What bothers me is that nobody else was bothered that they ceased disclosing the data on repurchase agreements. I think this is because the public understands M3, but they don't understand repurchase agreements, and/or they don't care. Repurchase agreements are short-term loans that the Fed makes to banks, brokerage houses, and other financial institutions. This is one way the Fed can pump liquidity (currency) into the markets. And by rolling over old loans, while continually making new ones, the Fed can inflate the currency supply as well as the markets. So now the Fed has hidden one of the methods used to inflate (Repurchase Agreements), and they have hidden the measurement that would reveal this inflation, (M3).
Their excuse for not publishing M3 was that it was too costly to compile and publish. But the data on repurchase agreements are numbers in the Fed's check registerÂ… they were the ones who made the loans. All they have to do is print a report and post it on the internet. It would cost them virtually nothing, and there is no excuse for discontinuing the disclosure of this data.
Please note, that regarding M3, they do not say they are going to stop collecting the data, they just say that it's costly, and they're not going to publish it any more. When it comes to the Fed, I have discovered that what they don't say is more important than what they do say. My bet is that they still want to know how much currency is out thereÂ… they just don't want us, and more importantly, foreign buyers of U.S. Treasuries (like Japan and China) to know.
Because there are several ways to inflate, but they all show up in M3, and if they embarked on a program of increased inflation, Japan and China would no longer buy our Treasuries. If the government can't sell off enough pieces of America (Treasuries) to fund the budget deficit, then they'd have to monetize debt (print the currency) to fund our deficit spendingÂ… and that type of inflation would come back immediately, to haunt them as rapidly rising prices. That would make the job (hiding inflation) of the BS, I mean the BLS, (I stole that joke from Adam) just that much harder.
AnywayÂ… back to the story. I took the last known M3 data published by the Fed, $10.29 trillion dollars as of February, 2006, and calculated the percentage increase from January of 2000 (when the Dow hit its previous peak) which was $6.51 trillion dollars, a whopping 58% increase. Where did all that currency come from? We borrowed it, of courseÂ… much of it from Japan and China.
This 58% increase was achieved by an average annual increase of the currency supply of 7.82% compounded over the six-year period. Now, the United States needs a continuous flow of suckers lining up to buy U.S. Treasuries to fund our budget deficits. If these suckers ever did the math, they'd figure out that if they buy a T-Bill yielding 4.82%, and the Fed inflates at a rate of 7.82%, they are actually losing 3% (paying the U.S. government 3% annually to loan it the currency).
Now, if you use M2 you come up with only a 43% increase over the same period. This, my friends, is why the Fed is now only disclosing M2Â… so the suckers will keep lining up. We need to keep borrowing or the game will come crashing down.
...
After finding out that our currency supply as of Feb. 2006 was 10.29 trillion, I took the previous rate of growth, 7.82%, and extrapolated it out to today for approximately $11.09 trillion. Now hold on to your seats because this one's going to hurtÂ… there is now 70% more currency in the currency supply today than when the Dow peaked in 2000. This means that today the Dow would have to be above 20,000 to be in positive territory.
And that's a conservative M3 estimate; because I just extrapolated past rates of inflation out to today. But John Williams has come to the rescue again, and his numbers show M3 inflating at a rate of about 9% for the first 7 months of 2006, and then rising to 11% by 2007.
However, if we only look at the inflation of the currency supply we are overstating the effect it should have on true values because at the same time the currency supply was inflating, so was the population.
So I did the same calculations for the census data on the U.S. population and found that the population has increased only 1.04% annually. If you take the estimated M3 and divide it into the estimated population, it means that, even though there are 70% more dollars in existence, there are now 58.5% more dollars per person in existence than there were in January 2000. Thus, any investment that has returned less than 58.5% over this time period is under water, and that means that the Dow would be at the break even point if it were at 18,623 today. This is using my numbers however. If John's numbers are correct then these numbers are just a little bit higher, but will get much higher in the future.
There are basically two kinds of tax, the kind the masses can see, and the kind they can't. The inflation tax is of the second kind. Whenever a politician promises you more free stuff than the guy he's running againstÂ…. Whenever the masses think they're getting something for nothingÂ… Whenever our government does deficit spendingÂ… Whenever we borrow the prosperity of tomorrow to spend todayÂ… It comes back to haunt us as the inflation tax, insidiously, silently, invisibly, and deceitfully, confiscating our wealth. If I have done my job, by the end of this article, you will be able to see it clearly from now on. This is a great advantage for an investor to have.
Just to drive the point home, here is the Dow from the year 1900 (blue line) showing the 1929 crash and the spectacular bull run from 1932 to today. But wait a minuteÂ… What's that other line doing there? It's the Dow deflated by the CPI. You'll notice that, measured in value, the Dow was a breath away from 400 (381.17 actually) in 1929 (where the deflated data begins), and falls to a bottom of 40.22 in 1932. Then it began its bull run to 1966 where it topped at inflation adjusted 550 points, just 29% above its 29 high.
Then something very strange happenedÂ… The Dow began a long slow crash that would see it lose 70% of its value over the next 16 years. This was the raging price inflation of the 70s, eating away at investor's profits. It's called "The Invisible Crash" because investors never knew what hit them. The Dow had bumped its head on 1,000 points from 1966 to 1982. But due to inflation, if you had put $100,000 in the Dow in 1966, by 1982 your $100,000 was still $100,000, but it would only buy you $30,000 worth of 1966 goods and servicesÂ… a 70% loss in value!
Then the Dow began what the uninformed call "the greatest bull market in history". The Dow ran from 777 in 1982 to 12,795 on February 20, 2007Â… a more than 1,500% gainÂ… measured in dollars, of course. But, measured in purchasing power, the Dow only exceeded its previous 1966 high by 82%. But that's using the CPI, which we now know to be a lie. Hey, that rhymes.
