The Federal Reserve released the data on the money stock report this morning. This is a dangerous time for the money supply. There is a seasonal drop in the 13 week annualized M2 non-seasonally adjusted figures at the beginning of every year. This year has been no exception to that.
It looks as though the money supply bottomed on week 8. It has rebounded slightly but it is well below last year’s figure. My expectation is that the money supply will stay steady over the next 2 and a half months. Here are the past 10 weeks’ worth of money supply figures:
The bottom line is, slowed money growth results in a contraction in the capital structure, therefore a decline in the stock market. Our debt based monetary system needs an ever increasing rate of money/credit growth in order to sustain the bubbles that have been blown in the economy. The question then is, is 6.03% enough to keep the game going? This is where I rely on other signals such as margin debt usage and the 10-2 yield curve for answers.
Here’s a look at the 10-2 year yield curve.
In the past, this curve has been an excellent predictor of an oncoming recession. Once it goes negative, there is typically a short lag period before the economy craters and the stock market plummets.
The lag time between a negative curve and a peak in the S&P500 is less.
I believe many now watch the 10-2 curve because of it’s track record of recession prediction. This will compress the time period between the curve going negative and the S&P500 peaking. We could even see a sizable selloff the day it goes negative.
So to answer the earlier question, is 6.03% money growth enough? I believe it is but it is barely enough. We are scrapping the bottom of the trees here. Not somewhere where I want to be. The flattening of the yield curve shows that money growth has slowed to a point that it is hardly able to keep the bubbles from popping. Keeping a close eye on the 10-2 curve is now vital. I have moved my 401k from my employer into the money market option. I don’t have a lot of confidence that the Fed is going to goose the supply here until the recession hits. Then expect the Fed to act swiftly by taking the Fed Funds rate to 0 and restarting QE. Their only other option would be to let the stock market drop and the recession to clear out the mal-investment. The last time this was allowed to happen was under Volcker. I don’t see Powell as the next Volcker. The next money stock report will be published April 26th.