An "Austrian View" Approach To Equity Prices

Tyler Durden's picture

Take all you know about the formation of equity prices... and throw it out of the window, at least according to the following paper out of (fittingly Austrian) Erste Group, which applies Austrian theory to stock "valuation", by looking at a world in which the only determining factor for "fair value" is credit money creation. Indeed, the 2011 market, in which cross-asset correlations broke all records, and in which fundamentals were cremated once and for all, showed that the only thing that matters is who prints first, and more importantly, who frontruns said printing (it also means that most hedge fund analysts will soon be redundant). Here is Erste with a slightly less jaded view: "We come to the conclusion that it makes sense for equity investors to track monetary and, especially, debt developments closely. We believe that the changing dynamics of monetary as well as debt aggregates are often a good leading indicator for equity markets. Historic data shows that accelerating money and credit growth drives equity prices, while decelerating growth in the money and credit supply generally puts pressure on equity prices...Financial history shows that equity markets are ‘addicted’ to new money and credit creation. To keep rallies going, the equity markets need ever more fuel (faster rate of change in the money and credit supply). As soon as the rate of change is negative (decelerating money and credit supply) markets tend to become sluggish and lose momentum, even though in absolute terms the money and credit supply is still rising." And while this is not telling Zero Hedge regulars something they didn't know already, with the fiscal pathway of creating new money blocked in a (mock) austere world, the only other way to generate M1-X is by printing. Summary - much more currency debasement and devaluation ahead, only this time with a $100 base in WTI. Which most certainly means that very soon the world will need to find an extended source of cheap energy (read oil). And everyone knows what that will be...

Summary from Erste:

At the heart of this product lies the analysis of the development of historic money and credit statistics. It is called the ‘Austrian View’ because studying the theories of the Austrian School of economics (especially Ludwig von Mises’ book: ‘The Theory of Money and Credit’; which, by the way, will celebrate the 100th anniversary of its first publication in 2012) has inspired us to examine the relation between money/credit developments and equity prices. We have come to the conclusion that, indeed, there seems to be a connection between the two. However, it is necessary to have the right angle of vision when poring over the money and credit statistics, because otherwise they are pretty useless.


We have to admit that it has become very difficult to determine what money and credit actually is. Money supply aggregates like M0, M1, M2, M3, sometimes even M4, are being published. To complicate things further, central banks publish credit statistics as well. Finally, money and credit are just two sides of the same coin in today’s monetary order. Someone’s savings account (contained in the calculation of M1) is at the same  time the credit financing someone else’s project (contained in credit outstanding). We therefore believe that one should denote currency (apart from cash in your pocket) in savings and other bank accounts as claim, not as money. We believe that M1 and M2 are good short-term leading indicators for equities. In this publication we also track the development of debt as a supplemental indicator.


Apart from the question of which aggregates to track it is important to understand that the rate of change in the money supply is of interest. In order to drive a rally, the rate of change in the money supply has to increase. As soon as the rate of change is slowing down, equity markets tend to get sluggish and weaken. There is, however, a certain time lag effect involved. We decided to use the US stock market cycle 2001 - 2007 as a case study in order to demonstrate how the analysis of monetary forces can improve an investor’s decision-making process. The appendix  of this publication will track several monetary aggregates for the main currency areas.


The punch line is that this framework advises investors to establish long positions in equities (or overweight cyclical or financial stocks) as long as the credit supply is loose and accelerating; as soon as the credit supply becomes tight and decelerates, investors should gradually sell their positions or switch into more defensive sectors. [ZH: incidentally this is what we suggested back in May when recommending the QE unwind trade, which has returned about 10% over the S&P, or about in the top 95%-ile]


In this context, we would like to mention, that in December 2010 an interesting paper was published by Jordà, Schularick and Taylor, titled ‘Financial Crises, Credit Booms and External Imbalances: 140 years of lessons’. They have studied the experiences of 14 developed countries over 140 years and exploited a long-duration dataset in a number of different ways (application of new statistical tools to describe the temporal and spatial patterns). Their final conclusion confirms our interest in money and credit statistics, because the overall result is that credit growth emerges as the single best predictor of financial instability.


The overall framework has to be understood as an additional tool within the toolbox at the investor’s disposal. It is not the Holy Grail or something like that, but we believe that it can provide equity investors with an informative basis in times when fundamental analysis does not seem to be of any use.

Full note (pdf)


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DaveyJones's picture

Happy Holidays everyone. Leave with this CNBC / Onion Headline:

The good news is that Wall Street experts think stock prices will rise more than 10 percent next year. The bad news is that they expected big gains in 2011.

russki standart's picture

More BS from money managers who get paid even as clients get fleeced. I could only see this scenario manifesting if the dollars drops 10% and/or trillions are 'printed'

Cheesy Bastard's picture

How to avoid a Fema camp:  I pledge allegience to the fag of the United States of America, and to the banana republic for which he stands, one nation under arrest, indefensible, with liberals and "just us" for all.  Merry Christmas

MillionDollarBonus_'s picture


The Austrian school makes a fatally flawed assumption about equity prices. Namely that they should be determined by the subjective preferences of market participants. There is in fact a far better and more objective means of price discovery - create a central body to set equity prices according to the mathematical models of professional economists.

