Archive for the ‘Investment Returns’ Category

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Commodity Returns and Broad Money Expansion.

In Investment Returns on April 25, 2011 by CQCA

The above chart shows the price increase of selected commodities if they were adjusted to the M3 money supply. The broad money measure (M3) expanded 192% over the period. Even though these commodities outpaced the CPI and M2, they did not keep up with the broad money measure. In a hyper-inflationary environment, like the 1970s, even an increase of 188.24% (for Talc and Pyrophylite) in price still did not allow an investor to see real gains in wealth.

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Commodity Returns and M2 Expansion.

In Investment Returns on April 24, 2011 by CQCA

The previous article showed the negative real returns of commodities when adjusted to the CPI. However, the increase in the CPI did not fully reflect the increase in the M2 money supply. The chart above shows the investment return on commodities if they were adjusted for the increase in the money supply.

The price of titanium slag increased 147.19%, but the M2 money supply increased 149.83% over the decade. This means that an investor in titanium slag actually lost about 2% of real wealth.

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Commodities with Real Negative Returns in the 1970s.

In Investment Returns on April 23, 2011 by CQCA

The previous article showed commodities with nominal decreases in price per metric ton. Most commodity prices increased during this time, but some did not keep pace with the CPI rate. The price of scrap mica increased 101.17% over the period, but the CPI increased 103% during the same time. This means that an investor in scrap Mica would have lost about 2% in real wealth over the decade. As was said earlier, inflation does not equal easy money for all investments.

The commodities listed in that graph are:

  • Mica (Scrap)
  • Gemstones
  • Lithium
  • Garnet
  • Iron and Steel Slag
  • Feldspar
  • Salt
  • Stone (Crushed)
  • Beryllium
  • Peat
  • Pumice
  • Wollastonite
  • Copper
  • Magnesium Compounds
  • Selenium
  • Mica (Sheet)
  • Stone (Dimension)
  • Kyanite
  • Germanium
  • Abrasives (Natural)
  • Bromine
  • Gypsum
  • Diamond (Industrial)
  • Iron and Steel Scrap
  • Hafnium
  • Quartz Crystal
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    Commodities with Negative Returns in the 1970s.

    In Investment Returns on April 22, 2011 by CQCA

    Despite rampant inflation in the 1970s, the nominal price of some commodities actually decreased. The above data is from the U.S. Geological Survey.

    Rhenium is a case of bad timing. According to John W. Blossom’s research, the price of Rhenium spiked in 1970 because it was used to make unleaded gasoline. Extraction processes improved throughout the decade, which brought the price down significantly. In 1980, the amount of Rhenium in gasoline was doubled, causing the price to skyrocket again, surpassing the 1970 price.

    The previous article on this website showed that the S&P 500 did not keep up with inflation. The above decreases are calculated using current, unadjusted Dollars. If the CPI was used to adjust them, the losses for investors would be even larger. Inflation does not create easy money for all investments.

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    Stocks are Not an Inflation Hedge.

    In Investment Returns on April 21, 2011 by CQCA

    The chart above shows the S&P 500 and the CPI, indexed to their 1970 rate. During the 1970s, the lowest increase in the CPI was 3.3% in 1971. Both 1974 and 1979 saw CPI rates over 12%.

    A common misperception is that stocks appreciate with inflation. From the beginning of 1970 to the end of 1979, the S&P 500 increased 27%. During the same time, the CPI doubled. If the S&P 500 return was annualized (equation: (1.27^.1) -1 =?), it would have increased at a rate of about 2.4% every year. That is lower than any of the CPI rates throughout the decade.

    If an investor put $100 into the stock market in 1970, and then waited until 1979, that $100 would have turned into $127. However, a product that cost $1.00 in 1970 would cost $2.00 in 1979, so the investor has more Dollars, but less wealth. Remember that the next time policy makers indicate that inflation will boost the stock market.

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    Chinese Real Estate’s Great Leap Forward.

    In Investment Returns on April 19, 2011 by CQCA

    In December, the People’s Daily reported that the Chinese National Bureau of Statistics was changing its housing price calculation method. The most alarming part of the change was how the data would be collected. According to the article “[The NBS] released the draft plan on September 25, which said prices, floor areas, and sales of newly-constructed houses in 35 major cities would be based upon data from local real estate departments, instead of independent research.” Every time China’s central government allowed the local government to report on important economic data, it has usually ended in disaster.

