Money Supply Grows Almost 10% Annualized and Nears $21 Trillion

In the latest period, M2 increased by $163 billion and sits just shy of $21 trillion. This represents a 0.78% MoM increase which annualizes to 9.8%. This is below last month’s rise of $254B and last September’s rise of $223B.

Figure: 1 MoM M2 Change

The table below shows the change in M2 over different period lengths. All numbers have been annualized for consistency. As can be seen, the growth in M2 is decelerating compared to the 6-month, 1-year, and 3-year average growth rates. The charts below put the growth rate in context and show that the “slower” growth rates over the last 6-month may be due to seasonal factors.

Figure: 2 M2 Growth Rates

M2 used to be published weekly, so the chart below shows the noisier weekly data that is not seasonally adjusted by the Fed (the chart and table above are seasonally adjusted).

The most recent week available, ending Oct. 4, showed growth of $215B which is the fastest weekly growth rate since the money supply growth increased $260B in April 2020. The drawdowns in the prior two weeks kept the month-over-month growth rate in check.

Note: A monthly annualized growth rate of 9.8% is still extremely high relative to history. The past two years have skewed the data to make it appear less extreme.

Figure: 3 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.

The objective of this analysis is to normalize the choppy data and get a better sense of the general Money Supply trend. In the table below, decelerating trends are in red and accelerating trends in green. Because of the slower growth seen over the summer, the last three weeks show an acceleration in money supply growth.

This acceleration should help support the stock market and economy heading into Q4. A deceleration, especially one that occurs rapidly, can slow money velocity and put pressure on the stock market. Fortunately, the money supply seems to be heading out of its annual deceleration phase.

Figure: 4 WoW Trailing 13 week average supply growth

The plot below helps show the seasonality of the Money Supply and compare the current year to previous years. The range of the y axis has been capped at 25% so that the massive spike in 2020 up to 60%+ does not skew the graph.

As shown, the trend has moved past the annual summer dip that occurs every year except 2020. The red bar looks to be increasing again. It will be interesting to watch how the Fed tapering might affect the money supply growth rate. If the growth rate turns back down and begins decelerating it could prove very dangerous for the market. Especially considering the seasonal components of the market.

Figure: 5 Yearly 13 Week Overlay

Historical Perspective

The charts below are designed to put the current trends into a historical perspective. The orange bars represent annualized percentage change rather than a raw dollar amount. As can be seen, even the recent periods remain quite elevated compared to pre-Covid, driving total M2 near $21T in the most recent period.

Figure: 6 M2 with Growth Rate

Taking a historical look at the 13-week annualized average also shows the unprecedented growth seen over the past 18 months. 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%.

It could also be argued the pullback in 2018 could be due to an extended lead up of low Money Supply growth compared to previous years. More recently, the stock market has been moving sideways all summer as Money Supply growth has fallen rapidly compared to the prior year. As the Money Supply growth rate has turned back up, the market has been able to make new all-time highs.

Figure: 7 13 Week M2 Annualized and S&P 500

Finally, it is important to consider the massive liquidity buildup in the system. The Fed offers Reverse Repurchase Agreements (reverse repos). Essentially this is a tool that allows financial institutions to swap cash for instruments on the Fed balance sheet.

Current Reverse Repo hit a record $1.6T on Sept 30, dwarfing the old records of ~$500B in 2016-2017. The reverse repos typically top out at quarter-end before coming back down rapidly. That being said, unlike past periods, the pullbacks after quarter-end are much smaller in magnitude. This shows the massive liquidity difference in the current environment.

Figure: 8 Fed Reverse Repurchase Agreements

What it means for Gold and Silver

Inflation is an expansion of the Money Supply that generally leads to higher prices. Therefore, gold and silver can be used as protective assets to protect against dollar devaluation (higher prices). Money Supply has been growing at alarming rates for years now, and absolutely exploded over the last 2 years. It is hard to imagine this will not bleed into the CPI in the months and years ahead, even being designed to understate price increases (e.g. Owners’ equivalent rent).

If price increases prove to not be transitory as the Fed promises, gold and silver could be the biggest winners. With Money Supply growing like it has, “transitory” becomes very hard to believe.

Data Source: https://fred.stlouisfed.org/series/M2SL and also series WM2NS and RRPONTSYD. Historical data changes over time so the numbers of future articles may not match exactly. M1 is not used because the calculation was recently changed and backdated to March 2020, distorting the graph.

Data Updated: Monthly on fourth Tuesday of the month on 3-week lag

Most recent data: Oct 04, 2021

Interactive charts and graphs can always be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/USDebt/