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This page is written as a reminder of trends that might logically occur in some (may be not too distant) future in a hope that understanding larger trends can helps me to avoid attempts to catch a falling knife. I doubt about my ability to get the return above inflation for the next three years at least but I would like to avoid additional, unnecessary losses induced by Bubblevision or market hype. It is also might present the economic situation in terms more understandable to programmers and IT specialists. Actually that's pretty sad that neoclassical economics operates with those primitive (and obscure) linear models, models which bear no or little resemblance to reality "in a short run" instead of using programs in some standard simulation language. For example can't those economic professors just learn Excel and present their hypothesis in Excel models terms ;-). It's actually pretty funny how they try to use mathematics...
For those who have 401K plans and are concerned about them here is my list of few things which probably take longer then many expect (this 100% derivative material and as in all forecasts it would be great is 60% of predictions are correct ;-). You are warned):
Inflation stabilization cannot be indefinitely compromised to support bail-out activities. However convenient it may be to have several years of elevated inflation to help bail out homeowners and financial institutions, the gain has to be weighed against the long-run cost of re-anchoring inflation expectations later on.
Willem Buiter in his Welcome to a world of diminished expectations noted in August 5, 2008:
From a cyclical perspective, things look bad for Europe, the US and most of the global economy. My contribution to summer cheer is to note that longer-term local and global economic prospects are likely to be worse than expected. So welcome to boom and bust. Welcome to subdued long-term growth prospects.
While downturn started in financial sector "sector rotation" is imminent. Real economy just stated sliding and entered or will enter the recession. We are entering a full blown recession and a very serious one. As of September 17 it looks like financial bubble burst. But seizing up of liquidity and Asia will stop pumping money into the USA and slowing consumer, residential and non-residential financial create huge pressure of companies.
Be stoic in absorbing losses and do not try to compensate for losses
with risky investments or dreams about the market bottom ("catching
falling knife). That's a real problem for me personally as I lack patience
needed for a good investor. See recent
Mark Faber
interview for how a very good investor views the current situation
and what course of actions he recommends.
Successful risk management must reflect the fact that markets are now in the grip of three distinct but reinforcing forces that will play out over a number of quarters.
- First, look for further balance sheet contractions in the financial sector that will continue to suck oxygen out of, and undermine risk appetite in credit and equity markets. This is part of a long-term process of de-risking that is currently driven by markets but will soon have a more important regulatory dimension.
- Second, markets are yet to adequately price the morphing of the credit crunch into a full-scale US economic disruption. Prepare for even stronger headwinds fuelled by declining real income and eroding household wealth.
- Third, there are no easy policy solutions. Instead, policy makers face an extremely difficult situation in which any action, no matter how well-intentioned, entails unstable feedback loops and impose distortions elsewhere. Collateral damage cannot be avoided, yet its exact characterisation is uncertain given the extent of still-hidden vulnerabilities in both the real economy and the financial sector.
....you are well advised to stay on the sidelines, focused on the probability that these same markets will also be treacherous for at least the remainder of this year.
Typical baby boomer 401K account already is probably already $10K-$20K in red. I think since the beginning of the year more and more 401K investors are getting an understanding of how steep the fall might be. Attempt to re-enter those markets on dips is like trying to catch a falling knife: stock markets are yet to discover the full extend of the old shock and credit crunch.
Inflation is the other side of weakening of the dollar:
Increases in commodity prices such as oil and gas and the decline in value of the U.S. dollar against other currencies are fueling inflationary pressures across the U.S. The year-over-year wholesale and consumer price increase, including food and energy, is running close to 5%, according to June government numbers. The country hasn't seen those rates in nearly 20 years. Excluding food and energy, the rate is about half that (2.4%), but even that is "above the level consistent with price stability," according the Federal Reserve Bank in Philadelphia.
While there are arguments over just how inflation is measured and
what the inflation rate is, there is agreement that either measure is
higher than it should be -- and the outlook is deteriorating.
The financial crisis continues to create victims. This is not only Peak Oil but Peak Credit. Not only people but also crazy but dominant ideas like market fundamentalism will go the way of Baer Sterns. The idea that financial markets are efficient now looks very unconvincing, to say the least. This is not a liquidity this is solvency crisis. The banks now have deep and justified concern about the solvency of their peers: the quality of the underlying collateral for much of the lending of previous years – housing – continues to deteriorate. The Case-Shiller 20-city index declined by 18 per cent in nominal terms and 22 per cent in real terms between its peak in mid-2006 and April of this year. This rate of decline is also accelerating.
