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Show HN: M1 Chart – The stock market adjusted for the US-dollar money supply
- sf_rob 6y agoWhy would you adjust for usd money supply? The only reason my (uninformed) self sees is that it’s arbitrary but fits a fiscal Hawk narrative. Fwiw I’m worried about inflation, but this seems uninteresting.
- YuriNiyazov 6y agoThe claim is that there is an asset bubble. In other words, stocks and real estate are being inflated, whereas the products that constitute the traditional measure of inflation (basket of goods with bread milk and eggs in it) are not. This attempts to show the “real” inflation so to speak.
- atombender 6y agoCPI does show significant inflation [1] among things like dairy (3.8%) and meat/fish (5.1%). But it's offset by lower energy prices and airline fares. As a result, the overall increase from Jan 2020 to Jan 2021 was just 1.4%. [1] https://www.bls.gov/news.release/pdf/cpi.pdf https://www.bls.gov/news.release/pdf/cpi.pdf
- lumost 6y agoTBH the CPI index has had an air of funkiness for the last 2 decades. In the run-up to the subprime crises the measure was altered to use "rental equivalent" to avoid factoring in the increase in real real estate prices. There were interesting arguments for this change of course, and pages of economic research. But the whole thing reeked of finding a justification for a foregone conclusion. Ultimately there are many factors the CPI simply cannot include, or due to the lack of ground truth can be argued away. If tomorrow real estate prices 10x'd but this price change never made it to residential rents then CPI wouldn't budge. If every farm in the US shuttered due to commercial real estate shooting up 10x but consumers could still import food the CPI wouldn't budge. Which ultimately goes to say that the use of CPI as the GDP deflator in monetary theory is arbitrary. Treating it as a gold standard measure of inflation risks ignoring inflation in other prices (and in turn systematically miss-estimating GDP).
- roenxi 6y agoYou have to adjust nominal returns with something, and exactly what you use is a matter of style and taste. Exactly what adjuster to use is always arbitrary. Money supply is a lot simpler than inflation, because something like M2 is a pretty simple sum while inflation is a weighting that is a bit hard to follow the implications of (the handbook for how to calculate inflation is a bit of a doorstop, from memory). Plus if an investment aren't even keeping a constant slice of the monetary pie an investor has good reason to be nervous about their strategy. There is a monetary firehose out there and it makes sense to get in on it.
- nanis 6y agoFriedman was right when he said "inflation is always and everywhere a monetary phenomenon." Assume doodads are $1 today. If tomorrow money supply is doubled, they will be $2. A reasonable definition of the intrinsic value of a stock market index is the discounted net present value of all the profit streams of all the firms included in it. If it is 100 today, and the money supply doubles, it will be 200. What good are the returns to your investments? At some points, those returns are to be spent on real stuff. If your returns went up by 100% but the prices of the stuff you spend money on went up by 200%, the returns are not that good, to put it mildly. Over 2020 and continuing in to 2021, governments around the world have chosen to burn GDP, and lower the future growth trajectories of their economies. Ceteris paribus, that would mean the intrinsic value mentioned above will be much lower. Given the expansion in the money supply, asset prices will be inflated (i.e. keep going up despite physical reality). As governments fear asset price crashes, inflationary policies will be their refuge. See stagflation in the 70s and the so-called inflation-unemployment tradeoff. > The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.[1] [1]: https://www.nobelprize.org/prizes/economic-sciences/1974/hayek/lecture/ https://www.nobelprize.org/prizes/economic-sciences/1974/hay...
- Wolfenstein98k 6y agoOversimplified, but a very good visual representation of the scale of recent money-printing. MMT is being tried in realtime, even as the debate roundly defeats it.
- core-questions 6y agoHave you seen any solid, readable critiques anywhere I could read?
- zeckalpha 6y agoRay Dalio has been writing a series on this.
- Ericson2314 6y agoI recommend https://www.ineteconomics.org/perspectives/blog/mainstream-macroeconomics-and-modern-monetary-theory-what-really-divides-them https://www.ineteconomics.org/perspectives/blog/mainstream-m... for while MMT is nearly as divergent from the mainstream than is hyped. This comparison makes both clearer.
- stephen_g 6y agoNonsense. MMT is a theory of how government finance works and interacts with the foreign and private sectors (including money, banking and debt). It’s not something you try. Overt Money Financing (OMF) is a policy option that MMT opens up, and there are probably shades of that in what’s going on, but I don’t see a whole lot of fiscal or monetary policy that actual MMT economists would say is a good idea.
