The Money Supply

Hey everyone and thanks for jumping back Into the macroverse today we're going to Talk about the money supply or M2 if you Guys like the content make sure you Subscribe to the channel give the video A thumbs up and check out into the Cryptographers premium at into the let's go ahead and jump In in this video we are going to look at The money supply in a number of Different ways we're going to first look At the raw data and look at the Year-over-year percentage change maybe Even look at it on some other time Frames as well then we're going to look At it in a different way and that is to Adjust for inflation which I think is is It opens up some insights that you will Not get if you ignore inflation so I Want to go through this fairly Systematically I think there is some Confusion on Twitter uh on how to how to Read some of these charts and the Ramifications of what it means or what It doesn't mean so let's just cover Everything as best we can alright so Essentially what we have here is we have M2 the money supply which is the Orange Line the blue line is the S P 500 and That's just there for your reference I'm Probably not going to talk much about it But you know as we go through the charts You can see where the s p is and then These gray shaded regions are recessions

Right now clearly all recessions are not Brought on by changes in the money Supply I mean it's obvious they're Normally brought on by you know the Unemployment rate going up or something Like that Um but it's just there so that it's just There for your reference okay now the Money supply in this case we're talking About M2 and the way M2 is calculated is Essentially M1 uh Plus near money which Is savings deposits money market Securities and time deposits such as CDs We talked about CDs before certificates Of deposit uh this is you know we've Talked a lot about interest or in fixed Income investing as rates have gone up It's opened up different types of Investment vehicles for you know for for Millennials that I mean for everyone but Right Millennials haven't even really Seen these types of investment options Because interest rates have just been so Low for so long but now they've gone up A lot And so more people have have gotten CDs Uh so it's it's M1 plus all that stuff And again M1 is the M1 money supply Includes currency demand deposits and Other liquid deposits so when we think About M2 we can think about it would Generally expand right like you would Generally think that as as the economy Grows as there's more people uh we would

We would expect for the money supply to Generally expand if it were going down Then you would have to start to wonder Well how is that going to affect you Know prices of things if if the amount Of money in circulation is going down What would that do to the prices of Goods and services and risk assets right How would that affect things and the Reason why that's important is because You know in 2020 when the FED printed Six trillion dollars we saw asset prices Go up a lot but we also saw asset prices Come down a lot in 2022 and and you know Some have been continuing to come down And many have have you know put in new Lows even as recently as this week Depends on where what sector you're Looking in but It's important to understand you know What are the ramifications of the money Supply going down so what I want to do Is first of all if you look at this Chart you'll see that this is the first Time at least going back to say the 1950s That into Has gone down right now is it the first Time ever no there have been plenty of Periods in history where M2 has gone Down year-over-year percentage change Just not the knot that we have at least Supported on this chart but if you were To go back a few more decades before the

50s you would find a time when that Actually happened but what I want to Talk about more specifically is what are The ramifications of this and you know There's certainly different ways to look At it okay there's sort of the the glass Half full approach and the glass half Empty approach depends on kind of who You are and and I guess what your bias Is but One way to look at this is is we're Going to just go to look at the year Over year Percentage change And you'll see that it's at negative 4.63 percent meaning the money supply is Almost five percent less now than it was A year ago at this time almost five Percent less If you look at it where it was last Month it was 3.95 percent less before That 2.29 before that negative 0.887 Right so we've been getting increasingly Negative okay the money supply has been Contracting now there has been some Confusion on how do you read these Charts you might look at this chart And think that if it's going down like It was say over here in the 80s you Might look at that and say that the Money supply is Contracting but that is Not true this is the derivative right It's a rate of change it's like you know If think about it this way

