We begin today\u2019s Irregular Roundup with monetarism.<\/p>\n
Monetarism<\/span><\/h6>\n![\"Joachim](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2019\/11\/Joachim-Klement-300x270.jpg\")
<\/a><\/p>\nJoachim Klement does not believe in monetarism.<\/p>\n
\n- He\u2019s written about it many times before and calls it a dead theory.<\/li>\n<\/ul>\n
According to Joachim, a new paper shows that the quantity theory of money hasn\u2019t worked since 1985.<\/p>\n
\n- The paper calculates regression coefficients for 18 developed countries between inflation and the change in the money supply.<\/li>\n<\/ul>\n
If monetarism worked perfectly, the coefficient should be 1.0<\/p>\n
\n- Above 1, we get more inflation than expected and below 1, less inflation.<\/li>\n<\/ul>\n
The real problem is when the coefficient turns negative \u2013 here money printing lowers inflation.<\/p>\n
![\"Narrow](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/08\/Narrow-money-supply-and-inflation-7-Circles-187x300.png\")
<\/a><\/p>\nThe bars cover four time periods:<\/p>\n
\n- 1870 to 2020 = blue<\/li>\n
- 1870 to 1945 = red<\/li>\n
- 1945 to 1985 = green and<\/li>\n
- 1985 to 2020 = yellow<\/li>\n<\/ul>\n
The first chart looks at the narrow money supply and the second chart at the board money supply.<\/p>\n
![\"Broad](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/08\/Broad-money-supply-and-inflation-7-Circles-189x300.png\")
<\/a><\/p>\nJoachim draws three conclusions:<\/p>\n
\n\n- The regression coefficients are almost always less than 1.0 indicating that the theory is overstating the amount of inflation<\/span><\/li>\n
- In general, monetarism has worked best between 1945 and 1985<\/span><\/li>\n
- Since 1985, the quantity theory of money has failed completely. The regression coefficients became negative for almost all countries<\/span><\/li>\n<\/ul>\n<\/blockquote>\n
The period when the theory worked was when it was formulated, and then popularised by Milton Friedman.<\/p>\n
There\u2019s certainly been a \u201cproblem\u201d in creating inflation since 1985, and in particular since 2008.<\/p>\n
\n- Central banks are supposed to keep inflation relatively low, but since the GFC they have been more worried about deflation.<\/li>\n<\/ul>\n
On the other hand, doling out money to unproductive people during Coivid seems to have done the trick, and inflation is back one more.<\/p>\n
\n- The study doesn\u2019t look past 2020, but I suspect the last few years will have been more kind to monetarism.<\/li>\n<\/ul>\n
GDP targeting<\/span><\/h6>\nA second article from Joachim looked at nominal GDP targeting<\/a> by central banks.<\/p>\n\nChanges in nominal GDP come from the combined change of real GDP and inflation, so when real growth is low, inflation can be higher to stimulate future real growth and when real growth is high, inflation needs to be lowered to reduce nominal GDP growth.<\/span><\/p>\n<\/blockquote>\nThis means that short-term fluctuations in inflation can be ignored, and the medium-term growth trajectory can be focused on instead.<\/p>\n
![\"GDP](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2024\/08\/GDP-targeting-7-Circles-300x142.png\")
<\/a><\/p>\nJoachim doesn\u2019t like this proposal as he sees it as monetarist.<\/p>\n
\n- More importantly, the impact of GDP targeting seems to depend on heroic assumptions about the public\u2019s ability to understand economics.<\/li>\n<\/ul>\n
\nIf this [Nominal GDP Level] target were understood by the publice, it would create expectations of stable money spending growth that would become self-fulfilling.<\/span><\/p>\n<\/blockquote>\nAnd:<\/p>\n
\n\u201cThis concept can be better understood by noting that changes in the supply of money are automatically offset by changes in the demand for money under NGDPLT.\u201d<\/em>\u00a0<\/span><\/p>\nI hope the average man and woman on the street get the memo that they must demand less money whenever the central bank decides to cut the supply.<\/span><\/p>\n<\/blockquote>\nThe theory also required money printing at the zero bound (when interest<\/a> rates are zero).<\/p>\n\n- This didn\u2019t work after the 2008 crash, so probably won\u2019t work next time.<\/li>\n<\/ul>\n
