China Has the Most Valuable Money Supply in the World.

In Money Supply on 十二月 12, 2011 by CQCA

While no one seemed to be watching, the money supply of China snuck past the U.S. Dollar, the Japanese Yen, and the Euro to become the most valuable money supply in the world. According to each central banks’ official statistics, it reached first place in September, 2011. The Chinese money supply reached US$12.3 trillion, followed by the Eurozone at US$11.8, then Japan at US$10.4 trillion. Is this good news or bad news?

While the U.S. dollar and Euro are taking a beating in international financial markets, China and Japan have quietly gotten into a much worse monetary situation. The Yen seems to be extremely overvalued. Over the last few years it has been appreciating despite massive government debt and low interest rates supporting it. China seems to be a case of hot money driving up asset prices. If most of that new money is foreign currency, it will at some point leave the country and deflate one of the largest asset bubbles in history. If most of that new money is Renminbi, it will have to devalue sharply against other major currencies.

Either way, China seems to be doomed in the very near future. The U.S. dollar has a few more years before it reaches its intrinsic value, which is also zero.

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A Tale of Two Crises.

In Investment Returns on 十一月 19, 2011 by CQCA

We like to compare the 2007 crisis to the Great Depression, but the real Great Depression II started in the year 2000. The graph above compares the run-up and wind-down of the stock market peaks in 1929 and 2000.

On the X-axis, zero is when each stock market topped out on a monthly basis (September 1929 and August 2000). The high point of both has been indexed to one. It also shows the ten years (120 months) prior to and after the peak. The blue line (1929) and the red line (2000) trace the value of the stock markets if they were priced in gold.

Even though the lines are similar, there is one difference that we need to understand better. Between the +20 month and the +90 month, the lines separated. The 2000 market stabilized for about three years before continuing to fall. In the end, the 2000 stock market performed worse than the 1929 stock market. What was different about those years?

The above graph shows the indexed rate for the Federal Reserve bank rate over the same 10 year period. Interest rates were, on average, lower before for the 2000 peak than before the 1929 peak, which explains why the rally was also higher. But the immediate reaction was also different. After 2000, the Federal Reserve cut interest rates by more than 80%, from 6.5% to .98%. After the 1929 crash, the interest rate was only cut by 50% before being brought back up slightly. This extra stimulus from low interest rates allowed the stock market to level out for a few years.

However, that short-term gain eventually led to long-term pain, which is what we’re facing now. Not only did the stock market end at a comparatively lower point than in 1929, economic activity also took a much harder hit.

After getting a boost from low interest rates, indexed corporate earnings, which began to recover between +20 and +60 months after the crisis, eventually hit a lower point than at any time during the Great Depression I. In August 2010, ten years after the 2000 crash, we were at the same point that we were in September 1939, ten years after the 1929 crash.

At least Germany hasn’t invaded Poland, again.

Sources: Data on S&P 500 price and earnings are from R. Shiller. Gold prices are from Kitco. Interest rate data is from FRED.

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The Gold Price of Cotton.

In Currency, Inflation on 十月 16, 2011 by CQCA

From the Economist: “John Barrett, a cotton producer based in south Texas, explains that around March of last year most of the farmers he works with were happy to contract for that year’s crop at roughly 80 cents a pound. It was, historically speaking, a good price. Hardly anyone expected that, by harvest time, prices would have nearly doubled. In December cotton futures hit a nominal record of $1.59 a pound. The last time prices were so high was during the civil war and its aftermath.”

The Dollar price of cotton is at an all-time high, but the gold price of cotton is at an all-time low. Fiat currency and hard money are telling us completely different things. Both of them can buy the same thing, but one has seen constantly rising prices, and the other has seen constantly lowering prices.

In a market economy, lower prices should be the norm, not rising prices. Economies of scale and competition will bring prices down, and therefore increase the purchasing power of the common person. Instead, we have a fiat currency where the norm is for prices to rise every year. This is a monetary policy problem, not a market problem.

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Tobacco Stocks.

In Investment Returns, Money Supply on 八月 21, 2011 by CQCA

I don’t usually talk about specific stocks on this site, as I prefer to focus on money supplies and interest rates. But, for September’s newsletter, I have been looking at oil and tobacco stocks as commodity/inflation investments. I thought I would share this graph comparing the S&P 500, Altria (MO), and the money supply. Dividends were re-invested.

