Monday, December 20, 2010

CFNAI-MA3 vs. S&P 500

Here is a chart of the last six years of the Chicago Fed National Activity Index (3 month moving average) vs. the S&P 500 closing price.

The Chicago Fed National Activity Index (CFNAI) is a monthly index designed to gauge overall economic activity and related inflationary pressure. The CFNAI is released at 8:30 a.m. ET on scheduled days, normally toward the end of each calendar month.

A linear regression on the data over the last six years found little correlation (R-squared = 0.27) between the CFNAI and the S&P 500. The CFNAI is a trailing indicator that has a pretty good track record of marking recessions, but does not appear predictive of market movements.

Friday, October 22, 2010

99ers in the Shade

This is a quick chart I put together from the BLS private and government employment totals. This shows the month over month change in total employment and when roughly 99 weeks of unemployment benefits expire.

For people who have been out of work that long and are still looking, this is when all unemployment benefits expire. The next five months may be the toughest unless Congress extends benefits.

Tuesday, August 24, 2010

Added Propublica Bailout List

I added a Link List section after the blog roll. Some of the blog roll links should probably be moved down to the link list.

The lead off batter for the link list is the Propublica bailout list that covers not only TARP, but Fannie and Freddie. A few black holes in that list from which no money ever escapes.

Thursday, June 17, 2010

The shape of the elephant

The story of the blind men and an elephant is apropos of economics and markets.

The story of the blind men and an elephant originated in India. In various versions of the tale, a group of blind men (or men in the dark) touch an elephant to learn what it is like. Each one touches a different part, but only one part, such as the side or the tusk. They then compare notes on what they felt, and learn they are in complete disagreement. The story is used to indicate that reality may be viewed differently depending upon one's perspective, suggesting that what seems an absolute truth may be relative due to the deceptive nature of half-truths.

Several years ago, I began an intensive, focused (my wife says this is the only way I know how to do things) examination of money, economics, and markets. Only in the last few months have I begun to feel like I can see the silhouette of elephant.

It will always be a little fuzzy because it never sits still, always moving. The strategy I have evolved combines my own reading, research, and statistics with the opinions, research, and statistics or many other blind men whose opinions I trust.

Unfortunately, the blind men in power, who have the best vantage point -- those in the Federal Reserve, the Department of Treasury, some academics, the mainstream press, and Wall Street analysts -- are so often wrong that they are not reliable.

There are very good reasons why they are so often wrong, some innocent, some not. I did not come to this conclusion quickly or intentionally, but through countless hours of study and comparing ideas, statements, and predictions with unfolding events.

The blind men and women I rely on to help me see the elephant are scattered throughout history and the world. Some are living and some are not. The truth is out there, just not in plain sight.

Saturday, May 29, 2010

Six impossible things

This is a great post from John Mauldin on the impossibility of every nation becoming net exporters and reducing deficits at the same time.

Sunday, May 16, 2010

Thursday, May 6, 2010

Stock market is broken

While I was at lunch today, the DOW took a thousand point plunge, then recovered about 600 points within about 30 minutes. Meanwhile, gold was up over 2.5%. The stock market mechanism is broken and fraudulent due to HFT trading, front running, and a host of other reasons.

Google finance was showing 30,110 shares of Accenture stock (ACN) traded at 1 penny, while it closed at 41.09. Any system where this is normal is not a place to put hard earned money, or pension fund money.


Saturday, May 1, 2010

California Unemployment Insurance Fund Balance

The following chart shows the California UI Fund balance and Month-over-Month changes since the recession began in December, 2007. The balance went negative at the end of 2008 and has had a growing negative balance since then.

Monday, April 19, 2010

US Debt vs. Gold Price linear regression

WARNING: This is not financial advice, just a fun project for me.

A chart at Jesse's Cafe Americain inspired me to crunch the debt numbers on my own. That chart compares US debt to the gold price and showed a very high correlation (R-squared of 0.93).

I downloaded monthly public debt data from the Treasury starting in 2001 and historical gold prices from Kitco, then ran my own linear regression using the open source R program. The R-squared was was 0.9288, confirming the value from the chart at Jesse's site. This is the regression chart for the 2001-2010 data:

The linear regression formula (without the error term) is:
GOLD PRICE (nominal) = -522.86 + (.1334 * US-debt-in-billions)

If we take the Obama administration estimates of $1 trillion dollar deficits for the foreseeable future, the model makes this prediction (with 95% confidence):

June 1, 2016: US debt = $19 trillion
price of gold (nominal) = 1849.42 (low), 2011.84 (best fit), 2174.27 (high)

Now, some caveats. Below is an annual regression from 1971 which still has a good correlation (0.5564), but predicts lower prices. Correlation is not causation, and I suspect there are many other factors that weigh on the gold price, both positive and negative.

