Uncovered: share prices and speed of money

The first week of Unhedged is over. How are you? Send an email: Robert.Armstrong@ft.com.

QE and share prices (second part)

Here are two lines that usually go up and to the right:

The two lines are the M2 cash supply (cash, deposits, money market accounts) and the S&P 500. M2 is growing rapidly due to quantitative easing: the Fed buys bonds to make money and therefore puts in new money. S&P is rising so fast why it’s not so clear. The fact that the two lines have moved together lately is pushing for a well-known causal story: “The Fed is printing money, and it has to go somewhere, and it’s going into the stock market.” I a couple of days ago indicate cause these stories are wrong because money does not become stock. When I buy shares, the seller gets the money. There is no “stock market”.

What is really happening is that all the extra money people want is less, compared to stocks, and the relative increase in demand for stocks shares prices. This is how QE affects share prices (or does so in a way that other people, especially central banks, prefer stories about lowering the QE discount rate, and there will be more soon).

Eric Barthalon, head of capital markets research at Allianz Research, said the process is self-limiting. As stock prices rise, the weight of money in investors ’portfolios falls on the weight of shares to the level that investors are happy with. Investors leave so much to trade and prices stabilize. In this story, it is not about filling the Fed markets with money. There is a mediating factor: the relative preference of investors over money.

Barthalon’s argument – I find it quite plausible – is that (a) investors ’preference for money is unstable and (b) the Fed does not have control over it at times when it matters, that is, when markets fall. You can track the unstable priority of investors in cash by looking at the speed of money or how much it changes manually. Barthalon told me:

“It is not the amount of money but its circulation that raises or lowers asset prices… And historical experience shows us that central banks do not control the speed of money, especially in the capital markets.”

We will now see why central banks may prefer with QE, which controls the discount rate that determines the value of stocks, while maintaining the yields on government bonds. This lever will, in theory, work, even if investors suddenly decide that they like quite a bit of money, which is what they do when markets fall.

Here is a long-term chart of the speed of Barthalon’s stock market (the value of daily market transactions divided by M2) by stock market value. Look at how the speed drops in the market as it falls:

These two lines change together, and are connected by a neat causal story. The way it is carried away is that the large amount of money circulating around it cannot in itself keep the stock market high.

Armstrong’s department is wrong: bitcoin

I argued yesterday that bitcoin is the only asset in a company with unproven technology. This technology will be proven when Bitcoin becomes money. But bitcoin is not money now because it is not widely accepted as a form of payment while people are trading, because there are few transactions, transaction costs are high and so on.

The most common response received is that bitcoin is not trying to make money. Money has two key properties. It is a storehouse of value and exchange. Most people who think I’m wrong think that the value of bitcoin is to save value. This is why its finite supply is so important. If the trade is a bit expensive, it’s a bit liquid and so on. Who cares? It is similar to gold and diamond in that it is rare to highlight the uniqueness and ease of use and is not as precious as it is precious.

I am not convinced. Gold and diamonds have uses in industry and jewelry, they have evolved into thousands to protect their preciousness. The only thing that supports bitcoin as a store of value, as a precious commodity, is a store of value and above all a good means of exchange – broad, frictionless, low cost, and (here’s the real key) to act without the supervision or control of a third party. And I don’t think we know that yet. Bitcoin is scarce, but so are the watercolors I painted in high school. This does not make them a repository of value.

In addition, bitcoin heads should register our newsletter #fintechFT, a crossroads of technology and finance. Click here.

Good reading

It surprised me this With so strong demand for U.S. homes, homeowners are moving away from fixed prices Bloomberg’s story by holding blind auctions to get the highest possible bids:

“Clash of forces related to the pandemic [is] retaining new inventory when needed most. Buyers are looking for new homes as remote jobs increase employment, while timber costs are rising and labor shortages are slowing construction. ”

This description suggests that in 2007 there was no toxic style speculation in the mix. That makes me paranoid. Isn’t speculation everywhere today? Why not housing? I don’t know if there is any evidence, but I’m looking for it. If you have, send us an email.