Between January, 1970 and August, 2011, the S&P returned 1,221.49%. The money supply increased 1,472.87% over the same time, so S&P investors actually lost wealth. Altria’s stock, by comparison, increased 118,550%. Not all tobacco stocks do well over the long term (Japan Tobacco, I’m looking at you), but some of them have outperformed gold.

I especially look forward to sending out September’s newsletter. Contact me ( if you are interested in receiving a copy.

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You’d Better Have A Really Big Mattress.

In Investment Returns on 八月 4, 2011 by CQCA

Nominal interest rates have just gone negative. That is how screwed we are.

From the WSJ:

“They say that nothing comes for free, and now that includes cash.

Bank of New York, the world’s biggest custodian bank, announced it is charging a fee of 13 basis points for unusually large cash deposits.

That has pushed money funds to move even more of their cash into already in-demand T-bills, short-term agency notes and Treasury repos.

“By forcing cash out into the marketplace, demand for money-fund investments is only going to grow, forcing investors into a pool with already incredibly shallow options,” says a money fund manager. “Most importantly, if other banks follow suit, then yield levels as a whole will have no where to go but lower as investors look to remain invested.”

Three-month T-bills recently yielded 0.008%, and short-term bills have been darting in and out of negative territory this morning.”

The real interest rate, meaning the nominal interest rate minus the inflation rate, has been negative for a long time. However, we have at least been keeping the illusion going by setting nominal interest rates higher than zero. When nominal interest rates are lower than zero, it becomes more wise to keep your money stored under your mattress. The $25 trillion that the Bank of New York Mellon has under custody and administration will have to find a pretty big mattress.

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Gold Doesn’t Look Overvalued Now.

In Debt, Investment Returns on 八月 1, 2011 by CQCA

In 1950, the U.S. national debt was $257 billion. The average price of gold that year was $34.72 per ounce. At the end of 2010 (fiscal year), the U.S. national debt was $13.5 trillion, or an increase of 52.70 times from 1950. The average price of gold in 2010 was $1224.53, or an increase of 35.27 times. As the graph shows, the increase in the price of gold has been dwarfed by the increase in the national debt.

The current national debt is estimated at $14.3 trillion. If the price of gold were to return to the same ratio that existed in 1950, the equation would be:

($34.72 per ounce/$0.257 trillion) = ($X per ounce/14.3 trillion)
X = $1,931.89 per ounce.

The closing price today was $1,620 per ounce. Even though the nominal price of gold is at historic highs, in terms of the national debt, the current price is still undervalued by 16% against the 1950s ratio.

Considering both U.S. political parties have indicated that they are unwilling to put an upward limit on the national debt, we should be safe in assuming that there will be no upward limit on the U.S. Dollar price of gold.

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Japan’s Historical Money Supply.

In Money Supply on 七月 23, 2011 by CQCA

The graph above shows Japan’s money supply between 1868 and 2010. This data came from a lot of different sources, and the Bank of Japan has not been consistent in its record keeping, so I am not as confident about this data as I am about my research on the U.S. money supply. However, I am certain that the Yen has been inflated at an incredible rate.

Isn’t it interesting how quantitative easing in Japan hasn’t re-inflated asset prices to their pre-bubble level?

Data for 1868 to 1893 comes from “Economic Fluctuations in Japan, 1868-1893,” by Shigeto Tsuru (1941). Data for 1914 to 1919 is based on “Debts, Revenues and Expenditures and Note Circulation of the Principal Belligerents,” by Louis Ross Gottlieb (1919). Data for 1920 to 1928 is estimated from “Economic Developments and Monetary Policy Responses in Interwar Japan: Evaluation Based on the Taylor Rule,” by Masato Shizume (2002). Data for 1929 to 1939 is based on estimates from “Effects on Japan of Depreciation of the Yen,” by the Institute of Pacific Affairs and Shizume’s work. 1946 to 2010 data is from the Bank of Japan, although the money supply was not uniformly calculated thought the years.


On A Long Enough Timeline, Everything Goes Parabolic.

In Money Supply on 七月 17, 2011 by CQCA

The above chart shows the growth of the different types of the U.S. money supply back to 1892. The Federal Reserve only provides online data back to 1959. The Federal Reserve Bulletins, published since 1914, and Comptroller of the Currency reports are available on the Federal Reserve Bank of St. Louis’ website. They provide enough data on currency in circulation, demand deposits, time deposits, and non-financial institution deposits to recreate the series back to 1892.

