Wednesday, 26 November 2014

The Money Relation Signals Decreased Inflationary Pressures

The Money Relation is pointing in the direction of a less inflationary environment in the U.S. as money supply growth slows and as the personal savings rate increased somewhat in October. The reading for the month, -44.5%, was a nine month low and represented the 10th month in a row in negative territory (suggesting money is becoming less "abundant").

As U.S. government deficit spending is shrinking (for now) and as the Fed ended QE3 in October, the money supply growth going forward is likely to continue to decrease. Unless QE4 is implemented shortly, only increased bank lending and security purchases by banks from the non-bank public can offset this likely reduction in the money supply growth rate. The Fed will however continue to roll over its assets and large proportionate purchases from the non-bank public might offset the decline in the money supply growth rate somewhat, though likely marginally. 

For now, the Money Relation is not pointing to an imminent economic collapse, but it is pointing in that direction. Do keep in mind that things can change quickly, as 2006 and 2008 demonstrated very clearly when the Money Relation as defined here also declined for ten consecutive months. 

The current development is certainly no good news for stocks, especially as stock prices and earnings are grossly inflated and reliant on further money supply growth in my opinion as I've tried to highlight in numerous charts and articles (e.g. here). 

Thrift? Who Cares, The Show Must Go On.

Personal consumption (spending) and saving data for October has just been released. Dividing consumption by spending gives us the consumption/saving ratio. For an economy to prosper longer term and for sustainable economic growth to take place, savings is an all important input. In fact, it is an absolute necessity - without savings there simply can be no real economic growth. The more savings, the more resources are available for investment purposes. 

Based on data for the U.S. going back to 1973, consumption has steadily increased compared to savings (i.e. the C/S ratio has increased). Having said that, the ratio was fairly stable for the 30 year period spanning 1973 to 1993 (the horizontal axis crosses at the 1973 to 2014 average of 14.47):

But then, starting around 1993, things started to change and towards the end of 1990s the ratio surged as Americans started spending a significantly bigger proportion of their income (and hence saved less proportionally). This contributed to the artificial economic booms and very real busts we've seen ever since. The chart below is constructed on the same basis as the chart above, but depicts the 1993 to 2014 period instead.

For the 1973 to 2014 period as a whole, the chart looks like this. 

Though the ratio is today nowhere near the insane levels preceding the 2008 economic collapse, it remains substantially higher than it was during the 1973 to 1993 period and also substantially higher than the long term average.* In this respect, politicians and economists (including Fed officials) believing consumer spending is what drives the economy and that good old fashioned thrift is to be avoided, has succeeded. If only they were right. Unfortunately, the only thing easy money and credit seem capable of producing is a manic-depressive economy resulting in lower living standards for most. 

Meanwhile, the show goes on at Wall Street as the stock market thrives on artificially low interest rates and an expanding money supply. 

Until thrift once again becomes an absolute necessity for the saving-starved U.S. economy.

As of October 2014

A Bearish Hedge Fund Bets Against the Bulls and Still Profits

By Peter Eavis

The stock market has been rising for years, hitting new highs almost every week. So how is it that one of Wall Street’s most bearish investors can claim to have profited strongly over this period?

Universa Investments, a hedge fund founded by Mark Spitznagel, is one of the few firms that is set up with the aim of making money in an economic and financial collapse. In the market turmoil of 2008, Mr. Spitznagel earned large returns.

Large pessimistic bets usually lose a lot of money when stocks are rising, as they have ever since 2009. But Universa is saying that its investment strategy has been able to produce consistent gains since then, including a 30 percent return last year, according to firm materials that were reviewed by The New York Times. In comparison, the benchmark Standard & Poor’s 500-stock index in 2013 had a return of 32 percent with dividends reinvested.

Insurance policies that pay out after disasters do not produce big returns when the catastrophe fails to occur. But since 2008, some investors have been looking for ways to ride the market higher while having bets in place that will notch up huge gains if the system teeters on the brink once again.

At Universa, Mr. Spitznagel’s strategy stems from his skepticism toward government efforts to revive the economy. He acknowledges that the stimulus policies of the Federal Reserve and other central banks have the power to drive stocks higher. But they will ultimately be self-defeating, he contends.

This theory holds that another crash will occur when the Fed stops being able to stoke the economy. Universa’s strategy seeks to profit when confidence in the central banks is strong — and when it evaporates.

