Economic quick take; Could the Fed be engineering a contraction in the money supply?

Will these asset price trends persist?

Is the Fed trying to undo the post-COVID money supply growth?

There were two instances in the past 20 years, before last month’s Federal Reserve H.6 data release, in which monthly M2 data values fell on a monthly basis.

As I pointed out previously, I find last month’s data drop in M1, M2, and currency base + demand deposits disturbing, and this month’s upcoming Federal Reserve H.6 data release will reveal important clues as to whether the Fed is attempting to engineer a contraction in the money supply. I do not recall any other instance this millenium in which all three measures fell at the same time. Will we see the start of something more everlasting if the Fed attempts to shrink the money supply?

2003-2004

Billions USD; Observe the drop and lateral movement in M2 from August 2003 – January 2004. Refer to the data table below for the actual data points.

 

2009-2010

Billions USD; Between July 2009-March 2010, I observe the instances in which M2 either dropped on a month-to-month basis or was trendless. Refer to the data points in the table below.

If the Fed is attempting to actually shrink the money supply, we could see more problems going forward in all asset classes. How long can the average US citizen continue to deplete his or her savings and checking account in order to survive? These account reductions effectively shrink all three (M1, M2, currency + demand deposits) money stock measures.

A wild card here; how many foreign-held USDs are going to end up back in the United States as increasingly paranoid foreigners attempt to unload their dollars? After all, investors have lost a lot of confidence in the Fed’s abilities in the post-COVID world, and foreigners may flee by dumping dollars by buying USD-based assets and driving up US price inflation, regardless of how poorly the US citizens fare.

Time will tell, but it’s not looking good so far. Not even gold is immune to money supply contractions and higher interest rates.

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42 thoughts on “Economic quick take; Could the Fed be engineering a contraction in the money supply?

  1. The price action seems to have changed recently.

    Before, futures were relatively neutral/bullish and the cash market was extremely bearish. Now, futures are extremely bearish and the cash market is more neutral.

    Perhaps insiders are attempting one last push lower before the market reverses after options expiration tomorrow (6/17)?

  2. While it’s hard to say for sure, I keep wondering if this recent run up in housing prices is setting up another buying opportunity like post 08?

    Covid locked everyone in the house. Not long after it was realized the internet cable connected to a computer doesn’t care if you are in the cubicle on the 20th floor – or 2 hours away in a nice big house for the same price as the crappy one bedroom studio you rented near that office high rise. Was part of the covid scam about redesigning the work place? Emptying out all those office high rises? Are the high rise owners bleeding red ink or do they have another trick up their sleeve? “Lucky Larry Silverstein” the sequel?

    I live about 35 miles east of SF and older homes were selling for up to $100K over. And best I can tell these are legitimate buyers who no longer wanted to remain in the over priced apartment in the city. But what legitimate young buyer can afford that kind of money? Well, many make an obscene amount of money and bonuses and as a result legitimately qualified for those loans under the post 08 borrowing rules. How long before that obscene pay disappears along with the bonuses? Are we headed for a wave of foreclosures?

    Now we see news of major housing price drops fueled by rising interest rates (is the reason cited for the lack of buying activity). One realtor told me this summer is going to be brutal and for me to wait until November to consider selling. But as prices drop that creates a buying opportunity or at least a major drop in insanity of over bids. Might be able to get something decent for asking price now? Or dare I say below asking, which is the logical way to bargain. The people who overpaid for housing in the last year are also out of the way as the prices drop so long as they maintain payments.

    1. I too am mulling this over. I’ve always thought that it all kind of works out in the wash, sell high, buy high, or buy low but you need to sell low too. I’m not sure you can time the market perfectly to benefit. Another thing that I always found remarkable was the ability to have 2 properties – one to live in, and one to vacation in. When I was a kid, that was for the ‘rich’ but seems lots of the middle class owns more than one property. As inflation rises, some will have to let go of the vacation property (I’m thinking of Canadian cottage country) – and those will be sold first – just because even though boomers like the idea of retiring at the cottage – they can’t – difficult to access doctors, hard to maintain those properties. When that happens, there will be deals to be had.