Joachim also notes that the Fed has only one tool \u2013 interest<\/a> rates.<\/p>\n\n- But Scott Sumner \u2013 \u201d the inventor of market monetarism\u201d \u2013 is proposing some more:<\/li>\n<\/ul>\n
\nHe thinks the Fed should introduce a nominal GDP futures market. The Fed can then use the prices of these futures to understand what kind of nominal GDP growth markets expect. The Fed adjusts money supply until the futures market reflects the desired nominal GDP growth rate. The Fed would essentially trade against the hedge funds.\u00a0<\/span><\/p>\n<\/blockquote>\nJoachim doesn\u2019t think this would end well.<\/p>\n
Return Stacking<\/span><\/h6>\nReturn Stacking (essentially, the use of leveraged diversified portfolios) has reached the mainstream, with a none-too-positive article on Bloomberg entitled \u201cLevered Trade That Blew Up in 2008 Gets a $600 Million ETF<\/a> Redo\u201d.<\/p>\n\n- The article\u2019s author \u2013 Lu Wang \u2013 also describes RS as \u201cportable alpha\u201d (a 1980s term) for the masses.<\/li>\n<\/ul>\n
This is presumably because it\u2019s available to US investors (and UK investors with US accounts) as a suite of ETFs<\/a>.<\/p>\nRSST was the example fund used.<\/p>\n
\n- It mixes stocks with trend following (managed futures), offering $1 of each for each dollar invested (100% leverage<\/a>).<\/li>\n<\/ul>\n
The leverage<\/a> works against you in a downtrend, but the diversification across asset<\/a> classes should mean that volatility is lower to begin with.<\/p>\n\n- That\u2019s assuming the historically observed correlations persist.<\/li>\n<\/ul>\n
As we saw recently when stocks and bonds fell at the same time, this won\u2019t be the case across all economic regimes.<\/p>\n
RSST is also expensive, at more than 1% pa, though that\u2019s cheaper than standalone managed futures funds.<\/p>\n
\n- A 100% allocation to RSST would be quite risky, but that isn\u2019t the idea.<\/li>\n<\/ul>\n
Optimal leverage<\/a> for long-term private investors is probably at least 15%, though I expect few are targeting that, and few tools are available (particularly within tax shelters).<\/p>\nThe original fund in this class, for which a better term is \u201ccapital efficiency\u201d is the WIsdomTree Efficient Core fund (NTSX) which takes the traditional 60\/40 stock bond<\/a> portfolio and levers it by 50% to make it a 90\/60 portfolio.<\/p>\n\n- This is also the only fund available in the UK.<\/li>\n<\/ul>\n
It\u2019s my largest holding, at 5% of my portfolio (I won\u2019t hold more than that in a single fund).<\/p>\n
\n- That means I only have leverage<\/a> of 2.5%, a long way short of my 15% target.<\/li>\n<\/ul>\n
VCTs<\/span><\/h6>\nThe EU has given the green light to another 10 years of VCT and EIS schemes.<\/p>\n
\n- This is being spun as good news for the venture industry, though I\u2019m not sure there was ever a real threat to the tax breaks.<\/li>\n<\/ul>\n
Chris Lewis, chair of the VCT Association, said:<\/p>\n
\nThis a very good day for the UK\u2019s VCT community. The VCTA has continuously sought to demonstrate the positive impact made by our members through their investment in the next generation of early-stage businesses. The European Commission was informed by not only the VCTA\u2019s own research, but also by a body of research from other associations across the industry.<\/span><\/p>\n<\/blockquote>\nLabour watch<\/span><\/h6>\nThe government net borrowing figures for July came in hot at \u00a33.1 bn.<\/p>\n
\n- This is \u00a33bn more than predicted by the ONS and more than a billion higher than the consensus economist forecast.<\/li>\n<\/ul>\n
The total for the four months of the current tax year is \u00a351.4 bn, the fourth highest since records began.<\/p>\n
\n- So anyone who still believes Rachel Reeves\u2019 claim that there is a \u00a322 bn black hole to fill with the October budget<\/a> must now think that we have a \u00a325 bn problem.<\/li>\n<\/ul>\n
