By: Jeff Cooper

Hit and Run Trading Morning Report - September 20, 2023

FOMC Second Mouse?

In every Bear cycle from the 1920’s to the present day, there have been loud and persistent warnings before the credit events and destructive forces that followed.

One of those warnings is an inverted yield curve. Another is M2 money supply.

What is M2, why does it matter and what is it telling us in September 2023?

M2 is like a big bucket of money that a country has. Inside this bucket you’ve got:

Actual cash

Money in checking accounts (the kind you can spend any time with a debit card)

Money in savings accounts

Some particular types of savings are CD’s…certificates of deposit where you promise the bank you won’t touch the money for a while.

Why is M2 important?

The group in charge of money in the country (like the Federal Reserve in the U.S.) looks at M2 to help decide whether to change interest raes. These decisions can make borrowing money cheaper or more expensive.

If M2 grows quickly, it might increase prices for things (inflation). If it grows slowly or shrinks, the economy might be slowing down.

M2 helps us see how much money is moving around quickly in the economy. More money flowing can mean more spending.

Why do people watch M2?

By watching M2 experts try to guess what might happen next in the economy.

Leaders use M2 to make choices that impact the country’s money situation.

People who  trade in markets watch M2 because it can hint at what big banks might do next, which can change the value of things like stocks or bonds.

In sum, M2 is like a health check for as country’s money.

Looking at it we can see how the economy is doing and where it might be headed.

What has M2 money supply been doing since the beginning of 2022?

The money supply is officially contracting.

This has only happened four times in the last 150 years.

Each time a Depression with double-digit unemployment rates followed.

Since peaking at roughly $21.7 trillion in July 2022, M2 has declined to about $20.89 trillion as of June 2023.

We’re talking about a 3.75^ drop from the all-time high.

A 3.75% decline in U.S. M2 money supply doesn’t sound bad, especially after a 26% yearf over year expansion in a single year during the pandemic.

It’s always possible this decline represents nothing more than a reversion to the mean.

Yet there’s another side to the story:

The 3.75% drop in M2 rperesnts the first meaningful contraction of U.S. money supply since the Great Depression.

It’s only the fifth time in history we’ve witnessed a drop in M2 at least 2% yearly.

M2 fell by at least 2% the other four times resulting in three depressions---the 1870’s, 1921, and the Great Depression, and one panic in 1893.

To oversimplify, the bottom line is that the most rapid decline in M2 since the Great Depression nearly 100 years ago is yet to be reflected in economic data because of the ‘lag effect’.

I believe the U.S. economy is rapidly approaching the end of that lag---the point in real time when higher interest rates and falling money supply will significantly impact spending, profits, employment, and the general health of the U.S. economy.

Facts are stubborn and financial markets like to argue with facts but they could be in for a severe reality check once facts overpower hopes.

Net advances were -458/-859 on the NYSE/NAZ yesterday weighing down the McClellan Oscillator and Summation Indices as the SPX fell to a new low for the month and the Summation Indices more deeply lower.

The FOMC report is scheduled today with a press conference to follow.

These reports are traditionally the most significant market movers of any month.

An FOMC in September/October… typically volatile months… raises the expectations for extraordinary volatility today.

Yesterday the SPX recaptured the 4430 Maginot line. Watch that line today as a second mouse move opens the door to 4340, the August low.

In between resides the 20 week moving average at 4395.

The 20 week mving average has not been fully tested since…you guessed it---March.