    In February, a Wall Street Journal article reported that “China’s statistics agency said it will stop publishing the country’s much-watched official index of national property prices, scrapping a set of data whose accuracy was widely questioned but which also had become a rallying point for public anger over rapidly rising housing prices.”

    Conveniently, a People’s Daily article later reported that “Property prices in key cities grew slower in March [2011], and some actually declined, as the government’s measures to curb rampant real estate speculation and tightened monetary policies began to bite.”

    The article goes on to say that housing prices in China’s two largest cities, Beijing and Shanghai, actually increased. It is likely that China’s property market data will reflect the central government’s conflicting policy objectives of both keeping rents down and stimulating the construction industry, instead of reflecting reality. The U.S. built houses, China is building skyscrapers. It will not end well.

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    SLV’s Trade Volume Spiked in the Beginning of April.

    In Investment Returns on April 17, 2011 by CQCA

    This month SLV saw a spike in trade volume. That means more investors are hoping to get on the bandwagon and the current holders are cashing out. If anyone bought silver between 2006 and 2009, they are up about 200%.

    However, instead of being a simple matter of some investors cashing out and some hoping to continue on the upside, SLV trades may reflect precious metals investors’ views on longterm monetary policy. The last spike in the graph shown above was the week of November 2nd through the 8th, 2010. That is the same week the Federal Reserve announced it “[I]ntends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.”

    Will we see QE3? Silver investors think we will.

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    Relationship Between Physical Silver and SLV.

    In Investment Returns on April 12, 2011 by CQCA

    Investors looking to directly add silver to their portfolios have two options: physical silver or an ETF.  Physical silver means coins and bars, usually held in a safety deposit box or private residence.  An ETF is traded like a stock, but instead of representing ownership of a company, in represents an actual asset, such as a commodity.  The most common ETF for silver is the iShares Silver Trust (SLV).

    Even though SLV is linked to physical silver, the share price of SLV and the spot price of silver do not always move in tandem.  The above chart took the average monthly closing share price of SLV and the average monthly closing spot price of silver. Data for the monthly closing spot price of silver was taken from the Silver Institute.

    The reason prices for each would be different are that they both serve different functions.  If an investor seeks easy, instant investment or divestment of silver, an exchange traded fund is the better alternative.  If an investor believes the financial system will collapse and civilization will press the restart button, physical silver is ideal.  However, these differences do not account for the two similar financial products’ price occasionally moving in different directions or lagging each other.  This will not affect long-term holders of silver, but high-volume traders could learn from this.

     

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    ECB Interest Rates and the PIIGS.

    In Investment Returns on April 11, 2011 by CQCA

    If I deposit €100 in the bank for one year, and then receive €105 at the end of that year, the nominal interest rate is 5%. However, if the value of those Euros decrease by 6% over that same period, that €105 at the end of the year is not worth the original €100 at the beginning of the year. Even though the nominal interest rate is 5%, the real interest rate, which equals the nominal interest rate minus the inflation rate, is -1%.

    Ludwig von Mises wrote:

    “The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved. (Human Action, 4th revised edition, Fox & Wilkes, San Francisco, p. 572.)”

    This seems to have been the case in the Eurozone. Since 2002, the Eurozone’s real interest rate has been zero for most years. However, the PIIGS’s real inflation rate has been consistently lower that the Eurozone until 2007, when a larger correction happened in the PIIGS than in the Eurozone as a whole. The data supports Professor von Mises’ conclusion that sustained artificially low interest rates will cause booms to occur, followed by busts. In Europe’s case, the lower interest rate countries saw a larger bust.

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    U.S. Housing Prices in Silver.

    In Investment Returns on April 4, 2011 by CQCA

    The chart above shows the price of a house in the U.S. if it were bought with silver.

    In 1975, the average price of a house was $42,600. An ounce of silver was $4.09. Therefore, it would take 10,415.65 ounces of silver to buy one house.

    Houses then lost 68% of their value by 1979. The price of a house in that year was 3,294.64 ounces of silver.

    The bull market is silver-priced housing lasted until 2003. Between 1979 and 2003, the silver price of a house increased 1,412.5%.

    Between 2003 and 2010, the silver price of a house decreased 73.35%.

    For reference, the value of homes in Dollars, gold, and silver is shown below.

    Sources: Housing price data is from the U.S. Census Bureau and gold and silver prices are from Kitco.

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