If this number is positive Then It's expanding it might be expanding at A lower at a slower Pace but it's still Expanding think about if you had you Know real GDP come in one quarter at say Three percent and then the next quarter Was at two percent you wouldn't say that The economy is Contracting just because It only grew at two percent if it grew At three percent the previous quarter You would say no it's still expanding It's just the rate at which it expands Is is slowing down it's the same thing With inflation that I think a lot of People get confused about there's a Difference between disinflation and Deflation Inflation is coming down in in many Sectors so we're seeing disinflation but Just because it goes from eight percent Year over year to five percent Year-over-year doesn't mean that we're In a period of deflation the prices of Goods and services are still generally Going up they're just going up slower Than they previously were okay so we Need to understand that so if the rate Of change is going down As long as it's still above zero it Still is expansionary right like it Still is we're in a phase of expansion Okay if it's below zero If you see the year over year percentage

Changes below zero Then we're in contraction This is a year over year okay now There's other ways you can look at it I Mean you could look at at quarter over Quarter and and see some you know some Some different Trends I mean there are Definitely very brief periods like you Can see in 1992 there was a period Quarter over quarter where it dips Slightly negative and again in in 1993 Where it dipped slightly negative and Then Um you can see right here in January of 2004 a quarter over quarter slightly Negative as well Maybe no not even here so looking at a Quarter over quarter there's a few times Where it dipped very very slightly Negative but It was not a sustained move in any way I Mean this has been going quarter over Quarter uh for a while now okay so Clearly this one is an outlier compared To these and when you look at it on a Year-over-year basis There's no contraction going on Okay it is you know you could say that You know this is just noise quarter over Quarter it's just noise and the more Sustained trend is more so captured in The year over year percentage change it Helps to reduce some of the noise Um

So in this case right if you're looking At it from the the early 80s until say The mid 90s you you know you might Instinctually look at this and say well M2 is Contracting but that's not Actually true it's still going up it's Just going out of a slower pace and if You think about it we can go look at the Sort of just the raw data I mean you can See it clearly right in the 1980s Through the 90s I mean M2 is going up It's just at various points the rate at Which is going up is is slowing down but It's still an expansion Right now it's not an expansion it's in Contraction Okay so you can look at the year over Year percentage change and see that it's A negative 4.63 now let's look at the Quarter over quarter again just to sort Of see what what direction it is it's Trending at least recently Um and you can see recently quarter over Quarter it's getting increasingly Negative right so the rate at which the Money supply is dropping has been Increasing quarter over quarter more or Less Um and and so that's something something To consider but If you just think about it in general Right like if if asset prices go Up when money is printed you would sort Of expect there to be a headwind when

Money is is sort of destroyed But there's also a glass half half full Approach to this as well and that's to Say well if we switch this over to a Logarithmic scale you might say well why Switch to a log skill when you're Dealing with something like you know the Something that's spanning several orders Of magnitude like the money supply and Stuff of that nature then you know Looking at a log scale makes sense and You can see this trend emerge if you Look over the last um you know several Decades there is a clearly well defined There's pretty well defined Trend uh in The money supply and it wasn't until March of 2020 that it really expanded Upward you can see that I expanded from Around you know 15 trillion all the way To over 21 trillion so we essentially Added 6 trillion into the system in a Relatively short period of time now had This not occurred and we had just stayed Upon on Trend we probably would be Closer to maybe like 19 trillion or so By this point so the fact that it's Still a well above Trend You could argue An optimist might say well that gives us Some wiggle room right we're just trying To get back to Trend and I think the Economy uh it sort of recognizes that Right I mean there's and we've talked About this before as well right like When you look at job openings there's

This idea of let's just get back to Trend you know one of the reasons the Labor market hasn't softened up is it's Not because people haven't been getting Laid off a lot of people have been laid Off but it's just that when you look at Things like job openings For various sectors let's just look at Total non-farm there's a trend here as Well and we're still technically above Trend it's coming down but it's above Trend and so that's I think one of the Reasons why it's important to consider Well what was the previous Trend and Where are we in relation to it so in This instance We're still above Trend right we are Coming back down but there's still Plenty of wiggle room for us to come Back down and get back to Trend and then Start and then start you know trending Back up again and hopefully between now And then inflation comes back down to Earth so that we can have another phase Of economic expansion but there's Another way to look at this as well Which I think it's important it's not a Way we've looked at it I believe not on This channel anyways although I'm sure Some people have covered it That's to adjust for inflation okay so To recap right to recap when you look at The money supply It generally goes up