We also had more updates on the counter-intuitive way that Labour is pursuing its proclaimed \u201cgrowth agenda\u201d.<\/p>\n
\n- We\u2019ve had cancelled investments in roads and AI supercomputers and the public sector pay rises (that are largely responsible for the fiscal black hole) n not tied to productivity gains (or indeed, simple reforms to outdated working practices).<\/li>\n<\/ul>\n
Last week we had Angela Rayner\u2019s \u201cright to switch off\u201d.<\/p>\n
\n- This would prevent employers from contacting their staff outside of work hours.<\/li>\n<\/ul>\n
It\u2019s not hard to imagine scenarios where not speaking to someone with crucial information \u2013 and being unable to recall them back to the workplace \u2013 could impact productivity.<\/p>\n
\n- Labour also seems very keen on giving people the right to work from home.<\/li>\n<\/ul>\n
This will apparently make them happier \u2013 perhaps because they can get more of their own stuff done and less of their employer\u2019s tasks.<\/p>\n
\n- If WFH really helped with productivity, wouldn\u2019t we have noticed in the four years since the Covid lockdowns began?<\/li>\n<\/ul>\n
In fact, public sector productivity is at a 30-year low.<\/p>\n
\n- It\u2019s all very reminiscent of the way things were done in the 1970s (ie. pre-Thatcher).<\/li>\n<\/ul>\n
We should mention Ed Milliband\u2019s brainchild (no, not the EdStone), GB Energy.<\/p>\n
This publicly owned company has four somewhat conflicting objectives:<\/p>\n
\n- boosting clean energy supplies<\/li>\n
- reducing emissions<\/li>\n
- greater energy efficiency<\/li>\n
- increased energy supply efficiency.<\/li>\n<\/ol>\n
And all this for \u00a38.3 bn (which Labour claims will unlock another \u00a360 bn of private investment).<\/p>\n
We\u2019re back to the \u201cpicking winners\u201d idea which failed so badly in previous decades (British Leyland, British Steel, British Shipbuilders).<\/p>\n
\n- Chuck in more natural (for a time at least) state monopolies like British Rail and British Telecom, and perhaps we can see why Labour prefers the Olympic-style prefix \u201cGB\u201d.<\/li>\n<\/ul>\n
It\u2019s only a matter of time before that one is tarnished, too.<\/p>\n
Back to growth, and following the big pay rise for teachers and NHS workers, we have a 15% pay rise for train drivers (with no productivity or efficiency linkage).<\/p>\n
\n- Tough on pensioners, and easy on unions is the track record to date, but it\u2019s hard to square these above-inflation pay rises with the growth agenda.<\/li>\n<\/ul>\n
Automating the trains would make more sense.<\/p>\n
![\"Joachim](\"https:\/\/the7circles.uk\/wp-content\/uploads\/2019\/11\/Joachim-Klement.jpg\")
<\/a><\/p>\nJoachim Klement does not believe in monetarism.<\/p>\n
- \n
- He\u2019s written about it many times before and calls it a dead theory.<\/li>\n<\/ul>\n
According to Joachim, a new paper shows that the quantity theory of money hasn\u2019t worked since 1985.<\/p>\n
- \n
- The paper calculates regression coefficients for 18 developed countries between inflation and the change in the money supply.<\/li>\n<\/ul>\n
If monetarism worked perfectly, the coefficient should be 1.0<\/p>\n
- \n
- Above 1, we get more inflation than expected and below 1, less inflation.<\/li>\n<\/ul>\n
The real problem is when the coefficient turns negative \u2013 here money printing lowers inflation.<\/p>\n
<\/a><\/p>\nThe bars cover four time periods:<\/p>\n
- \n
- 1870 to 2020 = blue<\/li>\n
- 1870 to 1945 = red<\/li>\n
- 1945 to 1985 = green and<\/li>\n
- 1985 to 2020 = yellow<\/li>\n<\/ul>\n
The first chart looks at the narrow money supply and the second chart at the board money supply.<\/p>\n
<\/a><\/p>\nJoachim draws three conclusions:<\/p>\n
\n
- \n
- The regression coefficients are almost always less than 1.0 indicating that the theory is overstating the amount of inflation<\/span><\/li>\n
- In general, monetarism has worked best between 1945 and 1985<\/span><\/li>\n