    2. We could see a housing crash that doesn’t benefit individuals. Chris has been talking about this.

      Home prices can “crash” on paper but the mortgage rates will rise so much that individual buyers will end up spending just as much as they would have during the housing peak (or more).

      Meanwhile, institutions will issue debt at much lower interest rates or issue shares and achieve much lower financing costs. They will also be better equipped to handle home maintenance inflation due to economies of scale.

      1. I would agree with that, if you were an individual and need to borrow lots to buy a home. They system is designed that way.

      2. That’s exactly the plan. Drive everybody out from home ownership because of massive costs increases, while the institutions come in and scoop up everything.

        I’m begging you all, please hold on to as much good income producing rental real estate as you can possibly hold on to without overlevering. It is going to get rough but if you keep a lean ship and know the business you can still do okay.

        Pay down costly lines of credit and be careful about owning properties that do not generate ample cash flow. It is clear that the Fed and its owners are engineering a storm that will blow through the housing market. If you can come through it in the next couple years you may be able to pick up some properties, but the institutions will make certain that the prices and costs of ownership will be much higher. They can compress cap rates and income streams, because they will be more efficient in managing now that they have all of the technology and ready information available to do so.

        Imagine the billion dollar lines of credit that the institutions can get for 150 bps above treasuries. These institutions can go in and buy entire communities or put firms like DH Horton to work and buy up their entire inventory of new construction. Meanwhile Joe six pack is tossed out of the equation when he has to struggle to pay his 8% mortgage.

        The only people who will be able to receive favorable borrowing costs will be the governments and the large institutions.

      3. While I didn’t spell it out this way, I can’t imagine the average Joe and Jane getting any breaks these days. Seems every month the system proves to consolidate wealth for those at the top. This is why I have the questions and trying to make sense out of my observations. Rising rates seem to be lowering prices but that only ensures the average Joe and Jane can’t afford to buy a decent place in a good neighborhood. The ultimate decision for many may be to continue renting in the nicer neighborhood.

        In my case I own a condo in a great neighborhood. A very sought after area. And I don’t have a mortgage. It costs me about $550.00 / mo to live here. Trading the condo dollar for dollar I can get a house in a not so good area in a different city. Adding about $200K will get me into a decent house in a good area in that same city, which happens to be where I work.

        Selling the condo and keeping my tax base would be a pretty good deal that the younger folks can’t touch. I can be in a $800K house and pay roughly 50% of the tax rate compared to someone who is paying at assessed value. Lots of people bash CA but I’ll say this. Where else do you have a property tax rate that guarantees a 2% max increase per year? And being over 55, I can keep my base. They just redid the law that states I can buy up and will pay the tax difference on the amount over the selling price. Still a good deal. Because we know taxes are the gift that keeps on giving.

        I’d like to make the move because I don’t want to be stuck in a condo for the rest of my life. I have no rental property and at this point I would be insane for trying to get into residential real estate rental market. My investment is myself. My company, that after two decades, manages to produce some of the best rebuilds in the country for a very specific type of pump. We are not big or high volume but people always come back to us. And I’m seeing some new customers lately. It seems the hacks have worn out their welcome right at a time when many companies are feeling the pinch and need to reel in spending? Fix it right and it will run longer saving money in the long run.

  3. Housing starts definitely topped out this cycle with a big swing and a miss this morning. For those who are real estate investors, let’s hope rent rates continue to remain elevated.

    https://fred.stlouisfed.org/series/HOUST1F

    Given the massive waves of price inflation, I would have to suspect that this will be the case. I also think a lot of small investors are going to be booted to the streets as the large institutions gobble up everything over time. The remaining small rental property investors should benefit from this consolidation as long as they are savvy enough to navigate this new paradigm.

  4. I typically visit tradingeconomics.com to look at data. I noticed that today, shortly after the Powell press conference that the banner changed from Ukraine blue/yellow back to default greyshades.