When you look at it year over year you Can see that there's only one phase of Sustained contraction in the last you Know 60 years or so you'd have to go Back a few more decades to find a period Where the month over or the year over Year money supply change was negative Okay you'd have to go back a few more Decades Um So that's one thing to consider But When you adjust for inflation there's a Completely different story that can be Told okay so now we're going to do that Inflation adjusted you can see it's False now we're going to click on true Now it looks a little different doesn't It now This is not the only period where M2 has Gone down Right I mean you can see that I mean it has Gone down a lot when you adjust for Inflation But there's also periods over here During the 70s which was also during an Inflationary period where adjusted for Inflation M2 was going down Okay so let's look at that year over Year Percentage change negative nine percent Negative nine one four percent to be Exact so inflation adjusted M2 is down

Over nine percent year over year when You don't adjust for inflation it's only Down four point six three percent year Over year so a clearly right inflation Has had a pretty big impact here and we Know that I mean you know headline Inflation is around five percent so This gives us something else to compare To in recent history again if you were Not to include inflation it inflation it Does it you'd have to go back to say Like uh a few more decades like the 1920s 30s that's that sort of time frame But when you adjust for inflation there Are periods that you can compare to okay Now The first thing we'll note is that this Is more negative than it's been on this Chart right so there are periods where It's gone negative but the the furthest It's gone negative is maybe around Negative five negative six percent in The night in the early 1980s okay at Least on the time frames that we have on This chart A Counterpoint is to say well that may Be true but we also just went more Positive than we have on this chart as Well so what you're sort of seeing here Is you're seeing things swing Aggressively in One Direction and then Just as aggressively more or less going Back in the other direction okay so Rather than have just a you know a

Normal period it's just we we printed a Lot of money really quickly and now a Lot of that money is being taken back Okay So Um Negative 9.1 per one negative 9.14 Percent year over year percentage change And if you look back At other times where it was like this You can see here's an example in the Early 1980s where you can see that it Came down to about negative six and a Half percent or so the market was you Know during this period you could see That it was going into it it trended Down for a little while we popped back Up had a correction turned it higher a Little bit and then we had you know and Then we had this Um longer longer bear Market in the 1980s where it you know it basically we Had a we had a double a double sort of Like a double dip recession we had one Very brief recession uh the market Continued higher and they're like oh Well we actually do need to get Inflation under control so let's just Induce another recession and get it Under control and then you can see we Had another bear Market that essentially Lasted from say you know early 1981 January 1981 February 1981 all the way Until say July of 1982 so it lasted

About you know 18 months or something Like that Um And that came after that that bear Market came after the money supply year Over year change started to go back up Right it was after after that period And that's not the only thing we compare To if you compare to say 1973 you can See that it went negative during that Period we were still we were already in A bear market and we continued that bear Market and that bear Market essentially Lasted until This turned back up right and it wasn't Really until this turned back up that The market that the S PS turned back up In a sustained way and then there's one More example here where it went down to About negative four percent or so and You can see in this case the market by The time it turned negative we were Already in a bear market and the bear Market continued Um until just after the year-over-year Percentage change started to go up right So year over year percentage change of M2 money supply uh inflation adjusted Started to go back up here so it was Still negative right it was still Negative but it was getting less Negative right so it was still Contraction but the contraction wasn't As bad it was we were trending in the

Right direction and the market continued To go down for a little bit longer and Then once this trend became you know Sustained you can see that the the s p Started to really recover okay Now there's another period here in the And you can see in like 1989 Um and uh 1990 where it went slightly Negative like negative two percent or so During that period Um you know the stock market so it first Rallied for a little bit and then in September 1989 uh it basically just went Flat until February of 1991 so about you Know 18 months or so where the market Was just relatively flat during this Period but then you can see that it was Slightly negative uh two between one to Two percent and the market just sort of Slowly grinded higher Um for for you know a couple of years Okay so Where are we here right I mean like There's not really a great spot to Compare at least not going back to say Like the late 1950s the the times that Appear the most similar to this would of Course be the 1970s but two of those Examples you can see that the s p was Already in a bear market and the bear Market did not really get over we did Not really finalize until the Year-over-year percentage change in the Money supply M2 was starting to become