- Since 1985, the quantity theory of money has failed completely. The regression coefficients became negative for almost all countries<\/span><\/li>\n<\/ul>\n<\/blockquote>\n
The period when the theory worked was when it was formulated, and then popularised by Milton Friedman.<\/p>\n
There\u2019s certainly been a \u201cproblem\u201d in creating inflation since 1985, and in particular since 2008.<\/p>\n
- \n
- Central banks are supposed to keep inflation relatively low, but since the GFC they have been more worried about deflation.<\/li>\n<\/ul>\n
On the other hand, doling out money to unproductive people during Coivid seems to have done the trick, and inflation is back one more.<\/p>\n
- \n
- The study doesn\u2019t look past 2020, but I suspect the last few years will have been more kind to monetarism.<\/li>\n<\/ul>\n
GDP targeting<\/span><\/h6>\n
A second article from Joachim looked at nominal GDP targeting<\/a> by central banks.<\/p>\n
\n
Changes in nominal GDP come from the combined change of real GDP and inflation, so when real growth is low, inflation can be higher to stimulate future real growth and when real growth is high, inflation needs to be lowered to reduce nominal GDP growth.<\/span><\/p>\n<\/blockquote>\n
This means that short-term fluctuations in inflation can be ignored, and the medium-term growth trajectory can be focused on instead.<\/p>\n
<\/a><\/p>\nJoachim doesn\u2019t like this proposal as he sees it as monetarist.<\/p>\n
- \n
- More importantly, the impact of GDP targeting seems to depend on heroic assumptions about the public\u2019s ability to understand economics.<\/li>\n<\/ul>\n
\n
If this [Nominal GDP Level] target were understood by the publice, it would create expectations of stable money spending growth that would become self-fulfilling.<\/span><\/p>\n<\/blockquote>\n
And:<\/p>\n
\n
\u201cThis concept can be better understood by noting that changes in the supply of money are automatically offset by changes in the demand for money under NGDPLT.\u201d<\/em>\u00a0<\/span><\/p>\n
I hope the average man and woman on the street get the memo that they must demand less money whenever the central bank decides to cut the supply.<\/span><\/p>\n<\/blockquote>\n
The theory also required money printing at the zero bound (when interest<\/a> rates are zero).<\/p>\n
- \n
- This didn\u2019t work after the 2008 crash, so probably won\u2019t work next time.<\/li>\n<\/ul>\n
Joachim also notes that the Fed has only one tool \u2013 interest<\/a> rates.<\/p>\n
- \n
- But Scott Sumner \u2013 \u201d the inventor of market monetarism\u201d \u2013 is proposing some more:<\/li>\n<\/ul>\n
\n
He thinks the Fed should introduce a nominal GDP futures market. The Fed can then use the prices of these futures to understand what kind of nominal GDP growth markets expect. The Fed adjusts money supply until the futures market reflects the desired nominal GDP growth rate. The Fed would essentially trade against the hedge funds.\u00a0<\/span><\/p>\n<\/blockquote>\n
Joachim doesn\u2019t think this would end well.<\/p>\n
Return Stacking<\/span><\/h6>\n
Return Stacking (essentially, the use of leveraged diversified portfolios) has reached the mainstream, with a none-too-positive article on Bloomberg entitled \u201cLevered Trade That Blew Up in 2008 Gets a $600 Million ETF<\/a> Redo\u201d.<\/p>\n
- \n
- The article\u2019s author \u2013 Lu Wang \u2013 also describes RS as \u201cportable alpha\u201d (a 1980s term) for the masses.<\/li>\n<\/ul>\n
This is presumably because it\u2019s available to US investors (and UK investors with US accounts) as a suite of ETFs<\/a>.<\/p>\n
RSST was the example fund used.<\/p>\n
- \n
- It mixes stocks with trend following (managed futures), offering $1 of each for each dollar invested (100% leverage<\/a>).<\/li>\n<\/ul>\n
The leverage<\/a> works against you in a downtrend, but the diversification across asset<\/a> classes should mean that volatility is lower to begin with.<\/p>\n
- \n
- That\u2019s assuming the historically observed correlations persist.<\/li>\n<\/ul>\n
