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M2 Peaking as Reverse Repo Drains to ZeroThe reverse repo balance at the Fed represents trapped liquidity. When this balance comes down it means liquidity is released into the economy and markets. The M2 level lags the change in reverse repo by about 300 days. Because reverse repo changes have been steady for some time, it is possible to draw a trajectory for reverse repo going to zero, and then M2 peaking out. This would coincide with a potential topping process for SPX as shown in the lower pane of the chart.
FRED:M2SLShort
by DarklyEnergized
Global Liquidity: A Turning PointLooking at the state of global liquidity, I believe we're in a solid position for some longer trades. The chart reflects a potential inflection point, suggesting that liquidity could increase over the next six months. This aligns well with my base case that we may see a gradual rise in liquidity, supported by macroeconomic tailwinds. From a strategy perspective, this appears to be a prime opportunity for longer-term spot positions in miners, Bitcoin, and metals. These assets are historically well-positioned to benefit from rising liquidity conditions, and current levels offer an attractive entry point for patient investors. While short-term volatility is always a possibility, the broader trend signals that this could be a pivotal moment for accumulation in these sectors. Patience and conviction will be key in riding this next wave.
FRED:M2SLLong
by martinxi5u4
M2 needs to move to historic trend to avoid massive risks.The United States has the capacity to bailout the retirement system for Boomers and Millennials if we do not blow the "dry powder" of American Exceptionalism on pumping up the economy and markets for political and 1%er gains. America will be at peak Boomer dependence on Social Security & Medicare around 2030 and will not see a reduction of that dependence until more Boomers have crossed the Rainbow Bridge than Xers retiring. During the 2040s there will be a reprieve for the retirement system, but then in the 2050s the Millennials retire putting strain back on. The United States needs a sustained period of 3%+ GDP growth, moderate to low energy prices and productivity gains driven by technology. America should probably also merge & standardize Medicare & Medicaid to eliminate waste and fraud (Trumpcare?), as well as, start putting about 20-25% of Social Security payroll taxes into the S&P 500, 600 & 400 indexes with the rest in special 3% rate UST in the "lockbox" that Al Gore talked about 25 years ago. That will require seed money in the form of $10-20 trillion of QE, aka, the dry powder we can't waste.
FRED:M2SL
by Kirk_Spano
M2 supply seasonality - sell in may & go away until OctoberUsing this formula: (FRED:M2SL+ECONOMICS:EUM2+ECONOMICS:JPM2+ECONOMICS:CNM2+ECONOMICS:INM2+ECONOMICS:GBM2+ECONOMICS:CAM2)/100000000000000 This formula includes US, EU, GB, CAN, JP, In & CN M2 money supply. You can clearly see M2 money supply seasonality changes, rounding consolidation from June1st & going up starting from October. Every time - for the last 5 years very clearly. More global liquidity should drive the markets up.
FRED:M2SLLong
by strip
2
The most important chart in your trading career.Merry Christmas to all, I hope you and yours are well. My present to you this year is the one chart you should ALL be watching. SPX/GOLD Risk On (Equities), Risk Off (Gold). It will save you a TON of time/headaches, if you follow this chart. In this video I go over why you should use it. How your portfolio would have been managed the last 50yr, and at the end give a quick method for managing your ratio between Risk On/Off. As always, good luck in your trading, have fun, and practice solid risk management.
