The Money Supply

Hey everyone and thanks for jumping back Into the macro verse 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 Crypto various premium at into the there's been of course a Lot of talk about the money supply over The last several years as the FED Printed trillions of dollars back in March of 2020 and now we have been you Know dealing with the consequences of That due to things like inflation uh for Quite some time we also know that the Money supply has been trending down or So for a little over a year so we want To talk about that a little as well now One of the things you may notice is this Is on a linear scale uh at least the the Metric here that we're looking at the M2 Money supply and of course it is has Been increasing fairly quickly over the Last over the last couple of decades However if you were to switch this to a Logarithmic scale you can see that the Money supply has been following a fairly Well-defined Trend and almost a very Predictable trend for quite some time However there is a deviation from this Trend back in in March of 2020 and Recently you can see we've actually Rolled over and the money supply is Starting to go back down again now

Because it's going down it makes people Want to look at things like the Percentage change on a year-over-year Basis because this is not something that We've really typically seen if you look At least not anytime recently if you Look at a year-over-year percentage Change of M2 you can see that it is Actually quite negative right now to Tune about negative four percent now This is notable considering at least on This chart we don't really see the M2 Money supply going seeing a drop year Over year going you know all the way Back to the 1960s I mean none of the None of these none of the data that we Have here going about the 1960s shows This as as being negative in fact you'd Have to go back I believe Um maybe about a hundred years or so to Find a time when the money supply was Was going down like this into sort of Negative territory when you look at it Year over year now that might sound Pretty bad that the money supply is Contracting and and I I do think that it Is likely going to have a a you know Some at least create some Macro Headwinds for risk Assets in general Until until we start to see some type of Shift in this trend and of course it Could come before then but you may Notice that you know while there's been A lot of talk about where the stock

Market is and what it's doing if you Really zoom in here Um Hazard is more or less remained Unchanged for about a year now right I Mean a year ago we were at these prices We also have these prices back in August Of 2022 we were at these prices back in February 2023 and we find ourselves Again at these prices today now that Might seem somewhat optimistic however If you were to account for inflation Um um I mean in terms of real in terms of real Returns not nominal this is still not Really great right considering inflation Has been so high and to find yourselves With the s p is still the same valuation That it was more than a year ago Furthermore it's you know at the same Valuation that it was at uh you know Back in in early 2021 as well right so You're talking a couple of years and and The s p is more or less at a at a very Similar value despite the fact that We've had record at least record Um inflation at least for the last Several decades so that is something you Know something to consider so the Year-over-year percentage change as I Said is down to negative four percent Now what's interesting though As if you look at a month over month Change you can see that this is actually Going negative going increasingly

Negative Meaning that while it's true that the Money's Supply is going down in recent Months it's actually started to go down More quickly than it was before for Instance if you look at the month over Month percentage change back and say Um May of 2021 is about one and a half Percent and then in December 2021 was 1.1 percent Um in in the July of 2022 0.168 percent In September 2022 negative point six two Six percent and today it's actually a Negative 1.22 so we are not only seeing The money size the money supply contract But we're seeing it accelerate to the Downside meaning it's Contracting even Quicker today than it was say six months Ago or six months before that so that is Something that I at least think is Notable now of course this of course you Know while I do think it provides a Headwind for risk assets until we see Some type of Shift in this trend Um I would also argue that To some degree we are just simply going Back to Trend again if you look at this Chart the money supply here on trading View and we draw and we draw a trend Line going all the way back say 1996 Through the data You could argue that We are just simply trying to get this

Back to Trend and once it gets back to Trend perhaps you know we'll sort of Resume the the normal money printing but It's hard for us to do that right now With inflation so high so again the FED Continues to roll off assets from their Balance sheet rather they're reducing The size of the balance sheet we of Course are dealing with higher interest Rates than we have in a long time and All of this of course will likely Continue to put some type of headwind on Risk assets it doesn't mean you won't Ever see them go higher it just means That Um you know we're still likely going to Be range bound and and we could of Course explore lower prices at some Point Um as as the month as the months pass on But when you think about the the money Supply M2 and and simply going back to Trend it's not necessarily say the Harbinger of Doom that that you might be Tempted to make it out to be right I Mean during pre previous depressions we Saw the money supply go negative but Again we're dealing with a you know with With circumstances here where we saw M2 Goes significantly off of the prior Trend right so to some degree we are Just simply trying to get back to Trend Right Where I become where it could become a

