On May 31, 1889, after heavy rainfall, Pennsylvania’s South Fork Dam failed causing “The Johnstown Flood,” which claimed the lives of 2,208 people and changed the town forever.
The threat of floods came to mind while reading JP Morgan’s Guide to the Markets, which indicated the M2 money supply hit 70.2 percent of the U.S. nominal GDP – the average since 1985 is 53.9 percent. Generally speaking, an elevated supply of money should lead to lower interest rates and spur increased business investments and consumer spending, two of the largest contributors to GDP. A stronger GDP, combined with cheap and available money, would lead to steady volumes and high prices in M&A. Too much of this money hitting the market concurrently could start a wave of inflation, changes in the dollar and overall uncertainty, which would slow deal-making.
The fundamental question we are asking is, “How will the excess cash on the sidelines flow when people and companies tire of earning $338 on a six-month, $100,000 CD? Will the metaphorical dams fail?”