"just some comments on money creation and credit" -- first off, I am not an oracle on the subject, but I did want to offer some comments for consideration because of the many comments I have seen on this board about wild and out of control money and credit creation that "has to" result in inflation and ipso facto tremendous increases in the price of metals and the stocks of companies that mine those metals. I also cannot comment on the validity of "non-money" credit creation and ask if anyone can point to any studies anywhere showing an inflationary increase in response to such credit creation. You and others have great insights into valuation of mining stocks but those insights are steeped in intensive knowledge of mining and the valuation rules applicable to stocks in general and to mining stocks in particular. It strikes me as out of character that many, imbued with this rigorous valuation set, would be prone to accept a hodge podge of non-money credit creation statistics and run with them as being inflationary. Maybe, just maybe, this credit creation will instead sink the economies of the world into depression as the debt burden exceeds the capacity of individuals and corporations to pay.
All I would offer is that the MZM increase in the 15 month period from November, 2000 through January,2002, at a 20% or better clip each month, was truly extraordinay over a reviewed time period of 17 years. MZM is to my thinking the best reflection of the money measures for direct Fed action. Adrian Van Eyck of the Money Forecast Letter would agree with this assessment. My work indicates about an 18 month lag from money creation to U.S. CPI measures. Impact on price of raw materials will be a shorter time period as those raw materials themselves are part of the process of money creation translating into broader segments of the economy. In this case, the CRB Index bottomed at about 185 in 185 in October, 2001 and began its sharp ascent 12 months after the onset of the MZM "spurt". The CRB Index continued its rise, as money supply theory would predict, to a peak of 248 in January, 2003, again very close to the 12 month lag from the peak of MZM growth.
What about this theory going forward? MZM has declined steadily to a level now where the year-on-year increase is about 8%, the level it was at before the MZM spurt. Viewed over the last 17 years, 8% is not a particularly high rate of growth, more like the average. My present take is that this rate of growth is insufficient to prop the present economic fabric and if Fed policy is intended to do so, to extend the bubble (although I think that this is a misguided policy, that market troughs in the business cycle are natural and healthy to purge the excesses and misallocation of assets in the preceding peaks), then it made a mistake in baking off the pedal and believing in January, 2002 that its off-sized credit creation was sufficient to kick start the economy back to health. The excesses haven't come close to correction.
I am prone to the views of Steven Roach, also the Comstock Partners group. James Grant looks thoughtfully at all the same criteria and believes that inflation is inevitable. I certainly wouldn't rule him out. It's a tough call and the inflation/deflation question should be the question before everyone on this board before making their investment decisions. It's been fun the last two years, but remember the agony before that, 1997-2001. It was fun before that 1994-1996, not so much fun 1981-1993. Before that it was ecstasy in the late 1960s, up to 1980.
These runs are cyclical and I just can't come to a postion with more than 55% "certainty". I'll get off this dry and uncertain stuff now and give it back to you and the others who do the real work on this board in providing actionable mining stock information. |