Less negative and then the last one Again in early 1980 Um the market was sort of trending up Into this negative period but then Eventually once it once it in once it Started to become less negative then you Can see we started another bear Market That lasted you know basically again From the early 1981 from early 1981 Until about August of 1982 so again About about 18 months or so So you know of course when you're Looking at it right now it will it's Important to consider how far how far Will this go before it turns back around Certainly money being destroyed would be A headwind for risk assets it doesn't Mean that risk assets can't go up some I Mean like a lot of risk assets have gone Up some some have put in new highs some Have put in new lows as recently as this Week right it all depends on on you know What your bias is right if you if you Look at say Nvidia it's been doing Pretty well right it just put in a new High if you look at Regional Banks you Know they didn't get the memo that the Economy is doing well right I mean a lot Of them have not been doing that well Um And I mean there's some other stocks That haven't been as well so and it Really all depends on where you look Right it really does depend on where you

Look uh crypto I mean Bitcoin is is has Been doing fairly well this year but It's also coming off the back of of 2022 Which was more or less down only so One other way to look at this right and I don't want to go too much longer Because I don't I mean I know these Videos aren't really that appealing but When you look at Just sort of the inflation adjusted Rate or not rate of change we're just Looking at the raw data so remember Non-inflation adjusted Well Log scale you can see we're well Above Trend okay we're still well above Trend even though it's rolled over if You adjust for inflation I don't know That you can necessarily make the case That we're well above Trend you might Say that we're back to Trend right now Wouldn't you If you just look at the screen And sort of draw an imaginary line Through this through this right here you Would argue that we're already back to Trend based on on what we've currently Seen so I think the risk the inherent Risk Is if this continues to go down and Becomes increasingly negative like it Has been I mean you're looking at you Know negative 0.4 negative 2.27 and Negative three and you know and it just Keeps getting worse and worse and worse

Um That is something that you know could be A a very strong headwind for risk Assets Now you also should I I suppose we Should look at at where it started to to Really start to roll over here And it was in um you know December of 2021 Um and so I mean of course when you Compare April 2023 you're comparing it To April of 2022 so I guess I guess the Downtrend had already started but the Point in all this is to say like you Know when you don't adjust for inflation It certainly seems like we're well above Trend so it doesn't look that bad if you Adjust for inflation we're not that far Above Trend okay so it all depends on on How you look at this data and and I I Also suppose that it probably depends on What your bias says I mean you know if You're if you're a bull you're probably Just going to say well uh non-inflation Adjusted we have plenty of room to go Down and it's still not a big deal if You're a bear you probably would say Well we're kind of already at Trend and Normally when the money supply contracts That's going to be a headwind for risk Assets as we saw you know about 90 90 Years ago so just something to think About uh we'll see where M2 ends up in The in the coming months and if it and If it does turn back around and if it

Does turn back around then we'll start More so comparing to sort of these three Prior times over here where you can see It went pretty negative and then turned Back around note that the furthest Negative it went in 19 uh in the 1970s 1980s was around negative six and a half Percent and right now it's already at Negative nine point one four percent the Biggest Counterpoint of course is that Um before this negative six and a half Percent move the highest it went back Over here was you know seven seven point Nine three percent okay the highest it Went here Was 24.75 right so it's not comparing The same thing right a lot of money was Printed and now they're trying to undo Some of the mess they created because it Created all this inflation that they're Trying to get rid of okay So but hopefully this has been useful to You guys I'm not going to keep you any Longer thank you for tuning in make sure You subscribe if you're not subscribed Give the video a thumbs up and again Check out into the cryptoverse premium Uh into the see you guys Next time bye


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