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Velocity Has Stopped Climbing That’s the Pause Before the Verdict
M2 velocity jumping off the COVID lows made sense because money that had been parked finally started moving, people spent down excess savings, and nominal GDP adjusted to a higher price world. By mid 2024, though, that catch up phase was done. QT had been draining reserves for two years, policy was still tight in real terms even after the September and October cuts, and households were feeling the grind of higher prices and higher rates. In that environment, every paycheck still moves quickly through the system, but there isn’t a new wave of risk taking to push velocity higher. So it flattens. Not because nothing is happening, but because spending has shifted from burst of demand to keeping up with the bills.
That plateau is the monetary reflection of the broader macro mood. Growth hasn’t collapsed, but it’s not accelerating. Banks are still lending, but they’re pulling back from real economy credit and leaning more into lending to financial intermediaries. Households are turning over money to cover living costs, not because they’re flush.
What If Velocity Rolls Over From Here?
This is where the long term chart matters. Look back across the last 60 years and you see a clear pattern that when M2 velocity turns down decisively, it almost always lines up with recessions or sharp slowdowns. The late 80s to early 90s fade, the slide after the dot com peak, the big collapse around 2008, the plunge into 2020 each roll over in velocity came with a period where nominal GDP fell behind the existing money stock and the economy downshifted hard.
If today’s plateau breaks lower, you’re not just talking about a small wiggle in a ratio. You’re talking about a world where…
• households stop even the churn spending and start hoarding again;
• businesses cut back further on borrowing and investment;
• banks see less loan demand and more precautionary cash;
• nominal GDP slows relative to the money base, which is how you slide from disinflation toward outright recession.
Because velocity is already low by historical standards, another leg down from here tends to mean stress, not comfort. The Fed would almost certainly keep leaning into more cuts and probably reopen the door to some form of balance sheet support. Long duration assets might catch a bid on the rate side, but that’s the kind of rally you get when earnings, employment, and credit quality are all weakening underneath.
So the flat stretch since mid 2024 is the hinge. As long as velocity holds sideways, the story is tired cycle, but still moving. If it rolls over the way it has before every major downturn, the message flips…the system isn’t just catching its breath, it’s running out of it.
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Velocity Has Stopped Climbing That’s the Pause Before the Verdict
M2 velocity jumping off the COVID lows made sense because money that had been parked finally started moving, people spent down excess savings, and nominal GDP adjusted to a higher price world. By mid 2024, though, that catch up phase was done. QT had been draining reserves for two years, policy was still tight in real terms even after the September and October cuts, and households were feeling the grind of higher prices and higher rates. In that environment, every paycheck still moves quickly through the system, but there isn’t a new wave of risk taking to push velocity higher. So it flattens. Not because nothing is happening, but because spending has shifted from burst of demand to keeping up with the bills.
That plateau is the monetary reflection of the broader macro mood. Growth hasn’t collapsed, but it’s not accelerating. Banks are still lending, but they’re pulling back from real economy credit and leaning more into lending to financial intermediaries. Households are turning over money to cover living costs, not because they’re flush.
What If Velocity Rolls Over From Here?
This is where the long term chart matters. Look back across the last 60 years and you see a clear pattern that when M2 velocity turns down decisively, it almost always lines up with recessions or sharp slowdowns. The late 80s to early 90s fade, the slide after the dot com peak, the big collapse around 2008, the plunge into 2020 each roll over in velocity came with a period where nominal GDP fell behind the existing money stock and the economy downshifted hard.
If today’s plateau breaks lower, you’re not just talking about a small wiggle in a ratio. You’re talking about a world where…
• households stop even the churn spending and start hoarding again;
• businesses cut back further on borrowing and investment;
• banks see less loan demand and more precautionary cash;
• nominal GDP slows relative to the money base, which is how you slide from disinflation toward outright recession.
Because velocity is already low by historical standards, another leg down from here tends to mean stress, not comfort. The Fed would almost certainly keep leaning into more cuts and probably reopen the door to some form of balance sheet support. Long duration assets might catch a bid on the rate side, but that’s the kind of rally you get when earnings, employment, and credit quality are all weakening underneath.
So the flat stretch since mid 2024 is the hinge. As long as velocity holds sideways, the story is tired cycle, but still moving. If it rolls over the way it has before every major downturn, the message flips…the system isn’t just catching its breath, it’s running out of it.
U.S. M2 Money Supply hits new all-time high of $22.3 Trillion 🤑📈🥳 https://t.co/nYryFFj3Vk tweet
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EndGame Macro
These default rates are trailing 12 month figures for large corporate borrowers, the group with the most tools to avoid showing distress. They can refinance, extend maturities, negotiate covenant waivers, or slide problems into private credit vehicles that don’t register as defaults on these public datasets. Because it’s a 12 month rolling window, the line mostly reflects the last wave of defaults aging out of the calculation, not the current state of the credit cycle. In practice, corporate default data is usually 6 to 12 months behind reality, and sometimes as much as 18 months behind the earliest signs of stress.
Meanwhile, the parts of the system that crack first including autos, credit cards, student loans, and commercial real estate are all moving the other way. Delinquencies are rising. Office distress is climbing. Lower income borrowers and subprime consumers are feeling real strain. That’s the ground truth. The chart looks calm only because the pressure hasn’t reached the part of the credit market that shows up in those numbers but it’s already visible everywhere else.