As Paul De Grauwe wrote in Financial Times (Jul 22, 2008):
Its proponents told us that when financial markets were left free, they would work miracles. Savings would be channeled to the most promising investment projects, thereby boosting economic growth and welfare. In addition, these financial markets would spread risk around over a large number of participants, thereby lowering the risk of doing business, again boosting growth and welfare. In order to achieve these wonders, financial markets had to be freed from the shackles of government control.
The country that embodied these principles most was the US. Helped by the missionary zeal of successive American administrations and pushed by international financial institutions, country after country freed their financial markets from pernicious government controls, hoping to share in these economic wonders.
The credit crisis has destroyed the idea that unregulated financial markets always efficiently channel savings to the most promising investment projects. Millions of US citizens took on unsustainable debts, pushed around by bankers and other “debt merchants” who made a quick buck by disregarding risks. While this happened, the US monetary authorities marveled at the creativity of financial capitalism. When the bust came, a large number of Americans who had been promised a new life in their beautiful homes were told to move out. This boom and bust cycle cannot have been an example of efficient channeling of savings into the most promising investment projects.
The fact that unregulated financial markets fail to deliver the wonders of efficiency does not mean that governments should take over. That would be worse. What it does mean is that a new equilibrium must be found in which tighter regulation is reintroduced, aimed at reducing the propensities of too many in the markets to take on excessive risks. The need to re-regulate financial markets is enhanced by the fact that central banks, backed by governments, provide an insurance against liquidity risks. Such insurance inevitably leads to moral hazard and excessive risk-taking. The insurer cannot avoid monitoring and regulating the behavior of those who obtain this insurance.
Satyajit Das, well-known expert in derivatives asked the rhetoric question (Markman, July 5, 2008) that is applicable to Fed officials like Helicopter Bernanke too:
"Given that the bank presidents have been consistently wrong about everything they've said about their losses until now, why on earth would anyone believe them now? "
At the same time the Fed policies can be viewed as an example of cargo cult economics -- the repetition of past solutions without any recognition that we're living in a different world. The core problem of the US economy is the orgy of bad debt indulged for the past 7 years and its broken, oversized, untrustworthy, "pass the buck" financial system. Manufacturing is now only 11.7% of GDP (2007, source: NAM).
A pervasive lack of confidence in our economy and our government is as serious a threat as a deterioration of the balance sheets of our financial sector. More over, a stable financial system is as important to renewed economic growth as is any fiscal stimulus, much as confidence in sustained aggregate demand is as important as balance sheet integrity to the financial system. But we should learn from our mistakes and act pragmatically to regulate markets as they exist in fact, not theory. The repeal of the Glass-Steagall Act, coupled with cheap money and tolerance for ever greater risk, led to this situation. Unbridled use of short-selling can be destructive of value and contrary to growth and investment. Speculation may play a role in the rise in commodities prices and, if so, risks more pain if the commodities bubble bursts.
Here is one comment from NC readers:
... Can I add a few more?
- Food inflation
- Healthcare spend being a totally ridiculous % of GDP in relation to its productivity.
- Military spending ditto.
- Widespread incompetence and corruption in the administration(s)...
The US will repatriate some manufacturing market share, no doubt, but it will be small compared to the loss of market volumes around the world. Take furniture. Transports costs are making China less competitive, so the US is getting some back, but at the same time the US domestic market for furniture has almost evaporated.
According to Douglas Cliggott, chief investment officer at Dover Management LLC, profit margins may bottom in late 2009 or early 2010 (Bloomberg, July 29). But all such predictions should be taken with a grain of salt.
Also in June 2006 A report by the RBS's research team warns that the S&P 500 index is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
Business debt continued to expand and in the first quarter grew 10.8% yoy. The interest payments remains at historical lows (relative to profits). This explains why businesses have been shifting the means to finance itself, from bond issuance to bank loans. But risks are growing: the financial gap remains at a high level, indicating the need for external financing in order to keep current operations. So far the massive liquidity injections from the rest of the world, or what Brad Setser calls “the quiet bailout.” continued unabated.
Companies and markets are undergoing structural changes due to rise of commodity prices and the present turmoil is just the beginning of the decades-long transformation. In his Sept 20, 2007 column Are we headed for an epic bear market - MSN Money Markman sited Satyajit Das opinion:
He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates.
