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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Praetor's picture

No sane person in Australia drank Fosters....they have recently been purchased by a British brewer.

StychoKiller's picture

Tooth Sheaf Stout -- FTW!

theMAXILOPEZpsycho's picture

I'm from the UK and even Im a Coopers Pale ale guy!

YesWeKahn's picture

you are kidding right?

 

Bernanke's formula is p2 < 1.

Burr&#039;s 2nd Shot's picture

MDB, you do a valuable service here, acting as the anti-Emmanuel Goldstein for the ZH Two Minute Hate.  Putting this into some type of formula is a stroke of genius. As an obviously inferior being, I am not sure if my input is valuable enough for you to consider, but I think that you could enhance wi through selective breeding of the market participant.  If I am not mistaken, this will also have a positive correlation on xi.

MillionDollarBonus_'s picture

Quite right. I have already suggested something akin to this. Refer to my comment a few months ago:

 http://www.zerohedge.com/news/jon-stewarts-extended-interview-ron-paul#comment-1716791

“3. Employ a system for seeking out and selecting the potential economic leaders at a young age. This would involve setting up economics academies for teaching the most advanced Keynesian theories and pioneering ever more efficient capital-allocation models

spankfish's picture

They are called Finance Academies... they already exists in Maryland.  No joke.

Future Jim's picture

+1
Stop
You're killin me
Gotta let me breathe

dougngen's picture

you sir are an Idiot or a establishment shill.. you think for one second that your ridiculous formulas can overpower common sense? You are part of a dying system. I hope you are paid well to act like such a fool.

RockyRacoon's picture

You are one in six.  Now let's see if the other five show up.

bpom's picture

Your units don't match.  That is, you are saying that price in dollars equals intelligence times influence?  That is no more true than an increasing rate of change in the money supply is the primary market driver while simply an increasing change in the money supply is not effective.

MillionDollarBonus_'s picture

Actually I said “U(price)”, which is the utility/value of the price. I suggest you look up utility theory. I am inferring that more intelligent individuals have more valuable preferences than less intelligent individuals. That is the basis for this equation.

Funghi's picture

MDB, gotta love how you always say it with a straight face. Always entertaining.

Tompooz's picture

 

Prepare for special FEMA camps for Austrians and their supporters.

economics1996's picture

For the ZHrs here is a blog I did showing the real GDP taking out governent, which is bull shit, and leaving the productive sectors.

http://usa-wethepeople.com/2011/12/what-is-the-real-gross-domestic-product-down-6-8-from-2007/

As you can see when the BS is stripped away we are in a world of shit.

 

economics1996's picture

So here is the GDP for the last 40 years in 2005 dollars (adjusted for inflation) with and without government.

Date…………GDP (billions)….GDP (- fed gov.) …Federal Consumption%…Labor Force %

1971-01-01…… 4409.5……….. 3549.6………………………. 19.5…………………….. 56.6
1972-01-01…… 4643.8……….. 3733.6………………………. 19.6…………………….. 57.0
1973-01-01…… 4912.8……….. 3994.1………………………. 18.7…………………….. 57.8
1974-01-01…… 4885.7……….. 3972.0………………………. 18.7…………………….. 57.8
1975-01-01…… 4875.4……….. 3836.9………………………. 21.3…………………….. 56.1
1976-01-01…… 5136.9……….. 4037.6………………………. 21.4…………………….. 56.8
1977-01-01…… 5373.1……….. 4255.4………………………. 20.8…………………….. 57.9
1978-01-01…… 5672.8……….. 4498.5………………………. 20.7…………………….. 59.3
1979-01-01…… 5850.1……….. 4674.2………………………. 20.1…………………….. 59.9
1980-01-01…… 5834.0……….. 4568.0………………………. 21.7…………………….. 59.2
1981-01-01…… 5982.1……….. 4654.1………………………. 22.2…………………….. 59.0
1982-01-01…… 5865.9……….. 4510.9………………………. 23.1…………………….. 57.8
1983-01-01…… 6130.9……….. 4690.1………………………. 23.5…………………….. 57.9
1984-01-01…… 6571.5……….. 5112.6………………………. 22.2…………………….. 59.5
1985-01-01…… 6843.4……….. 5283.1………………………. 22.8…………………….. 60.1
1986-01-01…… 7080.5……….. 5487.4………………………. 22.5…………………….. 60.7
1987-01-01…… 7307.0……….. 5728.7………………………. 21.6…………………….. 61.5
1988-01-01…… 7607.4……….. 5987.0………………………. 21.3…………………….. 62.3
1989-01-01…… 7879.2……….. 6208.8………………………. 21.2…………………….. 62.9
1990-01-01…… 8027.1……….. 6269.2………………………. 21.9…………………….. 62.8
1991-01-01…… 8008.3……….. 6222.4………………………. 22.3…………………….. 61.7
1992-01-01…… 8280.0……….. 6450.1………………………. 22.1…………………….. 61.4
1993-01-01…… 8516.2……….. 6693.7………………………. 21.4…………………….. 61.7
1994-01-01…… 8863.1……….. 7001.8………………………. 21.0…………………….. 62.5
1995-01-01…… 9086.0……….. 7214.3………………………. 20.6…………………….. 62.9
1996-01-01…… 9425.8……….. 7521.8………………………. 20.2…………………….. 63.2
1997-01-01…… 9845.9……….. 7925.9………………………. 19.5…………………….. 63.8
1998-01-01…… 10274.7…….. 8312.2………………………. 19.1…………………….. 64.1
1999-01-01…… 10770.7…….. 8778.1………………………. 18.5…………………….. 64.3
2000-01-01…… 11216.4…….. 9175.0………………………. 18.2…………………….. 64.4
2001-01-01…… 11337.5…….. 9274.1………………………. 18.2…………………….. 63.7
2002-01-01…… 11543.1…….. 9338.4………………………. 19.1…………………….. 62.7
2003-01-01…… 11836.4…….. 9504.6………………………. 19.7…………………….. 62.3
2004-01-01…… 12246.9…….. 9846.5………………………. 19.6…………………….. 62.3
2005-01-01…… 12623.0…….. 10111.0…………………….. 19.9…………………….. 62.7
2006-01-01…… 12958.5…….. 10353.8…………………….. 20.1…………………….. 63.1
2007-01-01…… 13206.4…….. 10617.9…………………….. 19.6…………………….. 63.0
2008-01-01…… 13161.9…….. 10437.4…………………….. 20.7…………………….. 62.2
2009-01-01…… 12703.1…….. 9527.3………………………. 25.0…………………….. 59.3
2010-01-01…… 13088.0…….. 9973.1………………………. 23.8…………………….. 58.5
2011 (est)…….. 13249.9…….. 9897.7………………………. 25.3…………………….. 58.2

