By Jeffrey Snider
The concept of bank reserves grew from the desire to avoid the periodic bank runs that plagued Western financial systems. As noted in detail starting here, the question had always been how much cash in a vault was enough? Governments around the world decided to impose a minimum requirement, both as a matter of sanctioned safety and also to reassure the public about a particular bank’s status.
Later on, governments added other forms of bank “reserves” which could be used to satisfy any statutory deposit requirement as opposed to actual depositor needs or desires. Typically tied to the level of reported deposits, a depository institution could use not only cash and money but also any positive account balance drawn from a central bank window or liquidity program whether or not there was any actual cash or money associated with it (almost always never).
The implicit assumption is that a positive reserve balance can be made into actual cash or converted into money because of the central bank’s ability to print the former and mobilize its holdings of the latter.
Continue reading Brent’s Back In A Big Way, Still ‘Something’ Missing
By Steve Saville
In a blog post about three years ago I explained that in the real world there is money supply and there is money demand; there is no such thing as money velocity. “Money velocity” only exists in academia and is not a useful economics concept. In this post I’ll try to make the additional point that in addition to being useless, it can be dangerous.
Before getting to why the money velocity concept can be dangerous, it’s worth quickly reviewing why it is useless. In this vein, here are the main points from the blog post linked above:
1) The price (purchasing power) of money is determined in the same way as the price of anything else: by the interplay of supply and demand. The difference is that money is on one side of almost every transaction, so at any given time there will be millions of different prices for money. This is why it makes no sense to come up with a single number (e.g. the CPI) to represent the purchasing power of money.
2) Money velocity, or “V”, comes from the Equation of Exchange. This equation is often expressed as M*V = P*Q, or, in more simple terms, as M*V = nominal GDP, where “M” is the money supply. In essence, “V” is a fudge factor that is whatever it needs to be to make one side of the ultra-simplistic and largely meaningless Equation of Exchange equal to the other side.
3) The Equation of Exchange can be written: V = GDP/M. Consequently, whenever you see a chart of “money velocity” what you are really seeing is a chart showing nominal GDP divided by some measure of money supply. During a long period of relatively fast monetary inflation the line on such a chart naturally will have a downward slope.
4) Over the past two decades the pace of US money-supply growth has been relatively fast. Hence the downward trend in the GDP/M ratio (a.k.a. money velocity) over this period. Refer to the following chart for details.
5) During the 2-decade period of declining “V” there were multiple economic booms and busts, not one of which was predicted by or reliably indicated by “V”.
Continue reading The Useless and Dangerous “Money Velocity” Concept
By Tim Knight
Whenever someone argues against short-selling, they often bring up two very scary words: Infinite Risk. In other words, the most you could lose on a long position is 100%. But there is no mathematical limit to short losses. You could short a stock at $10 and it opens the next day at – – what – – let’s say $500,000. Shriek, right?
Well, yeah, but that doesn’t happen. I think the most horrendous wipeout I ever suffered was a 50% gap up, and since my positions are typically 1% of my portfolio, it wasn’t devastating. If someone is going to argue against short selling, I think a far better and more realistic argument is not that losses are unlimited but that profits are limited.
In other words, the most you can possibly make on a short is 100% and, let’s face it, stocks never go to zero. Hell, I think even Lehman Brothers is still trading in some form to this day. A gain or 20% or 30% – – maybe 50% once in a blue moon – – is a terrific success.
However, the profits on long positions are unlimited. Making more than 100% – – be it 500%, 1000%, 5000%, or even 100,000% – – is absolutely possible, and it’s been done by people all over the world. The main ingredient is timing and patience.
I’ve used SlopeCharts to create some percentage charts below, to illustrate some long-term winners as Intel……
Continue reading Stock Market Superheroes
By Otto Rock
Today’s offering from Pan American Silver (PAAS) is on this link. Here we go, your humble scribe does the black ink:
VANCOUVER, June 4, 2018 /PRNewswire/ – Pan American Silver Corp. (NASDAQ: PAAS) (TSX: PAAS) (the “Company”) today announces that the security situation on the access roads to the Dolores mine has improved following increased patrol and enforcement by the Mexican authorities.
We know this. Police have been running heavily armed convoys through the zone.
As a result, road transport of diesel fuel, cement and other supplies to the mine has now resumed.
Strange that they didn’t previously tell us they’d stopped. But so far at least the La Linea narco gangs have not engaged the convoys and trucks have got through.
The Company will increase the use of its private, secured airstrip to transport people to and from the mine site until the situation normalizes.
A nice bit of legalese here. In fact the company has been running 20 light aircraft flights per day to get workers out of Dolores. I suppose that the pilot flying back in counts as “to the mine” as well, but the traffic in reality has been one-way. Hundreds of workers flown out, with the next batch due to leave in the second half of this month. that’s when they plan to ship out heavy machinery, too.
Continue reading Parsing Today’s Pan American Silver (PAAS) NR on Dolores
By Anthony B. Sanders
10Y Term Premium Remains Negative
Yes, between Italy’s political problems and trade turbulence, the US Treasury 10Y-2Y curve is goin’ down. In fact, it is the flattest since September 17, 2007.