FRED:M2SL
by mrjones2020
7
Inflation SupercycleOn the afternoon of October 3rd, 2023 something unprecedented happened in the U.S. Treasury market. For the first time ever, bear steepening caused the 20-year U.S. Treasury yield and the 2-year U.S. Treasury yield to uninvert. Bear steepening refers to a scenario in which long-duration bond yields rise faster than short-duration bond yields, as bond yields rise across the term structure. In all past instances, inverted yield curves have normalized due to bull steepening . The probability that bear steepening would cause an inverted yield curve to normalize is so low that, until now, most term structure models excluded the possibility of it ever happening. In this post, I'll explain why this anomalous event is a major stagflation warning. The chart above shows that the 10-year Treasury yield has been rising much faster than the 3-month Treasury yield throughout 2023, narrowing the once-deep yield curve inversion. Since a yield curve inversion indicates that a recession is coming, and bear steepening indicates that the market is pricing in higher inflation for the short term, and even more so, for the long term, then bear steepening during a yield curve inversion indicates that high inflation may persist even during the recessionary phase. High inflation during the recessionary period is what defines stagflation . Since very strong bear steepening is normalizing a deeply inverted yield curve, the combination of these events is a warning that severe stagflation is likely coming. High inflation has caused Treasury yields to surge at an astronomical rate of change. Bond prices, which move in the opposite direction as yields, have sharply declined causing destabilizing losses. The effects of these massive bond losses are not even close to being fully realized by the broad economy. The image above shows a bond ETF heatmap with year-to-date returns. Large losses have been mounting across numerous bond ETFs. Long-duration Treasury ETF NASDAQ:TLT has declined by more than 18% this year. Click here to interact with the bond ETF heatmap Despite the extreme pace of monetary tightening, many central banks are still struggling to contain inflation. Inflationary fiscal spending and ballooning debt-to-GDP levels are confounding central bank monetary policy efforts. In Argentina, for example, inflation continues to spiral higher despite the central bank raising interest rates to 133%. The chart above shows that the central bank of Argentina has hiked interest rates to 133%. Despite this extreme interest rate, the country's inflation rate continues to spiral higher. In an inflationary spiral, there is no upper limit to how high interest rates can go. As the Federal Reserve tightens the supply of the U.S. dollar -- the predominant global reserve currency -- all other countries (with less demanded fiat currency) generally must tighten their monetary supply by a greater degree in order to contain inflation. If a country fails to maintain tighter monetary conditions than the Federal Reserve, then the supply of that country's (lesser demanded) fiat currency will grow against the supply of the (greater demanded, and scarcer) U.S. dollar, causing devaluation of the former against the latter. In effect, by controlling the global reserve currency, the Federal Reserve is able to export inflation to other countries. This phenomenon is explained by the Dollar Milkshake Theory . The forex chart above shows FX:USDJPY pushing up against 150 yen to the dollar. The longer the Bank of Japan continues to maintain significantly looser monetary conditions than the Fed, the longer the yen will continue to devalue against the U.S. dollar. The meteoric rise in bond yields is particularly concerning because it has broken the long-term downtrend, signaling the start of a new supercycle. After hitting the zero lower bound in 2020, yields have rebounded and pierced through long-term resistance levels. The chart above shows that the 10-year U.S. Treasury yield broke above long-term resistance, ending the period of declining interest rates that characterized the monetary easing supercycle. We've entered into a new supercycle, one in which lower interest rates over time are a thing of the past. The new supercycle will be characterized by persistently high inflation. It will start off insidiously, with brief periods of disinflation, but over the long term it will accelerate higher and higher, ultimately causing today's fiat currencies to meet the same fate that every fiat currency in history has met: hyperinflation. * * * Important Disclaimer Nothing in this post should be considered financial advice. Trading and investing always involve risks and one should carefully review all such risks before making a trade or investment decision. Do not buy or sell any security based on anything in this post. Please consult with a financial advisor before making any financial decisions. This post is for educational purposes only.
