Sunday, January 22, 2012

22 Jan 2012

As I talked with a friend over dinner last night, we came up with the idea that we need to see a chart of the Dow against a broad credit measure.   I am no expert on all the different ways economists decide to measure credit...m3, m2, m1, monetary base, but I believe I read somewhere that MZM is the most broad the Fed has to offer. and still has charts of m3 but I don't have their data.

The results are not surprising to any gold bug who has been exclaiming against deafening ears for a decade now that the US economy has not grown in real terms despite the media continually using words like "surprisingly bad considering the recovery" or "don't want to fall into a double-dip" not realizing the first two dips never ended for the broad swath of Americans.  What they mistook for growth could be labeled, in many cases, as the Broken Window fallacy, where destruction and rebuilding or building with no purpose somehow makes us richer.  Certainly there has been money to be made playing the last two stock market bubbles engendered by unprecedented fiscal and monetary easing, private outsourcing, and replacing people with better processes.  I still believe in things like competitive advantage or division of labor to drive consumer good prices down, but sometimes I waiver, especially after reading articles like this:  Apple says US not competitive

I view economic improvement as the increase in free time and real wealth of each individual.  These goals have mainly been achieved over the course of history through inventions and the use of fuel to make survival cheaper and easier.  I find that these are the only things that actually allow individuals to create new things, ponder new ideas, and maybe make something that make lives better for others.  Orville and Wilbur Wright invented the airplane using free time as their bicycle shop provided enough funds to meet basic survival needs and fund experimentation.

Some people view economic success as the percent of the population that spends its time doing busy work.  Maybe they are right, for a free people with plenty of time might begin to analyze the world a lot more than they do when they work 75% of their waking hours, and it may become dangerous for those in power.  Plus, in a world where everyone can easily get what they want, the rich can no longer feel special as those little things that distinguish wealth like big TVs, cars, eating out are easily available to everyone.  Ever wonder why rich people continue to live surrounded by the poor in third world countries even though they could easily migrate to a cosmopolitan city in a better country?

Without further delay, let's look at some charts confirming what worries many people.  This is from the Federal Reserve's site directly.  It is merely a coincidence that the scale works well for the Dow and MZM.  The S&P just stays at the bottom, which is why I created my own chart later.

As you can see at one point the Dow Jones Industrials, what I consider a poor index to track the quality of the stock market because it is only comprised of 30 companies, was outpacing MZM for much of the 90s.  It appears that it is no longer easily responding to what seemingly must eventually be exponential growth of debt (or credit if your glass if half full).  I think that if the Bernank is targeting any constant rate of inflation, he might want to watch this video to fully realize what that means, or he may already know.

Now, let's check out the S&P and some other prices.

This chart shows that MZM is now outperforming the S&P 500.  It also shows that on the scale of bubbles, gold is not quite there.  However to be fair, in 1980 gold was still falling from its 70s bubble and quite high.  The stock indexes were about to be launched after a decade of nothingness.  Nevertheless, it still shows the incredible growth of debt and that a lot of it has made itself appear as prosperity in the stock markets.  As of now, not a whole lot has leaked into the gold market.

To make it easier to see, I plotted the stock indices in terms of MZM.  As you can see, we have had a lost decade despite more and more desperate attempts to get it going by going further and further into debt.  We are actually below .01 on the S&P (right hand axis) meaning it actually requires more debt than we can get in output from it.

The same chart, but this time for gold.  Notice we are still substantially where we were in 1980, and the trend looks to be up since 2000.  These ratio charts don't do much for setting targets.  However, the first chart might.  If gold were to be 12 fold of its 1980, the same as the MZM currently is, the price would be $7152. 

One thing of humor while putting this together is that the Fed's site does a wonderful job of allowing for many measures to be plotted and downloaded, it doesn't have the price of gold despite having piles of other data showing they clearly are interested in gold's price, like the volatility index for gold miners or total reserves excluding Iran's gold.  See below.  I had to use gold price data from

                                                       Courtesy of
This seems to be showing a hard rollover for Federal Withholding Tax deposits.  Considering this is a new data source for me, I don't have anything else to say for it. 

Still haven't quite recovered for rail traffic or carloads.

And for my normal day to day charts...

 Long term view of the below chart.  Is there any reason that this must be permanently glued to the top?  Could the opposite occur?  I don't know.

 This still shows the behind the scenes weakness that is hidden by the Dow at nearly two year highs.

 This shows that the percent of stocks over their 40 day moving average cannot get a lot higher considering historical trends.

The RSI (bottom) is finally overbought for my favorite indicator.  This does not signal a turn is going to happen tomorrow, but does signal that a turn always happens in this zone.

This is the substitute for my normal excel plots.  Note that all timeframes from short to medium term are overbought.    This doesn't mean they can't stay overbought, but it does mean it is more risky to buy here than it was to buy at the numerous valleys the past six months.  We are still under the peak from 10/26.

There was an ice storm here this past weekend that caused a power outage - I live in a run down apartment to save as much money as possible.  I lost the last three weeks of my excel data.  So much for that autosave feature.  The weirdest thing is that Excel autosaved some other spreadsheets that were mostly completely useless to me.  I just put the most recent value and the value from three weeks ago as half the range each so they look like step functions.

I could fix it by using my saved plots, but find it unnecessary.  We have recorded enough values to know what is overbought and the chart above is the same - just not as easy to see.  Unfortunately, the levitation on my short term chart was amusing.


Best of luck.  Make it a good week.

"We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power."
 -- Alan Greenspan (Chairman of the Federal Reserve US Central Bank), appearing before the Senate Banking Committee on February 15, 2005, in response to Democratic Senator Jack Reed of Rhode Island on the topic of funding Social Security.

"Gold still represents the ultimate form of payment in the world. Fiat money in extremis is accepted by nobody. Gold is always accepted."
-- Alan Greenspan, May 20, 1999


  1. I'd love to see this starting from 1998 or 1999 instead of 1980:

  2. Please see today's post. Thanks for the suggestion.