Magic Trees: The Performance Of Equities Vs. Commodities [View article]
Good question. It's actually a lot closer, partly because these are big companies that tend to manage earnings...so most of the time they are very close, but then they diverge dramatically in crises. So right now, it's 15.92 versus 15.56 (+ only).
But in 2009, it was 18.04 and 15.84.
In 2008, it was 15.01 and 10.90.
...which is also a good argument for using 10-year earnings, by the way!
Magic Trees: The Performance Of Equities Vs. Commodities [View article]
Although the returns for a single futures contract are strongly correlated with the spot price, it is not the spot change of the futures contract that leads to the majority of the gains in the index over time - you can't generalize the main sources of DAILY return to the main sources of LONG RUN return.
Implementing the commodity index strategy is nearly costless. Bid/offer in commodity futures markets is tiny.
The main return from stock indices comes from gains in the underlying earnings. But for commodities it comes from selling the commodities that have risen and buying the ones that have fallen (plus the collateral return). This same effect has almost no value for equity indices because the correlation of individual index components is nearly 1. (I demonstrated this in an article a couple of years ago...would have to search for it). In the real world, commodity index strategies have in FACT over time matched equity indices...commodity index strategies have been around since the 1970s.
The theory of normal backwardation adds only a small piece of the total returns of a commodity index. I am not sure the theory has ever been satisfactorily proven, but it doesn't really matter much for the returns of a commodity index.
I do appreciate the feedback, and the skepticism is valuable. But this really is the latest word on the subject (the Gorton/Rouwenhorst article, not the Ashton/Greer article).
Magic Trees: The Performance Of Equities Vs. Commodities [View article]
This is the last word on the subject, by Gorton & Rouwenhorst. http://bit.ly/UBmDZx
I am always very careful to say: commodity INDICES, not commodities. Those are very different things. Physical commodities return something less than 0, after inflation, over time. That includes gold.
When you move from physical commodities to futures, you add a return from the collateral, and a return from normal backwardation. When you move from futures to an index, you also get a SUBSTANTIAL benefit from rebalancing.
Over a long period of time, the returns of commodity indices and equity indices has been very close to the same, with similar risks, except that commodities indices are positively skewed and kurtotic while equity indices are negatively skewed and positively kurtotic (in other words, equities crash downward while commodity indices tend to crash upward).
I also wrote a paper with Bob Greer on this topic; it became chapter 4 of this book: http://bit.ly/11gUopc
Magic Trees: The Performance Of Equities Vs. Commodities [View article]
I don't try to pick individual commodities. The source of long-run return is in the rebalancing, so you want a wide variety of commodities, not just one or two!
Magic Trees: The Performance Of Equities Vs. Commodities [View article]
But commodities are real goods, while equities are only loosely-speaking real assets. There is a direct connection between the quantity of money and the dollar price of a real good. So what should have happened is that stocks should have gone up, but by less than inflation, and commodities should have boomed (see: the 1970s!). At least, that is the rational and theoretically-preferred explanation. It didn't happen this time!
Why The Fed Doesn't Fear Inflation, But You Do [View article]
No. The prices paid subindex basically tracks energy prices. The correlation between the change in unleaded gasoline prices and the prices paid subcomponent of ISM is 0.6 over the last decade or so. There isn't much informational content in it (and actually, the correlation used to be higher than that!).
Yes, the Fed has been paying Interest on Excess Reserves since the first QE.
I didn't mean to suggest that M2 is the ONLY measure of money that matters - only that you need something that measures transactional money rather than reserves.
No bank has borrowed at the Window since deep in the crisis. They all have too MANY reserves, not too few. But they get paid to hold reserves, rather than utilize those reserves by increasing lending.
There's no question that QE through the "portfolio balance channel" has substituted for animal spirits (I wrote an article recently "a relatively good deal doesn't mean it's a good deal", or something like that, where I make that point and show an illustration of it).
i wouldn't expect much difference in credit creation under that circumstance. QE hasn't had much effect on M2, which is where it all matters. It has had SOME effect, but not much, because it's all sitting in excess reserves (but if the Fed hadn't paid interest on excess reserves, it would have had a much larger effect because the incentive to lend it would have been larger. And if the Fed made IOER a penalty rate, it would have had a very large effect).
Well, I will be explicit. Without QE, as it has been implemented (that is, paying banks to keep the reserves in the vault, rather than releasing them into the economy, so that it mainly has served to delever the banks):
Assuming that the Fed didn't do what the Fed did in the Great Depression, and TIGHTEN - if they had merely maintained the standard monetary policy (I leave aside the question of the emergency measures, some of which were necessary and none of which were QE), and M2 had grown at 6-7% rather than 9-10%, then we would have had core CPI near 0% rather than 0.6% at the lows. By now, it would be back around 1.5%. The asset markets would be lower and steadier, and offer better opportunities to invest for future returns. Interest rates would be slowly rising as the economy improved, unless the Fed took action to keep them low. I don't think it should.
Unemployment would have followed essentially the same trajectory, as theory says it should have. (All of this assumes that the Congress and Administration followed the same path.)