And the 10-year Treasury term premium remains negative.
I wonder why the US is so tentative about issuing covered bonds?
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By Keith Weiner
[biiwii comment: gold & silver supply/demand report follows]
Picture a scene in one of those action moves. Two guys are fighting for control over the steering wheel. The car is going 75mph, the road is narrow, and there is a drop over a cliff on one side. And there are lots of sharp curves.
This is a pretty good picture of the action at our central banks. Desperate men are fighting for who gets control of the monetary steering wheel, and for which rules to use to determine when to turn left and when to turn right. One side wants central planning with discretion and the other wants central planning with rules. Among the latter, a debate now rages whether to use inflation, GDP, or another measure.
For decades, the central banks have centrally planned our economy. Just as the guys fighting in the car don’t notice the abyss they keep not falling into, these central planners don’t notice the falling interest rate.
Perhaps it’s because they scoff at the actual rate at which actual lenders lend actual dollars to actual borrowers in the actual market. This, they dismiss as the mere nominal rate. But they calculate inflation, averaging apples and oranges, gasoline, and housing. Then they subtract inflation from nominal interest to get the real interest rate. That’s what they call this fictitious number, at which no one lends and no one borrows. Their real rate probably isn’t pathologically falling, the way the nominal rate is…
Wait, let’s look.
Continue reading Liquidity Preference Rising, Report 3 June 2018
Through it all (i.e., despite trade uncertainty, Italy’s political drama and ongoing concerns about the sustainability of the domestic political situation as Trump remains at odds with the nation’s top law enforcement agencies and intelligence apparatus), U.S. equities managed to turn in their best May performance since the bull market began.
To be sure, that’s a largely meaningless statistic, but it’s worth mentioning I suppose and if nothing else, it makes for a fun chart and an easy lead-in to my traditional Sunday evening week ahead preview:
Over the weekend, Trump seemed to be more agitated than usual with regard to the special counsel probe and while that drama has recently taken a backseat to more pressing concerns for markets, it’s important to remember that the headline risk around the investigation is still there – it’s just a matter of when the next shoe drops. For those who missed it, here’s a smattering of egregious “covfefe”:
Continue reading All Enemies, Foreign, Domestic, Real And Imagined: Full Week Ahead Preview
By Michael Ashton
When I don’t write as often, I have trouble re-starting. That’s because I’m not writing because I don’t have anything to say, but because I don’t have time to write. Ergo, when I do sit down to write, I have a bunch of ideas competing to be the first thing I write about. And that freezes me a bit.
So, I’m just going to shotgun out some unconnected thoughts in short bursts and we will see how it goes.
Wages! Today’s Employment Report included the nugget that private hourly earnings are up at a 2.8% rate over the last year (see chart, source Bloomberg). Some of this is probably due to the one-time bumps in pay that some corporates have given to their employees as a result of the tax cut, and so the people who believe there is no inflation and never will be any inflation will dismiss this.
On the other hand, I’ll tend to dismiss it as being less important because (a) wages follow prices, not the other way around, and (b) we already knew that wages were rising because the Atlanta Fed Wage Tracker, which controls for composition effects, is +3.3% over the last year and will probably bump higher again this month. But the rise in private wages to a 9-year high is just one more dovish argument biting the dust.
Continue reading Potpourri for $500, Alex
By Kevin Muir
Quick – the United States suddenly backtracks on half century of globalization and enters a trade war with almost all of its trading partners – do you buy or sell equities? And how about bonds?
Don’t mistake this question as me going full tinfoil-hat – I know we are far from a trade war – but it is an interesting exercise to contemplate.
I don’t have an answer how a trade war would affect financial markets. The reality is that “it depends”. I know, I know – the old joke about the one-handed economist is probably applicable here, but the financial repercussions from a trade war are not as obvious as they might seem at first.
Trade wars cause rising prices – no denying that point. But whether that causes stock and bond prices to rise or fall depends a lot on the reaction function of the central bank.
Continue reading Sleep Walking Into the Next Crisis?
US Treasury Bonds/Yields
On May 20 we presented a case in NFTRH 500 that the bearish bond play (bullish yields) was done, at least temporarily, from a contrarian perspective.
About Those Bond Yields
That was written before I realized – thanks to an alert NFTRH subscriber – that Thursday, May 31 would be another Fed SOMA (or QT) day, as bonds are allowed to hit maturity.*
The day after this bond maturation yields again went up (bonds down) as the stock market shook off the media-manufactured fears that ostensibly started in Italy but actually were destined to crop up regardless in one place or another (there was a lot of trade war noise this week).
See this NFTRH Premium update, now unlocked to the public, as it was presented in-day and in real time to give perspective for subscribers (and myself) as the media were scaring the herds into risk ‘off’ behavior and the perceived safety of Treasury bonds.
Continue reading Wrapping Up an Eventful Week in Bonds and Stocks