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🤔 So what's going on with global M2, the four-year cycle and the dollar, and what does it all mean for asset prices?
M2 money supply is continuing to expand globally.
The latest data show the nominal stock of M2 money is rising across most international currencies, including the five largest (USD 🟢, CNY 🔴, EUR 🔵, JPY ⚪️, GBP 🟡).
The supply of these currencies has generally been rising since at least late 2023.
The euro and the dollar in particular are currently growing at a faster pace than they were pre-pandemic.
However, the strong US dollar is still weighing heavily on dollar-denominated global M2 money supply measures.
This is because the dollar has recently been increasing in value at a faster percentage pace than the money supply of other global currencies is increasing.
While you can play with the Y-axis to show whatever you'd like, I think it's clear there's currently a disconnect between global M2 and the price of assets like US stock indices and bitcoin.
To be confident of a sustained risk asset bull market in 2025, I would ideally like to see this dollar-denominated global M2 measure rising.
It's all about the denominator
So, this latest downleg over the past three months for dollar-denominated global M2 measures is not "global money contracting".
It is solely a "denominator technicality".
But it's still important.
Here's my thoughts:
1⃣ It needs to be denominated in something, and the dollar makes the most sense, because the vast majority of people using these measures are doing so to compare against the value of assets, which they are also denominating in dollars.
2⃣ The dollar appreciating against other currencies is a problem for "global liquidity" as a whole because:
⏺️ More than 50% of world trade is denominated in dollars
⏺️ More than 50% of global debt is denominated in dollars
So, if the dollar is strengthening rapidly against other currencies, servicing debt and conducting trade saps more and more liquidity globally, consequently leaving less available to put to work in asset markets.
This is why the dollar weakening is one of my key themes for 2025.
Should it weaken a lot - we could see dollar-denominated global M2 measures increase significantly.
But if the dollar doesn't weaken, or even strengthens further - it will be a very tough ask for any significant dollar-denominated global M2 increase.
Over the past eight years, more than 95% of the increase in dollar-denominated global M2 money supply has coincided with four relatively short periods of dollar index (DXY) weakness:
The four-year cycle
For the past 14 years, global M2 measures have generally followed a loose 4-year cycle, coinciding with bitcoin cycles (average length of 1507 days from trough to trough).
Many people are pinning their hopes on a repeat.
But so far, this cycle has been lackluster at best - lagging behind previous cycles.
I think it's likely the nominal stock of M2 money across global currencies will continue to increase at a decent enough pace through 2025 as the worldwide rate cutting cycle continues.
However, to see a dollar-denominated global M2 increase at a similar scale to 2017 or 2020, it's likely that the dollar must weaken a lot.
Using the dollar index (DXY) as a measuring stick, I'd estimate that DXY must weaken down to at least 100 and probably lower (-8%+ from current levels) to see a cycle anywhere near the scale of previous cycles.
The dollar is the most important thing to watch heading into 2025.
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Information on the case is on the website.
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