More significant issue is if it goes Below Trend right like if if the money Supply ends up coming like down down Like this then that could be a a pretty Big issue uh it doesn't really seem like The the most likely outcome but it is it Is something that we need to be aware of And and if that happens then I I would Imagine it would put a lot more downward Pressure on on risk assets as it stands Today right as it stands today I think It's likely headed back to the general Trend okay now if it's going back to Trend does that mean that you need to See Um you know that it that it you Necessarily need to see assets respond In kind one of the things I've said Again I think that it will provide a Headwind for risk assets until you see This sort of reverse course and go back Or at least but maybe just before it Reverses course and goes back in the the Other direction now If it just if it goes just simply back To Trend I still think that it's not Necessarily the most bullish thing for Risk assets because if risk assets when When the you know when the money supply Was way up here we saw them get very Very inflated and we've since seen a lot Of them come down right a lot of risk Assets have come down significantly of Course some have rallied right but I

Mean Bank stocks are getting absolutely Annihilated right now Um and and of course various sectors are Are seeing those sort of capitulations At at various times but when you think About going back to Trend it still Likely is a headwind even if we don't Overshoot it to the downside because it Basically gets risk assets back to more Fair evaluations rather than inflated Violations just simply because more Money was printed okay When you print trillions of dollars People are going to seek yield on that Money and one of the places that people Are going to put it of course are in Risk assets so if money is then Destroyed and there's not as much money In the system then I mean it would it Would make sense to me anyways it would Provide some pressure to those risk Assets that at one point it initially Supported so you know I think it's Always a good idea to sort of look at Things as objectively as we can of Course I don't always do the best job of That admittedly but you sort of see both Sides of it right I mean you see the Some people say well money supply year Over year is going down which is is is Not a good thing and and it has only Really happened in in pretty bad times In the economy and that's true and I I Think there's a reason to be concerned

On the other hand when you look at it From a a glass half full perspective you Could argue that it's going back to Trend and so the main conclusion that I Have from this basically is that the Money supply going down is likely a Headwind for risk assets Um the main risk lies with us Overshooting this to the downside until We see this get back to Trend or get to The point where it's going to start Moving back in the other direction I Think it's going to remain a headwind Um and and I just simply don't see that Changing until until the money supply Starts to go back up because you know as Much as we might not want to admit it You know when you look at as say the S P 500 divided by the money supply you'll In fact notice that we're at valuations That we were at back in the 1990s right 1997 we were at the same valuation when Accounting for the money supply okay so Um Another sobering reality if you're still Not on board with this idea is that And I again this is like a a a difficult Pill for I think some people to swallow But the valuation we reached in February Of 2020 just before the March 2020 Capitulation was the same valuation that We peaked at In late 2021 more or less Think about that for a minute right

Think about how crazy it is think about How crazy the rally we had in Risk Assets was in 2021 and 2020 and 2021 Think about how much things went up When you account for M2 we did not go Any higher than or not much higher than Where we were back in in early 2020 just Before the crash occurred so when you Think about it like that it really does Open up another perspective on the Market right to some degree really ever Since the 1990s Most risk assets have gone up Commensurate with the money supply Okay that's just A fact right and that's just something We've seen and so when I think about This chart And I think while if if M1 or sorry if M2 if it going up leads To risk assets going up and if it's and If if risk assets are are basically Trending sideways as a function of M2 Then it means that they're very Dependent on the on the money being Created but if money is being destroyed Then that's why I think it provides a Headwind for these risk assets because Now you're you're you're taking money Out of the system right you're removing Liquidity from the system and therefore You would expect risk assets to sort of Respond in kind but it is really Interesting if you look at this chart

You know a bit you'll you'll find things Where you know prior capitulations right Like the December 2018 capitulation is Is very similar to what what happened Back in September of 2022 Um and and so on and so forth and also The uh the fed the Gen the 2016 Capitulation here was not that different Than what we saw back over here in you Know at the end of Crash if if We were to go back to the lows of era on on this chart I mean it Would still call for another 32 to 33 Percent move to the downside on on on The S P divided by the money supply Chart but again I would encourage you to Go look at a lot of risk assets and just Simply divide it by M2 to see what story Can we you know what what story is the Asset trying to tell is it going up Because the money supply is going up or Is it going up for other reasons right Is it outperforming the the pace of of You know money that's actually being Created so think about it like that and Then we can better understand I think You know the money supply chart We can better understand the Implications of of a year-over-year Percentage change you know it's negative Right and and getting us into this Contraction territory hasn't really been Great a great thing a great indicator in The past it's not necessarily as bad uh

In terms of in terms of just looking at It like this once you account for the Fact that we are likely just going back To Trend be that as it may the fact that It's going down should provide some type Of headwind for risk assets if you guys Like the content make sure you subscribe To the channel give the video a thumbs Up and again check out into the Cryptographers premium at into the I'll see you guys next Time bye


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