Friday, 1 August 2014

The Short Version of the "Austrian" True Money Supply (TMS), as of 21 July 2014

The short version of the Austrian True Money Supply (SVTMS) for the U.S. decreased 0.07% (-3.74% annualised) during the most recent week ending 21 July 2014 to hit $10.2171 trillion. This measure of the money supply is now up 3.16% year to date.

The 1-year growth rate increased slightly from last week, from 8.27% to 8.44%, but was 77 basis points lower than same week last year.

The shorter term growth rates (i.e. 1 week to 26 weeks) have picked up in recent weeks and are now all higher than a year ago. The 39 weeks to 5 year annualised growth rates on the other hand are however substantially lower. The overall trend in the growth rate of the money supply for medium- to long term growth rates is therefore still heading downwards.

Visit the short version of the Austrian True Money Supply archive here. 

Something for The Week End: Gold Standards - True and False

Thursday, 31 July 2014

The Argentinian Default: Here's What Happened to The Monetary Data Preceding It

Argentina has just defaulted on its debt for the second time in the last twelve years (the technicalities of it is under some debate). Following futile attempts to maintain an overvalued exchange rate against the US dollar (here), the Argentinian Peso has dropped from about 5.51 against the dollar a year ago to yesterday's 8.19.

Back in early February this year, I wrote a short post asking what all panic-prone emerging market had in common. The answer was a very high money supply growth rate over an extended period. So here's what happened to the monetary data in Argentina leading up to the default:

Back in October last year Reuters reported,
Argentina is inching closer to a currency crisis that could unleash economic havoc unless the government takes the tough decisions needed to increase confidence in Latin America's No. 3 economy and stem the outflow of foreign reserves.
Starting in 2003, Argentina's government began moving away from market-friendly economic policies toward a more populist attitude that grants generous government subsidies on everything from public transport to social programs.
This soon led to a spike in inflation, which private analysts estimate at 25 percent, one of the world's highest rates. The government, which has been reprimanded by the International Monetary Fund for inaccurate data reporting, says inflation is between 10 and 11 percent.
In an attempt to control prices, President Cristina Fernandez's government has kept the official exchange rate at artificially strong levels, effectively making imports cheaper but hampering manufacturers' ability to compete internationally and driving down private investment.
With the country unable to finance imports or debt payments by borrowing from abroad after its 2002 default, Argentina has been forced to rely on foreign exchange reserves, which are mostly generated by grains exports.
Reserves are down by 20 percent this year to $34.4 billion, their lowest level since early 2007.
If this trend continues, the government may find itself without enough foreign currency to honor its debts or pay for its energy needs, eventually leading to economic collapse.

The current Argentinian default is arguably a text book example of how a government, in tandem with its central bank, can be a harbinger of poverty and with it bring an entire economy to its knees.

Related: Argentina's Consumer Price Inflation, Money Supply and the Collapsing Peso

Also see: Understanding Argentina’s Coming Default

Six Current Economic Myths and Realities

Austrian economist Patrick Barron recently listed "Six Current Economic Myths and Realities" in an article:

Myth #1: Increased money leads to economic prosperity.
Myth #2: Manipulating interest rates leads to economic prosperity.
Myth #3: Lowering the foreign exchange rate of the currency, to give more local currency in exchange for foreign currency, will lead to an export driven economic recovery.
Myth #4: Money expansion will not cause higher prices.
Myth #5: More, better, and more vigorously enforced regulations can prevent loan and investment losses.
Myth #6: Government can prevent hyperinflation. 

Read his comments on each here.

Wednesday, 30 July 2014

Fed Tapers Further, But The Fed Put Endures

Right, as we all know by now, free market fundamentals are overshadowed by Fed policy and actions in the U.S. world of investing. The Greenspan/Bernanke/Yellen, no longer merely implied, but very explicit put, is what really counts for overall asset prices in the broad scheme of things. 

When the, on many counts, useless but widely followed measure of economic growth called GDP for Q2 2014 today reportedly jumps 3.95% on an annualised basis in so-called "real" terms from Q1 to Q2 (4.06% in nominal terms on a YoY basis), the stock market drops even as the GDP numbers allegedly beat expectations (DJIA is down 0.19% at time of writing). Why? Because it gives the Fed, at least for now, a reason to continue tapering. And that is what just happened. Effective this August, the Fed will reduce its monthly asset purchases by a further $10 billion a month, to $25 billion. Since December last year, the Fed has now reduced, or tapered, monthly asset purchases by a total of $60 billion, or 70.6%. 

This means, ceteris paribus, there will be less freshly minted fiat dollars entering the market and hence reduced liquidity especially when it comes to pushing yields on longer-term treasuries and agency mortgage-backed securities down. What effect this will have on those yields and the stock market remains to be seen, but commercial banks have certainly taken on a much bigger role once again in driving money supply growth

This is really exciting times to be an observer of financial markets. And maybe, just maybe, real investment and valuations skills based on analysing fundamentals excluding artificial stimuli will once again be the only game in town. Ahh, I was just dreaming there for a beautiful second or two, so please don't bet on that happening any time soon - the Fed is ready, it has told us so on numerous occasions, to turn on a dime, or as they put it in today's statement:
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

And the Fed has been ready to turn on a dime for the last 100 years and probably will be for the next century as well. Perhaps more so than ever before as unsustainable and massive government debts, not to mention malinvestments, are lurking all across the world. So continue paying attention to what the Fed says, but pay even more attention to what it actually does. Still, never be tempted to ignore fundamentals (e.g. earnings, asset quality, profitability ratios, credit quality etc), of which the money supply is an integral one. And it will be as long as the U.S. has a fractional reserve banking system backed by its central bank (read: the taxpayer and owners of the US dollar). The same applies to other countries.

Related: Reserve Ratios of U.S. Depository Institutions - Better, But Still Very Fractional