The collapse of an indicator that has not fallen for 90 years sets off alarm bells in the US economy. A week after talking about the Federal Reserve raising interest rates once again, this information comes to light, which made the stock markets very nervous with large falls last week.

We are witnessing drastic movements that will have an impact on the real economy and surely on the markets. With the COVID crisis, the Federal Reserve and the US government implemented expansionary policies (monetary and fiscal) unprecedented in history. The Fed boosted the monetary base and the government, through government spending, boosted the rest of the monetary aggregates. This was reflected in the economy’s aggregate spending and, ultimately, in inflation (demand grew faster than supply). Now, in the wake of the inflationary disaster, the Fed is dismantling its entire monetary arsenal, while the government has lowered the expansionary tone of its policies. The result is that the M2 monetary aggregate has fallen for the first time since the Great Depression in the US, which may be the prelude to a recession (a negative), but also the beginning of the end of high inflation (a positive).

To understand what the M2 monetary aggregate is, it consists of the equivalent of bills and coins in circulation, bank reserves, demand deposits, savings deposits, short-term deposits of less than $100,000, and money market mutual fund shares, which are the most liquid funds out there. Well, the M2 aggregate has fallen to $21.207 trillion in December 2022, down from highs of $21.740 trillion in March 2022 and $21.489 trillion in December 2021. This aggregate has seen the first year-on-year decline since the Great Depression (1929).

The fall in the money supply is contributing to the slowdown in inflation, as there is less liquidity in the economy to spend on goods and services, reducing the imbalance between supply and demand that helped drive inflation. Some economists fear that this type of slowing movement is only seen in recessions, but some senior Fed members see this drop as good news for the economy as it portends a decline in inflation that would allow the Fed to pilot a soft landing. With M2 falling the economy would undoubtedly be growing at a slower pace than in 2021 and 2022, the question is whether that decline in growth will end in a crash (recession) or a soft landing (preventing GDP from contracting).

In any scenario, investors have a door of opportunity to help many people who in one way or another will be affected by this downturn and its effects on the markets. Preparing and educating ourselves on new ways to add value and be the solution to complex situations in 2023 is both our commitment and our duty. Evaluating buy and hold strategies will surely be the most propitious and the most appropriate. In the meantime, we will continue to monitor the new news that governmental organizations give us in their struggle to control inflation and right the ship of the economy.

Let’s be part of the solution and add value, there are no magic formulas!