US Money Supply and Recession Outlook

Jan 27, 2023

USM2 There were four time US money supply trend has changed in last 60 years or so. The 1st one was with the Clinton Govt. with lower interest rate in 90's that started the boom and bust and 2001 recession. This trend starting in 90's changed with similar slope in 2008 when the interest rate went down to 0 after the Great Financial Crisis. This third trend line did reset during Covid resulting in current trend line with a near 90 degree angle of the slope - supply exploded with free money from government on top of 0% interest. This caused finally Fed to intervene and raise interest rate reacting to inflation.

Starting 2022 we do see the reversal of the latest trend. If the steep slope of money supply is unsustainable either 1) we yield to a new trend line with similar slope increment like past two events 2) Merge to existing trend that started in 2008 .

In case that scenario #1 materializes the new trendline which is nearly at angle vs. the previously emerged on in 2008 - we should see a so called small landing or a very mild recession. This should settle by around Q3 of '23. This might materialize with a rapid depletion of assets going below the dotted new trendline between April and July and then settles back by end of Q3.

In Case scenario #2 we should see a gradual depletion of the excess money supply that would bring the money supply to the 2008 trendline. This probably would mean a rolling recession in various sectors. We have already seen that happened in Housing followed by Technology. In this case with the strongest balance sheet in the bank - probably financial is going to be hit last causing credit crisis in around 2024 and finally Fed to cut and a recession to be over sometime around 2025 as highlighted with the red arrow aka "hard landing".

In either case - a recession in a presidential election year or the year before is rare if not unprecedented. This will not be desired in current social and political environment of United States - something to worry about for the '24 election outcome.

And in either case - unless we (the tax payers) are paying for a incompetent and blatantly stupid Federal Reserve - I don't see how Fed can stop raising or pausing interest rate until money supply is curbed. So far the trend reversal is very short and not steep enough - so it will be unbelievable if Fed declares victory with inflation.

In other words, in "normal world" pain should sustain and stocks and bonds should be shorted.