12/12/23 09:06 AM EST

M2 Leading CPI Lower

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

Those of you who have read the Tier1 newsletter for more than a year, firstly, thank you, and secondly, you will recognize this chart of M2 money supply Vs CPI on an 18-month lag. We covered this chart many months ago when CPI was well above 7%, and M2 had yet to turn negative.

On the surface, the takeaway here is quite simplistic. If the M2 money supply (amount of currency in circulation including M1 physical cash and checkable deposits) falls, inflation will generally follow on an 18-month lag.

We have a few other examples of M2 dropping below zero. In October 1921, M2 turned negative, and the US experienced deflation of -15.79%. This occurred again in December of 1930, and CPI later fell to -10.67%.

The recession of the early 1920s in the United States, which followed World War I, was primarily deflationary, marked by a sharp decline in prices, a significant rise in unemployment, and a contraction of credit. It was a period of economic adjustment as the country transitioned from wartime production to peacetime needs, compounded by the Federal Reserve's interest rate hikes to curb post-war inflation.

The other example mentioned above was, of course, the recession of the early 1930s, which evolved into the Great Depression, the most severe and prolonged economic downturn in modern history. It began with the stock market crash of 1929 and was characterized by widespread bank failures, massive unemployment, and deflation. The economic crisis was exacerbated by a lack of federal intervention in the initial stages and was marked by a collapse in national and international trade.

It's easy to forget how damaging recessions actually are.

This article is already far too long, but we encourage you to research the role the increased velocity of money has on inflation. This will be covered in future bonus sections. Good luck this week.

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