Adam Hamilton did an excellent job deflating the Dow in is essay aptly titled "Deflating the Dow", written in 2001.
"In M3 deflated terms, the Dow at 9000, after holding for over FORTY years, would have granted investors a real 1.2% average annual compounded LOSS on capital. At that rate, after holding for four decades, an investor would have seen his or her capital cut by over one third! In for the long-term, eh?
The bottom line? Inflation MATTERS for ALL investors. Inflation is the single most dangerous macro-factor affecting investments over the long-term in countries with completely fiat currencies. The common Wall Street assertion being parroted by the shameless Wall Street promoters that there is no inflation in the US and that equities do well over time in inflationary environments is flat out wrong. The cheerleaders chanting this mantra on bubblevision are naive at best or intentionally deceptive at worst. Every one of these folks that goes on TV and claims inflation is either irrelevant or dead should be tied down to a chair, their eyelids taped open, and they should be forced to memorize graphs of the CPI, M1, M3, and US equity index performances over the last few decades.
Inflation IS real, it IS bad, it IS ugly, and it WILL chew investors up and spit them out." – "Investors today with capital at risk in any US market must fully understand and prepare for the ravages of currency inflation."
I think at this point I have proven my point beyond a shadow of a doubtÂ… I think I've presented an air tight caseÂ… and I think it's time to pronounce it "case closed"Â… the general equities markets (a.k.a. stock markets) are crashing, and have been since 1999-2001, depending on how you measure it. Even though the Dow is going up in price, if everything else is going up in price faster than the Dow, then the Dow is crashing in relative terms. In fact, I can't think of anything you can measure the Dow with that doesn't show it crashingÂ… except of course, dollars.
Wait a minuteÂ… yes I canÂ… Zimbabwe dollars. According to the International Monetary Fund (IMF) the hyperinflation in Zimbabwe should exceed 5,000% this year. One Zimbabwe dollar used to be worth one U.S. dollar, but now one U.S. dollar fetches $25,000 Zimbabwe dollars.
So, if you take U.S.$1,000 and convert it to Zimbabwe dollars you'll get 25 million of them in what they call "the parallel currency market" (black market). Then, if you take your Z$25,000,000 and put it in the Dow, by the end of the year you should have at least Z$1,275,000,000.00. You must agree, that's stellar performance. Then, you can cash out your Z$1.275 billion and buy a loaf of breadÂ… maybe.
So we have seen that there was a previous "invisible crash" in the 1970s. Question: has this happened many times before? Answer: yes and no.
An invisible crash is a product of a fiat currency system and/or rampant credit creation. It requires a rapidly expanding money supply to obscure the fact that an overvalued asset class is correcting and reverting back to fair value or less. It cannot happen on a gold standard with conservative fractional reserve banking practices. Therefore, it didn't happen in the United States until the 1970s and today. But it has happened numerous times throughout history once a country leaves an asset backed currency standard. The stock of the Mississippi Company of John Law's France, and the German stock market during the Weimar hyperinflation come to mind.
Can an investor prosper under these conditions? Is there a way to beat inflation? Absolutely! In fact, an investor can achieve superior results under these conditions. Why? Because anytime you find yourself in a situation where you are the informed investor and the masses don't yet know what's going on, you have the advantage. Once the cycle has changedÂ… once you have confirmation that the conditions have shiftedÂ… any investor that does reasonable due-diligence, takes a position early, waits for the masses to wake-up, and hangs on for the ride, has an extremely high probability of achieving extraordinary results.
The 70s were part of what is known as a commodities bull. This is a cycle that repeats and repeats, where first equities (paper assets like stocks) outperform commodities for 20 years or so, then the cycle reverses and commodities out perform equities. During a commodities cycle almost all commodities rise in price. Remember that commodities are the stuff you buy or the stuff that goes into the stuff you buy, so all commodities bulls end up being periods of rapidly rising prices. The very act of investing in commodities drives the price of commodities higher, which in turn causes the price of consumer goods to rise. For more information see "The Commodities Cycle" by Brent Harmes
Other than the bull market for gold that we are currently in, the only other gold bull we can look at and analyze is the 1970s bull. Before that the dollar was backed by gold at a fixed price, so gold did not go up or down against the dollarÂ… it was the dollar.
The gold bull of the 70s was one of the greatest bull markets of all time, and precious metals were its top performer. Precious metals stocks were the gold medalists, taking top honors in total returns, silver won the silver, gold got the bronze medal, and oil came in a distant forth with other commodities not far behind.
As I said, almost all commodities rise during a commodities bull. However, there comes a time, near the end of a commodities bull, when the public, the masses, the herd, awaken from their collective comaÂ… They finally realize that their $100 is buying them fewer and fewer bags of groceries, and they look at their neighbor, who told them about gold and silver five years ago, and whose purchasing power is rising while theirs is falling, and they rush toward gold and silver. This is when gold and silver leave all other investments in the dust. It took nine years, from 1971 to 1979, for gold to go from $35 per ounce to $200 per ounceÂ… But once the public woke up, it only took three more months to reach $850. This is why gold and silver were the top performers of the 70s. Gold and silver are money. All other commodities are just commodities. Thus, all commodities are usually good investments during a commodities bull, but gold and silver have been, and should continue to be, spectacular.
There have been 5 commodities bulls in the past 200 years and we have just begun the 6th. They are as natural as the coming of the tides. And while betting against it may be hazardous to your financial healthÂ… investing with the tide can bring you great wealth. HayÂ… that rhymes too.