As can be seen the productive sector of the economy peaked out in 2007 and is currently down 6.8% from the 2007 level. Trillions of dollars wasted to accomplish nothing more than allow politicians, Wall Street, and the Federal Reserve outbid the rest of Americans for the remaining real resources of production. Printing money, giving it to your friends, outbidding the peasants for goods and services, then telling the peasants that there is no recession, only positive economic growth.

The real growth for 2011 will be negative 0.8% in real terms when government spending is removed. I hope this removes any doubt that the ministry of information is feeding the peasants hopium and dopium.

nmewn's picture

"So here is the GDP for the last 40 years..."

And as always, as stated by the "inventor" of the GDP metric "the welfare of a nation can scarcely be inferred from a measure of income",

Kuznets, if I recall correctly, said this to a Senator.

Who promptly misunderstood what he was saying or disregarded it entirely for politcal expediency. So we are left, down through history, with a measure which means almost nothing, when fully one third of "GDP" is derived from government spending.

Which of course, the ability of government to spend, must come from taxation or come from printing something of value from thin air.

I'm reminded of the age old question, what happens when everything everyone has ever been taught, is a lie?

Merry Christmas ;-)

GMadScientist's picture

So by which measure should a nation's welfare be judged?

I'll open with...

...the ratio of children with lives better than their parents (by whatever definition they choose) to the population as a whole.

Call it a proxy for "class mobility" which is harder to pin down objectively.

nmewn's picture

Thats a good question.

A lot smarter people than I have pondered the question and I did notice you picked up on the central issue posed to a government official...the welfare of.

I would say yours is as good as any, but it ultimately relates to many things.

For the young i-shit is what they know. now Is this better or worse that someone can track you at every hour of the day? It wasn't always this way, it evolved. So can it be said that having the ability to have i-shit is better or worse? I think its a valid question. What was traded and what was lost?

There can also be no doubt that we don't have mass starvation here. But what of those who are on lifes edge and will stay there forever because it is so easy to be a serf to the printing machine. Is this moral and ethical to them...for them? That they can't ever hope to be free of it?

All interesting questions that I have very few answers for because they reside in every individual. I can't speak for them, only me.

BigJim's picture

...the ratio of children with lives better than their parents (by whatever definition they choose) to the population as a whole.

Call it a proxy for "class mobility" which is harder to pin down objectively.

'Class mobility' is zero sum. In the social mobility stakes, for every winner there's a loser.

Piranhanoia's picture

It is Friday, please, no digital crap.

TheSilverJournal's picture

Here's another good CNBC / Onion Headline:

"US Government Spiraled Deeper in to Debt This Fiscal Year"

http://www.cnbc.com/id/45776248

Is CNBC just figuring this out? Actually, CNBC probably still thinks the debt of the US is no problem at all, even as it crosses 100% debt / GDP.

