A Perspective on Monetarism, Valuations and Manias

 

By Victor Sperandeo with the Curmudgeon

 

Background – My Economics Education: 

I studied Economics at New York City College and earned 80+ credits.  I went to college at night while working in the day on Wall Street.  The professors were professionals, which was a very good thing.  Overall, I had an A- average.  I was 18-to-22 years old and without a mentor.  What did I know?

There was nothing I learned in college that made me 10 cents!  As a matter of fact, my first trade in bond futures, applying my college “misinformation,” cost me $15,000.

I am a researcher at heart, so read a great many books (over 3,200). Most of them colleges wouldn’t recommend then or now.  I especially liked Ludwig Von Mises and the “Austrian School of Economics  Indeed, the Austrians were by far the best in economics.

Monetarism and Real Money:

Curmudgeon Note:  Victor discussed this topic in depth in A Historical Review of Money and Gold in the U.S.

Milton Friedman was a “Monetarist.” He was wrong about human nature! But Friedman was the greatest educator of “Free Market Economics” that ever lived. His monetary theory basically stated “increase money supply 6% a year.” 

That turned out to be incorrect in that politicians or Federal Reserve Board members (who were and still are running the “printing press”) would never abide by this discipline. The idea of supplanting the Gold Standard with a fixed increase in paper money ran counter to politicians, and the human desire for power. 

The U.S. Constitution (“law of the land”) states in Article 1 section 10 clause 1:  “No State shall ……. coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts.” Thereby, the Federal Reserve Notes in your wallet are actually paper money that’s not legally redeemable for anything by the U.S. government. 

Assessing the Current Financial Mania:

We’re now in an epic financial asset mania, as the Curmudgeon has pointed out in several recent blog posts. What caused it? 

Starting in March 2020, an underestimated pandemic caused an inept federal and state government response which led to a financial market panic. That resulted in the Fed cutting interest rates to zero and injecting stupendous liquidity into the financial system. The Fed followed that with yet another round of Quantitative Easing (QE) – this time at a clip of $120 Billion per month. And it is still ongoing!

Federal government stimulus spending was vital to keeping the economy from declining even more than it did in the second quarter.  U.S. government spending this fiscal year led to a $3.2 trillion dollar “stated budget deficit  It’s actually $ 4.2 trillion (but a trillion was not yet spent as of September 30th).  Also, $3.5 trillion in Fed buying of fixed income securities (including junk bond ETFs) calmed financial markets. 

The overall total is an estimate of $6.7 trillion in created new spending, which is ~39% of the GDP or $17 trillion.

……………………………………………………………………………………………………………………..

Sidebar - Revisiting Economic Suicide:

Never in history have States purposely committed “economic suicide” in the name of “saving the people” from a flu or virus. We discussed this in detail in Assessment of Global Economy Amidst New Coronavirus Lockdowns and in Perspective on U.S. Economy and the Coronavirus – Suicide is NOT Painless!                                                                                                      

Seven States never really shutdown (or did so for perhaps a week). They are Arkansas, Iowa, Nebraska, North Dakota, South Dakota, Utah and Wyoming. Those States have a total population of 11,402,000 and have attributed 12,835 deaths to the coronavirus.  That’s a 1.1% death rate – the exact statistical equal to the entire U.S. death rate (or 335,265 deaths by an estimated 330,000,000 million population or 1.0%). The difference is a negligible 12.8 people!

Studying history, you learn that governments don’t change or die in a day. That only occurs over a long period of time. The USSR took 73 years to end despite doing everything wrong economically. But the government leaders were backed by the military (guns).

As Mao Zedong so aptly put it:” All political power comes from the barrel of a gun. The communist party must command all the guns, that way, no guns can ever be used to command the party.”                 

………..………………………………………………………………………………………………………………..

Valuations and Tulip Bulb Mania:

One must agree that “all valuation is subjective” (an Austrian School tenet). In November 2017, when someone paid $450,000,000 (the highest priced painting in history) at Christie’s for “The Salvatore Mundi,” a Leonardo da Vinci painting, no one could say it was a good value. Someone with lots of paper currency wanted it. End of story.

Of all the bubbles in history, the one I’m most amazed at was the Dutch  “Tulip Bulb” mania of 1634-37 which I think was the greatest overvaluation in history.

In 1841, author Charles Mackay published his classic analysis, “Extraordinary Popular Delusions and the Madness of Crowds” on Tulip Mania. Among other phenomena, Mackay documents asset price bubbles like the Mississippi Scheme, the South Sea Bubble, and the tulipmania of the 1600s. It is through Mackay's short chapter on the subject that it became popularized as the paradigm for an asset bubble.

"The rage among the Dutch to possess [tulip bulbs] was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade."


                                       1637 Tulipmania FRAMED ART PRINT

………………………………………………………………………………………………………………………

A single tulip bulb could be worth as much as 4,000 or even 5,500 Dutch florins - since the 1630's florins were gold coins of uncertain weight and quality it is hard to make an accurate estimation of today's value in dollars, but Mackay does give us some points of reference: among other things, 4 tuns of beer cost 32 florins. That's around 1,008 gallons of beer - or 65 kegs of beer. A keg of Coors Light costs around $90, and so 4 tuns of beer ≈ $4,850 and 1 florin ≈ $150. That means that the best of tulips cost upwards of $750,000 in today's money (but with many bulbs trading in the $50,000 - $150,000 range).

Another great book on the subject is Charles P. Kindleberger’s “Manias, Panics and Crashes” which explains historical overvaluations and asset bubbles.

Paying $750,000 for a flower you can grow but will die in a vase in 5-7 days is an overvaluation you can certainly call a mania!

End Quote:

Perhaps the thoughts of a well-known investor has some meaning :

“At the height of the Enron mania, the company's market value was $65 billion. Once the dust cleared, the final value was $0.” Robert Kiyosaki

……………………………………………………………………………………………………………….

Good health, stay calm and safe, persevere under lockdowns and till next time….

                       

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

Copyright © 2020 by the Curmudgeon and Marc Sexton. All rights reserved.

Readers are PROHIBITED from duplicating, copying, or reproducing article(s) written by The Curmudgeon and Victor Sperandeo without providing the URL of the original posted article(s).