FRED:M2SL
by SpyMasterTrades
46
The Fed Must Pivot When This Happens...We can try to predict when the Federal Reserve may pivot to a less hawkish stance by using charts. Below are some helpful charts. 1. Money Supply The chart shown above is a monthly chart of the U.S. money supply (M2SL). The white line shows the money supply over time. Below the white line is a stepped moving average (9 period), which I consider the 'steps of a debt-based economy'. In order for our debt-based economy to persist, the money supply must continue moving up these steps endlessly. For reasons beyond the scope of this post, if the money supply falls much below this level a financial crisis is likely to ensue due to credit and liquidity issues. Below are some examples in which money supply came down to the stepped moving average before climbing higher. Not even during periods of higher inflation did the Federal Reserve let the money supply fall below this level. Therefore, the closer the money supply comes to this stepped-moving average, the more likely we are to see the Fed pivot to a less hawkish stance. Since money supply is largely negatively correlated to the value of all assets priced in U.S. dollar, reaching this level may also be somewhat of a buy signal for these assets (e.g. stocks, Bitcoin). Indeed, the fact that money supply always goes up is a large part of the reason why the stock market always goes up, too. Whereas if inflation becomes so severe that it forces the Fed to take the unprecedented step of dropping the money supply below this critical level, then a financial crisis will likely ensue. Indeed, under the surface a crisis is already brewing. (You can see my posts linked below for more charts on this). 2. Eurodollar Futures It is generally accepted that the Eurodollar Futures chart is one of the best leading indicators for the Fed Funds Rate. (Don't know what Eurodollar Futures are? See the link at the bottom of this post.) Therefore, when Eurodollar Futures plateau or begin dropping, we can expect a Fed pivot. However, this assumes that the Fed Funds rate has actually reached the terminal rate implied by Eurodollar Futures, which has not yet happen because the Fed is so far behind the curve with hiking. Keep an eye on how markets react to quad witching on September 16th, the time at which stock-index futures, options on stock-index futures, single-stock options and index options simultaneously expire. This period has been known to generate significant volatility. See the bottom of this post for more information about quad witching if you're unfamiliar with it. 3. Yield Curve Inversion Usually around the time or shortly after the yield curve inverts, the Fed pivots to a less hawkish stance. Right now the 10-year and 2-year yields on treasuries are inverted. Below is a chart of the US10Y/US02Y ratio. In the below chart, I marked the points at which the Fed pivoted in the past (pivots were measured by marking the last date the Fed raised rates). The values that you see labeled on the bottom right are the values of the US10Y/US02Y ratio at the time the Fed pivoted in past hiking cycles. In the chart below, I zoomed into the current time. As you can see, the US10Y/US02Y ratio is currently below all the levels at which the Fed previously pivoted. Green is the highest ratio at which the Fed pivoted and red is the lowest ratio at which the Fed pivoted. The chart above shows that we are in uncharted territory in the scope of yield curve inversion that the Fed has created. The fact that the Fed has forced the yield curve invert to this extreme degree and has still not pivoted is likely reflective of one or both of the following hypotheses: (1) The Fed started hiking rates too late. (2) The factors of inflation from the demand side and/or supply side are worse than we experienced in the past (since at least 1988 -- the period covered by the data in the chart). Nonetheless, the Fed must pivot soon or risk causing a financial crisis. My hypothesis is that an inverted yield curve can have the effect, among others, of destroying money. Since some banks borrow at short term rates and lend at long term rates, an inverted yield curve makes this less profitable or even unprofitable. Therefore some banks will lend less. Since bank lending creates the most money, an inverted yield curve can decrease the money supply substantially. The Fed cannot let this monetary phenomenon continue for long without causing significant issues. 4. Inflation Of course the biggest consideration for the Fed is the rate of inflation. The next CPI report is not scheduled to be released until the morning of September 13, 2022, but we can use chart analysis to, with a high degree of certainty, predict the rate of inflation. The above chart is a chart of the price of gold (GOLD) multiplied by the Commodity Index Tracking Fund (DBC). This chart allows us to extrapolate both the supply and demand side of inflation to a high degree of certainty. It is a statistically valid leading indicator for the inflation rate. You can see how drastically it has fallen recently. You can also see how closely it matches the chart of the inflation rate on a lagging basis. For those interested in the statistics GOLD*DBC correlates to USIRYY as follows: r = 0.904, r-squared = 0.8844, p = 0 In the chart above I provide an even better correlation to the rate of inflation. In