TheSilverJournal.com

CrashisOptimistic's picture

>>

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...

>>

 

Yep.  We all know what that will be and the miraculous nirvana that will result from the new extended source, that everyone knows will be used.  We have been preparing for the new stuff for decades.  It's very exciting.

 


KK Tipton's picture

Oh yes, *very* exciting. I've seen it firsthand.

It's a game changer. Incredibly innovative.

It will change the way cities are designed.

cossack55's picture

Does Hopium come in 55 gallon drums?  Hmmmmm......

WmMcK's picture

No, but slurpees do (and in slightly smaller sizes, too)

CPL's picture

That's the byproduct of the new and abudant energy source from bipedal ambidextrous meat robots given central programmed authority to deliver services. 

 

When these devices wear out, then they become Solyent green.

CrockettAlmanac.com's picture

Nuclear. Although Fukushima is a fly in the ointment.

Axenolith's picture

$100 base WTI is still as cheap as it's ever been inflation adjusted.  Gasoline (and it's source, oil)  is not under any unusual pressures with respect to supply and demand until the inflation corrected price of gas falls below ~$0.18 or rises above ~$0.32/gallon as priced in pre-1965 silver denominated US coinage for over approximately a 6-12 month period.

 

When that happens, I might perk up a bit over "peak oil" hysteria, but until then, [YAWN]...

Hohum's picture

Axenolith,

Are you on crack?  Do you realize oil was about $10 barrel in 1999.  You are just wrong here.

CPL's picture

You know how much money has been printed between now and then?

 

Nobody appearently knows.

LowProfile's picture

Well, that's why it's called a SHADOW banking system, you big silly!

CrashisOptimistic's picture

This is not what Occam's Razor would say.

Why contort yourself into using a default presumption of infinite oil flow and changing the denomination of the yardstick?  Why is this the straightforward answer, in comparison to the very simple and straightforward acknowlegement that the Earth's interior volume is not infinite and therefore what comes out of the interior cannot be infinite?

 

 

spinone's picture

But unlimited cheap energy is our birthright!  The American Way of Life is non-negotiable!

emsolý's picture

And everyone knows what that will be...

...Chinese solar stocks?

Milestones's picture

Leo's back???        Milestones

CPL's picture

You have to understand Chinese solar isn't priced in the same dollar hegemony.

evolutionx's picture

APRES NOUS LE DELUGE

A deluge of an unprecedented magnitude is both inevitable and imminent. The consequences of the economic and political mismanagement will have a devastating impact on the world for a very long time. And the consequences will touch most corners of the world in so many different areas; economic, financial, social, political and geopolitical.

 

Yes, it is amazing the castles in the air that can be built with paper money and deceitful manipulation of all economic data.  And Madame Bernanke de Pompadour will do anything to keep King Louis XV Obama happy, including flooding markets with unlimited amounts of printed money. They both know that, in their holy alliance, they are committing a cardinal sin. But clinging to power is more important than the good of the country.  An economic and social disaster is imminent for the US and a major part of the world and Bernanke de Pompadour and Louis XV Obama are praying that it won’t happen during their reign: “Après nous le déluge”.

 

More:

http://www.mmnews.de/index.php/english-news/7423-apres-nous-le-deluge

centerline's picture

Ahhh, the mathematics of parabolic curves.  Approaching the asymptote from the left hand side via inevitable printing.

HoofHearted's picture

Maybe you mean hyperbolic....

fonzanoon's picture

"We believe that monetary authorities in the major currency areas have taken the right measures in order to give equities the necessary support in 2012. Due to the fact that the markets will have to digest weak and disappointing data for quite some time, we do not believe that a stock market rally is imminent.The USD Index displays the ongoing strength of the USD vs. other global currencies. This is another indication that risk appetite is not yet rising, and leads us to believe that equity markets in our core region will remain sluggish in the short term"

From the austrians themselves.....looks like the large cap US dividend payers are the wave of the future.

ebworthen's picture

Light up that Keynesian pipe of hopium

Print more fresh currency tobacco please.

Spread it around so all are dopium,

Central banker dealers will ease.

 

"You'll feel better with another hit"

Chime the econometric pushers.

"This won't hurt a bit"

Whip the taxation mushers.

 

Zero interest, Trillions in debt.

Don't worry kids, we'll fix this yet.

Don't do this at home, no bailouts for you,

Just get ye to work, and we'll turn the screw.

richinar's picture

Just give ME some of it this time!

 

San Diego Gold Bug's picture

TD,  Keep up the great work!  Saw this on TFmetals....classic video that give you a shout out and big thanks!

http://youtu.be/AtBrctgDb1I

OldPhart's picture

That is AWESOME!!

One of the commenters called it "Hard Core Silver Porn".  IT IS!!

 

SHEEPFUKKER's picture

I think Arnold Schwarzenegger graduated from the Austrian School of Economics.