Tagged: money

What’s In It

We rode the Colorado National Monument this week with our good friends from Sun Valley. There’s a lesson in it about life and stocks both.

We would’ve been riding bikes in Puglia with them now, if not for this pandemic.  Oh, and part of the lesson learned is in Telluride.

Stay with me.  I’ll explain.

So we learned Sun Valley is comprised of four towns.  Sun Valley, Ketchum, Hailey and Bellevue. Each has its own mayor, own government.  It could be one united town, but no.

There’s a point.  While you ponder that, let me give you some background.

Karen and I wandered from Denver to Glenwood Springs (rode bikes, ate great food, soaked in hot springs, at this energetic little burg favored by Wyatt Earp and Doc Holliday), and on to Grand Junction (pedaled the Monument and bunked at the lovely Hotel Maverick on the campus of Colorado Mesa University).

We then migrated to Moab and hiked Canyonlands and cycled the Potash Highway where evidence remains of a civilization once living in paradise on the Colorado River (if your etched recreations of yourselves in sandstone reflect jewelry and wildly stylish hair, you’re well up the actualization hierarchy from basic sustenance).

We next traversed the remote stretch from there to Telluride, a dramatic geological shift. The little city in a box canyon lighted by Nikola Tesla and robbed by Butch Cassidy is a swanky spot at the end of the road.  Wow.  I get it.  Oprah. Tom Cruise. Ralph Lauren. It looks like their town.

Or towns, rather.  Because here too as in Idaho there are cities a couple miles apart with two mayors, two governments. There’s Telluride, CO, in the valley. There’s Mountain Village, CO, up above (where no expense has been spared – you cannot find a tool shed that’s a shack).

And that’s the lesson. People talk about coming together.  Sun Valley can’t.  Telluride can’t.  Could it be humans are motivated by their own interests?

And how about money behind stocks?

More on that in a moment.

NIRI, the association for investor-relations professionals, has a 50-year history.  I’m on the national board representing service providers.  We were blindsided by the SEC this summer, which abruptly proposed changing the threshold for so-called 13Fs, named for the section of the Securities Act creating them.

Our profession depends on those filings to understand shareholdings.

The SEC said funds with less than $5 billion of assets would no longer have to file.  There goes insight into 90% of funds. The SEC never asked us.

You’re thinking, “There’s a hammer here, and a nail. Perhaps I’ll just pound it through my hand rather than continue reading.”

Don’t quit! You’re getting close.

Tip O’Neill and Ronald Reagan made deals. You youngsters, look it up.  There were “pork barrel politics,” a pejorative way to describe a quid pro quo.  Wait, is that a double negative?

Let me rephrase. Politicians used to do deals.  Give me something, I’ll give you something.  You can decry it but it’s human nature.  We don’t “come together” without a reason.

Sun Valley. Telluride. They haven’t yet found a reason to unite.

NIRI could learn. We can talk for ten years about why we deserve better data. There’s nothing in it for the other side. I bet if we said to the bulge bracket, the Goldman Sachses, the Morgan Stanleys, “You lose your corporate access until you help us get better data.”

Now both have skin in the game. Stuff gets done.

Most of us outside Jesus Christ, Mother Theresa, Martin Luther King, Jr and Mahatma Gandhi are motivated by what benefits us.

Shift to stocks.  Money with different purposes and time-horizons drives them.  The motivation for each is self-interest, not headlines or negotiations between Nancy Pelosi and Steven Mnuchin.

Let’s call it, “What’s In It for Me?” All the money is motivated by that.  Humans are similarly animated.  For most of the money in the market, what’s in it is a short-term return.

If you want to understand what motivates the money, you must understand self-interest.  You can learn it in Sun Valley or Telluride.  You can learn it watching politics. And it applies to stocks. Money wants returns. When that opportunity wanes, it leaves.

That’s it. No more complex. And ModernIR measures that motivation.  Ask us, and we’ll show you what’s in it for the money behind your shares.  Too bad we can’t figure it out in politics. It’s not that hard.

Mr. Smith’s Money

The price-to-earnings ratio in the S&P 500 is about 23.  Is it even meaningful?

Some say a zero-interest-rate environment justifies paying more for stocks. That’s compounding the error. If we behaved rationally, we’d see both asset classes as mispriced, both overpriced.

