Thursday, 30 October 2014

Chart of The Day II: Spot The Small and The Big Bubble

Chart of The Day: "Total Assets to GDP" Ratio for U.S. Banks Hits All-Time Record High in Q3-14

Wednesday, 29 October 2014

QE3 Has Ended: FOMC Minutes 29 Oct-14

FOMC minutes 29 October 2014 (my bold),

Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.

The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Narayana Kocherlakota, who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level.

Aggregate Money Supply Growth for the U.S., Euro Area and the UK Falls to 22 Month Low (as of Sep-14)

UK Monetary Base Flat on Last Year, Money Supply Continues to Decline YoY (as of Sep-14)

Euro Area Monetary Base Continues to Drop, Money Supply Growth Increases (as of Sep-14)

Tuesday, 28 October 2014

Update: Overall "Monetary Stimuli" and The Reserve Ratio

Following on from the short note posted a couple of weeks ago, the growth rate in the overall monetary "stimuli", measured as the combined growth rate of Fed assets and the money supply, has now fallen below the 10.4% long term average since December 2003 to 9.6%.

Meanwhile, the reserve ratio for U.S. banks declined from 99.2% previous week to 97.8% this week. 

The Drive Towards Riskier Assets is Subsiding

Monday, 27 October 2014

Declining Price Inflation Expectations in the U.S. Hint at QE4.

Compared to one year ago, the break even price inflation rate in the U.S. has dropped from 2.18% to 1.90%...

...a decline of 12.8%. 

This decline in price inflation expectations is one development the Fed could use to "justify" a possible implementation of QE4: the lower it gets the bigger the chance the Fed will intervene and once again step on the monetary accelerator. 

Friday, 24 October 2014

Monetary Inflation and Stock Market Earnings

“A continual rise of stock prices cannot be explained by improved conditions of production or by increased voluntary savings, but only by an inflationary credit supply”

Fritz Machlup

The Short Version of the "Austrian" True Money Supply (TMS), as of 13 October 2014

The short version of the Austrian True Money Supply for the U.S., the measure of the money supply applied in this weekly report, decreased 0.05% on last week for the week ending 13 October 2014. At $10.3522 trillion, the money supply is now up $468.9 billion, or 4.79%, year to date.

The growth rate in the money supply headed down sharply during the week. The 1-year growth rate fell to 6.71%, down from 7.36% last week. It was the lowest year on year growth rate reported since the final week of last year. The growth rate also remains significantly lower than the 8.30% average since 1980.

Compared to the growth rate recorded one year ago, the year on year growth rate shred 1.68 percentage points, the sharpest drop since mid April this year.

Taking a look at the longer term data, the 5-year annualised growth rate ended the week on 10.23%. The growth rate is still well above the 7.55% longer term average, but it keeps dropping compared to a year back as it has done now for 46 consecutive weeks. This week it declined 1.78 percentage points compared to last year (the dotted line in the chart below), the biggest drop since week ending 15 September 2008 which happens to be the day Lehman Brothers filed for Chapter 11 bankruptcy protection.

As I started reported some time back, the year on year percentage point drop in 5-year growth rate since August 2011 resembles the trend from December 2001 onwards. What is different this time around however is that the growth rate is dropping faster. As the chart below tries to convey, the current drop in the growth rate is significantly lower than it was as of week 168 the last time around. In fact, the current drop in the growth rate is one year and three months ahead of the 2001 to 2006 trend.

Should this trend continue, we could fast be approaching market turmoil of some sort. Or we could actually be in the storm as we speak. There are certain signs the turmoil has already started as the U.S. stock market has been very volatile in recent weeks*, the 10-year treasury yield has dropped about 37 basis points during the last four months even as the Fed has been tapering and as the VIX shot up to 26.3 just nine days ago, the highest reported since early June 2012.

As banks are increasingly being left with the "burden" of increasing the money supply as the Fed is nearing the end of QE3, the risk of further drops in the money supply growth rate appears high. But maybe QE was never meant to end at all and that QE4 is just around the corner? Or maybe the Fed is becoming scared (now that it has saved the banks) of the inevitable collapse of the monetary system with ongoing inflationary policies and instead will implement full-reserve banking? Time will show, but this is what the U.S. economy has come to as everything hinges on Fed policy. Unfortunately, a central bank can never print itself out of economic problems, only into them.

* The 21 day moving average coefficient of variation of the S&P 500 index has more than doubled during the last few weeks compared to the January 2013 to September 2014 period.



The Short Version of the Austrian True Money Supply vs Austrian True Money Supply, as of September 2014

Thursday, 23 October 2014

DNB ASA Q3 2014 Balance Sheet: Snail's Pace "Capital Building"

"DNB continues to build up capital after a strong quarterly performance" reads the headline of the Q3 2014 news release for DNB ASA, Norway's biggest bank. Well, the bank is (sort of) "building capital", it is just that the capital is being built from a very, very low level and that it is being built very, very slowly.