“The Fed has created a trap in this yield-chasing environment,” Mr. Spitznagel said...

Continue reading the article here.

Should Economics Emulate Natural Sciences?

By Dr Frank Shostak

Economists have always been envious of the practitioners of the natural and exact sciences. They have thought that introducing the methods of natural sciences such as laboratory where experiments could be conducted could lead to a major break-through in our understanding of the world of economics.
But while a laboratory is a valid way of doing things in the natural sciences, it is not so in economics. Why is that so?
A laboratory is a must in physics, for there a scientist can isolate various factors relating to the object of inquiry.
Although the scientist can isolate various factors he doesn’t, however, know the laws that govern these factors.
All that he can do is hypothesize regarding the “true law” that governs the behaviour of the various particles identified.
He can never be certain regarding the “true” laws of nature. On this Murray Rothbard wrote,
The laws may only be hypothecated. Their validity can only be determined by logically deducing consequents from them, which can be verified by appeal to the laboratory facts. Even if the laws explain the facts, however, and their inferences are consistent with them, the laws of physics can never be absolutely established. For some other law may prove more elegant or capable of explaining a wider range of facts. In physics, therefore, postulated explanations have to be hypothecated in such a way that they or their consequents can be empirically tested. Even then, the laws are only tentatively rather than absolutely valid.1
Contrary to the natural sciences, the factors pertaining to human action cannot be isolated and broken into their simple elements.

Read the rest here.

Tuesday, 25 November 2014

Global Irrational Exuberance Enters a New Phase

By Brendan Brown

The present global plague of asset price inflation — with its origins in Federal Reserve quantitative easing policies and featuring much irrational exuberance — is transitioning into a new phase. Some optimistic commentators suggest a benign and painless end to the plague lies ahead. They cite the skill of the Federal Reserve in “ending QE.” These optimists even suggest that meanwhile, controlled injections of new viruses of asset price inflation by the Japanese and European central banks could have a good outcome, and this justifies the risks of the procedure. None of this optimism is justified by the evidence, nor by the known pathology of asset price inflation.

Continue reading the article here.

This Stock Market Ratio is Now 14.2% Higher than in Q1 2000 and 45.0% Higher than in Q2 2007

And no, the ratio is not peaking due to historically low private investments as the current 10-year average hit an all-time high in Q3 this year.

Wilshire 5000 as of 24 November 2014

And this one does not look too good either...

Click here for more charts of the U.S. stock market bubble

Hayek, Statistics, and Trade-Cycle Theory

Austrian economics is often caricatured and criticized because of its approach, or deliberate lack of an approach, to mathematical models, multivariable calculus, and econometrics. Attacks are leveled against Austrians such as Mises, Rothbard, and Kirzner for their failure or refusal to avail themselves of applied empirical research in their scholarship. The Austrian methodology most frequently targeted is praxeology.

It is not the purpose of this short article to refute these attacks or to explore their errors and merits. That has been done ably by others (see, for example, the series of debate-essays available here, here, here, and here). Nor does this article attempt to stand up for the deductive reasoning of praxeology or to defend its claims about a priori truths, a task better suited for a lengthy work of scholarship, not a short article. This piece instead asks one simple question: does Hayek’s early work on trade-cycle theory complicate stereotypes about the methods of Austrian economics or clarify the manner in which Austrians can and do approach economic theory? The answer, of course, is yes.

Hayek proposed that the purpose and function of trade cycle theory was strictly limited: it was “to explain how certain prices are determined” and “to state their influence on production and consumption.” Expanding trade cycle theory beyond that purpose and function was, he believed, fallacious. “Any attempt to forecast the trend of economic development,” he claimed, “or to influence it by measures based on an examination of existing conditions, must presuppose certain quite definite conceptions as to the necessary course of economic phenomena.” But economic development — and the trade cycle in particular — is too important and complex to be guided by mere suppositions regarding matters about which there is much disagreement.

Saturday, 22 November 2014

Guess Who Has Been Spending An Ever Larger Share of U.S. Dollars During The Last 34 Years

The U.S. government of course, both Republicans and Democrats alike.

Friday, 21 November 2014

Whenever Monetary Inflation Outpaces Consumer Price Inflation....

...other prices will be pushed up instead as a result.