Normally, after a month as bad as June 2008, you'd expect some sort of reversion, a sucker rally. At the same time many companies now feel they hit the wall of limits of growth and long term the equities look overvalued. According to Patrick Legland (Societe Generale) earning estimates are too high. Inflation is undermining confidence. There are several negative factors in play now:
Gone also are the violent street protests and mass movements against globalization. What makes news nowadays is the growing list of mainstream economists who are questioning globalization’s supposedly unmitigated virtues.
So we have Paul Samuelson ... reminding his fellow economists that China’s gains in globalization may well come at the expense of the US
...Today, the question is no longer, “Are you for or against globalization?” The question is, “What should the rules of globalization be?” ...
GM plans to further reduce its salaried headcount, accelerate plant closings, eliminate health-care coverage for US salaried retirees over 65 and suspend its dividend as it grapples with a sharp slowdown in auto sales.
Byron Wien, chief investment strategist at Pequot Capital Management, told CNBC Wednesday that 2009 will be better than most people expect. Wien shared his insight on the markets and the economy with the Squawk Box crew Thursday morning.
- Corporate Bonds, Oil & More “[Corporate bonds] are the most attractive place. You can get very good returns…close to 10 percent in quality corporate bonds, and a possibility for capital appreciation as well. That’s a very attractive area, and I don’t think the stock market can really recover with any verve until the bond market starts to do better.”
- Looking Ahead to '09 “I think [Wall Street] is forever changed. You have three major firms – Merrill, Bear Stearns and Lehman – go out. Really only Goldman Sachs and Morgan Stanley are the only firms left. I never thought I would see a year where the market went down 40 percent in ten months.
I think the economy’s going to recover and the market’s going to recover, but it isn’t going to be a snapback recovery that we’ve seen in earlier cycles.”
- Stimulating the Economy “The right answer right now is to try to stimulate this economy back to recovery, because we don’t have a shot long-term viability until then.”
... the balance of economic forces is contractionary:
- financial crises and property price collapses in the US and a number of other high-income countries;
- soaring commodity prices;
- and inflationary pressures, particularly in emerging countries.
It is hard to see any outcome other than a sustained slowdown in the world economy. It is even quite likely that the trend growth of the world economy is considerably slower than was hoped a few years ago.
Furthermore, some of the risks could combine in dangerous ways.
...The good news is that the world economy has held up surprisingly well. The bad news is that the risks remain squarely on the downside. It will take some luck and much judgment to pass through the storms unscathed.
The ... slow recovery of financial markets that I think is likely suggests that the U.S. economy will be subject to substantial headwinds for some time."From Fed Governor Frederic Mishkin: Global Financial Turmoil and the World Economy.
The subprime crisis is the joint product of perverse incentives and historical aberration of extremly loose fiscal policy. It is buy-and large a structural problem that signifies "Peak Credit". Investors in subprime-related financial claims made ex ante unwise investments, which seem to be best understood as the result of a conflict of interest between asset managers and their clients. The next wave of resets (Alt-A mortgages) will peak only in December 2009. Alt-A is the new subprime. A chart from Calculated Risk shows the starting next year a second tsunami of bad mortgage debt hitting and lasting another 2 years or more:
http://calculatedrisk.blogspot.com/2007/10/imf-mortgage-reset-chart.html
It is possible that May 2008 was the last month in which the year-over-year rate of decline of prices of houses accelerates. But in absolute terms real estate prices will probably continue to decline for many months. And there is no catalysts for a sharp rebound any time soon so this will be L-shape recovery. Economy.com noted that enough houses are on the market to satisfy demand for the next two-and-a-half years without building a single new one.
As for the length of further declines, in July 2008 Citigroup chairman Win Bischoff has warned that house prices in the United States are likely to keep falling for another two years. He also said he expected the credit crunch could continue through 2009 (NC July 20, 2008). Early 2010 is the year in which effects of Alt-A and Option ARM resets will convert into additional foreclosures (NK, July 22, 2008) The housing market is unlikely to be out of the woods before the dust settles and that means 2011. Many don't see a rebound until 2012.
Some areas might never recover. Distant (more then 60 miles from metropolis like Pocono in NJ) suburbia housing recovery requires a pullback in oil and unemployment. With high oil prices transportation costs became substantial (reversal of death of distance) unless the residents convert to the most efficient cars (Prius) and prices stabilize at present level. The might mean resurgence of cities. Suburbia living might become a dying ideal.