this chart I provide the total securities sold by the Federal Reserve as part of their overnight reverse repurchase facility, I then attempted to improve the correlation values by adjusting the value by using the price of gold as a multiplier. Although this may sound complex to those who are not familiar with the repo facility, in short it just represents the amount of dollars that the Fed is pulling out of the banking system. To diminish the effect of any non-inflationary factors that would cause the Fed to do this, I adjusted the value using the price of gold. Recently, the Fed has been pulling less dollars out of the system and on some days it has actually been putting more dollars back into the system. The Fed would not be putting more dollars into the system if inflation were still spiraling out of control. While anything can happen in the future, and additional inflationary shocks can occur, this equation gives us a tool to predict the rate of inflation before the CPI report is published. For those interested in the statistics, GOLD*RRPONTTLD correlates to USIRYY as follows: r = 0.954, r-squared = 0.94, p = 0 In the chart above, I've adjusted the values to match the inflation numbers as best as I could (I simply used a divisor that equates the peak values in both charts). It is far from perfect and it is definitely not something that you should use to trade on. The number that is actually reported by the government could be way different. The best that we, as traders, can ever do is use charts to try to predict what may happen, which is what I've done here. More information about Eurodollar Futures: www.investopedia.com More information about Quad Witching: www.investopedia.com
FRED:M2SL
by SpyMasterTrades
108
How to Build Wealth (Even During Monetary Tightening)One question that many investors are asking right now is: How can I build wealth during monetary tightening? To answer this question, one must understand how the money supply works. The Money Supply The money supply refers to the total amount of currency held by the public at a particular point in time. M2 is one of the most common measures of the U.S. money supply. It reflects the amount of money that is available to be invested. M2 includes currency held by the non-bank public, checkable deposits, travelers’ checks, savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds. The chart above is a time-compressed view of the money supply. The time scale has been compressed such that the money supply appears as a vertical line with clusters of dots. Each dot represents a quarter (or 3-month period). During periods of monetary easing, when the central bank accelerates increases in the money supply, the dots stretch wider apart, as shown below. During periods of monetary tightening, when the central bank decelerates increases in the money supply, the dots tighten together. In rare cases, the central bank can reduce the money supply to fight inflation, in which case the dots can retrograde. The central bank rarely reduces the money supply because it usually results in economic decline. The Money Supply and The Stock Market Since the money supply reflects the amount of money that can be invested in the stock market, the stock market tends to track the money supply. As the money supply (M2SL) grows so too does the stock market (SPX). The chart above shows that despite the stock market’s oscillations, over the long term, the growth rate of the stock market tends to track the growth rate of the money supply. The stock market goes up, in large part, because the money supply goes up. The chart below is from the book Stocks for the Long Run by Jeremy Siegel, Professor of Finance at the Wharton School. The chart shows that compared to other asset classes, stocks generally perform the best over time. Stocks generally perform the best over time because the growth rate of the stock market generally tracks the growth rate of the money supply fairly well. Investing in the stock market is therefore an efficient means of preserving wealth over the long term. One will always be better off investing in assets that grow in price at a faster rate than the rate at which the money supply grows than investing in assets that do not. When the money supply decreases during periods of monetary tightening, as is happening right now, only assets that outperform the money supply can produce positive returns. Knowing these facts, we can reach the following conclusion: Generally, investing in the stock market does not intrinsically build wealth, it merely efficiently preserves wealth over time against the perpetual erosion of an ever-increasing money supply. To build wealth one must invest in assets that grow in price faster than the rate at which the money supply grows . Preserving Wealth vs. Building Wealth As noted, to build wealth one must invest in assets that move up in price faster than the rate at which the money supply moves up. Investing in assets that move up in price over time, but at a rate less than that which the money supply moves up over time may seem like a good investment to an investor if the investor is making money, but such investments are not typically wealth-building. These investments are merely some degree of wealth-preserving. When the price of an investment increases over time at a rate less than the money supply, that investment causes