August Money Supply Grows by Most Since December 2021
Money Supply is a very important indicator. It helps show how tight or loose current monetary conditions are regardless of what the Fed is doing with interest rates. Even if the Fed is tight, if Money Supply is increasing, it has an inflationary effect.
One key metric shown below is the “Wenzel” 13-week annualized money supply figure. It was made popular by the late Robert Wenzel who tracked the metric weekly as an indicator for where the economy might be headed. In 2020, the Fed started reporting the data monthly instead of weekly. It should also be noted that Money Supply data can be heavily revised in future months.
Recent Trends
Seasonally Adjusted Money Supply is delayed by a month. The six consecutive periods of increased money supply are for March through August. August was the biggest month since December 2021 as shown below.
Figure: 1 MoM M2 Change (Seasonally Adjusted)
The July increase was 6.8% annualized.
Figure: 2 M2 Growth Rates
That is on trend with the average of +7.1%.
Figure: 3 Average Monthly Growth Rates
Non-seasonally adjusted numbers show data through early September, and show another big up month of 104B. This only includes the first week of the month.
Figure: 4 MoM M2 Change (Non-Seasonally Adjusted)
The weekly data below shows the big spike that occurred in the first month of September.
Figure: 5 WoW M2 Change
The “Wenzel” 13-week Money Supply
The late Robert Wenzel of Economic Policy Journal used a modified calculation to track Money Supply. He used a trailing 13-week average growth rate annualized as defined in his book The Fed Flunks. He specifically used the weekly data that was not seasonally adjusted. His analogy was that in order to know what to wear outside, he wants to know the current weather, not temperatures that have been averaged throughout the year.
The objective of the 13-week average is to smooth some of the choppy data without bringing in too much history that could blind someone from seeing what’s in front of them. The 13-week average growth rate can be seen in the table below.
Growth has been positive for 38 consecutive weeks now with the latest 7 weeks showing a modest acceleration after reaching a low of 0.33% eight weeks ago.
Figure: 6 WoW Trailing 13-week Average Money Supply Growth
The plot below shows how this year compares with previous years. This year saw a much flatter curve as summer approached, but the increase can be seen where the growth rate is catching up to previous years due to a faster growth rate. For example, 2024 now sits at the same growth rate as 2015 for the same time of year despite starting nearly 7 percentage points below 2015 to start the year.
Figure: 7 Yearly 13-week Overlay
Inflation and Money Supply
The chart below shows the history of inflation, Money Supply, and Fed Funds. As shown, in 1970 inflation worked with ~2 year lag compared to Money Supply. Given this, it is possible that another bout of inflation is lurking just under the surface considering the massive spikes in 2020 and 2021. Please note that the latest Fed cut is not shown yet on this graph.
Figure: 8 YoY M2 Change with CPI and Fed Funds
Historical Perspective
The charts below are designed to put the current trends into historical perspective. The orange bars represent annualized percentage change rather than raw dollar amount.
Figure: 9 M2 with Growth Rate
Below shows the 13-week annualized average over history. This chart overlays the log return of the S&P. Mr. Wenzel proposed that large drops in Money Supply could be a sign of stock market pullbacks. His theory, derived from Murray Rothbard, states that when the market experiences a shrinking growth rate of Money Supply (or even negative) it can create liquidity issues in the stock market, leading to a sell off.
While not a perfect predictive tool, many of the dips in Money Supply precede market dips. Specifically, the major dips in 2002 and 2008 from +10% down to 0%. 2022 was highly correlated with a fall in Money Supply and the rebound has corresponded with the big stock market move we have seen recently.
Please note the chart only shows market data through Sept 2nd to align with available M2 data.
Figure: 10 13-week M2 Annualized and S&P 500
One other consideration is the reverse repo market at the Fed. This is a tool that allows financial institutions to swap cash for instruments on the Fed balance sheet.
Reverse Repos peaked at $2.55T on Dec 30, 2022. Money has been gushing out ever since. While the Fed has been maintaining higher interest rates, this drop in reverse repos is certainly providing liquidity to the economy, driving Money Supply and the stock market higher. It has started to level out in recent weeks which could be a reason for the more sluggish growth recently. It has been hanging out around $400B lately.
Figure: 11 Fed Reverse Repurchase Agreements
Wrapping Up
Money Supply can be a leading indicator and help explain the action in the stock market. Money Supply fell the entire year of 2022, bottomed in early 2023 was rising up until the recent period where it flattened out. Keeping an eye on Money Supply can help one understand how much wind the stock market has at its back.
