

[@marvo162]

Janet Yellen? Uh?

[@MarkMeldrum]

Incoming Treasury Secretary.

[@marvo162]

@@MarkMeldrum gotcha 👌🏿