- choxi 6y agoA lot of people say there’s no such thing as asset inflation [1] and I find that very confusing. Hypothetically, if we add $1T to the economy and everyone invests it into stocks, is that not inflation? I guess economists say it’s not, but it feels like a pedantic argument about assets being “overpriced” not “inflated”. I think our current method of measuring inflation against the CPI is nonsense, the basic premise that you can assume the price of e.g. milk is stable doesn’t even make sense. There’s changes in manufacturing, quality, brands, and market demand that aren't accounted for in the CPI. Measuring inflation (or whatever you want to call the difference between an asset's nominal value and it's intrinsic value) is still useful, but the current method of pegging everything against the bag-of-goods in the CPI seems like an overly simplistic model. This approach of normalizing asset prices against the M1 supply seems more reasonable to me. The intrinsic dollar value of an asset is its value relative to how many dollars there are, not relative to whatever the price of milk is. 1. http://noahpinionblog.blogspot.com/2013/07/asset-price-inflation-is-not-inflation.html http://noahpinionblog.blogspot.com/2013/07/asset-price-infla... Edit: I am clearly not an economist, please see some of the informative comments below. In particular, it sounds like the CPI does account for some complexities, asset inflation is more commonly supported than I thought, but normalizing by M1 might not make any more sense than CPI.
- kgwgk 6y ago> There’s changes in manufacturing, quality, brands, and market demand that aren't accounted for in the CPI. https://www.bls.gov/cpi/quality-adjustment/questions-and-answers.htm https://www.bls.gov/cpi/quality-adjustment/questions-and-ans...
- choxi 6y agoInteresting, thanks I didn't know about this. I'm still struggling with "If we add $1T to the economy and TSLA goes up 500%, how do we calculate the actual change in TSLA's intrinsic value?" I still don't see how the CPI is factoring this in, do you?
- dragonwriter 6y ago
- FartyMcFarter 6y agoIf the red line is the "M1-adjusted" price I would suggest having the "-adjusted" as part of the dropdown box, or some other way of making that more obvious. At first I thought the red line was just "M1".
- pieterhg 6y agoThanks, done!
- nabla9 6y agoThis is very confused "Internet economics" take on the issue. Money in band account that is not used is just a number. As Fed puts more money into the economy, the velocity of money decreases as the money is used less. https://fred.stlouisfed.org/series/M2V https://fred.stlouisfed.org/series/M2V Federal Reserve can increase and decrease effective money supply as it pleases. Money supply does not determine the prices as we have learned over last two decades. --- Edit: some real issues affecting stock price valuation. (1) Global savings glut https://en.wikipedia.org/wiki/Global_saving_glut https://en.wikipedia.org/wiki/Global_saving_glut (2) low real interest rates, typically measured as yields on inflation-indexed government bonds https://fred.stlouisfed.org/series/DFII10 https://fred.stlouisfed.org/series/DFII10 If real interest rate is 10%, only this years earnings matter. If the interest rate is very low or negative, like they are now, time horizons grow accordingly. --- Edit2. "real" things in economy are things like real output. The level of goods and services produced depends on the factors of production. How much capital, labor, level of technology rather than the amount of currency circulating. This means that the money supply can't affect the real level of output in the long run.
- zeckalpha 6y agoInstead of M1, would this make more sense as a currency adjusted chart, with USD against a basket of non-USD currencies (or gold)?
- nabla9 6y agoNo. The whole premise is flawed. Nominal prices don't determine market valuations. Economy is a process. Companies are priced against their future cash flows. If you want to get some idea of what is going on, use ratios like CAPE or market cap to GDP.
- georgeplusplus 6y agoYou may be eluding to it but for others that don’t know, There is an index chart that measures the USD against a basket of non USD currency called DXY.
- dragonwriter 6y ago
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- deanmoriarty 6y agoI don’t understand this. My current portfolio is, say, 30 times my yearly living expenses. All I care about is that it will continue to grow in a way that stays at/above this ratio, so I will be able to retire early. The pace at which my yearly expenses inflate is much more correlated to CPI than money supply. My expenses haven’t changed much between 2019, 2020 and 2021 (projected), despite the large money printing, and my consumption pattern has been the same. So, why should I care? Genuine question.