After confirming the original chart, I went back to Treasury and gathered annual debt numbers as back to 1971 when the final dollar link to gold was broken. The R-squared for the larger data set is 0.5564. This is the regression chart for the 1971-2010 data:

The linear regression formula (without the error term) is:
GOLD PRICE (nominal) = 181.46 + (0.0518 * US-debt-in-billions)

And this is what the updated model predicts (with 95% confidence):

June 1, 2016: US debt = $19 trillion
price of gold (nominal) = 780.95 (low), 1165.66 (best fit), 1549.94 (high)

Friday, April 9, 2010

Gold charts 4/1/2010

In all charts, money stock values come from the St. Louis Fed. Gold stocks come from the Gold Council and gold prices from Kitco. These comparisons are for US money stock vs. World gold supply. Charts do not start at zero to better show changes.

Tuesday, March 16, 2010

Gold charts 3/1/2010

In all charts, money stock values come from the St. Louis Fed. Gold stocks come from the Gold Council and gold prices from Kitco. These comparisons are for US money stock vs. World gold supply.

Starting with the 1/1/2010 data, I adjusted the estimated gold supply to reflect mining output for 2009 based on data from the Gold Council. This affects the M2/oz chart but does not affect the M2/price chart.

Charts do not start at zero to better show changes.

Saturday, March 13, 2010

They Pay Bonuses

Saturday, March 6, 2010

Consumer credit up in January, 2010

Total consumer credit was up (+2.4%) for first time since August, 2009. Before that, you have to go back to December 2008 for an uptick in total consumer credit. Despite the uptick in total credit, revolving credit (credit cards) continued down. We will have to wait for future releases to see if the down trend has changed.

Total Credit Dec 2009: 2451.3 Billion
Total Credit Jan 2010: 2456.3 Billion

Saturday, February 20, 2010

The Minsky view of Keynes

I just finished the book John Maynard Keynes by Hyman Minsky. It is a fresh look (circa 1975) at the revolutionary ideas from Keynes' major works, including but not limited to The General Theory.

Minsky believes that the work of Keynes was watered down and absorbed into the classical economic mainstream and the revolutionary ideas were mostly ignored. He thinks a heart attack shortly after The General Theory was published prevented Keynes from defending his work as vigilantly as he would have otherwise.

One of the big ideas in the book is an examination of how Keynes viewed investment decision making in times of uncertainty, and direct relationship between investment, growth, and employment. In A Treatise on Probability, Keynes stressed the difference between risk, which can calculated and assigned a numerical value, and uncertainty, which is incalculable. Uncertainty leads to money hoarding, leading to lower investment and employment.

Minsky fleshed out the ideas in Keynes' work related to lending, interest rates, financial investment and speculation, looking at the psychology that develops in various stages of the business cycle. Combined with the effect of increasing debts and rising asset prices, Minsky was able to tell a story about disequilibrium. The seeds of the destruction of each phase of the business cycle can be explained in terms of the psychology of financial investment and speculation, leading to the Financial Instability Hypothesis.

The book ends with an interesting discussion of Keynes' social philosophy and political aspirations. For Keynes, the trick was to achieve three goals:

  • economic efficiency

  • social justice

  • individual liberty

He believed he had found a way to balance these goals with policy modifications of government action, without going the way of Socialism or Communism. I have great empathy for these goals, though the implementation of the policy prescriptions have not proven to work as Keynes expected.

An epiphany for me was the connection between the work of Minsky and Keynes, and the Kondratiev long wave theory. Kondratiev had described long waves in Capitalism, but did not define the mechanism -- how or why long waves occurred. Minsky's Financial Instability Hypothesis, described how long waves between boom and bust could happen in a system of financial Capitalism. Rational and irrational actors play their parts, with banks, speculators, and workers interacting in fundamental ways. I need to spend some time assembling all the steps into a more coherent whole, but that connection hit me like a sledgehammer.

Wednesday, February 17, 2010

Gold charts 2/1/2010

In all charts, money stock values come from the St. Louis Fed. Gold stocks come from the Gold Council and gold prices from Kitco. These comparisons are for US money stock vs. World gold supply.

Starting with the 1/1/2010 data, I adjusted the estimated gold supply up by 2% to reflect mining output for 2009. This affects the M2/oz chart but does not affect the M2/price chart. I will make further adjustments when I receive updated supply figures from the Gold Council.

Charts do not start at zero to better show changes.

The beginning of February was a slightly better time to buy than January or December.

Saturday, February 13, 2010

Some Krugerrand trivia

The South African Krugerrand was the world's first 1 oz gold bullion investment coin. For a while, it was the most popular gold bullion coin, but has since been eclipsed by the Canadian Maple.

The obverse side has a picture of Paul Kruger, while the reverse side has a picture of a springbok antelope, one of South Africa's national symbols. The rand is the unit of South African currency, hence Kruger-rand. It is minted with no face value, but is legal tender in South Africa, taking on the current market value of spot gold.

Below the antelope image on the right side are the small initials CLS for Coert L. Steynberg, the South African artist who designed the image.

One of the unique features of the Krugerrand is that it is an alloy of only gold and copper, giving a darker, redder tone than other bullion coins, that are usually pure gold or are alloyed with silver in addition to copper. I happen to like the color, but it is purely a matter of personal taste.

One point that confuses some people new to gold investing is that 1 oz bullion coins contain a full ounce of gold despite being alloyed, so a 1 oz 22 karat Krugerrand contains the same amount of gold as a 1 oz 24 karat Maple. It actually weighs a little more than the Maple due to the copper content.