    I suppose we are now on to a new focus/crisis.

    1. It will soon be in red, for the sea of red ink the investors are facing as the Fed fixes the problem it created.

      A couple months ago, Powell said 75 bps off the table. He prolonged the damage for maximum effect.

      1. Hello Chris,

        I’m wondering if the right investment move is to sell half of all crypto/stock holdings, put the money in a tax-free savings account, and buy shares of the VIX index (fear index). If we are going to be going down for a few months while the Fed tightens, the VIX should skyrocket or at least have a decent upside move. But this investment thesis almost seems too easy/good to be true. I sometimes wonder since everyone is talking about a recession/economic downturn, it seems like a lot of people would do something like this, and market makers like to inflict max financial pain on most investors and do the opposite of what the masses do. I would be curious to hear your thoughts on this.

        1. I think the trend is already been well established and that any gains you make are going to come at assuming a much higher risk level than previously.

          It’s already kind of late to sell the cryptos, though I suspect we could see some terrible downside in that space. Based on the reckless speculation going out to last year, I still think there’s going to be a lot of hurt and I think of outfits and hedge funds that concentrate in this sphere could be forced to liquidate.

          I say this about the crypto sphere, because of the nonchalance of the big players involved. Many are sitting on a lot of unrealized losses and they all keep saying that the price is going to come back and they’re not worried. While it may eventually, how it gets there is another story. Keep in mind that at the depths of 2020, Bitcoin was selling for about $4,000.

          As for the VIX, the market sell off has been somewhat predictable here given a much higher levels of official price inflation and the late response of the Fed. Now, the FED seems intent on following through on the problem it created.

          While this seems to be another classic boom bust cycle created exclusively by the FED for its owners, it does seem to have a high level of predictability to it. I don’t know how much this is going to affect the VIX.

          I also have to believe that this down cycle is going to be much worse and longer than many believe.

          Putting on my conspiratorial hat; this could be the mother of all busts and can last a long time.

  5. Retail sales took a big dump while the import/export price indexes were mixed. At least the prices of exports rose more than expected.

    The economy seems to be rolling over in such a protracted way and I do not see how monetary policy is going to cure any of it.

    We have delusional people instructing delusional people how to manage the economy and financial system. We have delusional organs of government staging mass shootings with delusional thought in all sectors of the economy, including the church economy.

    Get ready for a systemic and horrible collapse. If the Federal reserve has been so incorrect in its predictions and assumptions, how can it be relied upon any more to make any valid choice?

    1. Excess death rate now up at least 20% and claims for disabilities now up over 20%, when compared to the long-term run rate. Doctors are delusional and the patients are now delusional. Only the vaccination is the difference between the before and after.

      Delusional people chasing delusional people and the world has become completely delusional and the world has been given over to a delusion and they believe a total lie. And because of that they damn their souls.

  6. Clarence Larkin was a personal disciple of John Nelson Darby. Both spoke like Masons and both are responsible for the final days lies expressed in the church. This is all what we are up against.

    https://en.m.wikipedia.org/wiki/Clarence_Larkin

    I marvel at how everything is all lined up, especially the Laodicean Church.

    When dispensationalist and planet X videos get over 100k monetized views in a couple days, and some get 1mm, I ask why are they so heavily promoted on YouTube.

    1. The last days delusion is off the charts and society can no longer exist in its current state without collapsing. This includes the economy and monetary systems as well. Delusional people are telling other delusional people how to govern and manage. A big reason why I stuck with working class rental properties is because most people are now living under a complete delusion. I thought it would be the easiest and most efficient form of investment for me. If real estate collapses now, at least I got further down the road than any others without having to work for some delusional scumbag.

      I just came across this video in my studies. I thought it was a very useful one and not too long. It goes a long way in explaining the teachings and deceptions of Clarence Larkin and what he enumerated about Darby’s Masonic system of thought. While both denied being Masonic, I find it difficult to believe given their teachings are so congruent with the secret society.