a loss of wealth, despite giving the investor the perception of increased wealth. A loss of wealth occurs because the investor’s purchasing power is decreasing over the period of time which the investment is held. Purchasing power is the value of a currency expressed in terms of the number of goods or services that one unit of money can buy. It can weaken over time due to inflation. To keep things simple, let’s assume that other elements of inflation, such as money velocity, remain fairly constant and that an increasing money supply is the main cause of inflation. Let’s consider some case studies. Case Study #1: REITs Suppose an investor, John, invests his money in real estate investment trusts (REITs), specifically BRT Apartments Corp. John is a smart investor and does research before investing. In his research, he sees that BRT has decent profitability and a fair valuation. He also sees that BRT has decent growth potential. After analyzing fundamentals, John does technical analysis. He sees the below chart which shows a decades-long bull run. (Chart has been adjusted to include dividends) He thinks to himself: This asset is a money maker. Despite periods of corrections, price generally goes up over time. John then buys shares of BRT as part of a long-term investment strategy. John has done his due diligence and indeed he is right that, over the long term, his investment is likely to make quite a bit of money. However, if John invests in this asset, although he will make money, he will lose wealth or purchasing power. That’s because the Federal Reserve is increasing the money supply at a rate that is faster than John’s investment grows. Here’s a chart of BRT adjusted for the money supply (and adjusted to include dividends). Adjusting the price of BRT by the money supply shows a clear downtrend over time. This means that while BRT is growing in price and its investors are making money, BRT’s investors are generally losing purchasing power over time by investing in this asset because the central bank is increasing the money supply at a faster rate than the rate at which BRT's price grows. By increasing the money supply exponentially over time, central banks trick people into believing that they are building wealth by investing when in fact most investments are, at best, some degree of wealth preserving. Only a minority of assets outperform the money supply, and usually, that outperformance is temporary. In the era of monetary easing, during which central banks drastically increased the money supply using various monetary tools, perceived wealth skyrocketed. However, actual gains in purchasing power or improvement in living standards, as measured by increased productivity, largely did not occur. You may be thinking that I simply chose a bad investment to demonstrate my point. While BRT is actually a great investment relative to most other assets, let's move on to the second case study: an asset that has skyrocketed in price in recent years. You will find that even for assets that have outperformed the growth in the money supply, the period of outperformance is usually temporary. Case Study #2: Microsoft (MSFT) Microsoft is an example of a stock that has outperformed the growth rate of the money supply in recent years. Below is a chart of MSFT adjusted for the money supply. The chart shows that although the growth in MSFT's price generally outperforms the growth rate of the money supply, it undergoes prolonged periods of underperformance when investors can lose wealth. This wealth loss effect cannot be fully ascertained by looking only at a chart of just MSFT's price. It only becomes fully apparent when one compares the stock's price to the money supply. Tech stocks have generally outperformed the money supply since the Great Recession. They were excellent wealth-building investments. However, now that the central bank has begun monetary tightening, interest-rate-sensitive tech stocks are especially likely to decline. Investing in these assets while the money supply is decreasing, and while interest rates are surging, may result in loss of wealth. Case Study #3: Utilities (XLU) The chart below shows how well the utilities sector performed over the past two decades. Let’s adjust the chart to the money supply. (See chart below) You can see that XLU moved horizontally relative to the money supply, meaning that it merely preserves wealth to varying degrees but does not generally build wealth over the long term. By including the money supply in our charts, we remove the confoundment of monetary policy and elucidate the true intrinsic growth potential of assets. Case study #4: ARK Innovation ETF (ARKK) Look at the chart below which shows ARK Innovation ETF (ARKK), managed by Cathie Wood, relative to the money supply. Cathie Wood’s investment choices have actually caused a loss of wealth since the fund’s inception in 2014. You can see in the above chart that price is slightly below the center zero line, which means that wealth has been lost by those who invested in ARKK in 2014 and held continuously to the current time. Finally, check out the below chart of SPY relative to the money supply. The entire post-Great Recession bull run in SPY was merely a recovery of the wealth lost since the Dotcom Bust, over 2 decades ago. The stock market is ominously again being resisted at this peak level. The below chart shows