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Julian Van Erlach

 
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  • Why Treasury Yields Are So Low [View article]
    Not the stock of Treasuries - but the marginal formation of capital in relation to expected real return: the Fed created and continues to create massive over-supply or marginal capital in relation to minor real return prospects: hence, the low real yield. Since capital is getting a very low real long term yield, so will labor: next to no real wage growth. Watch what happens to GDP growth...
    Jan 16 06:52 PM | 2 Likes Like |Link to Comment
  • Inflation Expectations Are At A Record Low - Or Are They Soaring? [View article]
    The Cleveland Fed needs to explain why, during the early stages of the 2008 crash when inflation expectations were clearly negative, their index shows those expectations to be actually higher than now. Impossible. Indicates serious issues with their methodology. I'll take the TIPS/Treasuries spread.
    Jan 9 10:18 AM | Likes Like |Link to Comment
  • ECRI Update: The Recession Call Is Further Undermined [View article]
    ECRI may be getting its calls wrong due to changes in the composition of GDP growth e.g. government spending and unemployment benefits, increase in personal debt used to spend, reduced imports vs. exports.

    What is concerning is the comparison of the LEVEL of the Index vs. the LEVEL of nominal GDP: this ratio must have fallen since the Index level is essentially flat for several years; and matches that of 2000.
    Dec 23 08:36 AM | 1 Like Like |Link to Comment
  • Oil Pricing And Valuation Solved - A Required Yield Theory Mechanism [View article]
    Other factors such as oil type availability, supply/demand variability, political unrest in oil-producing regions which may be expected to affect supply, energy type substitution and the like seem to fall into the 15% or so absolute variance from the model which is unexplained by the model.
    Nov 16 08:28 AM | Likes Like |Link to Comment
  • Gold: Exactly How It's Valued -- A Required Yield Theory Mechanism [View article]
    Good question. The long term global real per capita GDP growth rate is 2% (Lant Pritchett, World Bank; and others). This quanta is the basis of valuation arbitrage globally for all assets. Local higher or lower growth rates are discounted at the required yield for the expected duration of higher or lower growth. See the NYU paper: A Required Yield Theory of Stock Market Valuation and Bond Yield Determination.

    Best,

    Julian
    Nov 14 08:03 PM | Likes Like |Link to Comment
  • Casey Mulligan Nails It On The Economy-Wide Collapse [View article]
    QE created an excess of capital vs. prospective real return - see the fall in real Treasury yields. Since labor and capital must obtain the same return, QE drove down real incomes (lack of real return to capital will not permit a greater real return to labor). Since TARP, fiscal policy and QE prevented the necessary wage deflation and bad asset destruction that should have happened with the 2008 recession, real wages are still too high to allow full employment. See my article in S/A on how QE causes unemployment and prevents growth.
    Nov 11 09:44 AM | 4 Likes Like |Link to Comment
  • Weekly Unemployment Claims At 382,000: Much Worse Than Expected [View article]
    Dear Doug -

    Very thorough and insightful as always. Suggest looking at claims in relation to what they would be assuming a steady workforce participation rate in light of changing demographics. For simplicity: 382k of new claims could be looked at as percentage of the employed workforce (higher percent when employment down) and adjusted for a steady workforce participation rate (higher absolute number).

    Regards,

    Julian
    Sep 13 12:08 PM | Likes Like |Link to Comment
  • Gold: Exactly How It's Valued -- A Required Yield Theory Mechanism [View article]
    Charlie,

    All investment is risky in terms or intermediate term real after-tax return. These risks differ by asset class characteristic. The prospect of obtaining an extraordinary return is there with the right equity investment - or the right timing in other asset class investments e.g. zero coupon bonds. This incentive drives capital investment in new equity and debt offerings that fund innovation.

    In the long run, there is near zero risk of obtaining 2% (productivity growth) real, after-tax by steadily investing and gradually divesting. This return is and must be the same for stocks, long bonds, gold and even high yield debt after net principal losses. The proof for stocks is in Fed Funds Flows data since inception by comparing the compounded return of the sum of change in stock market value and dividends paid vs nominal GDP growth rate: the compounded returns and growth rates are nearly identical. No excess return.

    Regards,

    Julian
    Dec 13 05:57 PM | Likes Like |Link to Comment
  • Gold: Exactly How It's Valued -- A Required Yield Theory Mechanism [View article]
    Charlie,

    Thanks for your pointed thoughts. Please do read the article I posted on stock market valuation which specifically addresses the error in findings by a number of top academics on stock market returns, vs. those of an investor who reinvested all dividends with no taxation. What the market as a whole returned vs. the circumstances, which are not sustainable, that allowed the above investor to earn returns in excess of long bond returns - are two very different things.

    The RYT model has been proven to value stocks, the bond yield, gold and oil; as well as to solve Gibson's Paradox. Sustained returns in excess of GDP/capita are not feasible at the asset or market levels -but are at an investor level. Academics did not distinguish between the two.

