Saturday, 28 November 2015

The "Gold Price ($/oz) to Reserve Balances plus Money Supply" Ratio for the U.S. Hits 32 Year Low

To the extent gold is a hedge against (potential) monetary inflation, gold has never been appraised this low compared to the amount of reserves for U.S. depository institutions and money supply based on data since January 1984.

Reserves have here been added to the money supply for an important reason: though reserves are not classified as "money", they will become money once and if banks lend them out or use them to buy securities. Adding reserves to the money supply hence gives us an indication of the potential quantity of money.

This is especially relevant these days as the majority of reserves are classified as excess reserves, i.e. reserves above and beyond what banks (and other depository institutions) are required to hold. It is these excess reserves that banks can lend out or use to acquire securities, converting reserves (which forms part of the monetary base) to money in the process. *

* The money creation process makes it possible for new money to expand at a multiple of excess reserves. Assuming a 10% reserve requirement, new money can be created at a multiple of 10x the excess reserves. Given the tremendous amount of excess reserves today following QE1, 2 and 3, there is however little risk banks would be allowed by the Fed and regulators to create such vast amounts of new money.  

Wednesday, 25 November 2015

Thursday, 12 November 2015

Chart of The Day: How Norges Bank Defaulted on Key Mandate

* Norges Bank is Norway's central bank.


A short history lesson: After the last remaining link to gold was abandoned in 1971 (and the krone became paper money backed by absolutely nothing, i.e. fiat money), the Norwegian krone's value has collapsed compared to gold due to the tremendous increase in the money supply (the quantity of fiat money) orchestrated by Norges Bank, the government and (absent) regulators ever since.

Wednesday, 11 November 2015

The Madness of Euzone's Chief Monetary Crank

Draghi is speaking again today taking the opportunity as he always does to push his central planning infused political agenda:

Meanwhile, he is also hard at work creating another debt boom which can only make the damage already done by faulty monetary policies and insane government spending and debt accumulation that much worse. You simply cannot solve a debt problem by creating more debt.

Picture by The Telegraph

No amount of "economic and monetary integration", "pooling more sovereignty" and "common governance" can sort out the catastrophic mess the ECB and the commission have created together with governments. In fact, it will only make matters even worse. A good start would therefore be to end ECB's monetary policy making altogether sooner rather than later. 

Tuesday, 10 November 2015

Friday, 6 November 2015

Chart of The Day II: The Improving US Unemployment Rate as a Contrarian Indicator

Chart of The Day: Will Stocks Plummet Too?

"If the rise in the prices of stocks and real estate is considered as a gain, the illusion [of inflation] is no less manifest. What makes people believe that inflation results in general prosperity is precisely such illusory gains. They feel lucky and become openhanded in spending and enjoying life. They embellish their homes, they build new mansions and patronize the entertainment business. In spending apparent gains, the fanciful result of false reckoning, they are consuming capital" - Ludwig von Mises

Wednesday, 4 November 2015

Risk-Free Rate and Market Risk Premium Used by Analysts for 2015

Professor Pablo Fernandez and colleagues from the University of Navarra - IESE Business School have just released the annual survey Risk-Free Rate and Market Risk Premium Used by Analysts for 2015 (access 2014 and 2013 here).

In addition to the survey numbers themselves (personally, I use the money supply growth rate as the minimum "risk-free" rate rather than a government bond yield), I especially liked these two comments from the report,
Most of the analysts use a Risk-Free Rate (RF) higher than the yield of the 10-year Government bonds. A reason for it and for the huge dispersion may be the activity of the European Central Bank (ECB). The risk-free rate (RF) is the required return to Government bonds when nobody (not even the ECB) manipulates the market.
A comment about the Quantitative Easing (QE) implemented by the ECB in 2014, 2015... It is just a strange synonym for “print a lot of money (euros) and buy many, many bonds of the countries in the EU”. By doing so, bond prices increase (and bond yields decrease) dramatically. Some people refer to this “QE” as “market abuse of the ECB”, “market manipulation”, “altering competitive markets”, “expropriation of savings”… We agree with all this definitions: they are clearer than “QE”.

Echo that!

Read the full report here.