All investors and all public companies want risk assets to be well-valued rather than poorly valued, sure. But Warren Buffett wasn’t the first to say you shouldn’t pay more for something than it’s worth.

What’s happening now is we don’t know what anything is worth.

Which reminds me of Modern Monetary Theory (MMT).  The words “money” and “theory” shouldn’t be used in conjunction, because they imply a troubling uncertainty about the worth of the thing everyone relies on to meter their lives.

That is, we all, in some form or another, trade time, which is finite, for money, which is also finite but less so than time, thanks to central banks, which create more of it than God gave us time.

Every one of us trading time of fixed value for money of floating value is getting hosed, and it’s showing up in the stock and bond markets.

Let me explain.  Current monetary thinking sees money as debits and credits.  If gross domestic product is debited by a pandemic because people lose their jobs and can’t buy stuff, the solution is for the government to credit the economy with an equal and offsetting amount of money, balancing the books again.

This is effectively MMT.  You MMTers, don’t send me long dissertations, please. I’m being obtuse for effect.

The problem in the equation is the omission of time, which is the true denominator of all valuable things (how much times goes into the making of diamonds, for instance? Oil?). Monetarists treat time as immaterial next to money.

If it takes John Smith 35 years to accumulate enough money to retire on, and the Federal Reserve needs the blink of an eye to manufacture the same quantity and distribute it via a lending facility, John Smith has been robbed.

How? Mr. Smith’s money will now be insufficient (increasing his dependency on government) because the increase in the availability of money will reduce the return Mr. Smith can generate from lending it to someone else to produce an income stream.

Mispriced bonds.  They don’t yield enough and they cost too much.

So by extension the cost of everything else must go up.  Why? Because every good, every service, will need just a little more capital to produce them, as its value has been diminished.  To offset that effect, prices must rise.

And prices can’t rise enough to offset this effect, so you pay 23 times for the earnings of the companies behind the goods and services when before you would only pay 15 times.

And this is how it becomes impossible to know the worth of anything.

And then it gets complicated.  Read a balance sheet of the Federal Reserve from 2007.  The Fed makes up its own accounting rules that don’t jive with the Generally Accepted Accounting Principles that all public companies must follow.

But it was pretty straightforward.  And there were about $10 billion of excess bank reserves on a monthly average, give or take.

Try reading that balance sheet today with all its footnotes.  It’s a game of financial Twister, and the reason isn’t time or money, but theory.  A theory of money that omits its time-value leads people to write things like:

The Board’s H.4.1 statistical release, “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks,” has been modified to include information related to TALF II LLC. The TALF II LLC was introduced on the H.4.1 cover note on June 18, 2020 https://www.federalreserve.gov/releases/h41/current/.

The theory is that if you just keep footnoting the balance sheet to describe increasingly tangled assets and offsetting liabilities, so long as it zeroes out at the end, everything will be fine.

Except it leaves out Mr. Smith and his limited time on the earth.

Oh, and excess bank reserves are now nearly $3 trillion instead of $10 billion, proof money isn’t worth what it was.

This then breaks down fundamental constructs of valuation.  And it’s why we offer Market Structure Analytics.  While fundamentals can no longer in any consistently reliable way be used to discern what the stock market is doing, Market Structure Analytics lays reasons bare.

For instance, Market Structure Sentiment™ ticked up for TSLA July 2. Good time to buy. It’s got nothing to do with fundamentals.  FB Market Structure Sentiment™ ticked up June 23. Good time to buy. In fact, it’s a 1.0/10.0 right now, but it’s 57% short, so it’s got just limited upside.  Heard all the negative stuff that would tank FB? Fat chance. Market structure rules this Mad Max world.

Public companies, if you want to understand your stock, you have to use tools that take into account today’s madness. Ours do.  Same for you, traders. Sign up for a free 14-day trial at www.marketstructureedge.com and see what drives stocks.

How does it all end? At some point Mr. Smith will lose faith, and the currency will too.  We should stop the madness before then.

Root Cause

Karen and I are in the Windy City visiting the NIRI chapter and escaping gales on the Front Range that were delaying flights to Denver and blowing in spring snow due Friday while we’re in Palo Alto for the Silicon Valley NIRI Spring Seminar (we sponsor both chapters). Hope to see you!