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These default rates are trailing 12 month figures for large corporate borrowers, the group with the most tools to avoid showing distress. They can refinance, extend maturities, negotiate covenant waivers, or slide problems into private credit vehicles that don’t register as defaults on these public datasets. Because it’s a 12 month rolling window, the line mostly reflects the last wave of defaults aging out of the calculation, not the current state of the credit cycle. In practice, corporate default data is usually 6 to 12 months behind reality, and sometimes as much as 18 months behind the earliest signs of stress.
Meanwhile, the parts of the system that crack first including autos, credit cards, student loans, and commercial real estate are all moving the other way. Delinquencies are rising. Office distress is climbing. Lower income borrowers and subprime consumers are feeling real strain. That’s the ground truth. The chart looks calm only because the pressure hasn’t reached the part of the credit market that shows up in those numbers but it’s already visible everywhere else.
Default Rates Are Falling
The bottom line is that the US economy remains incredibly resilient. -Torsten at Apollo https://t.co/9yYSvggVVH tweet
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EndGame Macro
The near term forward spread is basically the bond market’s instinct about where short term rates are headed. When it drops below zero, it means investors expect the Fed to be cutting in the future, not because things are going great, but because policy has become tight enough that something eventually gives. Historically, that has lined up well with recessions because the Fed rarely cuts unless growth or inflation cools hard enough to force their hand.
The curve didn’t break this cycle, it simply fired early. Rates went from zero to restrictive at a speed we haven’t seen in decades, so the bond market started pricing future easing almost immediately. But the economy didn’t roll over on cue because households, businesses, and banks entered the tightening phase with more buffers than usual with stronger balance sheets, longer dated debt, and a labor market that stayed tight. Instead of a clean downturn, we’ve lived through a long, uneven softening with housing first, then manufacturing, with services keeping the top line numbers afloat.
Is the Signal Still Useful?
Yes, but not as a stopwatch. A negative spread still tells you the Fed has gone far enough that the next meaningful move in policy is lower. What it doesn’t tell you is why those cuts arrive. They can come because the economy breaks, or because inflation falls enough to give the Fed breathing room. Right now, the spread is hovering closer to zero, which many people read as problem solved, but it can also mean the market thinks the first cut is simply getting closer.
So the indicator hasn’t lost its edge, it just can’t compress an unusually complicated cycle into a simple timeline. It’s warning about the same thing it always warns about…policy is tight, and easing is the next chapter. The rest of the story depends on how the stress building in credit, lending, and consumer finances finally shows up in the broader data.
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The near term forward spread is basically the bond market’s instinct about where short term rates are headed. When it drops below zero, it means investors expect the Fed to be cutting in the future, not because things are going great, but because policy has become tight enough that something eventually gives. Historically, that has lined up well with recessions because the Fed rarely cuts unless growth or inflation cools hard enough to force their hand.
The curve didn’t break this cycle, it simply fired early. Rates went from zero to restrictive at a speed we haven’t seen in decades, so the bond market started pricing future easing almost immediately. But the economy didn’t roll over on cue because households, businesses, and banks entered the tightening phase with more buffers than usual with stronger balance sheets, longer dated debt, and a labor market that stayed tight. Instead of a clean downturn, we’ve lived through a long, uneven softening with housing first, then manufacturing, with services keeping the top line numbers afloat.
Is the Signal Still Useful?
Yes, but not as a stopwatch. A negative spread still tells you the Fed has gone far enough that the next meaningful move in policy is lower. What it doesn’t tell you is why those cuts arrive. They can come because the economy breaks, or because inflation falls enough to give the Fed breathing room. Right now, the spread is hovering closer to zero, which many people read as problem solved, but it can also mean the market thinks the first cut is simply getting closer.
So the indicator hasn’t lost its edge, it just can’t compress an unusually complicated cycle into a simple timeline. It’s warning about the same thing it always warns about…policy is tight, and easing is the next chapter. The rest of the story depends on how the stress building in credit, lending, and consumer finances finally shows up in the broader data.
We don't hear much about the near-term forward spread (3m yield - expected 3m yield in 18m). This was supposedly the best yield curve predictor of recession, but as you can see it's mostly been negative since 2022 with no recession. Triggered too early or no longer useful? https://t.co/93btBYkb2D tweet
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Dimitry Nakhla | Babylon Capital®
$NFLX $WBD $PSKY https://t.co/6thRxaXQgA
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$NFLX $WBD $PSKY https://t.co/6thRxaXQgA
Paramount is now reportedly looking to launch a hostile bid for Warner Bros
They feel their $30 a share all-cash offer is higher than what Netflix offered — in terms of cash, stock and the value of the cable business spinoff
(via @CGasparino) https://t.co/Vc3Yupvbkf tweet
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Clark Square Capital
A story that will appeal to the young value investor https://t.co/34bJP1OyWK
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A story that will appeal to the young value investor https://t.co/34bJP1OyWK
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Dimitry Nakhla | Babylon Capital®
$NFLX $WBD $PKSY 😅😂 https://t.co/Sqz2xos3WQ
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$NFLX $WBD $PKSY 😅😂 https://t.co/Sqz2xos3WQ
Paramount is now reportedly looking to launch a hostile bid for Warner Bros
They feel their $30 a share all-cash offer is higher than what Netflix offered — in terms of cash, stock and the value of the cable business spinoff
(via @CGasparino) https://t.co/Vc3Yupvbkf tweet
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My ancestors who had to hunt and fight wild animals for food watching me have a panic attack while trading leverage https://t.co/ZVlBPrUWYi
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My ancestors who had to hunt and fight wild animals for food watching me have a panic attack while trading leverage https://t.co/ZVlBPrUWYi
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