The Money Supply Is Down 10 Straight Months

As shown below, the U.S. M2 money supply (blue) has declined for ten straight months. Such is the longest streak since 1933! Because the historical reference to the Depression era is daunting, it’s worth putting the recent money supply decline into proper perspective. Such allows us to appreciate the relationship between the money supply and economic activity. Banks have been significantly tightening lending standards as the Fed removes reserves from the banking system via QT, and the inverted yield curve disincentivizes lending. Consequently, the amount of money in the financial system has declined. We remind you that all money creation is the result of new debt.

The U.S. economy’s growth and the financial system’s health are highly dependent on debt growth. Credit drives our economy. While the money supply is falling, it is still moderately above pre-pandemic levels. However, for the economy to grow, money supply growth must keep up with economic growth. This aspect makes the graph below concerning. The solid black line is the ratio of M2 to nominal GDP. The dotted line shows its trend. While the ratio is still above pre-pandemic levels, it’s well below the trend. Since 2000, when the ratio was below trend, a recession ultimately occurred. Barring renewed growth in M2, which entails lower rates, a steeper yield curve, and the cessation of QT, a recession is likely. The only question is how soon.

, The Money Supply Is Down 10 Straight Months

What To Watch Today

Economics

Earnings

Market Trading Update

Yesterday was a rough day in the market, with the Mega-Caps taking the brunt of the beating following Google’s (GOOG) earnings release. While the cloud revenue was indeed a bit light, revenue growth remains strong, as shown. Yesterday’s sell-off seems a bit over-exaggerated, but this is where money has been hiding during the bulk of the sell-off over the last 3-months.

Nonetheless, given the weight of the top 7 stocks in the market capitalization weighted index, the selling pressure in those stocks took the market back below the 200-DMA. As noted previously, the break, retest, and failure of support at the 200-DMA is important as it suggests we could see lower market prices in the week ahead. The one caveat is that the market is oversold on multiple levels after a long period of selling over the last 3-months. As such, downside risk is somewhat limited. I suspect that as we get into November, we will likely see a decent bounce back to 4300, which can be used to reduce risk and raise cash until the technical picture improves.

Bitcoin Surges As A Bitcoin ETF Appears Imminent

Since bottoming in late 2022, the price of Bitcoin has been steadily rising. However, over the last six months or so, the price of bitcoin has been consolidating. That ended as the price has risen nearly 25% in less than two weeks. The culprit appears to be the imminent introduction of a Blackrock Bitcoin ETF. Such a new product could vastly increase the number of Bitcoin holders, including institutional and retail money managers and individual investors.

While rumors of a Bitcoin ETF have been around for a while, this rumor appears to have substance. Per Bitcoin.com:

Blackrock is moving forward with the process of bringing its spot bitcoin exchange-traded fund (ETF) to market. The world’s largest asset manager has secured a ticker symbol and a CUSIP number for its forthcoming spot bitcoin ETF, which is now listed on the Depository Trust and Clearing Corporation (DTCC), the entity responsible for clearing Nasdaq trades. Additionally, Blackrock’s spot bitcoin ETF filing signals the firm’s intention to buy bitcoin to seed its upcoming ETF this month.

Mortgage Buydowns Buoy New Home Sales

The graph below shows that despite sharply rising mortgage rates, new home sales have been surging. At the same time, existing home sales have been falling. Yesterday, it was reported that new home sales grew by 12.3% month-over-month in September, the largest jump since August 2022. What gives?

For starters, the supply of existing homes is limited as few potential sellers are willing to sell, get out of their low mortgage rate, and assume a new house with a much higher mortgage rate. Secondly, and probably more importantly, new home builders are offering discounts in the form of reduced mortgage rates. For instance, consider the following from PulteGroup CEO Ryan Marshall:

“We’ve redirected the incentives we’re offering to the things that matter most.. Historically offered those incentives on things like countertop and cabinet upgrades today the consumer needs those incentives towards mortgage rate buydowns.” “Our most powerful incentive is the 30-year fixed mortgage rate buydown, down to 5.7%.

Pulte estimates that 80% to 85% of new home buyers are getting reduced-rate mortgages.