The optimality of the price of equities can be modelled by the following equation:

              U(price) = SUM( w1x1 + ... + wnxn )


              wi = intelligence of market participant i

               xi = proportional influence of market participant i on price

Letting Wmax = MAX( w1,...,wn ),we find that:

              Max{U(price)} = SUM( w1x1 + ... + wnxn ) | wi = Wmax for all i

                                            = Wmax * SUM ( x1 + ... + xn)

                                            = Wmax

Therefore, for maximum prosperity only the most intelligent professionals should be setting prices.


WonderDawg's picture

That. Is. Awesome.

The only problem is, I don't see the component of human nature in the equation. If market particpants A-Z decide they don't want to pay the price that the "most intelligent professionals" have set, then what?

MillionDollarBonus_'s picture

They will simply have to pay this price, since it will be mandated by law. But in any case, a failure to agree with the optimal price is a clear demonstration of ignorance, and the resulting social ostracism should be enough to enforce compliance. 

Snidley Whipsnae's picture

MDB... "But in any case, a failure to agree with the optimal price is a clear demonstration of ignorance, and the resulting social ostracism should be enough to enforce compliance."


If 'social ostracism' is the only necessity for compliance, why does the US have more people in jail than any other country on earth?

One would think that shame of wrong doing would stop all crime... especially crimes against humanity which bankers/pols commit daily.


Kali's picture

It's a shame, but there is no shame anymore.

AldousHuxley's picture

austrian view may be correct, but in an austrian world austrians would be dirt poor without government subsidies and world competition.


ron paul knows better that his entry into politics came from money and reputation of being a doctor and not a butcher or a car mechanic. But in a real world without government subsidy to doctors (50% of labor costs) and AMA lobbying to keep the profession supply less than demand, doctors wages and reputation would not warrant ron paul to run for elite political position.


Remember Doctors don't create cures, they just distribute them to you.

Also austrian and free market is brutal and cut throat. Do westerners really want to compete with BILLION Indian and Chinese youths?

lasvegaspersona's picture

Only 17% of American physicians are AMA members. It is now a left wing insurance company selling health and life policies and behaving more like AARP than a union for doctors. 

They have lost their way and now only a few academics or power hungry (or should I say a few who enjoy being pictured with politicians at social gatherings) doctors belong. Most who want helpful political input go with Docs4patientcare. The AMA has been useless for 40 years...make that dangerous.

Hohum's picture

Be that as it may, government out of health care completely would lead to a plunge in doctors' wages.  How could it be otherwise?

Michael's picture

The Ron Paul grassroots crew's creativity never ceases to amaze me. Check this out;

Pauled the Iowa Mall and Best Buy today! Submitted by storm on Fri, 12/23/2011 - 22:23.

Was at the largest mall in Iowa today. Went into the Apple store and turned the computers into Ron Paul. Opened to and changed the home pages loaded Ron Paul YouTube video. Also changed the backgrounds to the Top Tier Military donations picture. Here's the kicker, some of the computers already had the home page set to :) we are winning! I just went over to Best Buy and did the same thing. Now I am Pauling the parking lots with Super Brochures..Go get em!

Oh regional Indian's picture

I think I have a new expanded form of QE.

Quite Elevating! Question is what happens when they QE (Quit Elevating)?

I think we are seeing a with-drawal of liquidity around the edges.

India is jittery, because it knows all that dollar slosh can be GONE in a heartbeat and in fact IS currently looking to go home. WHen it does, the whoosh and thud in India and other QE dependent markets (most of th edeveloping world) will be awful.



Harlequin001's picture

My family and I would like to wish everyone on these pages all the very best for Christmas and the New Year, may the coming year bring you health, wealth and happiness, and that extends to our Muslin, Jewish, Hindu, Buddhist friends and every other creed, race and faith.

Have a good one...


navy62802's picture

Hahaha! That's brilliant. The best part of this story is where some of the computers had already been "Pauled." It's like there's a secret underground network that exists without you knowing about it.

ActionFive's picture

Why not just report them to the terror/watch programs- now they are guilty.

Hohum's picture

A pure free market is brutal and will hurt most.  But who said that isn't fair ;)? 

blunderdog's picture

Remember Doctors don't create cures, they just distribute them to you.

Some do.  There's huge variation between different specializations in terms of what they can get away with.  Surgeons probably have the greatest leeway.  If they can get someone with a severe medical issue to sign the right forms, surgeons can try cutting off just about anything as "treatment."

You're right about pharma and biotech development, though.

TrulyBelieving's picture

Competition is very good.  Let others be encumbered with a controlled market and let us have a free market, we'll outcompete every time.

GMadScientist's picture

China disagrees for 245 billion reasons (in 2010).



TrulyBelieving's picture

China disagrees because they see using slave labor as a way to gain the system. Crony capitalism disagrees because they see stealing and control as a way to gain the system. Now why is it you disagree?