that the stock market has given back much of the wealth built since the pre-Great Recession peak. In summary, wealth-building requires investing in assets with a growth rate that is greater than the growth rate of the money supply. To accomplish this, an investor should compare an asset against the money supply before choosing to invest. Assets that continuously outperform the money supply over the long term are better investments than those that do not. One can use standard technical analysis on the ratio chart to determine candidates that are most likely to outperform the money supply. In the face of high inflation, central banks must reduce the money supply. A decreasing money supply pulls the rug out from under the stock market. When the money supply is falling, corporate earnings and the stock market typically fall as well. Inflation When the COVID-19 pandemic hit, the Federal Reserve and central banks around the world increased the money supply by an unprecedented amount. Throughout the course of its entire history up until the pandemic, the U.S. money supply moved up predictably within a log-linear regression channel, as shown in the chart below. Before the pandemic, the log-linear regression channel had an exceptionally high Pearson correlation coefficient (over 0.99), which suggests that the regression channel was reliably containing the money supply’s oscillations over time. When the pandemic hit the global economy came to a halt. The Federal Reserve increased the money supply by a magnitude that was so astronomical that it went up vertically even when logarithmically adjusted. (See the chart below) As a thought experiment, let’s assume that the log-linear regression channel above is valid and that data are normally distributed (typically they are not in financial markets). If it were the case that such a sudden, astronomical increase in the money supply occurred totally randomly, the event would be a 10-sigma event (meaning 10 standard deviations away from the mean). The chance of such a rare event happening totally randomly is so small that it would occur about once every 500,000 quadrillion years. Since this is much longer than the age of the known universe, a 10-sigma event is essentially equivalent to an event that will statistically never happen. Thus, no one was prepared for the action that the Federal Reserve took. By exploding the money supply by this extreme amount and flooding the market with so much newly created money, central banks instantly made everyone feel wealthier by giving them more money, but this action would eventually make everyone less wealthy by destroying their purchasing power as inflation ensued. Once high inflation begins, it can be hard to stop. When inflation stays high for too long the public begins to expect more of it. The public then alters its spending and saving habits. The public also begins to demand higher wages to keep up with high inflation. This creates a negative feedback loop: When workers receive higher wages to keep up with inflation, workers can afford to pay inflated prices which keeps inflation higher for longer. As workers get paid more, keeping demand high, companies also charge more for their goods and services. Eventually, workers again demand higher wages to keep up with yet even higher prices. At every stage of inflation, the best strategy for central banks is to downplay its true severity. This is because the easiest way to control inflation is by managing the public’s perception of it. The hard way to control inflation is to raise the cost of money – interest rates – which in turn induces economic decline, and which can cause financial crises as highly indebted consumers, companies and governments cannot afford higher interest payments. Bonds Government bond yields reached a record low during the COVID-19 pandemic. The chart below shows that interest rates – or the price of money – reached their lowest level in the nearly 5,000 years for which records exist. Since the start of 2022, interest rates have surged higher, breaking a multi-decade downtrend, and ushering the market into a new super cycle where interest rates will likely remain higher for the long term. Interest rates and the money supply are inextricably linked. Few people know why an inverted yield curve predicts a recession. An inverted yield curve reflects the destruction of money. When the yield curve is inverted, banks can no longer profitably borrow at short term rates and lend at long term rates. Bank lending creates the most amount of money. An inverted yield curve is a market perversion that does not occur naturally but occurs only through central bank action. Inverting the yield curve is a highly obfuscated tool that central banks use to decrease the money supply. Furthermore, as we discussed before, since the stock market generally tracks the money supply, an inverted yield curve is a warning that the stock market will fall in the future. Recently, the yield curve (as measured by the 10-year minus the 2-year U.S. treasury bonds) inverted by the most on record. Below is the chart of iShares 20+ Year Treasury Bond ETF (TLT). TLT tracks an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years. As you can see from the chart above, which excludes the past two years, it looks like TLT has been a great investment over the past two decades. (For this chart, I included