Friday, August 27, 2021

Trying to Interpret the Inflated Economy

Did you notice that the NASDAQ 100 index hit record highs this week, mostly buoyed by the big high tech stocks, the ones they call the FANGMAN stocksFacebook, Amazon, Netflix, Alphabet (Google), Microsoft, Apple, and Nvidia.  Did you make any money?  Did I?  I started asking myself that question and I can't answer it without some deep study.   

The problem is the all the money creation that the Fed is doing makes it hard to know if you've actually improved your position in life.  Inflation does not improve your spot in life, at least for five-nines of the population (99.999%).  Inflation just blows up prices.  If your expenses cost 25% more and your pay rate at work (or retirement investments) went up more than 25%, congratulations!  You're better off.  Having started working for a living in the 1970s, during the awful inflation from the (until now) worst president in US history, I can tell you it's not usually the case that you make out well.  It's not like everything you need to buy goes up by the same exact percentage.  Some things go up more than others and you're lucky to come out ahead. 

One way to evaluate stocks is the Price/Earnings ratio.  Prices are up, that's what the record NASDAQ index means; what about Earnings?  Economic writer and advisor Bill Bonner notes that 10 years ago in 2011, the P/E ratio of the FANGMAN bunch was 16.  Today, the P/E is 39. 

Put another way, a dollar of earnings cost you $16 in 2011. Now, the same dollar of earnings costs $39 in FANGMAN stock prices.  By that way of looking at it, the value of the stocks has gone down.  

In a functioning free market economy, prices convey information.  The flood of fiat money being pumped into the world interferes with that information like a jammer blocking a radio link and keeps buyers and sellers from knowing what things really should sell for. 

Consider junk bonds.  They get that name because they're riskier than typical bonds issued by established companies or various governments, but they tend to pay higher yields than those bonds because of that extra risk.  The stated inflation from the official US sources are saying inflation is running under 6% - most of us think that's actually about a half of the real number but let's stick with 6% for fun. 

The Bank of America US High Yield Index shows that the yield on junk bonds has been below inflation for all of '21 - and back to November of '20.   If the real inflation rate is closer to the 12% Shadowstats shows, the high yield bonds have never been greater than inflation.

If you buy a 10 year Treasury Inflation Indexed Security, because it's backed by "the full faith and credit of the United States" (ha!) the current yield is negative.  Not less than inflation; less than zero.

A point I've pounded on more times than I can think in the life of this blog is that printing money never produces wealth.  Money is not wealth, it's simply a way of measuring wealth.  Printing money bends the wealth that is already there in the money-printers’ direction. 

I'm rather impressed with the Information Theory of Money, and the more money you print, the more confusing and chaotic the economic picture becomes.


  1. People will spend less if they have less and inflation impacts us all negatively. I'm sure that the big Oligarchs of business and politics have a plan to expand their grasp and feel that this is the way. Or it wouldn't be like this.

  2. I pulled my money from equities a long time ago. Yeah, I've lost some potential gains, but I sleep much better at night. And I don't have to worry about what "the markets" did yesterday, today or will do tomorrow.

  3. My fucking gawd. Stock prices have nothing to do with reality, never have, never will. It's like, your opinion dude. And you're betting play money on it.

  4. Those aren't stock prices, because the companies are too controlled by government. You wouldn't believe the "stock price" of a tractor factory in the former Soviet Union, would you? Those are made-up numbers in a mechanism to help the elites launder money.

  5. "[E]expenses cost 25% more and your pay rate at work (or retirement investments) went up more than 25%" does not take into account taxes. A 25% raise will push you into a higher tax bracket. You rephrased this in your next to last paragraph.