The Short Version of the "Austrian" True Money Supply (TMS), as of 10 November 2014

The short version of the Austrian True Money Supply for the U.S. increased 0.49% on last week for the week ending 10 November 2014. At $10.4324 trillion, a new high for the second week in a row, the money supply is now up $549.1 billion, or 5.56%, year to date.

The 1-year growth rate increased sharply for the week to 7.29%, up from 6.57% last week and the highest reported for five weeks. The growth rate however remains significantly lower than the 8.30% longer term average since 1980 and has plummeted since the +10% growth rate reported in early 2013.


Components of The Short Version of The Austrian True Money Supply


The Austrian True Money Supply
This weekly publication is based on a short cut version of the Austrian True Money Supply as some components are published on a monthly basis only and as the difference between the short and the "full" version is negligible. The two series can be compared as follows (as of October):

As the the charts demonstrate, the two series are close to identical on a monthly basis. It is also interesting to note that, on a monthly basis, both series expanded at the slowest year on year pace in October since November 2008. This observation should be viewed as an important supplement to the weekly comments in this report as it serves to further highlight the declining growth rate in the Austrian True Money Supply.

For monthly comments on the money supply, I suggest you have a look at the writings of Michael Pollaro. His latest report can be accessed here, here are two charts from that report:

A Leading Economic Indicator and The Stock Market - Disconnection Taken To New Highs

Can it really be the case that the stock market is independent of economic developments? I admit, I'm starting to sound a bit like a broken record, but better safe than sorry. The truth is yes, the stock market can act independently for a while as low interest rates and an ever increasing money supply channels return-starved funds to the stock market casino away from the more risk averse options. 

But the reality of the real economy hits Wall Street with a big hammer from time to time, knocking the stock market down to a more sensible relationship with the overall economy. Better be on main street and not Wall Street when that time comes soon again.

Thursday, 20 November 2014

Paying Lip Service to "Too Big To Fail"

As bank assets continue to hit new highs on a quarterly basis, fueled by money supply growth and the various QE programs, the number of banks continues to slide.

Compared to Q2 2008, there are today (as of Q3 2014) 1,501, or 21.0%, fewer banks operating in the U.S. During the same period, total assets for all banks operating in the U.S. surged by some $3.8 trillion to $14.8 trillion, an increase of 34.7%. As a result, total assets for each bank has increased 70.6% on average during the Q2 2008 to Q3 2014 period.

The above development is not a new trend however as it has been ongoing for at least the last 30 years.

The observant reader would perhaps wonder how this is possible as "too big too fail" (TBTF) has been a recurring item on the regulators agenda. As the Fed will naturally bail out large banks next time around as well (remember that the Federal Reserve banks are owned by the member banks, meaning the banks own the money printing press located in the trading room at the New York Federal Reserve Bank), one plausible conclusion seems to be that regulators are only paying lip service to this "problem". 

TBTF is, by the way, not a problem at all: just let them fail and let new investors pick up the wrecks. The real problem is fractional reserve banks operating with very little capital and an explicit bail-out put option, courtesy of the Fed. 


One Key Reason Banks Will Continue to Merge and Its Implications

U.S. Banks Are Now Operating With 100% Reserves - Is Full-Reserve Banking The Next Step?

Wednesday, 19 November 2014

The Short Version of the "Austrian" True Money Supply (TMS), as of 3 November 2014

Here's a bit of a late and short update due to spending the last week in NYC. I did notice that the increase in the U.S. money supply appears to have pushed other prices up in addition to asset prices.

The short version of the Austrian True Money Supply for the U.S. increased 0.61% on last week for the week ending 3 November 2014. At $10.3820 trillion, a new high, the money supply is now up $498.7 billion, or 5.05%, year to date.

The 1-year growth rate fell to 6.57%, down from 6.90% last week. The downward trend in the growth rate hence continues. The growth rate has averaged 7.43% during the last three months which is substantially lower than the 8.30% longer term average.

Wednesday, 12 November 2014

A Particular Problem Facing Economics

One of the problems in the world of ideas, particularly in the social sciences, is that the insight behind old ideas can get lost as new ideas crowd the intellectual landscape. Often, the historian of ideas has the thankless task of reminding his colleagues that what they think some long-dead writer said is not, in fact, what he was talking about at all.