Among other unprecedented developments, 2020 brought us new high-water marks in the US for both money supply growth and the personal savings rate. This week’s Chart Room looks at the global ripple effect, after US M2 money supply at the end of 2020 rose by a record 24 per cent year-on-year, the biggest increase since records began before the Great Depression. It remains sharply elevated. Meanwhile, the US personal savings rate peaked at 33.7 per cent in April, but has since fallen back to more normal levels, an encouraging sign that US consumers, who account for nearly 70 per cent of the world’s biggest economy, are spending once again. 

At a global level, the dollar value of world money supply rose 17 per cent last year to USD104 trillion. We think this scale of monetary accommodation (i.e. balance sheet expansion) is likely to carry on. In a world with zombified growth, central banks have to prop up a system which relies on increasingly negative real yields to service debt.  

A rising tide  

This flood of dollar liquidity is seeping into all aspects of asset markets, and the impact is overwhelming in the absence of real productive utilization in the economy. In our view, this will likely benefit risk assets including corporate bonds, equities, and popular carry trade currencies, despite valuations looking stretched in some areas. But this will come at a cost, including a structural dollar downtrend. In addition, I expect inflation will rear its head in 2021.

But the worry is that real yields will begin to rise once we see the lockdowns end. There are already early signs of this in recent weeks. If yields do continue to climb, and inflation ticks upwards, we could see a UST yield curve tantrum (i.e. a steeper curve), which would in turn cause a temporary widening in credit market spreads (and a corresponding temporary selloff in equities, particularly tech). 

That said, I don’t think such a selloff would be prolonged. Central banks cannot sit idly by and watch real yields go higher. These days, the system only clears with real yields being driven more and more negative. There’s simply too much debt outstanding. The Fed can’t put the toothpaste back in the tube.

Steve Ellis

Steve Ellis

Global CIO, Fixed Income