      John Nelson Darby, Freemasonry & The Pyramids

      https://www.brighteon.com/5dc62f1b-bdcd-4ff7-bcf1-11dc7bd475d3

      Today’s end times Church is ready and set to receive the new world order. The church’s overriding philosophy is already a one world philosophy.

      I never thought that I would see such delusion in the world, and so quickly. I marvel at what the children are being taught in the public schools; but what I marvel at most is how the school systems can find enough people to teach it. There are actually enough people that can be hired to teach the doctrines of Lucifer directly to the school children.

      An increasing number of people in my inner circle are becoming sick and have been delusioned into believing that it’s all natural. I don’t go to the doctors anymore, because they’re going to try to insist I get vaxxed. If a person has a heart condition and wants to die, get a cardiologist. If a person has cancer and wants to die, get an oncologist.

      The delusion out there is off the charts. Extrapolate this out to the economic and monetary system and we can see why it is now set to collapse.

  7. New Zealand – House prices: ‘Another bloodbath’ as prices slump again in May for sixth straight month – REINZ figures

    https://www.nzherald.co.nz/business/house-prices-another-bloodbath-as-prices-slump-again-in-may-for-sixth-straight-month-reinz-figures/2RX7NZY4T2EVS7XHQGGORBWUVE/

    It’s going to be painful for overlevered investors and owners as well as renters. Relatively closed bordered countries and economies will struggle more than say the US. Long term owners will be okay with rent rolls rising. A country that welcomes foreign money will hold up better, though the price to income multiples in the former commonwealth (or anywhere else) are much higher than the US.

  8. Google and Bing used to return about 2,500 and 1,000 search results for the website every month until about 2.5 years ago. Now it’s about 60 and 75, respectively. I used to have a lot of people inquiring about my blog. Now I just get the regulars.

    Duck Duck Go is now number one, and that’s because people are more concerned about what my latest rantings are, rather than what I am saying and warning about.

    People from my past cannot believe that I turned out this way. Oh well….

    1. Outcasts…me and the dog! At least I’m not alone. Thanks, Chris for all. Chin up for the Outcasts.

    2. Amen to the outcasts. After all it is the outcasts that change the world.
      Jesus Christ was an outcast and he really changed humanity for the better by taking on our sins and giving us a way out.

      1. If you’re not loved by most of the world then you’re probably doing something right. Most of mankind are on the wrong path; spiritually and physically.

  9. I was just asked about my sentiment on bitcoin. If I had extra money I would be looking to buy some here. I just took a chunk of cash to pay down a 6.1% investor mortgage that resets in another two and a half years. Based on trend, that interest rate could go as high as 12% for me, so I need to pay off this loan ASAP.

    But if I had extra cash, I would entertain buying some Bitcoin and gold here. The fact that gold is still above 1,800 and interest rates are flying higher as well as a firming dollar at 20 year highs indicates that gold has some merit.

  10. What happened to all the staged mass shootings? I guess the synagogue took it for as much as they could get it and stopped engineering them for now. It was becoming too obvious to even the most profane observer. We get ten of them in about a week and then we don’t get anything afterwards. They received too much blowback from the Texas staged mass shooting with the school lockdown that lasted for at least an hour while multiple gunmen walked around killing people inside.

    The problem with the synagogue’s logic of gun control is that the staged mass shootings actually encourage gun ownership by the population. It is a non sequitur inconsistency. Every time there’s a staged mass shooting and the gunman goes on a rampage for an hour, millions more guns are sold here in the states. There are millions of people who own arsenals of firearms, because it’s not an intruder they fear; tens of millions of people here in the United States fear government as their worst adversary. I own firearms, because by fear government. I fear my government. I have an uneasy truce with my government. And if it does nothing to infringe on my rights, it has nothing to worry about.

    The more the dark forces engineer mass shootings and use its media to try to convince us to give up firearms, the more firearms the citizenry are going to purchase.

