QUOTE OF THE WEEK
“A river cuts through a rock, not because of its power but because of its persistence”
- unknown
TECH CORNER
We are still are in a cautionary mode managing your assets. In the Variable Annuities we are in high quality intermediate bonds and Treasuries and in the managed accounts we are positioned in Money Market and short-term Treasuries. We are still waiting for the recession to start. When that happens, we will move to longer duration Treasuries in the managed accounts and stay in the high quality intermediate bonds and Treasuries in the Variable Annuities. During recessions interest rates drop and that is a positive for bonds as bond values go up when interest rates decline.
We will know a lot more in the next month or so as the corporate earnings reporting season starts this month and we will get a report on the Gross Domestic Product (GDP) for the fourth quarter of 2023.
We have a high number of indicators that historically preceded recessions, some with 100% accuracy. I have discussed all of them in preceding letters.
One I haven’t discussed is the decline in the U.S. money supply which we haven’t seen since 1933. In theory, when there is less money in circulation there is less money to invest or spend which slows the economy. The money supply does fluctuate over time but generally doesn’t have big swings.
There are a handful of money supply measures. M1 and M2 are the two that most economists tend to focus on. M1 includes cash and coins in circulation as well as demand deposits in a checking account. Think of M1 as easily accessible money that can be spent at a moment’s notice. M2 accounts for everything in M1 plus savings accounts, money market funds, and CD’s below $100,000. It is money that is still liquid but requires a little more work to access.
Historically, M2 has risen at a relatively steady pace for more than 150 years. As the U.S. economy grows, more capital is required to facilitate transactions. In those rare instances where M2 notably declines, trouble has followed.
M2 money supply has dipped from a peak of $21.7 trillion in July 2022 to $20.77 trillion in November 2023. M2 is down a little over 2% on a year over year basis and down 4.31% from its all time high set in mid 2022. The is the first notable drop in M2 money supply since the Great Depression of 1929.
Although this is a very modest decline in percentage terms, it is a very big deal for an economy that has been fighting a red hot inflation rate. With prices for goods and service collectively rising at a faster pace than the Federal Reserve’s long term target of 2%, more capital will be needed to pay for things. But if M2 is shrinking, it means people and business will have to forgo certain purchases which is typically a recipe for a recession.
The U.S. economy hasn’t fared well when M2 has declined in the past. There have been a small number of times in the last 154 years where M2 has declined more than 2%. Those years were 1878, 1893, 1921, and 1931-1933 and now this period. The previous four instances all resulted in deflationary depressions for the U.S. economy, along with a sizable increase in the unemployment rate.
