I’m often asked what I think of the direction the economy is heading and unfortunately I don’t have a crystal ball but I do have several gauges that I use to determine the direction the economy might head to. gauges is the speed of money.
Money velocity is the rate at which money is spent in the economy. It is calculated by dividing the GDP (gross domestic product) (opens in a new tab) by the money supply (M1 & M2). M1 and M2 can be used for calculation purposes. Consider M1 as the most targeted number. This includes cash deposits and transactions, while M2 is larger and encompasses savings, CDs and money markets. GDP is the value of all goods and services in the economy.
The faster money changes hands in the economy, the stronger the economy is considered. Therefore, if we see a trend in either direction, we can assume that the economy is improving or deteriorating depending on the direction of the currency velocity, up or down. .
To subscribe to Kiplinger’s personal finances
Be a smarter, more informed investor.
Save up to 74%
Sign up for Kiplinger’s free email newsletters
Enjoy and thrive with Kiplinger’s best expert advice on investing, taxes, retirement, personal finance and more – straight to your email.
Profit and thrive with the best expert advice from Kiplinger – straight to your email.
Sometimes the velocity of money can be affected simply by things like rising inflation. During periods of high inflation, the velocity of money tends to increase. That’s why I followed him more closely this year.
As you know, the Fed is desperately trying to reduce inflation by raising interest rates in an attempt to slow down the economy. One of the ways we check to see if his attempts are working is to see if the money velocity drops. If not, there could be signs of continued high inflation.
It is important to note that money velocity is not the ultimate solution for measuring economy. The Fed’s manipulation of its balance sheet changes GDP and thus the calculation of the velocity of money, which some argue makes the velocity of money figure less valuable.
I would say that a higher Money Velocity figure paints a decent picture of higher inflation, but it’s a bit less reliable when it’s falling. This is why other factors must be taken into account to formulate a hypothesis on the direction of the economy.
So what are my thoughts? I think we will see a recession in 2023, but it probably won’t be deep or prolonged. I think the market has already priced that in, and therefore a recession won’t have much, if any, negative effect on the stock market.
This is purely my opinion.
As a result, I am buying more stocks now than I have all year and will likely continue to do so.
Remember that everyone’s situation is different and what you should be doing may be completely different from what someone else is doing.
My suggestion is to review your plan with your advisor, and if you don’t have a plan then you need a financial planning professional to make one for you.
These times are too turbulent to “fly away”.
Securities offered by Kestra Investment Services, LLC (Kestra IS), Member FINRA/SIPC. Investment advisory services offered by Kestra Advisory Services, LLC (Kestra AS), a subsidiary of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The views expressed in this commentary are those of the author and do not necessarily reflect those of Kestra Investment Services, LLC or Kestra Advisory Services, LLC. It is for general information only and is not intended to provide specific investment advice or recommendations to anyone. We suggest that you consult your financial professional, lawyer or tax advisor regarding your personal situation. To view the CRS form, visit https://bit.ly/KF-Disclosures (opens in a new tab).
This article was written by and presents the views of our contributing advisor, not Kiplinger’s editorial staff. You can check advisor records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).
#economy #velocity #money #clues