Happy Holidays! Offbeat Holiday Stats

Dear Readers,

I wanted to thank everyone who reads this blog for their interest.  I love investing and it’s fun to write these posts, but it means a lot to me that there are others out there who are enjoying the content that I’ve been putting together.  The blog will be in hiatus until the New Year (that’s the plan at least, but I’ll be around next week so there is always the possibility of a post).  I look forward to starting back in 2013 with more analysis that I hope you all will enjoy.  In the meantime I put together a list of holiday stats to entertain.  Happy holidays!

Scott Krisiloff

Holiday Statistics

Thanksgiving

· Americans eat 68 million Turkeys on Thanksgiving and Christmas (that’s 31% of the annual total)

· The average Turkey weighs 16 pounds, meaning that over 1 Billion pounds of Turkey are consumed on those days—roughly 3 pounds per capita.

Hanukkah

· A menorah burns 44 candles over the course of 8 nights of Hanukkah

· An average candle generates 250 BTUs (British Thermal Units) of energy, which means that a menorah generates 11,000 BTUs in 8 nights. That’s about equal to 0.18% of a barrel of oil.

· There are 2.9 million Jewish Households in the US. If each household lit a menorah every night of Hanukkah, the total energy content of the combined candles would represent about ~5,500 barrels of oil, enough to last a population of 10,000 Maccabees for 8 days (assuming that the Maccabees drive SUVs and otherwise consume oil at US per capita rates).

Christmas 

· 95% of Americans say they celebrate Christmas. 93% exchange gifts and get together with family. 88% put up a Christmas tree.

· Only 76% of Americans describe themselves as Christian, which implies that ~80% of non-Christian Americans celebrate Christmas.

· There are roughly 50 million kids age 0-11 in the US. If Santa spends $75 per child he would spend $3.75B on presents per year. If Bill Gates decided he wanted to be Santa Claus, his fortune would last for ~16 years at that pace.

New Year’s

· ~30% of all champagne sales take place in the last 2 weeks of the year. That’s ~300 million glasses or 1.25 glasses per working age US population.

HAPPY HOLIDAYS! 

How Often is the Dow Negative in May?

I may be getting a little ahead of myself here, but since the Santa Claus rally has been in full effect in 2012, I’m starting to think about the next time that the markets will hit a seasonal turning point.  The next big seasonal mile marker is when we are supposed to “sell in May and go away” 5 months from now.

In the recent past following the adage has been pretty effective.  The Dow has been down 3 years in a row in May, and 4 of the last 5.  In fact, even in 2009 when the market was rallying from the depths of the bear market, the index did take a breather around May.

The fact that seasonality has held so well in May got me to thinking about how and when the streak could end.  After all, in the 113 year history of the Dow, May is only negative a little over 50% of the time.  So will 2013 be a year to shirk seasonality?

Below is a chart that can perhaps help provide some guidance.  It shows the length of Dow losing streaks in May.  There have been three times that the Dow was negative in May for more than 3 years in a row.  The longest streak was between 1965 and 1971 when it was negative 7 years in a row.

Critique of Monetary Realism

I’ve recently been fairly active on the message boards at Pragmatic Capitalism, which is a great site put together by the very talented Cullen Roche.  The folks at Pragcap subscribe to a theory of money called “Monetary Realism,” which you can read more about at their site.  

Typically I try to only explicitly and actively voice my opinion on my site through my monthly investment letters; however monetary philosophy is something that I think is crucial to understanding the investment environment, and I’ve generated a lot of content at Pragcap which I think is important to share with my readers here.  

The basic framework of monetary realism is that the monetary system consists of “inside money” issued by private banks as deposits and “outside money” issued by central banks as currency and reserves.  The philosophy contends that a private banking oligopoly is outsourced the right to create money by the US government.  “Outside money” is only in existence to facilitate the clearing of transactions made with “inside money.”