Houses need to shrink like cars: heating costs of newer, larger houses are an acute problem as home builders chose to stop building homes for the average schmuck. Due to heating and maintenance price of McMansions that were bought during this housing boom might go the way of the Ford Expedition and Lincoln Continental.
According to Calculated Risk: "Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is probably more than half way complete as of Q1 2008 on a national basis." IMF Paper also suggests that US Housing is overvalued by 14%, and is likely to overshoot on downside. If we assume that correction is half-way complete and it took two years for the first part of the correction it is logical to assume that it will take another two years for the correction to finish. The second half actually can take longer: commercial real estate will follow residential and might considerably prolong the crisis:
"I think a lot of banks are already bankrupt … but they hide their rotten assets … in categories where you don't really need to value them,"
Roubini also thinks that "A systemic banking crisis will go on for awhile, with hundreds of banks going belly up." Soros in BBC interview think that as of Septmber 2008 we are only at the beginning of the financial crisys. Mr Soros told Newsnight that he expects more banks to collapse.
Reader Steve e-mailed some observations about recent FDIC actions that bear on this discussion to Naked Capatalism blog.
The huge losses embedded in household mortgage portfolios make the current banking crisis different, and the regulatory response is different as well. The reason for the concern over foreclosures has more to do with bank accounting than with bleeding heart concerns for mortgagors. When a property is foreclosed, a bank must write off the difference between the loan balance and the appraised value of the property (with a further downward adjustment for disposition costs). A write-off is a reduction in capital, so the bank's capital primary capital ratio is affected. Banks are prohibited from writing owned real estate back up. On the other hand, if the bank only recognizes an impairment on the loan, there is a reserve against capital but no write-off. So the loss can be strung out over time, and regulators can allow banks a fair amount of leeway in forming `opinions' about loss severities. In other words, an insolvent bank can appear to be adequately or even well capitalized. I believe an argument could be made that many institutions would be stone insolvent if foreclosures and write-offs were being done in accordance with traditional banking and regulatory practices. In particular, I suspect that the vast majority of foreclosed mortgages are investor owned rather than bank owned, and that regulators have adopted `go-slow' oversight in anticipation of legislative action on foreclosures.
The next stage of financial institutions crisis might be connected with open ARM mortgages and a huge accommodation for auction rate securities. The latter will be very painful for banks. As Aline van Duyn wrote in FT on Aug 2, 2008:
"Market is collapsing. No more $2k dinners at CRU!!" This message was sent in an e-mail by a Merrill Lynch executive to a friend in November last year, according to a complaint filed this week by William Galvin, Massachusetts' Secretary of State.
The market in question is, according to the complaint, the auction rate securities market. This was never regarded as the most exciting arm of finance to work in, although it may well have funded plenty of pricy dinners. [CRU, by the way, is located on New York's 5th Avenue and boasts a 65,000-bottle wine cellar and dishes such as live sea scallops with mozzarella.]
Auction rate securities, which grew to be a $330bn market, were used by providers of student loans and municipal borrowers such as schools and hospitals to borrow money.
Then, after years of humming along nicely and offering a slightly higher yield than cash, the market collapsed in February, a result of shattered confidence in bond guarantees that backed many of the securities' high credit ratings. The timing of the e-mail quoted above was important. In February, Merrill Lynch salespeople were telling clients that the bank "by all indications, is committed to this product" and the securities represented "a good, conservative, reasonable investment", the complaint says. However, comments such as the one made about the collapsing market, suggest otherwise, Mr Galvin argues. Merrill Lynch said it was "disappointed" the action was filed because "it ignores the only reason our advisers sold auction rate securities: they believed they were good investments for clients willing to trade some liquidity for higher return".
The legal tussles will continue. Yet, it is clear auction rate securities are fast emerging as the potential poster child of cracking down on the perceived Wall Street abuses that fuelled the credit bubble. There is a strong desire among law-makers and law-enforcers to find a way to hammer Wall Street for the mortgage meltdown. The auction rate securities market seems to be delivering it. As well as a case against Merrill, civil charges have been filed against UBS over its role in the market and two former Credit Suisse brokers are facing a criminal probe. Citigroup said yesterday it had received subpoenas from regulators in connection with auction rate securities.
There are two reasons that developments in auction rate securities should be very closely watched. First, they could be very painful for banks. A bank executive told me he thought auction rate securities could be "bigger than the research scandals" - referring to Eliot Spitzer's probe of research practices, which resulted in a $1.4bn settlement. Bigger in terms of payments? Bigger in terms of the reputational damage? Both, he said.