    Regards,

    Julian
    Dec 13 01:28 PM | Likes Like |Link to Comment
  • Oil Pricing And Valuation Solved - A Required Yield Theory Mechanism [View article]
    The point is certainly relevant:

    1. all three RYT models for gold, stocks and oil use macro independent variables and a valuation mechanism that explains real time asset pricing very well with little to no room for manipulation or "control" e.g. supply constraints by large producers like OPEC. The paper published by NYU shows the same for bond yields.

    2. oil producers face national budget constraints and cannot long suppress output, raising prices and cutting volume: the elasticity of unit demand of oil is such that artificial constraint will be worse than total revenue neutral for OPEC. In the past, the US created its own misery during the embargo by capping the price of domestically produced oil and thus supply, which Reagan undid, and OPEC's edge was history as domestic supply surged. Oil sands and fracking to name a few directly compete with OPEC - more so the higher the price of oil
    Dec 12 01:09 PM | Likes Like |Link to Comment
  • Gold: Exactly How It's Valued -- A Required Yield Theory Mechanism [View article]
    Charlie,

    RYT posits that all asset valuations (stock market, gold, oil, bonds) and returns are directly linked to GDP growth in relation to a constant: real long run per capita productivity growth of about 2.1%. A paper published by NYU's Salomon Center proves this for stocks and bonds: "A Required Yield Theory of Stock Market Valuation and Treasury Yield Valuation" - you can Google this or get if from the http://bit.ly/udKtNH site. This constant is the economic and Finance equivalent of the "E" in E = MC2.

    Gold: total stock/mine supply grows at about 1.2% (world population growth) ( (the paper cited shows why this has to hold unless a major cheap-to-mine discovery is made; and even then the impact is minor). GDP grows in real terms at the rate of population growth, per capita real productivity growth (+ inflation, the nominal component). So, a TOz. of gold yields world nominal and real GDP/capita/Oz. The relation of fiat cash to GDP is (1+ inflation rate)/GDP so its yield is - inflation. Long run, the price of an oz. of gold MUST and does rise at world GDP/capita; which is why it buys a hand-crafted suit over time (the tailor's real wage goes up at the rate of productivity, which is the rate of gain in gold). The value of all assets comes from their characteristic relationships to GDP.

    Re "DUST": I think that expectations for a slowing rate of inflation will overwhelm declining real yields, which is net negative for gold. If true, the USD$ also rises (because the resulting fall in US imports hurts other nations' GDPs more than the US gets hurt. This also hurts gold. Stocks are likely to fall; thus hitting gold miners even more than gold. I'm long RUSS and YANG with excellent returns and may go long DUST if I see evidence of US slowing and/or China slowing.

    Happy ThanksGiving.

    Julian
    Nov 22 06:37 PM | Likes Like |Link to Comment
  • Gold: Exactly How It's Valued -- A Required Yield Theory Mechanism [View article]
    Gold fell and flat-lined for a decade + in the 80's and 90's precisely because inflation and inflation expectations fell; thus the relative purchasing power of fiat currency rose. More recently, long-term real after-tax interest rates have fallen, driving real gold prices up (I'll write about why shortly).

    I'm counting on the bulk of academia and professional investors to NOT accept that asset prices are a function of absolute economic laws and not fear, greed, supply or demand. That puts them at a disadvantage in the market. Future articles will show that stocks, bonds, the yield curve and oil are all functions of principles.
    Nov 22 09:17 AM | Likes Like |Link to Comment
  • Money Supply Growth Alert [View article]
    If the Treasury may hit the borrowing limit - then it can't pay the principal on maturing Treasuries either. Perhaps investors prefer the certainty of cash instead of even buying riskless Treasuries when they can't be sure of getting principal paid timely as they mature.
    Jul 15 06:47 PM | 1 Like Like |Link to Comment
  • How Strong Is the U.S. Economy? [View article]
    TIPS yield is not real, but nominal. The reason is that investors require an after-tax yield from all investments. TIPS are taxed on both the coupon and the inflation gross-up of principal. Thus, the TIPS yield incorporates a marginal effective tax rate as well as inflation expectations. The marginal effective tax rate of the aggregate TIPS investor pool may differ from the rate of the "nominal" Treasury investor of the same term to maturity; thus the difference in yields may not accurately reflect inflation expections. A paper on yield determination published out of NYU's Salomon Center covers the Required Yield: A Required Yield Theory of Stock Market Valuation and Treasury Yield Determination can be obtained via Google search under that title or under Required Yield Theory.

    Regards,

    Julian
    Apr 23 09:34 AM | 4 Likes Like |Link to Comment
  • How Does Deflation Actually Happen? [View article]
    Banks do not simply create money as described. Otherwise, net worth or capital could suddenly be created by granting a loan:

    Deposit: $10; followed by $90 in new loans thus maintaining a 10% fractional reserve. The balance sheet would now show $90 in new assets (loans) and $10 in liabilities (deposits); with net worth up $80. This is not the case. Bank must borrow $90 to grant $90 in loans and generates net worth growth through profit: ROA - cost to service debt, deposits and operating costs.
    Oct 12 09:27 PM | Likes Like |Link to Comment
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