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Atle Willems, CFA is an equity investor with a long-term view investing in undervalued listed shares with solid operational track records and sensible balance sheets.
My company:
Liabridge
My blog:
EcPoFi - Economics, Politics, Finance
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  • U.S. Money, Credit & Treasuries Review (As Of 2 April 2014)

    According to data released yesterday by the Federal Reserve, the U.S. monetary base closed at USD 3.8850 trillion for the bi-weekly period ending 2 April 2013, leaving the base USD 134 billion, or 3.6%, higher than year end 2013. Compared to the same period last year, the base increased 30.1%. This is a tremendous increase even by Japanese standards.

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    With the Fed tapering now starting to bite combined with a higher denominator than last year, the year on year percentage increase was the lowest since the bi-weekly period ending 21 August last year. This means that even if the Fed did not taper, the growth rate in the base would continue to slow. The Fed taper therefore means the growth rate will drop even more. The monthly asset purchases will now be USD 55 billion a month starting this month. Assuming the Fed continues to buy USD 55 billion a month in assets for the rest of the year, this would result in an expansion of the base of "just" under 17% this year. With the Fed's expectation to reduce asset purchases "by a further $10 billion at each upcoming meeting absent a material change in the economic outlook" (here) the increase in the growth rate would fall below the 17% increase if the plan is stuck with. The growth rate in the base would as a result drop more than half the just under 40% expansion witnessed in 2013.

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    In one way or another, this drop in the growth rate of the monetary base will have negative consequences for the stock market as interest rates could move higher and money supply will expand less than otherwise. Both are negative for not only equities, but most asset prices. It would be challenging to argue that Fed balance sheet expansion has not been a primary driver of stock market prices especially in 2013. Perhaps stock market investors is just starting to absorb this knowledge as the S&P 500 index dropped 2.65% this week.

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    The M2 money supply year on year growth came in at 5.8% for the week, the lowest since the bi-weekly period ending 22 January and down from 6.2% two weeks ago. The growth rate in Bank Credit, a primary driver of money supply growth, fell from 3.0% two weeks ago to 2.9%. This is a low growth rate in a historical perspective (it has averaged 6.4% since 1985), but it is a significant increase from the trough of 1.1% hit on 25 December last year. As the Fed is now tapering, it's an absolute necessity that bank credit growth picks up to support money supply growth. Be advised that it's not my position that keeping a high money supply growth rate is the right thing to do. Regular readers of this review and EcPoFi in general will know that my commentary on the money supply is from the perspective of the Austrian Business Cycle Theory. This theory explains that booms are fueled by increases in the money supply (which again is driven by bank credit and government deficits supported by banks or the Federal Reserve) and will come to an end when the money supply growth falls.

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    Continued massive budget deficits, a debt to GDP ratio of 100% and government intervention in most areas of the economy ranging from minimum wages to housing, but who cares? When turmoil sets in, being it nervous stock market investors or emerging market crisis, the money still flows to U.S. government treasuries even as money inflation is running at around 6%. During the last two weeks, the 1-year treasury yield shred 3 basis points and the 10-year one did the same. The latter is now down 30 basis since 27 December last year. Compared to a year ago, the 1-year yield is down 2 basis points while the 10-year yield is up 92 basis points resulting in the spread between the two widening by 92 basis points.

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    The key developments in the money supply, bank credit and treasury yields for the bi-weekly period ending 2 April 2014 (11 April for treasury yields) are summarised in the tables below.

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    The U.S. Money, Credit & Treasuries Review is a report issued on a bi-weekly basis by EcPoFi. You can access all previous issues since February 2013 here.

    Recommended for the keen follower of money supply developments: The Short Version of the Austrian True Money Supply.

    Must read: The central banker with a different view: The Central Banker of All Central Bankers Explains The Way To Recove

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 12 2:35 PM | Link | Comment!
  • Waiting For Economic Growth Is Wishful Thinking

    Originally posted on ecpofi.com 4 April 2014

    I constantly come across reports claiming economic growth in Europe and the US is picking up. Many draw this conclusion from looking at changes in GDP. An increase in GDP is an increase in economic growth the thinking goes. But true economic growth is defined as "an increase in living standards". Without getting into a long debate of whether GDP growth is an indicator of economic growth, it perhaps suffices to ask whether U.S. citizens today really are 16.3% better off than they were at the end of 2007. This happens to be the overall growth in GDP from Q4 2007 to Q4 2013?