... ... ...
So, keep watching this in-the-making case study. The auction rate securities market is a historical relic, and few people expect its return, but it is not making a quiet exit.
Things might became really bumpy in 2009: despite a housing mess, securitization (and related credit crunch) the U.S. economy might not slide but advance 1% or 2% in 2009
News collected below suggest that it makes sense for 401K investor to be conservative and try to increase cash position those days. It's bad time to hunt for bargains, unless those are extreme bargans. Preservation of capital might be the highest possible achievement in 2008 and 2009 for 401K investors who were put in Procrustes bed of randomly selected stock funds and few bond funds in their 401K accounts. Especially for baby-boomers.
Speculative runs after a slump like we experienced in April, 2008 are a dangerous thing to follow. Did Fed unlock the credit crunch at this stage? The answer is no. Did banks solve securitization and over-leveraging problems ? The answer is: "The major banks are barely holding on to life...". Regular banks should probably be priced for zero growth. Investment banks are in real trouble due to off-balance accounts and can experience negative growth as their business model has been broken.
Another "sucker rally" can follow this July, 2008 slump (it might be late autumn "president rally" ).
Disclaimer: This page is mainly an exercise in self-education that was made available to others in a hope that it might be useful. The stories on this page are financial blogs stories picked by me from the Internet; in addition to being late some or most represent a typical market noise that is mostly irrelevant. You are warned !
Please read them critically and apply sound judgment. Very plausible stories and explanations can in retrospect be dead wrong. All 401K investors should be warned about the 95% rule, which states that about 95% of what you read about finance and economy is either wrong or irrelevant. In investment, 95% is probably a very conservative number. This site is no exception...
[Wrong] The country was on the wrong track for too long. Financial crises is the payback for excesses and will hit 401K investors in 2009 regardless of whether you are a saint or a sinner. Losses can be substantial.
Reality check: Not only this prediction was fuzzy, it looks like this prediction is completely wrong. 2009 will be an up year for 401K investors no matter in what class of instruments they were invested. Bond investors probably are up 7% or so, 'all equity investors" 20% or so.
[Wrong] For 401K investors, who are baby boomers, it might be better to stay out of the way for the next year.
Reality check: This prediction is completely wrong. Those who converted everything to cash at the end of 2008, have 2008 losses without 2009 upside. Some trading would be very beneficial for 401K accounts. Investors who stayed in equities got back approximately 20% of losses (which were in 2008 approximately 28%). Total loss in comparison with stable value funds for two year period is still substantial but it is much less for those who participated in the rally.
Unfortunately most 401K investors were burned too badly in 2008 and as of November 26 bonds funds have attracted $315bln of new inflows while there is virtually no inflows into equity funds. This Fed financed and zero rate induced rally was for and by Wall Street sharks not a regular 401K investor.
[Right, but with a caveat] Dollar might be structurally weak and that prevents stabilization. Joseph Stiglitz consider dollar to be doomed, but euro not up to the task of global currency either.
Reality check: Dollar his 2008 lows in November 2008, but few 401K investors participated in related gold rally. Actually gold was not recommended in this advice/prediction.
The financial crisis continues to create victims. This is not only Peak Oil but Peak Credit. Not only people but also crazy but dominant ideas like market fundamentalism will go the way of Baer Sterns. The idea that financial markets are efficient now looks very unconvincing, to say the least. This is not a liquidity this is solvency crisis. The banks now have deep and justified concern about the solvency of their peers...
Reality check: there was no foreign financial crisis in 2009. Lack of confidence pushed gold to new highs. Market fundamentalism is really dead now, including absurd idea that markets are efficient. Looks like banks are still hiding losses and many small banks were closed, but none of big banks went bust in 2009.
[Completely wrong] Equities are undergoing structural change with new (and few) winners and many (mostly old, established firms) as losers; they are probably further to fall from June 30, 2008 level. Earnings growth will be harder and harder to get. From one hand we should never discount the resilience of the US economy. There are a lot of companies which are positioned well to weather this period. Still the majority of fund managers dismiss hopes of double-digit earnings growth this and next year as "fantasy".
It was financial sector propelled by government which rallied. As rotten as they are, they were the top dogs in 2009. Also power of cost cutting was such that it increased revenue of many companies who the whole 2009. Unemployment hit double digits as a result.
No "multiple bankruptcies and liquidation" for U.S. airlines in 2009. Auto sector benefitted from "cash for clunkers".
