12/29/23 09:18 AM EST

Money Supply Growth Remains Most Negative Since Great Depression

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.

It's the last bonus chart of the year. The bonus section is a little bit like the Bank Term Funding Program (BTFP) – it was meant to be a temporary facility, but it's now a permanent program.

The chart presents the relationship between the U.S. M2 Money Supply and Nominal GDP Year-over-Year percentage changes. It shows a historical correlation where increases in money supply often align with GDP growth, reflecting the infusion of liquidity into the economy. Needless to say, the art is in the lags as sometimes they are inverse, but in general the scales are similar. The growth in M2 has remained more negative than anytime since the Great Depression. Should be fine...

While M2 has shrunk dramatically in the past 18 months, more recently since October, M2 expanded by $270 billion, with bank credit increasing by $100+ billion. How much of this is BTFP arbitrage is unclear. With the S&P 500 up 16% in 40 trading days, understandably the focus is on "easing financial conditions." Despite the Federal Reserve's tightening efforts, unemployment figures suggest the economy is at full employment. This juxtaposition raises questions about the effectiveness of the Fed's tightening in the face of significant deficit spending by Congress.

The U.S. deficit has expanded by about 2% of GDP, more than half a trillion dollars. Since 2020, the deficit has increased by 46%, whereas GDP has grown by 26%. We know deficit spending is a pivotal driver of economic activity, overshadowing the Fed's role. With the Fed's current stance of not substantially tightening monetary policy, it's effectively allowing the Treasury to keep interest rates low temporarily as fiscal spending continues to act as an economic stimulant.

Is the latest fall in rates more a Pavlovian reaction to the verbal Fed pivot, and we see rates rise again and equity valuations deflate due to shrinking risk premiums? That's the question we are asking ourselves going into 2024.

We hope you have a safe New Year's celebration and look forward to a prosperous 2024!

Learn more about the Market Situation Report written by Tier 1 Alpha.