Between 1892 and 1912, the money supply expanded at about 3.71% per year. All U.S. Dollars were redeemable for gold. Between 1913 and 2003, the money supply expanded at about 6.84% per year. All U.S. Dollars are redeemable for other U.S. Dollars.

The thing that stood out about this graph is that the monetary base jumped from just above M0 to surpassing M1, meaning banks now have more money in reserve than Americans have in deposit. Once new money flows from the monetary base into the different levels of the money supply, it begins to multiply. We’ve got a long way left to climb!


Which Currencies are the Most Overvalued Against Gold?

In Currency, Inflation, Money Supply on 七月 15, 2011 by CQCA

Ever wonder what the price of gold would have to be if governments wanted to back up the full money supply? It is really only a simple matter of division, the hard part is finding the data.

The World Gold Council provides data on gold reserves by country. (Free registration is required to see their data.) I took the gold reserves of each country, and then matched them up with the data I used to calculate the money supply growth of most countries’ currencies between 2005 and 2010. I then used the current price of gold in each currency to calculate how much each currency would have to be devalued in order for that government to establish par between its money supply and gold reserve. The results are below.

The IMF issues SDRs, or Special Drawing Rights, which are magical receipts for something—no one is quite sure. The IMF has issued 182 billion SDRs, and has 90 million ounces of gold, which means the price at par would be about 2,000 SDRs per ounce. The current price in SDRs (.6343 SDRs to US$1) is about 995 SDRs per ounce. This means that the IMF would need to devalue the SDR by 50% in order to establish a par price.

Venezuela came in second because it recently devalued its currency by half against the U.S. Dollar.

The United States Dollar came in 24th place, at 95.3658% devaluation. Put another way, $100 in the future could possibly only buy $4.63 worth of goods today.

China came in 69th place, at 99.5262% devaluation. Put another way, 100 Yuan in the future could possibly only buy 0.47 Yuan worth of goods today.

Hong Kong is the biggest loser, at 99.9885% devaluation. Put another way, 1,000,000 HKD in the future could possibly only buy 115 HKD worth of goods today. I also wrote earlier about how the money supply of the Hong Kong Dollar has grown much faster than the U.S. Dollar’s, meaning the fixed price of 7.8 HKD to 1 USD over the last 14 years is nowhere near reality.

There are a few things that need to be said about these results. The first is this only considered gold. Most of these countries have foreign exchange (like Hong Kong), so if the U.S. Dollar were tied to gold, and other countries held U.S. Dollars, their “gold holdings” would increase, and therefore change the results.

Another problem is that gold has almost never been par to the entire money supply of a country. A full devaluation of this magnitude would indicate a complete collapse of humanity’s confidence in the monetary system. A much more likely scenario is that currency is completely devalued and we then go back to bartering chickens. Decades later we can start to rebuild the gold standard. Ever seen the movie Water World? If you watch it backwards, you will see that “water” is a metaphor for “inflated currency.”

The biggest problem, though, is that the data I used relies on the assumption that governments of the world are honest about their gold holdings. Ha.


Silver Is Also Very Undervalued Compared to the Monetary Base.

In Investment Returns, Money Supply on 七月 13, 2011 by CQCA

I few days ago I wrote that the high nominal price of gold is actually relatively inexpensive if we compare it to the U.S. monetary base. I was also curious about the price of silver. The results are below.

The blue line shows how many billions of ounces of silver it takes to equal the monetary base. The lower the line is, the more expensive silver is; the higher the line is, the less expensive it is. In 1979, the average price of silver was $21.79 per ounce, and the monetary base stood at $133 billion, so the monetary base was worth 6.12 billion ounces of silver. In 2002, the average price of silver was $4.60 per ounce, and the monetary base stood at $639 billion, so the monetary base was worth 149 billion ounces of silver.

The bi-weekly ratio is shown below. Similar to gold, the real price of silver is actually decreasing.

On June 29, 2011, the U.S. monetary base was worth 76 billion ounces. This is only slightly lower than the 1993 ratio of 78 billion ounces. Even though the Dollar price of silver has increased almost 500% between 2000 and 2010, in terms of credit expansion, silver is essentially as cheap today as it was when the average Dollar price was $4.97.

Now for the exciting part. How high would silver have to rise before it reached a 1980’s style bubble?
(1980 high point)/(1980 monetary base) = (equivalent high point)/(current monetary base)
(49.45)/($133,436,000,000) = (X) / ($2,645,989,000,000)
X = $980.57

The price of silver would have to reach $980.57 before it is in 1980 bubble territory. The closing price yesterday was $36.90.