    A higher living standard means we are able to satisfy more of our wants. To achieve this we need to save and invest in order to produce goods and services to satisfy this end. The more efficient we become at these tasks, the more we produce and the more we can ultimately satisfy these wants through the act of consumption. By producing and consuming more of what we want and allocating resources in the direction of producing the most urgent wants first (and then proceeding down the wish list), we become better off economically speaking.

    It's the role of businesses to produce goods and services that satisfy consumers wants and needs. For these business to operate and to become better at what they do, they require savings which can be channeled into investments and producers goods which leads to the building up of capital. Capital accumulation means that business can produce not only more consumer goods than before, but also produce those goods more efficiently. This leads to not only cheaper goods and services ceteris paribus, but also higher wages as workers become more productive as a result. Taxes reduces the amount of savings in an economy and hence the resources available for investments.

    The market is an intricate web of actors and prices that interact on a continuous basis to exchange those goods and services produced. It consists of people who exchange something they want less off (selling) for something they want more (buying). Everybody choosing to exchange based on their free will wins (at least ex ante). This market is made up of all of us, both producers and consumers, independent of religion or political beliefs and includes actors which are short and tall, nice and mean, black and white and rich and poor. The market is an integral part of civilized society, without it there would be no society as we know it. It's the most wide spread form of social co-operation that exist. Strangely, this is too often forgotten about by politicians, voters and even some economists. Worse yet, some are not even aware of this fact.

    For businesses to produce and for the market to work as efficiently as possible, both require minimum government intervention, which only serves to substitutes coercion for voluntary actions and to distort all important price signals.

    To summarise, for economic growth to take place the following are prerequisites:

    • An increasing proportion of people need to take part in the actual production of goods and services
    • Increased savings to fuel investments and capital accumulation
    • A reduction of government intervention

    We here come to the crux of the matter: for economic growth to take place, governments must shrink in size and a larger proportion of people need to work in the productive sector. The overall tax burden must be reduced to allow an increase in savings. In addition, government intervention in the market needs to end and unnecessary regulations of the market must be removed. If not, nothing will fundamentally change as these factors combined explain much of the reason both Europe and the US entered the recession in the first place.

    Finally, all that went wrong in both the U.S. and Europe was made possible through fractional reserve banking systems supported by central banks. Such a system makes it possible to create money out of thin air which can then be used to finance a range of projects that otherwise would not have been able to attain finance. The monetary system hence also need to be improved to make it impossible for undue expansion of the money supply (see here for more on this).

    To raise the prospects for achieving economic growth going forward, we need to change what was wrong with the economy in the first place. Otherwise, expecting and waiting for economic growth would be wishful thinking at best. Above I have tried to highlight some of the key areas that are holding economic growth back. Of course, businesses become better every day at producing even with high taxes and intervention*. This by itself creates some growth, but the growth would be modest at best and significantly below what it could be.

    *And we could of course suddenly discover a giant deposit of oil reducing the price accordingly.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 09 8:32 AM | Link | Comment!
  • U.S. Money, Credit & Treasuries Review (As Of 19 March 2014)

    The U.S monetary base increased USD 71.5 billion during the last month according to the most recent bi-weekly monetary statistics released by the Fed. During the past 12 months the base has increased a total of USD 978.8 billion, or 33.1%. Though a significant increase, it was the lowest increase in the base in percentage terms since early September last year. It has gradually fallen since hitting 39.4% at the end of last year. This decline in the year on year (YoY) growth rate will continue going forward if the Fed proceeds as planned as it has now tapered its asset purchases by USD 30 billion a month to USD 55 billion a month starting April this year.

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    As I have explained on numerous occasions before, as the Fed is tapering an increased burden is put on banks to keep the growth rate in the money supply up. If they don't, the money supply growth will plummet and drag with it both the stock market and the economy. Should that look like becoming the case, the Fed will likely widen the monetary flood gates further once again. Bank Credit is now however showing some revived signs of increased growth. Having bottomed at 1.14% toward the end of 2013, the YoY growth rate has climbed to 3.02%, the highest reported eight months. This increase in bank credit has helped push up the YoY growth rate of the M2 money supply, from 4.87% in early January to the current 6.06%.

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    This growth in Bank Credit was driven by an increase in Loans & Leases. After bottoming at 1.86% in the early part of this year has since increased to the current YoY growth rate of 3.57%. This was the highest growth rate since early May last year.

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    The treasury yields were largely unchanged on two weeks ago. Compared to the same period last year, the 1-year yield is down 1 basis point while the 10-year is up 82 basis points leading to a 83 basis point widening of the spread.

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    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 03 3:50 AM | Link | Comment!
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