dividends. TLT pays out dividends that derive from interest payments on its bond holdings.) Look at the chart below to see what happens when we adjust the chart for the money supply. In the chart above we see that since its inception TLT moved horizontally relative to the money supply. What this means is that holding TLT over this period was not wealth-building, but it was good at preserving wealth. Its price moved up in perfect lockstep with the money supply. Now, let’s see how TLT performed in the past two years. As we see in the chart above, until 2021, an investor who held long-term U.S. government bonds would have been preserving their wealth and shielding it from the erosion of perpetual increases in money supply. However, as interest rates on government debt surged higher as central banks fight high inflation, bond investors are now seeing major wealth destruction. In a stable monetary system, investing in government bonds should preserve wealth, since if it fails to do so, no one will buy bonds to finance the government. The situation is also concerning when we examine investment-grade corporate bonds (LQD) relative to the money supply. This chart of investment-grade corporate bonds adjusted for the money supply shows that we should be concerned about the current state of even the most high-grade corporate bonds. We see that the value of investment-grade corporate bonds over time, inclusive of their interest payments, has fallen off a cliff relative to the rate at which the money supply is increasing. This chart suggests that those who invested in corporate bonds have recently lost a lot of wealth. Until the current trend reverses, who would want to invest in corporate bonds? This is a problem for corporate finance. Below is a chart of high-yield corporate bonds (HYG), (which are riskier than investment-grade corporate bonds), as compared to the money supply. You can see from the chart above that all the wealth built by investing in high-yield corporate bonds since the Great Recession has been completely wiped out. What I am about to explain next will be somewhat dense. Look again at the two charts below which show investment-grade corporate bonds relative to the money supply and high-yield corporate bonds relative to the money supply. Recall that bond prices move inversely to bond yields. Thus, if we flip these charts of corporate bond prices, we will get corporate bond yields relative to the money supply. Now let’s think. These charts show that the yields on corporate bonds are moving up faster than the supply of money. Corporate bond yields reflect the amount of money that corporations must pay on their debt. In other words, the amount of money that corporations will have to pay to service their debt is moving up faster than the money supply. As noted previously, the money supply speaks to corporate earnings since corporations can only ever earn some subset of the total supply of money in the economy. Thus, if the money supply decreases, as it is now, corporate earnings will likely decrease as well. If the interest on corporate debt is moving up much faster than the money supply, and the money supply which reflects corporate earning capacity is decreasing, what might this say about the future? Mortgages In the chart below, I analyzed the current median single-family home price in the United States adjusted by the current average 30-year fixed-rate mortgage (as a percentage). I then compared this number to the money supply. This chart gives us a sense of whether or not the Federal Reserve is supplying enough money to the economy to support the current expense of home ownership. As you can see, price is rapidly approaching the upper channel line (2 standard deviations above the mean), which signals that home ownership is the least affordable it has been since the early 1980s – the last time the upper channel line was reached. If one believes that the 2 standard deviation level is restrictive, then one may conclude that there is not enough money being supplied by the Federal Reserve to sustain such high home prices as coupled with such high mortgage rates. If the Federal Reserve does not pivot back to a less tight monetary policy soon, then there is a high probability that a housing recession will occur in the coming years. Perhaps what is more alarming is the below chart, which shows the EMA ribbon. The EMA ribbon is a collection of exponential moving averages that tend to act as support or resistance over time. When the ribbon is decisively pierced it reflects a trend change. We can see in the above chart, that for the first time since the mid-1980s, we have pierced through the EMA ribbon. This could be a signal that a new super cycle has begun, whereby a higher interest rate environment will persist alongside high inflation for the long term, potentially making homes less affordable for the long term. This is one of many charts that seem to validate the conclusion that inflation will remain persistently high for the long term. Commodities In the below chart, the price of commodities is measured as a ratio to the money supply. This chart informs us that commodity prices have broken their long-term downward trend relative to the money supply. The chart above shows commodities as a ratio to the money supply side-by-side an inverted chart of the S&P 500 as a ratio to the money supply. It