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Seasonal Adjustments – Did Money Supply Expand or Contract?

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According to the seasonally adjusted data, M2 expanded by $245 billion in January. However, when looking at the raw, non-seasonally adjusted M2 data, the money supply contracted by $214 billion. That would be the largest contraction since Jan 2013.

How do we parse out this data?

Note: It is very common to see a contraction in January, though this January was much larger than most.

Figure: 1 MoM M2 Change (Seasonally Adjusted)

Figure: 2 MoM M2 Change (Non-Seasonally Adjusted)


Ph.D. economists at the Fed and BLS run extremely “sophisticated” and fancy models to try and smooth out the peaks and valleys in the data (again, January typically shows a dip). Hence why Figure 1 looks less choppy than Figure 2. This recently became an issue with the latest jobs report where nearly all the gains can be attributed to the seasonal adjustments.

Statisticians argue that to reduce noise and better see a trend, the curve should be smoothed using adjustments. For example, if every year Jan – June saw job losses of 100k a year and July – December saw gains of 200k a year, then on average, the economy is gaining 50k jobs a month. In this example, the early months would be adjusted up by 150k and the others down by 150k to create a smooth curve.

Unfortunately, things are never this simple. There are hundreds of variables at play (e.g., holiday shopping, weather patterns, travel behavior, cyclical business, etc.). The models work to account for this and use advanced equations to arrive at adjustments that are considered statistically significant (i.e., they have a 95% chance of being accurate).

The problem being made by the statisticians is two-fold. First, their adjustments and forecasts are almost always wrong anyway (e.g., Great Financial Crisis, 2021 inflation expectations, etc.). Now, most would argue that the adjusted data is more accurate than raw numbers and better shows long-term trends by eliminating short-term noise. In the end, something is better than nothing so they have to work with what they have.

Perhaps, but this leads to the second problem. Real individuals cannot seasonally adjust their life.

If someone loses a job in January that doesn’t come back until June, they cannot magically adjust the numbers to make the transition easier. When the price of steak doubles and a consumer has to substitute chicken, the model does not adjust for the drop in quality of life. When Owners Equivalent Rent only rises by 4.1%, but the actual cost to buy or rent a home increases by 20%, a person cannot magically change the numbers to 4.1%, they will have to pay the full 20% price increase. The point is that adjustments make it easier for statisticians to look at the data, but it ignores the reality on the ground. Could you imagine a military general using the same approach and methodology? They would get obliterated!

Unfortunately, the Fed and BLS claim to have no better alternative. In times of a steady market environment, maybe they are right. But the economy is never stable for long and things are always rapidly changing, now more than ever due to the pandemic. This is why the latest jobs numbers were so heavily adjusted.

And this is why the M2 adjusted and unadjusted are off by a whopping $460B in a single month! The statisticians are forced to make greater assumptions in order to smooth the current data. They are surely correct mathematically, but when you mathematically smooth the path behind you, chances are you will miss the cliff in front of you.

Comparing M2 and the CPI

Rant over! Getting back to the Money Supply, let’s start with seasonally adjusted M2. The graph below shows YoY M2 compared to inflation and Fed Funds. As discussed before, the current trajectory is looking uncomfortably similar to the early 1970s with three major differences.

  1. The money growth has been more extreme
  2. Inflation is actually higher if measured the same way
  3. The Fed is much further behind the curve

As shown below, inflation tends to lag increases in M2 by about 1-2 years. Notice how all the black spikes occur a few years after the large orange bars. While most forecasters are talking about peak inflation occurring now, the chart below suggests we are in the early innings. Keep in mind, inflation only reversed once the Fed brought rates up above the inflation rate. However, this time they are further below the rate of inflation than ever before.

Figure: 3 YoY M2 Change with CPI and Fed Funds

Assuming for the moment that the Fed adjusted January correctly, then the table below shows that M2 is actually accelerating when compared to the 6 month and 12-month averages.

Figure: 4 M2 Growth Rates

As can be seen below, the current rate of 14.5% in January is well more than double the average growth rate for January from 2010 to 2019. According to the Fed adjusted numbers, they are being more than twice as accommodative now than they were in the entire decade leading up to the pandemic when inflation was below their ideal target.

Figure: 5 Average Monthly Growth Rates

The Fed only offers weekly data that is not seasonally adjusted. In the week ending Jan 24, 2022, M2 dropped by -$186B. In the same exact week last January, M2 dropped by -$118B. The current drop is actually the largest weekly drop going back to Feb 2019.

Figure: 6 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. Decelerating trends are in red and accelerating trends in green. Money Supply growth on a 13-week annualized basis was flat or accelerating for 19 weeks in a row. It has now started to turn negative.

Figure: 7 WoW Trailing 13-week Average Money Supply Growth

The plot below helps show the seasonality of the Money Supply and compare the current year to previous years. It shows that this is not uncommon for early in the year. That being said, 2022 is starting off below 2021.

Figure: 8 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 the raw dollar amount. As can be seen, even the recent periods remain quite elevated compared to pre-Covid.

Figure: 9 M2 with Growth Rate

Taking a historical look at the 13-week annualized average also shows the unprecedented growth seen over the past 24 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 might be argued that the current pullback could be due to the deceleration seen entering January. However, it’s hard to consider the current pullback significant when looking at the blue line holistically.

Please note the chart only shows market data through Jan 31 to align with available M2 data.

Figure: 10 13-week M2 Annualized and S&P 500

One other consideration is 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 $1.9T on Dec 31, dwarfing the old records of ~$500B in 2016-2017. The latest rate is $1.7T (up $100B from last month). The reverse repos typically top out at quarter-end before coming back down. However, unlike past periods, the recent pull-backs after quarter-end are much smaller in magnitude, staying elevated throughout the quarter. This shows the massive liquidity difference in the current environment. Can March 31 take out the Dec 31 high?

Figure: 11 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 insurance assets to protect against dollar devaluation (higher prices). Money Supply has been growing at alarming rates for years, and absolutely exploded over the last 2 years. It should be no surprise to any rational individual that this has shown up big time in the CPI, even after all the adjustments. Unfortunately, the Fed may be too deep in their models to see the cliff.

Is it still possible that inflation gets back under 2%? Possibly, but it doesn’t look probable. Chances are, raw M2 will rebound next month and start moving up. It might not be enough to keep the economy and stock markets inflated, so the Fed will go back to QE. Looking at how things unfolded in the 1970s and the similar lead-up, wealth preservation with precious metals may be something to consider.

Data Source: and also series WM2NS and RRPONTSYD. Historical data changes over time so 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: Jan 31, 2022

Interactive charts and graphs can always be found on the Exploring Finance dashboard:

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