    1. Yes, sudden stop.

      Some shootings were out of pattern as well, I study the details of all these stories and some contain a lot of superfluous detail. The last one in this series was this one in Nigeria on Pentecost. Also known as the night of the watchers. The linked video is about a minute long, the first 14 seconds are relevant.

      https://youtu.be/71-H-1wIEbU

      What is curious about this video is that when the cameraman enters the church the camera is pointed down at the ground to a display of sandals. They are placed because people do not get shot out of their sandals like that. On the night of the watchers, reading the book of Ruth is one of the rituals. Hence the placement and emphasis of sandals.

      Contract complete.

      1. More subtle and cleverly placed Antichrist propaganda.

        Bieber says Jesus has given him peace amid facial paralysis struggle
        BBC News

        https://www.bbc.co.uk/news/entertainment-arts-61793240

        Check out the photo of Justin Bieber in the article and the BBC cleverly conflates it with Jesus.

        The BBC could have used any other photo, but chose this one instead. It makes Bieber look like some sleepy fool.

        The average person has no idea of the warfare they’re up against.

    2. It does nothing BUT infringe on our rights. Every single alpha agency is unconstitutional and an infringement of our rights, beginning with the IRS, FBI, and DOE. And let’s not get started with the court system. Jury nullification is the only way to take power back. The jury has the obligation to judge the facts AND the law. Of course, the judges and lawyers will never tell the people the truth. Every court is now a kangaroo court.

  11. Hello Chris,

    Does this contraction in the money supply mean that the FED does not have to service the debt when they raise interest rates? I always thought there was a severe limit on how much they can raise interest rates because they would not be able to service such high debt. But if this is not the case it looks like they found a loophole that could cause everyone max financial pain.

    1. The Fed could lose money if the Fed raises rates significantly.

      The Fed receives interest and principal from the assets it owns. It remits most of that revenue back to the US government (although, before the 1960s, the Fed would keep 100% of the government debt payments).

      The Fed has mostly low yielding bonds. As rates approach 2.5% or more, the Fed’s interest payments on deposits will exceed its revenue from its assets. That means that the Fed can go from remitting 100s of billions to the US treasury every year to sending the US treasury a bill for the losses.

      So, yes, this is a terrible outcome, but the Fed has already stated that they are perfectly willing to do it. I think the banks will also get a huge windfall from this. Already, they have 2 trillion in reverse repos, and FFR is only 0.75%. Imagine when it’s above 2%. Banks are also passing on none of this revenue to their depositors.

      https://fred.stlouisfed.org/series/RRPONTSYD

      1. just read this. Nice answer. If forced to, the Fed could just shut down the Federal Reserve’s Overnight Reverse Repurchase Facility and force the depositors to lend out again. That would help increase the money supply. That’s if the Fed owners want that.

    2. If the Fed engineers wish to contract the money supply, they can still allow the govt to service its debt regardless of what the prevailing interest rates are at the time or what the money supply is. Any high rates could cause problems for the US Treasury in coming up with funds to service the interest. But here’s something to consider. Whatever the Fed makes in interest profit, it is supposed to remit it back to the UST. Interest income above balance sheet losses will remitted to the UST.

      https://www.federalreserve.gov/aboutthefed/chapter-6-reporting-requirements.htm

      There are loss provisions for balance sheet holdings, and these may be quite substantial, but won’t be realized unless it’s sold.

      The Fed’s primary function is to finance the Federal government, and all other objectives come second. The Fed has established the QE mechanism as a means to bridge the difference b/w what the world can finance organically and what the govt needs to operate and finance outstanding debt.

      The Fed will not let the USG go bankrupt. It will finance it, even if this means the US population has to endure max pain.

      There could be a theoretical scenario where the US Fed holds a huge percentage of Treasuries, and all the net interest income it earns is remitted back to the UST; effectively creating a closed loop. The Fed does not own that much, so the USG is still susceptible to higher rates. However, long-dated holdings are only replaced as they mature. Thus, UST holders feel the pain first.