AldousHuxley's picture

slave labor due to low labor standards.


America learned long time ago about what happens when you lock in women workers in a garment factory so that one owner can increase profit by 5%.


Chinese are new to capitalism and materialism. They will accept horrid labor conditions as long as they can buy stuff but in due time will realize that sacrifices made are not worth the materialistic way of life.


Americans will soon become Europeans...after spending all public tax dollars in fueling elite's ambition for global dominance in world wars, labor will demand more. The Iraq vet guy at the pizza shop will stop beliving that capitalism will make him happy.


Hope was all American middle class had after Reagan, Clinton x 2, Bush x 3, and Obama crushed that hope with horrifying realism that America after all is a corrupt oligarchy no different than Russia or China.

GMadScientist's picture

Remember, these are the folks that want "free" markets...but fences to keep out the illegals.

TrulyBelieving's picture

There is but one reason to be against a free market , and that would be the desire to gain the system. Just so you'll know, border protection is a Constitutional responsibility of the Federal Govt.

A Nanny Moose's picture

Digging below the surface of this is innovation, and it's natural nemisis, mercantilism. This begs the question whether government is even necessary, since they are the engine of mercantilism, and stifle innovation through regulation.

In the end, what do they (china/India) have, that I really need?

delacroix's picture

so who creates the cures? jonas salk wasn't a doctor? how about linus pauling?

ffart's picture

Is this guy a bot or just drunk.


Also austrian and free market is brutal and cut throat. Do westerners really want to compete with BILLION Indian and Chinese youths?

What choice do people have? Rapidly growing population vs declining energy source, and NO will to come up with alternatives since the government heavily subsides the least efficient ones. Maybe we could print our way to Keynesian prosperity because if the last 10 years have shown there's NO downside to that. What a fucking rube, must be from europe.

Mulletpower's picture you think price contol by the government in medicine is to subsidize doctors.  You are incorrect sir.  Try again..

NumberNone's picture

Austrian's what do they know about economics?  All I hear from them is 'G'day Mate' and 'Throw another shrimp on the barbi'.  

scatterbrains's picture

The reason so many more are in jail in this country is because we pour more tax payer funds into ensuring that only our bosses should profit from the drug trade.  "The War on Drugs"  really means "maintain control of the flow"  

 Sorry don't mean to offend your sensibilities.




WonderDawg's picture

If "The War on Drugs" wasn't so profitable, it would be over by now.

Xkwisetly Paneful's picture

If "The War on Poverty" wasn't so profitable, it would be over by now.

Dugald's picture

Fit this man with a tracer tag....he bears watching!!

nmewn's picture

"They will simply have to pay this price, since it will be mandated by law. But in any case, a failure to agree with the optimal price is a clear demonstration of ignorance, and the resulting social ostracism should be enough to enforce compliance."

You're almost as good as the original MDB.

Isn't everything you just said human action?

You present yourself as a blue blooded, ringlelted dandy with psychopathic tendencies seeking to insure his own lifstyle at the expense of others. You now realize you're going to have to sell those overvalued equity positions among yourselves don't you? 

One wonders at what prices...don't look

I will go out on a limb here (not really) and say the prices will be considerably lower when I come back around & pick through the ashes for those rings of yours.

But thanks for the laughs & your brand of Christmas cheer anyways ;-)

Piranhanoia's picture

They shall pay the discount rate master. Retail does not exist.


economics1996's picture

Sounds like LEONID VITALIYEVICH KANTOROVICH was reincarnated in MDB.

tom's picture

Thank you professor Million for your brilliant contribution. I'm sure we can implement this plan as soon as we get funding through the appropriations committees.

It's also interesting to observe that at least six ZHers are completely incapable of recognizing even the most obvious possible sarcasm. I suggest we need more experiments in this potentially very fruitful field.

economics1996's picture

Sorry if it was sarcasm.  My bad.

Bicycle Repairman's picture

Not all was lost. I learned a bit about Leonid.

youLilQuantFuker's picture

Do you have an appetite for discrete analysis?

Here's a video about linear threshold predicates and approximation resistance.

youLilQuantFuker's picture

"at least six ZHers are completely incapable of recognizing even the most obvious possible sarcasm"

I'm sure they we're in shock from MDB_'s butchery of linear optimization.

ihedgemyhedges's picture

You're crazy dude.  From my life experiences, Austrians are far more often right about things than wrong and they have a great outlook on life.  In fact, I'm working on my 4th Foster's right now................

Paul Kemp's picture

Did you just mix up Austria and Australia or was that just one sarcasm corner i didn't take?

Dugald's picture

You drink Foster's cooo errrr! now that really is poor taste!

AldousHuxley's picture

Fosters is Australian.....Arnold Schwarznegger is Austrian.

el Gallinazo's picture

Cut him a break.  He's on his fourth and they can come in really big cans.  The Sperminator is from California.  Hitler was from Austria.

Crisismode's picture

Hitler was from Australia

You idiot.

He was a whelp of an Abo and a marmoset

Crisismode's picture

Hitler was from Australia

You idiot.

He was a whelp of an Abo and a marmoset