Again, the real question is the counterfactual. If rather than QE, the Fed had pursued tight money, 2% or 3% money growth, then we would likely be in a primary depression and stuck in deflation. But I assume THAT error is one that would be unlikely, since we've already done that one.
Incidentally, as far as I can tell from the dozens of Fed economists I've met, spoken to, listened to, or read comments from...they are really basically one economist. There is a real dearth of creative thought at the Fed. I can identify only one or two true monetarists in all of those thousands - Daniel L Thornton at the St. Louis Fed is one that deserves to be singled out because he has spoken out about this problem. http://bit.ly/ZLgLkx
Magic Trees: The Performance Of Equities Vs. Commodities [View article]
But in 2009, it was 18.04 and 15.84.
In 2008, it was 15.01 and 10.90.
...which is also a good argument for using 10-year earnings, by the way!
Magic Trees: The Performance Of Equities Vs. Commodities [View article]
Implementing the commodity index strategy is nearly costless. Bid/offer in commodity futures markets is tiny.
The main return from stock indices comes from gains in the underlying earnings. But for commodities it comes from selling the commodities that have risen and buying the ones that have fallen (plus the collateral return). This same effect has almost no value for equity indices because the correlation of individual index components is nearly 1. (I demonstrated this in an article a couple of years ago...would have to search for it). In the real world, commodity index strategies have in FACT over time matched equity indices...commodity index strategies have been around since the 1970s.
The theory of normal backwardation adds only a small piece of the total returns of a commodity index. I am not sure the theory has ever been satisfactorily proven, but it doesn't really matter much for the returns of a commodity index.
I do appreciate the feedback, and the skepticism is valuable. But this really is the latest word on the subject (the Gorton/Rouwenhorst article, not the Ashton/Greer article).
Magic Trees: The Performance Of Equities Vs. Commodities [View article]
Magic Trees: The Performance Of Equities Vs. Commodities [View article]
I am always very careful to say: commodity INDICES, not commodities. Those are very different things. Physical commodities return something less than 0, after inflation, over time. That includes gold.
When you move from physical commodities to futures, you add a return from the collateral, and a return from normal backwardation. When you move from futures to an index, you also get a SUBSTANTIAL benefit from rebalancing.
Over a long period of time, the returns of commodity indices and equity indices has been very close to the same, with similar risks, except that commodities indices are positively skewed and kurtotic while equity indices are negatively skewed and positively kurtotic (in other words, equities crash downward while commodity indices tend to crash upward).
I also wrote a paper with Bob Greer on this topic; it became chapter 4 of this book: http://bit.ly/11gUopc
Magic Trees: The Performance Of Equities Vs. Commodities [View article]
Magic Trees: The Performance Of Equities Vs. Commodities [View article]
Magic Trees: The Performance Of Equities Vs. Commodities [View article]
Summary Of My Post-Employment Thoughts [View article]
A Broken Record But It's A Good Song [View article]
4 x (232.758 / 231.526 - 1) = 2.128%
If you use the NSA numbers, which I don't recommend, the figure works out to 3.5%.
Why The Fed Doesn't Fear Inflation, But You Do [View article]
Not So Fast On The Deflation Talk [View article]
I didn't mean to suggest that M2 is the ONLY measure of money that matters - only that you need something that measures transactional money rather than reserves.
No bank has borrowed at the Window since deep in the crisis. They all have too MANY reserves, not too few. But they get paid to hold reserves, rather than utilize those reserves by increasing lending.
There's no question that QE through the "portfolio balance channel" has substituted for animal spirits (I wrote an article recently "a relatively good deal doesn't mean it's a good deal", or something like that, where I make that point and show an illustration of it).
Why The Fed Doesn't Fear Inflation, But You Do [View article]
Not So Fast On The Deflation Talk [View article]
Not So Fast On The Deflation Talk [View article]
Assuming that the Fed didn't do what the Fed did in the Great Depression, and TIGHTEN - if they had merely maintained the standard monetary policy (I leave aside the question of the emergency measures, some of which were necessary and none of which were QE), and M2 had grown at 6-7% rather than 9-10%, then we would have had core CPI near 0% rather than 0.6% at the lows. By now, it would be back around 1.5%. The asset markets would be lower and steadier, and offer better opportunities to invest for future returns. Interest rates would be slowly rising as the economy improved, unless the Fed took action to keep them low. I don't think it should.
Unemployment would have followed essentially the same trajectory, as theory says it should have. (All of this assumes that the Congress and Administration followed the same path.)
Again, the real question is the counterfactual. If rather than QE, the Fed had pursued tight money, 2% or 3% money growth, then we would likely be in a primary depression and stuck in deflation. But I assume THAT error is one that would be unlikely, since we've already done that one.
Incidentally, as far as I can tell from the dozens of Fed economists I've met, spoken to, listened to, or read comments from...they are really basically one economist. There is a real dearth of creative thought at the Fed. I can identify only one or two true monetarists in all of those thousands - Daniel L Thornton at the St. Louis Fed is one that deserves to be singled out because he has spoken out about this problem. http://bit.ly/ZLgLkx
Not So Fast On The Deflation Talk [View article]