I disagree with parts of the philosophy, I agree with other parts of it, but my main frustration lies in how it defines its terms and the narrow prism through which it attempts to describe the monetary system.   It arbitrarily draws lines where they don’t need to be, and my sense is that the bulk of that is because of disagreements with a predecessor theory called MMT, which has its own shortcomings.  Below is a comment which I posted this evening that sums up my important criticisms of the framework.  Presented un-edited:

(in response to a previous comment)

After thinking some more about the issue of non-banks creating inside money I am willing to acknowledge that I am wrong to say that anyone has the ability to create “inside money” as MR defines it. In trying to incorporate MR’s framework and definitions into my framework for looking at savings markets, I erred and do see that banks are the only entity that can create deposits. We are now 100% in agreement on this point. Deposits are the sole domain of the commercial banking system. This explains why deposits are created when a bank buys a security but not when a non-bank individual buys a security.

The reason that I said that non-corporate entities could contribute inside money was based on my intuition that there is clearly net financial value created outside of the banking system in securities markets, which can be converted to deposits. If I buy an equity security which appreciates in value, net value is being added to society. If a company issues a corporate bond, a net savings product is being added to society. In attempting to draw a link between deposits and securities as a savings mechanism I do concede that I overextended the ability of securities markets to unilaterally effect the banking system.

However, this does not change the fact that I continue to believe that the MR framework is incomplete as a description of the modern monetary system because of the lack of incorporation of the bulk of the way that modern households do store their wealth. Empirically deposits are not the primary way that Americans save. In order to spend savings it is true that a crucial step is to clear through bank deposit markets. However, this clearing step should hold no more significance to aggregate economic purchasing power than the interbank clearing process via what MR refers to as “outside money.” Both are facilitating transactions based on purchasing power that is not dictated by the quantity of deposits held within the commercial banking sector.

To the extent that a monetary framework should describe the aggregate purchasing power and savings of a society, a truly modern paradigm for the US must include the securities markets as a centerpiece. As of March 2012 an average American household holds 15% of their financial assets as deposits. Any attempt to describe the liquid purchasing power of American households must include the other 85% of their financial holdings, which can easily be converted to bank deposits.

At the other end of the money spectrum lies USD. What is USD? I will continue to contend that the US dollar is the sole domain of the US government and that quantity in circulation does not matter only that it does have a specific value. It is a yardstick of economic value. There doesn’t need to be enough yardsticks to measure everything in the world to define what a yard is. The yard is a clearly defined unit of measurement endorsed by a) the government, but more importantly by b) the people and convention. The USD is no different, and derives its direct value from the quantity of the liabilities on the Fed’s balance sheet relative to the value of the assets on that balance sheet. This is no different from a foot deriving its base from a monarch’s forearm. A foot is “backed” by the length of the king’s forearm. Importantly although the size of the monarch’s forearm may change from monarch to monarch and the numerical value of feet from my couch to my door may change, there is nothing that the unit of measurement can do to change the real physical distance that I observe.

So where do deposits fit in this framework? They are a specific type of security which has a value generally equal to 1 USD. They are backed by the assets of the issuing bank ALONE, and their value cannot exceed 1 USD, even if their uninsured value can be less than 1 USD. (Just ask uninsured depositors of Indymac bank).

Deposits are a type of security. USD is a type of security. Corporate Bonds are a type of security. Equities are a type of security. All have an issuer and a holder. None is “ruler” of any other. All are means of saving. All have tradable value in relation to each other. All are “money” in some sense. Only one is USD.

2011 Dogs of The Dow Performance in 2012

With the year winding down and Bank of America up nearly 100% for the year on today’s move, I thought it might be a good time to revisit how all of last year’s Dogs of the Dow have done in 2012.  Thanks to Bank of America’s huge gain the 10 worst performing stocks of 2011 have averaged a 10.5% return in 2012, 2.2% better than the rest of the Dow.  However, if you strip out BAC’s gain the performance is less than stellar.  On average the other 9 stocks have returned only 1.3% this year.

Dogs of the Dow Performance 2012

What Does it Say That Samsung and Apple Have Roughly the Same Multiple?