      I am also looking at how the USG has tightened its financial belt and has pared back much of its previous spendthrift ways after covid. Inflation has helped reduce the real deficit by about 10% over the past 18 months.

    1. Velocity doesn’t mean much as long as the money stock measurements are growing, especially as much as they had been over the past 20 years.

      Now, velocity is indicating the drop in global growth as the money supply fades. At least one must grow. If neither are rising, watch out below. Maybe velocity will rise, which means the economy is perhaps moving along. The economy is the independent variable and velocity in this instance is the dependent one.

      If inflation is not going to increase velocity, we will be in a world of hurt. If inflation can’t do it, what will? I suspect that investors are hoarding dollars so that they can take advantage of upcoming asset deals, even if price inflation remains elevated. Low velocity to stay

      I want to see this next release of H.6.

      Thanks for the chart

  12. Property Values Fall Across US, Europe on Bite From Inflation

    https://www.bloomberg.com/news/articles/2022-06-13/inflation-triggers-drop-in-property-values-across-us-europe

    (Bloomberg) — The US and European real estate markets are experiencing a downwards shift in prices as buyers fall away, according to the global chief investment officer of Hines, one of the largest closely held real estate investors in the world.

    Prices have fallen by about 5% to 10% compared to a year earlier in some areas, according to David L. Steinbach, with Europe following a trajectory set in the US. “I think we’re in for a rough few months,” he said. “This year is going to be choppy water.”

    Businesses are re-examining expansion plans in light of higher costs, Steinbach said in an interview in Abu Dhabi. Rising interest rates are feeding through into higher funding costs, further dampening demand, he added.

    “Higher inflation is without a doubt making its way into private real estate,” Steinbach said. “The bidding pools are becoming thinner.”

    Real estate can provide a hedge against inflation as some leases are indexed to take account of rising prices. But more than a decade of rock bottom rates and anemic returns in bond markets pushed up prices to record levels in many areas, making them vulnerable to rising borrowing costs.

    Houston, Texas-based Hines manages about $90 billion in real estate assets with a presence in 27 countries. Steinbach was in Abu Dhabi meeting some investors in its funds which also partner with it on projects.

    The market for office space has been hardest hit in the US, Steinbach said, with demand for rental housing also starting to thin. “Some sponsors are having some trouble getting financing, so that alone is reducing the bidding pool,’ he said.

  13. I really wonder if the Fed and central banks around the world are trying to engineer an economic crash that precedes WWIII. After all the great depression in the 1930s preceded WWII.

    While the economy preceding WWI was not bad, that war appeared to be a distraction from worker uprisings and worker demands for higher pay. The wealth disparity preceding WWI was really bad. In todays world the wealth disparity is actually worse.

    1. Things have been set up for the Fed to raise rates as much as it wants.

      “Inflation” will stay as high as the SoS needs due to the war in Ukraine, the Chinese lockdowns, and the persistent “supply chain issues” that may or may not be real. (E.g. the surplus of CPUs and GPUs undermines the “chip shortage” narrative.)

      Unemployment is near “record lows,” which is largely due to the SoS distorting the way it is calculated. Actual unemployment (which would include discouraged workers and many who aren’t in the labor force) is not particularly low.

      The Fed is suddenly emphasizing its “2% inflation mandate.” The Fed can keep raising rates to no avail because of the supply issues. The Fed is also acting as if people want higher interest rates. When I heard Bullard talking about non-stop 0.5% hikes until the 2% goal is met, it reminded me of de Blasio talking about how vaccine mandates were the solution everyone was clamoring for. In reality, people just wanted things to be normal, but were forced to accept a cure that was 1) unnecessary and 2) worse than the actual problem.

      The contraction of the money supply is something I never see discussed in the media or by the Fed. I believe that’s because it contradicts the narrative that too much money is causing record oil prices. I also rarely hear “analysts” talk about the effects of war on the inflation. (Occasionally, you’ll get the truth out of a trader like Paul Tudor Jones, but never an analyst or a Fed official.)

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