Unlimited $ Printing: Measure SPX in Gold Terms

When all is said and done with monetary printing, consensus estimates for the size of the Fed’s balance sheet are upwards of $12 trillion, which would be a tripling in assets from Sept 2019, when the Fed’s balance sheet reduction abruptly turned course and began re-expanding as a crisis of liquidity in the overnight repo markets forced the Fed to intervene for the first time since the 2008 financial crisis.

Federal Reserve Balance Sheet Assets:
•Expansion: Sept08 $900bn→Dec ‘15 $4.5tn
•Reduction: Aug ‘17 $4.4tn→Sept ‘19 $3.8 tn
•Massive Re-expansion: May ‘20 $6.9 trillion

I’m not a mathematician, nor a monetary policy expert, but I’m pretty sure that “unlimited” > $12tn, or whatever other arbitrary figure some forecaster is throwing out there and basing every outcome off of, as if:

1) Unprecedented worldwide shutdowns + staggered restarts of global supply & demand, with multitudes of differing fiscal and monetary policy responses and their respective efficacy, contingent on containing the spread of a still-rampant coronavirus pandemic + the discovery and mass-scale distribution of a non-existent vaccination, are in aggregate somehow forecastable.

2) The Fed & Treasury, who are now acting as a singular, coordinated entity, will then somehow exercise fiscal and monetary restraint, and turn the liquidity faucets off after this “$12 trillion” in accommodation – lest US creditors lose their full faith to credit the full faith and credit of the printing press.

So let’s all just agree that either way, our parents were wrong: money apparently DOES grow on trees, and central banks + governments are fully harvesting the $ € ¥ £ ___ printing orchard.

Focusing on the USD world reserve currency printing Federal Reserve’s actually implemented (& not merely announced and promised) policies, at time of this writing, the speed and scale of monetary easing is staggering.

For context:

Sept 2008 Lehman collapse ~ end of QE3 peak in Jan 2015, Chair Bernanke took the Fed’s balance sheet from $900 billion to $4.5 trillion, adding +$3.6 trillion in assets over 6 years. This was (and still is) huge, to say the least- so much so that at the time, some prominent figures in finance were calling for Bernanke’s arrest on charges of overreaching his mandate and perverting free market price discovery mechanisms.

Under current Fed Chair Powell, the size of the Fed balance sheet currently sits around $7 trillion, as the Fed made +$3.1 trillion in asset purchases– roughly the same amount as Bernanke had done. But instead of the 6 years it took Bernanke to expand the balance sheet by an amount equivalent to ~15% of GDP, Powell did so in 8 months– and is far from finished.

Though the re-expansion really began in late Sept ‘19 when the overnight repo market had a seizure in need of immediate liquidity, Powell’s Fed really hit the gas pedal in March of this year. In the past ~8 weeks, Fed balance sheet exploded from about $4 trillion to nearly $7 trillion. That works out to about $57 million in asset purchases per minute, or simply rounded off: $1 million per second.

When the Fed is purchasing financial assets at a rate of a million dollars per second- be they long term US Treasuries or bottom of the rating dumpster junk bonds, or extends dollar swap line after swap line to a growing list of central bank counterparts (invite to PBOC & Russia was lost in the mail), it creates new dollars out of thin air and adds it to the existing/ever growing dollar supply, as per below:

M2 money supply (cash & coin currency in circulation + savings deposits at banks + money market funds + travelers checks etc)

And the more supply increases, the less each unit of supply is worth.

Instead of measuring asset price performance in USD terms, which are two moving variables with ever expanding dollar supply, and seemingly ever expanding multiples on future cash flows against ever narrowing base of index constituents, measuring USD denominated assets priced in GOLD terms (“real” terms) provides a different / more accurate picture of SPX performance against a relative constant.

Measuring S&P500 Performance in Gold

Since 2000, SPX in USD terms rallies and crashes within a longer term multi decade uptrend. But when SPX is measured in Gold terms, it reveals a very different prism and timeline of events:

• Post dot com & 9/11, Greenspan slashes rates to 1% (45 year lows), which stops the SPX /USD fall and starts the rally, while SPX/Gold stays flat during the US housing bubble- SPX/gold flatlined vs SPX/USD rally implies that SPX “growth” in 2000’s wasn’t due to any value creation, but rather, SPX was inflated against easy monetary policy and USD demonetization.

• SPX/gold stops holding flat and starts falling in ‘05, 2yrs ahead of the ‘07 SPX high, and continues falling through Bear Stearns and Lehman, through the March ‘09 SPX bottom to start the longest bull run in history.

• SPX / gold FINALLY finds its post ‘00 DOT COM BUBBLE BURST BOTTOM (which just continued into Lehman / ‘08 bottom) in AUGUST 2011, when the so called risk free US debt faced its first ever credit downgrade from the 2011 debt ceiling crisis. Once deficit reduction goal was established and debt ceiling raised, SPX / Gold finally finds bottom, 3 years after the SPX /USD pre rally bottom.

• SPX / Gold FINALLY gets back to flat from its ‘07 levels in Oct ‘18, 5 years behind SPX /USD’s recovery back to flat. And the moment SPX / Gold was back at breakeven levels in Oct ‘18, SPX and global risk assets experienced its most severe post crisis sell off as FOMC was on a seemingly autopilot rate hike + balance sheet reduction path, until Fed Chair Powell reverses hawkish course 180 degrees to dovish starting ‘19. Risk assets rally throughout ‘19, particularly in Q4 ‘19 as Fed started re-expanding its balance sheet to pump the repo market with liquidity, sending SPX /USD on an unconditional rally.

• But SPX in gold terms never recovered back since the Oct ‘18 back-to-flat → sell off, and continues downward till this day.

Conclusion:

SPX “growth” appreciation measured against a constant supply currency ( gold ) reveals the index has not actually grown, and furthermore, SPX price appreciation has been almost wholly dependent on easy monetary policy and USD printing. When policy is easy, USD assets rise. It’s only when fiscal and monetary restraint is exercised, or perceived to be exercised, does SPX perform in real terms (Aug 2011 debt ceiling crisis = SPX / Gold bottom, Fed balance sheet tightening = SPX / Gold rises).