CAMS Weekly View from the Corner - Week ending 8/18/23
August 21, 2023
If you asked most people what general asset class is the best over the long haul the trusted response would be stocks we suspect. More specifically, in terms of timelines, if the same question were asked relative to the 21st century we suspect the reply would remain the stock market.
We are using the reality of the 21st century asset class performance as a simultaneous launch point to share a larger view. This is a view that may be of interest to both the investor in you as well as the citizen in you.
First a look at the obvious and not so obvious asset class leaders.
The above chart begins at the opening point for the 21st century (year 2000) for precious metals and the stock market. Gold is the specific precious metal and the S&P 500 price index as well as the S&P 500 price index along with dividend accumulations represents the stock market.
Gold (black line) is the clear leader as it has registered a high point 600% increase since year 2000 (currently at 575% area) while the S&P 500 price only index (blue line) registered a 225% high point (currently 200%) with the S&P 500 price index including dividends (red line) coming in at a 375% high point (currently 350%.)
We suspect most would not include gold in a mix of top performing asset classes especially with such a standout performance.
This begs the question; why such a performance here in the 21st century, when for example, the decade and two before the above timeframe gold was nowhere to be seen on a returns/performance study?
Enter D.C. Policy Making Decisions
There are a plethora of tributaries we could open up here upon entering such a title into an edition. We will go right to the bottom line and address this in three words - money printing & debt.
Speaking to gold, relative to the three words, gold has been money for 5000 years and also has performed as a store of value.
Simply, very simply, we cannot print this precious metal. When fiat money – think Federal Reserve Notes (the dollars in your pocket) – is created with a push of a button, especially when done excessively, collective market participants take note.
It becomes a simple bottom line: As the paper currency is printed wildly and its value reduces it takes more of them to purchase an ounce of gold – a vehicle that cannot be printed at will and also a vehicle that has thousands of years of history performing as a store of value.
The store of value part is simply that its value cannot be inflated away – think increasing its supply at will. Rather, increasing the supply of this resource/historical money is very difficult to do via mining and all that goes into the process of discovery on to production and then to end delivery.
What has unfolded in this 21st century (thus far) is a century of money printing and debt. Broadening out from D.C. (i.e. U.S.) we can also offer this as a global experience. The above chart can be run in many countries around the world with a similar resulting theme – gold handsomely outperforming go-to asset classes.
Gold’s Performance Says Nothing about Gold – It Merely Reflects the Money
Enter the topic of gold and all sorts of silliness begins. For my part personally, I can attest to this ad nauseam. The emotional vehemence that arises with the topic leans into comedy. Let’s leave emotions to the side – it’s about the money.
Our central bank known as the Federal Reserve has expanded their balance sheet (think money printing) from $668 Billion dollars January 2000 to a high water mark of $8.9 Trillion by late spring of 2022. Current day it has decreased from its peak to $8.1 Trillion. In totality, the rate of creation of money is hard to describe. Let’s attempt some context.
For perspective the Federal Reserve began operations in 1914. From 1914 up to year 2000 – nearing a century - their balance sheet expanded up to the $668 Billion dollar mark. Then in 23 short years, it expanded its size 13 times over to the high mark of $8.9 Trillion!
(In the name of brevity we will pass on charting this but give a hat tip to Ron over at The Chart Store for the Fed balance sheet data points as well as the St. Louis Fed’s FRED Data Resource. www.thechartstore.com & Federal Reserve Economic Data | FRED | St. Louis Fed (stlouisfed.org))
Gold’s tremendous outperformance this century gives a visual, via an asset class performance of the incredible rate of money creation. This can also be stated as an incredible debasing of the national currency as the money is inflated and hence its value is debased. With this, it takes evermore of the debased currency to purchase an ounce of gold.
One step further to add a perspective. In year 2000 a Federal Reserve Note, i.e. our currency was valued at 1/280th of an ounce of gold. Gold’s dollar price was $280. Current day, our currency is valued at 1/1916th of an ounce of gold. Today’s gold price is $1916. The store of value known as gold speaks to the excessive money creation through its tremendous increase in price.
Enter the Debt Side
Buckle up dear citizen. The data details are most likely worse than you casually digest upon hearing the topic.
The above chart depicts the Federal Debt level starting in year 2000 and ending at the beginning of 2023. We emphasize the beginning of 2023 as we’ll get to the remainder of 2023 shortly.
To begin the 21st century the Federal Debt stood at $5.7 Trillion. From that point to begin 2023 the debt grew dramatically to $31.5 Trillion! This represents a fivefold-plus increase in a mere 23 years. $5.7 Trillion becomes $31.5 Trillion – 23 years.
The Federal Debt, which is officially titled “Public Debt” because at the end of the day the government is not responsible for it the citizenry is.
The citizenry pays in many ways including our first topic of a debased currency which brings with it downstream price inflation issues – sound familiar? There is a host of other ways this runaway debt is paid for by the collective but we will not delve into for this edition.
For additional context beginning year 1990 – the Federal Debt stood at $3 Trillion. With this from 1990 up to year 2000 the debt increased to $5.7 Trillion. By 21st century standards this was a comparative paltry $2.7 Trillion increase over 10 years.
By way of comparison, enter the 8 months of 2023 and we have seen the $31.5 Trillion debt level to start this year rocket to current day, August 17th, 2023 to $32.7 Trillion! $31.5 Trillion becomes $32.7 Trillion in 8 months. This represents a $1.3 Trillion increase in less than 8 months thus far in 2023. (If you are inclined citizen a source of details: Debt to the Penny | U.S. Treasury Fiscal Data)
$1.3 Trillion of new debt in 8 months and importantly this is of little notice by the citizenry let alone a discussion topic. The point is it has become common place. Sounds like a perfect description of a megatrend if you have read our recent editions. They morph into the general landscape and become viewed as normal.
Wrapping up the Summer
Labor Day is approaching and with this the unofficial end of summer. To do justice to this overall topic, in particular placing the debt story into a broader context we will push this into our next edition which will be our last edition for August as well as the summer season. We will place the debt into a context of economic growth and also in relation to money printing. The context is important.
I wish you well...
Ken Reinhart
Director, Market Research & Portfolio Analysis
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