As we saw recently when stocks and bonds fell at the same time, this won\u2019t be the case across all economic regimes.<\/p>\n
RSST is also expensive, at more than 1% pa, though that\u2019s cheaper than standalone managed futures funds.<\/p>\n
- \n
- A 100% allocation to RSST would be quite risky, but that isn\u2019t the idea.<\/li>\n<\/ul>\n
Optimal leverage<\/a> for long-term private investors is probably at least 15%, though I expect few are targeting that, and few tools are available (particularly within tax shelters).<\/p>\n
The original fund in this class, for which a better term is \u201ccapital efficiency\u201d is the WIsdomTree Efficient Core fund (NTSX) which takes the traditional 60\/40 stock bond<\/a> portfolio and levers it by 50% to make it a 90\/60 portfolio.<\/p>\n
- \n
- This is also the only fund available in the UK.<\/li>\n<\/ul>\n
It\u2019s my largest holding, at 5% of my portfolio (I won\u2019t hold more than that in a single fund).<\/p>\n
- \n
- That means I only have leverage<\/a> of 2.5%, a long way short of my 15% target.<\/li>\n<\/ul>\n
VCTs<\/span><\/h6>\n
The EU has given the green light to another 10 years of VCT and EIS schemes.<\/p>\n
- \n
- This is being spun as good news for the venture industry, though I\u2019m not sure there was ever a real threat to the tax breaks.<\/li>\n<\/ul>\n
Chris Lewis, chair of the VCT Association, said:<\/p>\n
\n
This a very good day for the UK\u2019s VCT community. The VCTA has continuously sought to demonstrate the positive impact made by our members through their investment in the next generation of early-stage businesses. The European Commission was informed by not only the VCTA\u2019s own research, but also by a body of research from other associations across the industry.<\/span><\/p>\n<\/blockquote>\n
Labour watch<\/span><\/h6>\n
The government net borrowing figures for July came in hot at \u00a33.1 bn.<\/p>\n
- \n
- This is \u00a33bn more than predicted by the ONS and more than a billion higher than the consensus economist forecast.<\/li>\n<\/ul>\n
The total for the four months of the current tax year is \u00a351.4 bn, the fourth highest since records began.<\/p>\n
- \n
- So anyone who still believes Rachel Reeves\u2019 claim that there is a \u00a322 bn black hole to fill with the October budget<\/a> must now think that we have a \u00a325 bn problem.<\/li>\n<\/ul>\n
We also had more updates on the counter-intuitive way that Labour is pursuing its proclaimed \u201cgrowth agenda\u201d.<\/p>\n
- \n
- We\u2019ve had cancelled investments in roads and AI supercomputers and the public sector pay rises (that are largely responsible for the fiscal black hole) n not tied to productivity gains (or indeed, simple reforms to outdated working practices).<\/li>\n<\/ul>\n
Last week we had Angela Rayner\u2019s \u201cright to switch off\u201d.<\/p>\n
- \n
- This would prevent employers from contacting their staff outside of work hours.<\/li>\n<\/ul>\n
It\u2019s not hard to imagine scenarios where not speaking to someone with crucial information \u2013 and being unable to recall them back to the workplace \u2013 could impact productivity.<\/p>\n
- \n
- Labour also seems very keen on giving people the right to work from home.<\/li>\n<\/ul>\n
This will apparently make them happier \u2013 perhaps because they can get more of their own stuff done and less of their employer\u2019s tasks.<\/p>\n
- \n
- If WFH really helped with productivity, wouldn\u2019t we have noticed in the four years since the Covid lockdowns began?<\/li>\n<\/ul>\n
In fact, public sector productivity is at a 30-year low.<\/p>\n
- \n
- It\u2019s all very reminiscent of the way things were done in the 1970s (ie. pre-Thatcher).<\/li>\n<\/ul>\n
We should mention Ed Milliband\u2019s brainchild (no, not the EdStone), GB Energy.<\/p>\n
This publicly owned company has four somewhat conflicting objectives:<\/p>\n
- \n
- boosting clean energy supplies<\/li>\n
- reducing emissions<\/li>\n
- greater energy efficiency<\/li>\n
- increased energy supply efficiency.<\/li>\n<\/ol>\n