- CyberRabbi 6y agoThe point isn’t that people with assets should care. The point is that people who hold dollars should care because eventually they’ll need to convert those dollars into assets.
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- bredren 6y agoIt is this, but there's a twist. Presume a person with assets sees information like this and in combination with other factors causes them to agree a dramatic market pullback (on the scale of last year's but worse) is likely and soon. The next logical step would be to enjoy all of the gains so far and sell out from the risk of the drop, and even after a nominal loss of value rebuy. What I've seen is rather than deal with what that might require, people will present the above argument. They may refer you to 1973's "A Random Walk down Wall Street," or bring up capital gains taxes. But what they will not do is confront the cognitive dissonance they're feeling between their own sense that something is wrong with the market and that they are in a position to take great advantage of a drop but will not.
- CyberRabbi 6y agoHmm I don’t see a market pullback happening any time soon. Honest question, Why would this information lead one to believe that? This information leads me to believe that the market is reasonable priced, given that it suggests the recent price increase is not a bubble but rather due to dollar devaluation in the asset marketplace. All other things equal, unless they start burning money I expect prices to grow or remain stable.
- anigbrowl 6y ago10/10
- gimmeThaBeet 6y agoat least the author also provides the m2-adjusted, though it's not quite billed. you don't end up with the narrative that money printing was the entirety of equities performance in 2020.
- xwdv 6y agoSo basically, if the Fed wasn’t printing money the rich’s wealth would have far greater intrinsic value, and they could be content with hoarding cash or making less risky investments, because there is little to no inflation to fight against. But because of all the money printing, they have to run in place just to stand still, so they funnel their money into assets like stocks, which the general public also invests in and gets a benefit from the rising stock price. Meanwhile, the actual day to day items that the general public relies on to live that are tracked by the CPI are mostly unaffected by this. Brilliant!
- eloff 6y agoHere's the S&P 500 in "real money" that is, gold, over the past century: https://www.macrotrends.net/1437/sp500-to-gold-ratio-chart https://www.macrotrends.net/1437/sp500-to-gold-ratio-chart I was looking at that earlier today to try to get a feel for if the stock market is really at record highs, or if it's just the Dollar and other major currencies that are just at record lows. Note, that massive crash on the chart after 1971 is the US abandoning the gold standard (where you could exchange US dollars with the government for a fixed amount of gold) and the massive devaluing of the US dollar, and massive surge in the price of gold that followed. But I thought the most interesting part is it clearly shows we're not at 2000 bubble levels right now. Which it looks like we are if you just look at the dollar denominated stock market value.
- fny 6y agoBut this isn't accurate either. Gold is highly correlated with interest rates. Why would I want to hold a rock that yields nothing if there are bonds that yield a real return? As of now we haven't hit a regime of negative real yields on long dated treasuries in the US. After being at ZIRP for decades with new inflation fears, I'd bet gold will continue to be punished as yields rise, so you may never see that same signal from Y2K.
- jkhdigital 6y agoGold has no yield (more like negative yield, due to carrying cost)... but also has no counterparty risk. Gold is an interesting option when real yields suck, but the real purpose is to preserve some semblance of wealth when the sovereign becomes insolvent.
- yks 6y agoWhether there is an unusual inflation or not, "inflation is skyrocketing" is for sure a popular meme among the tech crowd. It nicely fits with the libertarian mindset, "we are smarter than experts" narrative, some asset shilling/market manipulation (BTC, TSLA) and probably the fact that everyone in the tech bubble is either themselves a millionaire or knows a bunch of millionaires who compete for the same constrained resource, e.g. housing in the SFBA or, again, BTC. Now, since the memes are actually very potent force, I wonder if they create a self-fulfilling feedback loop where assets do rise first and foremost because everyone believes there is an inflation.
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- jzer0cool 6y agoWhat are the various interpretations when these two line charts cross? Are they expected or not expected to cross to a great extent?
- kvz 6y agoI showed this to a prominent Dutch economist and he dismissed this as “meaningless” https://twitter.com/mathijsbouman/status/1360495717727485956?s=20 https://twitter.com/mathijsbouman/status/1360495717727485956... I’m super sure why tho. Can’t we expect that printing dollars has an effect on its value? Aren’t stocks measured in dollars? If the value go down and I sell, aren’t I getting less purchasing power than I would have otherwise?
- kvz 6y ago_not_ super sure, and many more typos, sorry, too late to edit