Diameter 32.69mm
Thickness 2.74/2.84mm
Weight 33.931 g
Fineness Au 916.67/Cu 83.33
Gold 31.1035g
Reed edge 220

Wednesday, February 10, 2010

The most frequently counterfeited US gold coin

"The single most counterfeited series of U.S. gold coins is the Indian Head Quarter Eagle. This series accounts for approximately 40% of all counterfeit gold coins received by PCGS."

Read the full article at PCGS...

Saturday, February 6, 2010

Debunking Economics

Debunking Economics, by Steve Keen, is perhaps a seminal work for bringing economics out of the 19th century. Building on the work of Keynes and Hyman Minsky, Keen makes a strong case for leaving static, equilibrium based neoclassical economics behind.

The flaws in classical economic axioms are so obvious, and the predictions so poor, that they are indefensible. Yet, their ideas still dominate academic and practicing economists, with policies that are not just misguided, but harmful to the well being of the world political economy.

The new dynamic models Keen has developed show great promise as a new way to approach an understanding of modern credit based economies. This book ranks near the top of all economic books on my bookshelf.

I was particularly impressed with chapters 10 and 11, which cover financial markets, the efficient markets hypothesis, Irving Fisher's theories before and after the Depression, and Minsky's financial instability hypothesis.

Tuesday, February 2, 2010

Great money supply primer

I stumbled on a great money supply primer on Jesse's Cafe Americain.

In my gold charts, I mainly use M2 for comparisons against gold supply and gold price.

The use of pools of water is an excellent metaphor, and can be applied to money flows more broadly than just money supply (e.g. stocks and other assets).

Tuesday, January 26, 2010

Oompa Loompa Bankers

Oompa Loompa Bankerdee doo
I've got another puzzle for you
Oompa Loompa Bankerdah dee
If you are wise you'll listen to me

What do you get from a Ben Bernanke?
A flood of reserves and spreads greater than three
Why don't you try simply cooking your books?
Regulators would not dare to look

You'll get no
You'll get no
You'll get no subpoenas

Oompa Loompa Bankerdee Dah
If you are greedy you will go far
You will live in happiness too
Like the Nineteen
Oompa Loompa Bankerdee do

Saturday, January 23, 2010

Added Steve Keen's Debtwatch

Steve Keen is an Australian economist, who is a luminary in a more advanced school of economic thought, post neoclassical. He is extending the work of Hyman Minsky through dynamic system models and shows compelling data on the effects of too much debt.

I am about half way through his Debunking Economics book, gaining better insights into neoclassical theory and why much of it doesn't work in the real world.

There is a treasure trove of lectures, models, and articles at his Debtwatch site.

Friday, January 15, 2010

Q4 Hoisington Economic Review and Outlook

The Hoisington Investment Group publishes a quarterly review and outlook.

The outlook has not changed much from Q32009, with a strong case made for continued drops in money supply, credit, and asset prices. They recommend US long bonds to take advantage of disinflation (or even deflation).

What remains a mystery is under what circumstances a lack of foreign buyers would create a huge interest rate spike. Treasury rates, especially long rates seem particularly vulnerable.

On the other hand, the dynamic that seems to be at work presently is Fed monetization that is feeding banks, who recycle that money not into loans, but into stocks, bonds, and commodities. The Fed is threatening to withdraw support of the mortgage market, which could pull a lot of money and leverage out of the system. This would tend to push rates up, but could also spur a flight to safety in Treasuries. I'm not sure how the dynamic is going to play out.

Wednesday, January 13, 2010

Gold charts 1/1/2010

All charts start from a number greater than zero to better show monthly changes.

M2/World Gold Supply (oz)

M2/Gold Price

In all charts, money stock values come from the St. Louis Fed. Gold stocks come from the Gold Council and gold prices from Kitco. These comparisons are for US money stock vs. World gold supply. Starting this month, I removed the MZM charts since they really told the same story as M2 vs. gold.

After peaking in December, gold pulled back more than $100 to start the new year at $1,121.50. The pull back, along with an increased M2 for the month, made it [relatively] more affordable than December 1.

At the beginning of the month, the M2/Price ratio was 7.49. During the stagflation crisis in 1980, the ratio went under 3.

Saturday, January 9, 2010

One of these things is not like the other

Can you spot the broken promise in the picture?

This is a picture of a 1957 silver certificate and the reverse side of an 1879 Morgan silver dollar. Both are US legal tender with face values of 1 dollar. The silver certificate is supposed to be backed by silver in the US Treasury and convertible to silver on demand.

In 1965, the US Mint began debasing silver coinage and circulating coins contain no silver today. After 1968, the US Treasury reneged on its promise to honor conversion and the purchasing power of the silver certificate steadily declined while the purchasing power of the Morgan silver dollar increased. The Treasury has sold off all 16 million ounces of silver it once held as reserves. The Mint must purchase silver on the open market in order to create silver Eagle bullion and other collectible coins.

This scenario has played out time and again throughout the history of government issued money. Do not believe for a moment that the US government won't break its monetary promises. It has done so in the recent past.