According to seasonally adjusted data, M2 increased by $59 billion in March. As the money supply expands, this is the slowest increase since June 2021. It’s also nearly $200 billion less than the $238 billion expansion last March.
Figure: 1 MoM M2 Variation (seasonally adjusted data)
The economy and the stock market are accustomed to a rapidly expanding money supply. The current decline in growth could be responsible for the recent stock market challenges; however, the deceleration will likely be will not be enough to lower the CPI.
A look at the non-seasonally adjusted money supply shows a higher growth rate last March than the chart above; however, that’s still more than $400 billion less than last March’s $571 billion.
Figure: 2 monthly changes in M2 (unadjusted data)
The chart below shows M2 decelerating a bit to 3.3% over the past month. This is well below the 6-month and 12-month averages (7.9% and 9.9% respectively).
Figure: 3 m2 growth rate
When looking at the average monthly growth rate per month before Covid, March is growing historically at 4.8%. This March is well below the growth rate seen in the decade before Covid of 150 basis points.
Figure: 4 Average Monthly Growth Rates
The Fed only offers weekly data not seasonally adjusted. The chart shows how the rebound in unadjusted money supply is quite weak compared to recent history. Since the start of the year, the money supply has grown much less rapidly.
Figure: 5 changes in WoW M2
The 13-week “Wenzel” money supply
The late Robert Wenzel of the Economic Policy Journal used a modified calculation to track the money supply. He used a 13-week annualized average growth rate as defined in his book The Fed Flunks. In particular, he used the weekly data which not seasonally adjusted. His analogy was that to know what to wear outside, he wants to know the current weather, not the average temperatures throughout the year.
The goal of the 13-week average is to smooth out some of the choppy data without bringing in too much history that might obscure someone from seeing what’s in front of them. The average growth rate over 13 weeks can be viewed in the table below. Decelerating trends are in red and accelerating trends in green. Money supply growth on a 13-week annualized basis mostly accelerated for 16 consecutive weeks. It has now been stable or falling for 12 consecutive weeks.
Growth is now at 7.06%, which lowest reading in over 60 weeks.
Figure: 6-8 WoW 13 Week Average Money Supply Growth
The chart below helps show the seasonality of the money supply and compares the current year to previous years. It shows that the current trajectory is descending quite rapidly. For the past two years, this has rebounded in April, but it seems unlikely that the market will experience the same rebound this year. The current trajectory is lower than that of 2015 and 2016.
As M2 growth has been extremely high in recent years, the market has become accustomed to a certain level of growth. This deceleration is clearly putting pressure on the stock market.
Figure: 9 Annual 13 week overlay
Behind the inflation curve
The chart below shows YoY M2 versus Inflation and Fed Funds. As noted earlier, the current trajectory uncomfortably resembles that of the early 1970s with three major differences.
- Money growth has been more extreme in recent years
- Inflation is actually upper if measured the same way
- The Fed is a lot further behind the curve
As shown below, inflation tends to gap increases in M2 by about 1-2 years. Notice how all the black peaks occur a few years after the large orange bars. While most forecasters are talking about an ongoing inflation spike, the chart below suggests that we are in the early innings. Keep in mind that inflation only reversed once the Fed raised rates above the inflation rate.
In the most recent period, the Fed Funds are at 8.4% behind inflation. This shows that they are further behind the rate of inflation than ever before. Moreover, the chart shows that it takes time for higher rates to bring inflation down. The Fed doesn’t have the luxury of waiting for higher rates to work when they’re so far behind the curve.
Could some inflationary pressures be easing now that energy has pulled back? Of course, but the majority of inflation is not because of the war in Ukraine. Today’s inflation is a direct result of the massive increase in money supply shown below. In March 2021, YoY M2 had increased by 24.2%! This growth in the money supply creates the price increases that we are seeing now.
Figure: Change in M2 over 10 years with CPI and Fed Funds
The charts below are designed to put current trends into historical perspective. The orange bars represent the annualized percentage change rather than the gross dollar amount. the current deceleration can be seen as the orange bars fall rapidly to the far right.
Figure: 11 m2 with growth rate
A historical look at the 13-week annualized average also shows the current situation. This chart overlays the S&P newspaper yield. Mr. Wenzel proposed that sharp declines in the money supply could be a sign of a stock market pullback. The current value of 7.1% is the lowest value since September 2019.
His theory, derived from Murray Rothbard, states that when the market experiences a declining (or even negative) money supply growth rate, it can create liquidity problems in the stock market, leading to a sell-off. While not a perfect predictor, many declines in the money supply precede market declines. Specifically, the major lows in 2002 and 2008 went from 10% to 0%.
This current decline in the money supply could cause the stock market to lose traction.
Please note that the chart only shows market data through April 4 to align with available M2 data. This does not take into account the recent sale.
Chart: 12 M2 annualized over 13 weeks and S&P 500
Another consideration is the massive accumulation of liquidity in the system. The Fed offers Reverse Repurchase Agreements (reverse repos). It is essentially a tool that allows financial institutions to exchange cash for instruments on the Fed’s balance sheet.
The current Reverse Repo hit a record high of $1.9 billion on Dec. 31, eclipsing previous highs of around $500 billion in 2016-2017. The latest rate is 1.8 T$. Reverse repos generally peak at the end of the quarter before falling again. The $1.87T as of March 31 did not top December 31. This is the first time that a quarter-end has not exceeded the end of the previous quarter in over a year.
Figure: 13 Fed reverse repo agreements
What this means for gold and silver
Inflation is an expansion of the money supply which generally leads to higher prices. As the money supply continues to increase, the rate at which it grows decreases. This deceleration could be enough to slow down the economy and the stock market, but not enough to stop the rise in prices.
This again highlights the conundrum facing the Fed. How do they organize a “soft landing”? They can not ! The massive money supply growth seen in 2020 and 2021 cannot be reversed without a contraction of the money supply. The growth rate is down, but it’s always positive.
When the stock market falls but the CPI remains high, the Fed is unlikely to continue to reduce the money supply. They are more likely to come to the rescue with After liquidity. They can justify this decision by citing the strong rise in the US dollar lately. Unfortunately, this could be the move that causes the dollar to fall, only exacerbating the inflation problem.
Gold and silver will provide an excellent hedge against attempts by the Fed to correct past mistakes. The Fed is more likely to make even bigger mistakes when trying to clean up its mess.
Data source: https://fred.stlouisfed.org/series/M2SL and also WM2NS and RRPONTSYD series. Historical data changes over time, so future item counts may not match exactly. M1 is not used because the calculation was recently changed and backdated to March 2020, distorting the chart.
Data updated: monthly on the fourth Tuesday of the month with a 3 week lag
Most recent data: 04 April 2022
Interactive charts and graphs are always available on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/USDebt/
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