And all this for \u00a38.3 bn (which Labour claims will unlock another \u00a360 bn of private investment).<\/p>\n
We\u2019re back to the \u201cpicking winners\u201d idea which failed so badly in previous decades (British Leyland, British Steel, British Shipbuilders).<\/p>\n
- \n
- Chuck in more natural (for a time at least) state monopolies like British Rail and British Telecom, and perhaps we can see why Labour prefers the Olympic-style prefix \u201cGB\u201d.<\/li>\n<\/ul>\n
It\u2019s only a matter of time before that one is tarnished, too.<\/p>\n
Back to growth, and following the big pay rise for teachers and NHS workers, we have a 15% pay rise for train drivers (with no productivity or efficiency linkage).<\/p>\n
- \n
- Tough on pensioners, and easy on unions is the track record to date, but it\u2019s hard to square these above-inflation pay rises with the growth agenda.<\/li>\n<\/ul>\n
Automating the trains would make more sense.<\/p>\n
- Tough on pensioners, and easy on unions is the track record to date, but it\u2019s hard to square these above-inflation pay rises with the growth agenda.<\/li>\n<\/ul>\n
- Chuck in more natural (for a time at least) state monopolies like British Rail and British Telecom, and perhaps we can see why Labour prefers the Olympic-style prefix \u201cGB\u201d.<\/li>\n<\/ul>\n
- It\u2019s all very reminiscent of the way things were done in the 1970s (ie. pre-Thatcher).<\/li>\n<\/ul>\n
- If WFH really helped with productivity, wouldn\u2019t we have noticed in the four years since the Covid lockdowns began?<\/li>\n<\/ul>\n
- Labour also seems very keen on giving people the right to work from home.<\/li>\n<\/ul>\n
- This would prevent employers from contacting their staff outside of work hours.<\/li>\n<\/ul>\n
- We\u2019ve had cancelled investments in roads and AI supercomputers and the public sector pay rises (that are largely responsible for the fiscal black hole) n not tied to productivity gains (or indeed, simple reforms to outdated working practices).<\/li>\n<\/ul>\n
- So anyone who still believes Rachel Reeves\u2019 claim that there is a \u00a322 bn black hole to fill with the October budget<\/a> must now think that we have a \u00a325 bn problem.<\/li>\n<\/ul>\n
- This is \u00a33bn more than predicted by the ONS and more than a billion higher than the consensus economist forecast.<\/li>\n<\/ul>\n
- This is being spun as good news for the venture industry, though I\u2019m not sure there was ever a real threat to the tax breaks.<\/li>\n<\/ul>\n
- That means I only have leverage<\/a> of 2.5%, a long way short of my 15% target.<\/li>\n<\/ul>\n
- This is also the only fund available in the UK.<\/li>\n<\/ul>\n
- A 100% allocation to RSST would be quite risky, but that isn\u2019t the idea.<\/li>\n<\/ul>\n
- That\u2019s assuming the historically observed correlations persist.<\/li>\n<\/ul>\n
- It mixes stocks with trend following (managed futures), offering $1 of each for each dollar invested (100% leverage<\/a>).<\/li>\n<\/ul>\n
- The article\u2019s author \u2013 Lu Wang \u2013 also describes RS as \u201cportable alpha\u201d (a 1980s term) for the masses.<\/li>\n<\/ul>\n
- But Scott Sumner \u2013 \u201d the inventor of market monetarism\u201d \u2013 is proposing some more:<\/li>\n<\/ul>\n
- This didn\u2019t work after the 2008 crash, so probably won\u2019t work next time.<\/li>\n<\/ul>\n
- More importantly, the impact of GDP targeting seems to depend on heroic assumptions about the public\u2019s ability to understand economics.<\/li>\n<\/ul>\n
- The study doesn\u2019t look past 2020, but I suspect the last few years will have been more kind to monetarism.<\/li>\n<\/ul>\n
- In general, monetarism has worked best between 1945 and 1985<\/span><\/li>\n
- The regression coefficients are almost always less than 1.0 indicating that the theory is overstating the amount of inflation<\/span><\/li>\n
- Above 1, we get more inflation than expected and below 1, less inflation.<\/li>\n<\/ul>\n
- The paper calculates regression coefficients for 18 developed countries between inflation and the change in the money supply.<\/li>\n<\/ul>\n