But on this important measure capital is not growing at all and is lower today than it was in Q1 2010.

DNB ASA therefore continue to pose a serious threat to "financial stability" in Norway and at this snail's pace of "building capital" will continue to be so for a very, very long time indeed. Meanwhile, Norges Bank's printing machine is ready to rescue the company with fresh liquidity at any moment, courtesy of the Norwegian tax payers. 

Apple Inc. 2014 Results: A Great Company With A Share Price to More Than Match It

A few days ago, Apple Inc. (NASDAQ:AAPLreported the results for fiscal year ending September 2014. It's been more than two years since I last wrote a short piece on Apple's results and equity valuation. At the time, 10 September 2012, the Apple share was trading below $95 (just under $663 at the time, there was a 7-for-1 stock split in June 2014). Back then I wrote (bold added),
But for a great company it does not automatically follow that its shares are a great investment. The shares currently trade at a forward P/E of 15.1 (based on forecasted EPS of 44.21 for this year), a P/E of 24.1 based on 2011 earnings with a current P/B of 5.6. Based purely on the trailing P/E of 15.6 reported above the shares are not expensive. Based on average earnings for 2008 to 2011 however, the shares currently trade at a P/E of 46.0. Herein lies the fundamental risk of investing in the Apple share: The last five years have been extraordinarily strong operationally for Apple, but the market is pricing in a significantly better future than that delivered hereto. History shows, and economics teach us, that over the long term, very few companies manage to earn a return on equity significantly higher than its cost of capital as the high returns attracts ever increasing competition until the returns are brought down towards costs of capital. And significantly fewer (none?) manage to deliver a 85% return on equity on a sustainable basis, certainly not when having reached the size Apple now has.
 and concluded,
In conclusion, the probability of the Apple share price dropping seems significantly higher than it increasing, which is why I would not recommend the prudent investor to buy Apple shares at this price level. But look to buy the share if it drops below USD 480 [$68.6 following the share split] if the fundamentals remain strong, a price that implies no future growth from the 2012 expected earnings. The excess cash of USD 80 [$11.4 following the share split] a share is your margin of safety.
Since this report was written, the Apple share price has increased just under 6% to $102.99 as of 22 October 2014. During the same period, the S&P 500 increased more than 34% while the NASDAQ increased close to 40%.

Apple has continued to deliver some staggering accounting numbers during the last two years as well. Total revenue for 2014 was the highest ever reported, having expanded from $37.491 bn in 2008 to $182.795 bn this year. This equates to an annual growth rate just north of 30% during the last six years. Return on equity (ROE) for 2014 came in at 35.4%, the highest ever reported based on data since 2008 and up from the 30.0% reported for 2013. Cash earnings remain significantly higher than net income indicating high quality earnings. The balance sheet remains strong and with equity making up 48% of total assets and almost $72 bn in excess working capital (calculated as the working capital position plus long term marketable securities that exceeds 2.0x current liabilities) the company can survive an economic downturn or two.

A few key measures are however revealing the enormous company Apple has become. Total revenue for the year increased "only" 7.0%, down from 9.2% in 2013 and 44.6% in 2012. Gross profit increased 9.7%, up from the 6.3% decline in 2013, but significantly below the 35.0% average growth rate during the last six years. The gross profit margin is keeping up quite well, but at 38.6% it was lower than the 39.4% average for the 2008 to 2013 period. Though earnings for the year was up 6.7% on last year, they dropped 5.3% compared to 2012 and the record ROE discussed above was driven solely by increased leverage as both profit margin and asset turnover declined during the year. This is also evident by the declining return on assets (ROA), which fell to 22.6%, the lowest reported for the 2008 to 2014 period and 3.1 percentage points lower than the average during the period. 

Compared to two years ago, my back-of-the-envelope analysis and conclusion about Apple's results and the share price therefore remains large unchanged: it is a great company with a share price to more than match it. The biggest risk of investing in the Apple share also remains largely unchanged in my opinion, namely that the company's results and profitability are so impressive even expecting them not to deteriorate seems like a tall order. The stock market is however pricing in further growth. If you do too, you might just have to settle for poor returns during the next few years as well which I suspect any U.S. stock market investor with a long position will have to settle for anyway.

Soure: EcPoFi, Apple Inc.

Disclaimer: I have no position in the Apple Inc. share and do not intend to enter into any position in the near future. I have a short position in U.S. mid-caps. Read additional disclaimer here.


The Short Version of the "Austrian" True Money Supply (TMS), as of 6 October 2014

Wednesday, 22 October 2014

The Drivers of U.S. Bank Credit Growth

For the week ending 8th October, Bank Credit for all U.S. commercial banks increased $651.2 billion, or 6.5%, compared to the same week last year. Bank Credit is the major asset item on banks' balance sheets and consists of various types of loans and investments and is a key driver of money supply growth (together with the Fed monetizing government and agency debt). 

The chart and table below show the components of bank credit that generated this increase. 

Also read:

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

Nigel Farage on the Anti-Democratic European Commission