Money supply growth over 13 weeks hits multi-decade low

by SchiffGold 0 0

Money supply growth was positive in July at $42 billion, but was well below last year’s $161 billion. As the chart below shows, money supply growth has plummeted since February. Last year started with 5 straight months above $200 billion while 2022 only saw one month above $100 billion and that was January.

Figure: 1 MoM M2 Variation (seasonally adjusted data)

Figure 2 below shows not seasonally adjusted money supply which is a bit more erratic. Even with the heightened volatility, it is very clear that there is a lot more weakness in the money supply in recent months.

Figure: 2 monthly changes in M2 (unadjusted data)

Despite recent trends, the last month is actually above the average 6-month growth rate (2.3% vs. 0.6%). this is still less than half the one-year growth rate of 5.3% and well below the three-year annualized growth rate of 13.5%.

Figure: 3 m2 growth rate

When looking at the average monthly growth rate, pre-Covid, July is historically growing at an annualized rate of 7%. This compares to 2.3% for the current month.

Figure: 4 Average Monthly Growth Rates

The Fed only offers weekly data not seasonally adjusted. As shown in the chart below, we have seen more frequent weeks of negative growth. When growth is positive, it is much weaker than it has been in the recent past.

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.

Growth has now collapsed to -2.57%, which lowest reading since April 1993. This is also the 29th week of negative or zero money supply growth.

Figure: 6 WoW 13 Week Average Money Supply Growth

The chart below helps show the seasonality of money supply and compares the current year (red line) to previous years. For the month of August, this is the weakest 13-week money supply growth on record.

The chart below dates back to 2005 and the current growth rate is lower in every period of the chart and well below any other data point for this time of year.

Wenzel has often commented on his ability to guess the timing of the 2008 stock market crash based on the money supply that year dropping from 11.6% to 0% within months. In 2022, growth slowed from 12.2% to -2.5% in less than 6 months. Not to mention the 64% collapse seen in 2020.

It’s a Major slowing money supply and could pose significant headwinds for the stock market and the economy.

Figure: 7 13 week annual overlay

Behind the inflation curve

To combat rising prices, the Fed would need to write off most of the money it has created over the past few years. This would require bringing interest rates down above the inflation rate.

Unfortunately, the chart below shows that the Fed has never been so far behind the inflation curve. A recession alone will not solve this inflation problem due to lagged effects. If we consider the period of 1970, inflation has always increased with a lag after significant expansion of the money supply. Price increases are still waiting to feel the full effects of all the growth in M2 from 2020 and 2021. Moreover, history shows that it took rates above inflation to bring prices down .

The blue line below (federal funds rate) has almost always gone above the black line (CPI) to force inflation back down. The only anomaly was in 2011 after the Great Recession. The mainstream now assumes that’s the norm (i.e. a recession on its own will slow inflation), but the chart below shows it’s much more common than inflation rates. interest must outpace inflation to bring the curve down. The recent period has made the Fed complacent. It’s very dangerous !

Figure: 8 annual changes in M2 with CPI and fed funds

Historical perspective

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 slowdown can be seen on the right side.

If a few months of slowing M2 can cause so much pain for the whole economy (stock market, housing, bond yields, etc.), how much carnage would occur in a protracted fight against inflation where M2 had to twitch constantly for months?

Figure: 9 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. 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 from +10% to 0%. The economy is now struggling with a growth peak of 63.7% in July 2020 at -2.5%. It’s a major meltdown.

The market may have rebounded from the lows, but it seems unlikely to hit new highs without more liquidity from the Fed.

Please note that the chart only shows market data through August 1 to align with available M2 data.

Chart: 10 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 a tool that allows financial institutions to exchange cash for instruments on the Fed’s balance sheet.

The current Reverse Repo topped $2,000,000 on May 23 for the first time in history and has remained above $2,000,000 ever since. This eclipses the old record of ~$500 billion in 2016-2017. Pensions reached a record $2.3 billion on June 30.

Bottom line, even though M2 has slowed down, there is still trillion dollars in cash circulating. New funds will not be available to support the stock market, but excess liquidity is still available to drive up prices and keep inflation high.

Figure: 11 Fed reverse repurchase agreements

What this means for gold and silver

The market is currently experiencing an epic collapse in the growth rate of money supply. Based on historical data, August is usually the time when money supply growth bottoms out. There should be an increase in the coming months, but will it be enough to prevent the bottom from falling?

The Fed is doing everything it can to bring down inflation without crushing the economy. Unfortunately, the current slowdown in the money supply looks very likely to bring the addicted economy to its knees. This is another reason the Fed needs a quick fight against inflation. The Fed needs to get back to easy money ASAP or face the consequences.

The money supply is not shrinking fast enough to bring inflation down, but it will hurt many other sectors of the economy. The economy will need to be bailed out long before the Fed brings inflation back below 2%. When that happens, gold and silver will offer the best protection against the Fed’s reckless lifeline, which will turn out to be an anchor.

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

Latest data: August 01, 2022

Interactive charts and graphs are always available on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/USDebt/

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