I’m going to challenge economic orthodoxy. Whatever your reaction as an adult to hearing the term “Santa Claus” (follow me here; it’s a mechanism, not commentary on religion or culture), you know the imagery of adolescent expectations is a myth. Even so, parents perpetuate it generationally.

Today we’ll unravel the Saint Nicholas Theory of economics. Because at root equities reflect economics even when the barometer is errant. Economic orthodoxy – conventional wisdom on economies – says we need rising prices. For businesses selling things it’s called “pricing power,” the capacity to increase the cost of goods and services. The Federal Reserve and other global central banks have an “inflation target,” and bureaucrats wearing half-glasses at droll news conferences pore over boorish scripts about “structural malaise” and the exigency of combating deflation.

Few know what they’re saying except we gather they think prices should rise. Yet we consumers stop spending when things cost too much. If our spending is the engine of the economy – what economists call consumption – how is it that rising prices are going to drive more of it? In fact when stuff’s not selling, businesses hold sales. They cut prices.QuastCurve

Big Economic Idea No. 2 (we all know from childhood what “number two” means) is that access to credit – borrowed money – is the key to more consumption. If the economy slows, the problem, we’re told, is we need more spending. Central banks the world round want you whipping out a credit card lest the global economy slip into falling prices.

This is Santa Claus Economic Theory. It says spending drives the economy, which grows when prices rise. There is only one reliable way to drive up prices: Inflation.  Milton Friedman taught us “inflation is always and everywhere a monetary phenomenon.” While prices temporarily increase when more buyers chase fewer goods (say, Uber at rush hour), costs will revert when supply and demand equalize. So inflation – rising prices – is sustainable only if the supply of money increases faster than economies produce things.

Money as we presently know it can only expand one way:  Through debt. If the Federal Reserve wants to increase currency in circulation, it buys debt from the Treasury with cash it manufactures (backed by you and me).  Likewise, when you use a credit card, you create money. A bank isn’t reaching into dInflationeposits to pay a bill you incurred. The bank creates electronic funds.  When you pay your bill, that electronic money disappears.

Stay with me. We’ve almost arrived at the bizarre and impossible logic that animates the entire global monetary system, as I’ve illustrated with three charts here.  Today Janet Yellen will try to convince us we need inflation.  Rising prices. What drives prices up? More money. How does the global monetary system create money? Through debt.  So we’re left to conclude that prosperity can only happen if debt and spending perpetually rise. Because if you pay off debt, money is destroyed and prices fall.

Two weeks ago I was on CNBC with Rick Santelli declaiming how rising debt and rising prices are the enemies of prosperity, and purchasing power is the engine of growth. Purchasing power is when your money buys more than it did before, not less.  Example:  Uber.  It used to cost $100 for a cab to the Denver airport. Uber is about $40. Guess what? Cabs are coming down.  Purchasing power is improving.

Central banks are perpetuating a myth that will destroy the global economy, and I’ve proved it with three charts. The first – call it the Quast Curve – shows what happens to the US economy if the value of the money denominating goods and services is consistently diminished over time.  Growth rises but then collapses (eerily, in this model it topped in the 1960s before we left the gold standard and hit zero around 2008). USDebt

What will follow from the Quast Curve is rising debt and rising prices, illusions of growth – exactly what images two and three show. As money buys less and less, prices go up, and consumers have to replace the missing money with debt, a terminal cycle.  It’s now on the balance sheet of the Federal Reserve.

Real economies are simple. If money has stable value, and enterprising humans create things that improve lives, costs should stay steady or decline, not rise, which increases purchasing power and wealth rather than debt.  It’s infinitely sustainable.  Economist Herb Stein said if something cannot last forever it will stop.  You never want an economy built on things that will stop. What should stop instead are bad policies.

What “Money” Means Now

It’s almost Thanksgiving, and the sun-splashed snow along Denver’s South Pearl Street is festive! Groping for reflective thoughts this holiday season we found humorist Dave Barry’s mother, who told him these immortal words long ago: “Son, it’s better to be rich and happy than poor and sick.” As Dave Barry observed, “That makes sense, even in these troubled times.”