It seems interesting that according to data pulled from Bloomberg’s site Apple and Samsung are trading at virtually the same earnings multiple.  One would think that if Apple is losing share to Samsung then Samsung would have a higher multiple.  Samsung has been advancing as Apple has declined, but given the low multiples across large cap tech, does Apple’s decline say more about the company or the industry?

How Long Can Real Interest Rates Remain Negative?

Ray Dalio made some news this week when he acknowledged that interest rates had probably gone about as low as they could possibly go and that the next big opportunity will be shorting the bond market.  I’m inclined to agree, but there is some historical precedent for rates to go lower and stay there for even longer.

Dalio argued that real rates are currently negative (nominal rate minus inflation)–which they are–but they were also negative for 10 years between 1936 and 1946 as shown by the chart below, which compares Moody’s average Aaa bond yield to the realized 10 year forward inflation rate.  Inflation was high during this period, reaching above 10% in some years thanks to WWII.  The fact that rates stayed low is a testament to the fact that it’s not a good decision to try to fight the Fed.

Real Interest Rates Negative World War II
Used Aaa bonds as proxy for risk free rate.  Source: Federal Reserve Data

Why the Monetary Base Matters

Below is a comparison of the monetary base and CPI since 1918.  Each series has been indexed so that the value is 100 starting in 1918.  The data is also presented in logarithmic scale so that it’s easier to interpret rate of change.  I’ll admit there’s not a lot of science involved in this analysis, but eyeballing the chart it’s fairly clear that inflation and monetary base growth are highly correlated.  Although the series diverge in the late depression/WWII era, they generally exhibit a similar pattern with a slightly lagged increase in CPI following an increase in the base.

If the two series are re-indexed to 100 in 1945, the relationship is even more clear.  Between 1945 and 1983 CPI increases at almost the exact same pace as the monetary base.  In January 1983, when the two series diverge, the CPI calculation was adjusted to substitute a survey of “owner’s equivalent rent” for housing prices.  Further adjustments were made under the Clinton administration which slow the pace of CPI growth.

Since 2008 we are seeing another divergence in the relationship between CPI and the monetary base, but as I’ve noted in other posts, the relationship of the monetary base to oil and gold remains extremely strong, which is consistent with the idea that when more money is printed it becomes less valuable.  It is likely that a commensurate increase in CPI will occur at some point.

Annual Change in Monetary Base Since 1918

After yesterday’s post forecasting that we could see a 40% y/y increase in the monetary base in 2013, I thought it might be good to look at a long term chart of the monetary base to put that number into context.  Below is a chart showing the rolling y/y increase in the monetary base since 1918.  The only other time there has been such a steep increase in the US base was during the depression/WWII era during which there were three different periods of 20% annual growth in the base.

How Fast Should We Expect Unemployment to Decline?

To go along with the previous post forecasting when a 6.5% unemployment rate could occur, below is some analysis on how fast unemployment typically drops when we are in a period of falling unemployment.  Since 1949 there have been 10 periods of falling unemployment.  On average the unemployment rate falls by about 7 bps per month when it is declining.

Although the “scariest jobs chart ever” which has made the rounds on the internet implies that unemployment is falling at a much slower pace than it has in past cycles, in reality, we’re basically in line with the average rate of decline (the unemployment rate just spiked from a lower base than it had in the past.)

Unemployment Rate of Decline

When Will Unemployment Hit 6.5%?

As part of today’s statement, the Fed acknowledged that it would be maintaining the current QE rate until unemployment hits 6.5% or inflation gets out of hand (paraphrase).  Below is an estimate of when unemployment could hit that level based on an extrapolation of the current pace of decline.  Since peaking in late 2009 at 10%, the unemployment rate has fallen on average at about 6 basis points per month (.06%).  If it continues at this pace, the unemployment rate would hit 6.5% in mid 2014.

[Note that the decline has not materially picked up much pace in 2012.  In 2012 the rate declined by an average of 7bps per month.  At this pace 6.5% would occur just a few months earlier in 2014.]
Unemployment Forecast