Let’s take a quick look at how several investment assets have performed over the past year. This is price performance only; interest and dividends would add to the figures for stocks and bonds. At these low yields, however, not that much. To make this as real world as possible, I’m citing popular exchange traded fund (ETF) figures, including expenses, as a proxy for the underlying assets. All are in US dollar terms.
Copper (CPER): 30.34%
Gold (IAU): 24.23%
Silver (SLV): 40.88%
Platinum (PPLT): 13.13%
Short term US Treasuries (VGSH): 1.77%
Intermediate term US Treasuries (VGIT): 5.32%
Long term US Treasuries (VGLT): 12.87%
US Stocks (VTI): 19.72%
XUS Stocks (VXUS): 8.38%
Stocks (VT): 14.64%
Bear in mind these figures belie a variety of paths through which these annual changes occurred.
But how did so many so different things all go up so much? Metals from copper to gold, stocks in different parts of the world, even long term Treasury bonds? What do they have in common that would cause them all to rise in value over the course of a year? Did they all join in some metaphysical conspiracy?
Look for what they have in common. Nothing intrinsic. But we did quote all their prices in US dollars. Give the matter a little thought, and it’s clear that most of what we see as an otherwise inexplicable joint increase in value is an artifice of our having chosen a common unit of measure. One which we tacitly assume to be a constant but which only appears to be due to our habit of using it as our unit of account. Most of what we’re seeing here is a decrease in value of that common unit, the US dollar.
Near term, the risk setup favors gold over stocks. I called out gold as oversold on November 24, and it appears to have put in at least a short term bottom on November 30. Treasuries may have yesterday. Copper and platinum are on fire. Besides the overbought/oversold positioning, stocks have broadly been weakest near the end of the trading day, suggesting smart money is selling. Anecdotal reports also indicate insider selling has picked up, while the Robin Hood set has been in feverish speculation mode, piling in to momentum plays like Tesla and bitcoin. For now I’m not reading anything more into it than a near term reversion of overstretched trend, with a more significantly different environment not likely coming until after year end. We’ll discuss that further then when the next Synthetic Systems update is due.
Hello Finster,
It is disheartening that so many financial types claim that their is little or no inflation. Lately, I am seeing on many channels that their is little CPI inflation, because QE(Quantitative Easing) is not money printing. The claim is that QE gets trapped in the Central Banks balance sheet as bank reserves and thus is not new money. The link below shares one key figure of such claims. It is contained in the video to the left (Macrovoices interview), from about the 20 minute to the 60 minute mark. The speaker is Jeff Snider.
http://www.realecontv.com/videos/prices/december-05-2020.html
The possibility that the CPI isn’t showing much inflation because it’s designed not to doesn’t seem to have been considered.
Inexcusable since anybody who knows anything about the CPI ought to be familiar with the Boskin Commission. All they need to do is look it up on Wikipedia.
But that’s not even the biggest issue. The CPI wasn’t even originally designed to measure inflation; it was designed to measure consumer prices. The “CP” stands for consumer prices, and the “I” stands for “index”, not “inflation”. With the passage of time, ecopundits have gradually morphed into citing it as an index – if not the index – of inflation.
But that has happened tacitly, silently, without any actual attempt at justification.
Magically it’s now just assumed that inflation is defined by consumer prices. No need for a rationale.
As it turns out, consumer prices are about the last place inflation shows up. Trying to measure inflation by studying consumer prices is like trying to measure the speed of a passing car by analyzing its exhaust.
My next post looks at some of the earlier places inflation shows up, and concludes that we’re already seeing evidence of double digit inflation in the US.
Excellent clarifying commentary Bill. Thank you.
Do you have any thoughts on the ongoing claim that the latest rounds of “QE” were not really money printing but merely the creation of bank reserves, which will not count as money in circulation and part of the money supply, unless these reserves are lent by banks into existence?
Whether bank reserves are money ultimately winds up being a semantic issue that turns on how you define money. There are multiple accepted definitions; and consequently multiple measures of the stock of money, e.g M1, M2, M3, MZM, etc. Tell me whether the definition you’re using includes bank reserves and I’ll give you a definite answer.
But QE is an animal of a different color. When the Fed buys assets such as Treasury securities, where is it getting the money? Somebody else? Is it money it already happened to have laying around? No. On both counts. It creates the money for that purpose.
It’s not “printing”, but only because it’s not actual paper and ink. But of course the money in your bank account isn’t either.
So in every sense but the physical act itself, it’s printing money. What might surprise some readers though is that given my criticism of so much of what the Fed does, I don’t really have a problem with it. So long as the Fed confines its purchases to Treasuries and constitutionally defined monetary assets gold and silver, it’s at least practicing monetary policy.
But the Fed has no legitimate business buying assets like agency and corporate securities … that’s no longer monetary policy. Far worse is the setting of interest rate targets. That’s become more accepted just because it’s been done longer, but it’s done incalculable damage to the economy. If I were given the choice to confine the Fed to either interest rate targeting or purely monetary QE, I’d choose the latter in a New York Fed minute.
Google definitions:
M1, M2 and M3 are measurements of the United States money supply, known as the money aggregates. M1 includes money in circulation plus checkable deposits in banks. M2 includes M1 plus savings deposits (less than $100,000) and money market mutual funds. M3 includes M2 plus large time deposits in banks.
Money of zero maturity (MZM) is a measure of the liquid money supply within an economy. It represents all money that is readily available or in a liquid state. … Money in a bank CD would not be counted, however, because it isn’t in a state ready to spend or otherwise use immediately.
No mention of bank reserves.
Simpler questions:
1. If a bank has on deposit with the FED, a dollar, is that dollar money?
2. Would that dollar be considered part of the money supply?
3. If the FED exchanges newly created dollars for Treasuries, from a primary dealer bank, and those dollars end up as reserves in the primary dealer bank’s account with the FED, are those reserves part of the money supply? (Jeff Snider says no.)
In all three instances, it depends on your definition of “money”.
Whenever there are “newly created dollars”, however, tautologically there is an increase in the dollar supply.
I just saw Stacy Herbert on the Keiser report claim that M1 money supply has increased by 64.5% over 2020. This must relate in some capacity to asset price increases.
Utterly. The supply of dollars has rapidly outpaced demand, leading to a substantial depreciation. The loss of purchasing power so far has been mostly apparent in asset prices, because the increased supply has been mostly available to those positioned to buy assets.
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