[True for 2009] Approximate time for bottoming of real estate is probably around 2-3 years (2010-2011).
Still there is not bottom. Government subsidies propel sells but foreclosures are still rising.
Moon of Alabama
At the Earth Summit in 1992, George H.W. Bush forcefully declared, "The American way of life is not negotiable."
It's the End of the World as We Know It, Baltimore Chronicle, Aug. 3, 2004
My principle focus as vice president has been to protect the American people in our way of life
Transcript: Vice President Cheney on 'FOX News Sunday', Dec. 222, 2008
We will not apologize for our way of life nor will we waver in its defense.
Barack Obama's Inaugural Address, Jan. 20, 2008
December 27, 2008 | Robert Reich's Blog
I try to be optimistic -- especially this time of year when the days are short and cold, when almost everybody things everyone else is having a better time than they are, and now that we're in the worst economic downturn in almost anyone's memory. Yet I also try to be realistic about the effects of this Mini-Depression. At least three distinct groups are especially vulnerable, each quite differently:
- The poor and near poor, with family incomes typically under $20,000 a year. Their connections to the labor force are tenuous at best, often involving part-time and temporary jobs. They're also the first to be let go during downturns. Not surprising, this recession is taking a toll, and about to take a larger one. Few in this group qualify for unemployment insurance, and an increasing number have exhausted the five-year maximum for temporary welfare assistance. To the extent they're getting by, they're moving in with relatives. The media have missed this story almost entirely.
- Middle and lower-middle class households whose breadwinners are within five years of being eligible for Social Security. Many are in danger of losing jobs and a large number are already working fewer hours. They're cutting back on all discretionary purchases.
But their biggest problem is that both their savings and the value of their homes have shrunk dramatically, and probably won't bounce back before they planned to retire.
Social Security will cover about 40 percent of their pre-retirement earnings. So many are now planning to work well beyond age 65. This will be a particular challenge for blue-collar workers whose earnings have depended largely on physical labor. Their bodies may not last.
- Middle and lower-middle class retirees. Most are dependent on income from savings, which has declined sharply. They're cutting expenses where they can, but they're running out of resources. To the extent they can turn to their children for help, they are doing so.
That means a large and growing cohort of middle-income people between the ages of 35 and 65 have begun subsidizing their parents, even though they and their immediate families are under financial stress. Here's another untold story.
Other Americans are in distress but these three groups are particularly worrisome, and in the years ahead it seems likely they'll be in worse shape than they are today. If this is to be avoided, these three groups will need distinct public policies crafted to their particular needs. More on this to come.
In the meantime, happy holidays.
Huge government deficits, low interest rates and rapidly growing money supply all add to the likelihood of renewed inflation - and a rising gold price. How high? Very.
Jan 02, 2009 | Telegraph ( breakingviews.com )
First, consider the risks of inflation. US money supply grew slowly for a while in early autumn, but in the two months to December 1 the St Louis Fed's measure of Money of Zero Maturity increased at an 11.7pc annual rate. That's a return to the trend that lasted from 1995 to 2008, when MZM grew 3.6 percentage points faster than nominal GDP.
The US is not alone. Around the world, governments have implemented large stimulus packages. If the corresponding borrowing is not to crowd out the private sector, it must be financed by money supply creation.
This monetary expansion is not supposed to be inflationary, since the governments promise to take any money away before it can push up prices.
But investors can be forgiven for scepticism. Higher inflation is at least possible once the global recession bottoms out. And gold provides good insurance against this outcome.
Demand for gold from investors increased rapidly in 2008, despite a falling price since June. The dollar value of gold demand was 45pc higher in the third quarter than the second, and 51pc above the previous year, according to the World Gold Council. Supply has failed to keep up, with mine output up only 2pc from the previous year and central bank sales down sharply.
Gold's economics are truly mysterious. The commodity demonstrated "negative price elasticity" in 2007, when a higher price produced increased demand.
Nevertheless, weak supply, strong demand and valid fears of inflation constitute a perfect mix of ingredients for building a gold rally. Any surge into gold by hedge funds and other speculators could overwhelm the market, turning the rally into a bubble.
In January, 1980 - just before the Fed led the world out of an inflationary catastrophe, the gold price peaked at $875. That is $2,430 in today's dollars. But the pools of speculative capital are much larger now than in 1980. A true gold bubble could well leave this benchmark far behind.
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Last modified: April 22, 2019