appears that the ratio of commodities to the money supply reflects an inverse relationship to the S&P 500 and the money supply. Think about what these charts may be indicating. Could they suggest that in the face of a shrinking money supply, more money will flow out of the stock market into increasingly scarce commodities? In a deglobalizing world facing conflict, climate change, and declining growth in productivity, it’s unlikely that commodity prices will return to the extremely undervalued levels seen in 2020. One commodity, in particular, deserves its own discussion: Gold. Gold During a monetary crisis, the usual winner is physical gold. Since the dawn of human civilization, gold has played an important role in the monetary system. As a scarce commodity gold is often perceived as inherently valuable. In his 1912 book, The Theory of Money and Credit, Ludwig von Mises theorized that the value of money can be traced back ("regressed") to its value as a commodity. This has come to be known as the Regression Theorem. Once paper money was introduced, currencies still maintained an explicit link to gold (the paper being exchangeable for gold on demand). However, the U.S. abandoned the gold standard in 1971 to curb inflation and prevent foreign nations from overburdening the system by redeeming their dollars for gold. Currently, gold is extremely undervalued when priced in U.S. dollars. The current fair dollar-to-gold ratio is currently about $7,200 per ounce of gold. This number is produced by dividing the year-to-year increases in the money supply by the yearly production of gold in ounces. Eventually, a monetary crisis will occur, and according to Exter’s Pyramid, investors will scramble for gold, which may force fiat currency to regress back to a gold standard to stabilize markets. Bitcoin In this final part, I will give a few thoughts on Bitcoin, as it relates to the money supply. Below, you will see that when charted as a ratio to the money supply, Bitcoin formed a nearly perfect double top in 2021. This chart could have warned traders that Bitcoin had topped in November 2021 given Bitcoin's inability to achieve a new high relative to the money supply. This shows that one can use the money supply in their charting as an additional layer of technical analysis. In the below chart, we see how Bitcoin's market cap is moving relative to the U.S. money supply. Bitcoin’s yearly chart is a bull flag relative to the money supply. There are very few assets outside of the cryptocurrency class that present as a bull flag relative to the money supply on their yearly chart. What might this chart reveal about Bitcoin's tendency to disrupt central banks' ability to conduct monetary policy? The Federal Reserve’s inability to stop people from converting dollars into Bitcoin to store wealth is a problem that will likely result in Bitcoin and other forms of decentralized finance coming under the greater scrutiny of the U.S. federal government. In the future, I plan to write a post on investing in cryptocurrency. In that post, I will explore Bitcoin and blockchain technology in much greater depth. Final thoughts To build wealth one must invest in assets that grow in price faster than the money supply erodes purchasing power. To become a successful investor, one must revolutionize one’s perception of money and understand that cash – or central bank notes – are worth nothing more than the belief that the government will persist and remain solvent. To build wealth an investor’s goal should not be to make as much cash as possible, rather an investor’s goal should be to convert cash into assets that grow faster than the money supply and to accumulate as much of such assets as possible.
FRED:M2SLEducation
by SpyMasterTrades
48
Quantitative Tightening. We Have A Long Way To Go.I have previously calculated that it would take the Fed's until 2031 to roll off all of their balance sheets. Based on projected trend, the M2 money supply will continue to go down to levels we haven't seen since 1985. By the time the job is done, there will be only 2.3T of USD in circulation, a decline of 88% in money supply. Ladies and gentlemen. If this happens, the US dollar would become the best deflationarly asset in history. Even though the cryptomarket, stock market, real estates, bonds and other equities will be crushed into oblivion, you can appreciate that the dollar has redeemed its glory days. In 1985, a new car is around $10,000. A new house is around $82,000. A 2 L bottle of soda is less than a dollar. The great days are coming back! Sell everything and long USD for wealth and prosperity!
FRED:M2SLLong
by USDOLLARISKING
1
On the down-low Money Supply factsThe chart shows two recent and unprecedented occurrences that may lead to an outcome of equally unprecedented proportions. In the past year the money supply peaked and is still negative over a year since reached peak liquidity Causes include the effects of the pandemic, asset conversions spurred by tax reforms and corporate buybacks, rising unemployment and housing prices amid interest hikes , and government security buybacks initiated due to bond market stress. This general and massive sell-off at peak valuation with no likely intent or ability to spend in the near term at a time of impending stagnation forebodes a bearish outlook for markets worldwide.
FRED:M2SLShort
by cosmic_indicators