For new readers, I am currently going through a phase of writing deeper thoughts on Friday.
S2N Spotlight
At lunchtime every Thursday for the past 4 years, I study philosophy for 30 minutes with a brilliant scholar friend of mine. Yesterday, I raised a question that was part of the inspiration for today’s spotlight.
The wealth effect refers to the phenomenon where individuals spend more when the value of their assets increases. This concept has been a significant part of the central banking system’s playbook. The lowering of interest rates to near zero or even negative in some cases aims to inflate asset values (wealth).
The question I ask is: does it matter if the wealth increase is real or imaginary?
In previous posts, I’ve discussed how much of the wealth created over the last decade or so is through inflation. While you may have more dollars on your balance sheet, those dollars do not always translate to increased purchasing power. I am generalising a bit to set up my response. I will tackle this question through the lens of two different philosophical schools of thought.
Most of our Thursday study sessions focus on Aristotelian rational thought. I believe rationalists would say that the emotion one feels from increased paper wealth is real, but because the wealth, when measured after accounting for inflation, is not real, the wealth effect is not a true phenomenon, and spending more is irrational.
The utilitarian school of thought, with thinkers such as Jeremy Bentham and John Stuart Mill, would argue differently. They would say that if you feel wealthier, then you are wealthier, and that is all that counts.
If there is one thing I have learned is that when it comes to money we are far more emotional than we are rational. We all need someone objective to talk to when it comes to managing our wealth.
S2N Observations
The ECB and Danish Central banks cut rates yesterday, following the BOE cut the day before. I find it interesting that they have taken the decision to start cutting while forecasts for inflation remain above their target bands. There must clearly be stresses in the underlying system that we are not yet privy to. I remain bullish on gold and bitcoin (gulp).
If you look at the European yield curve it continues to remain inverted. I have to say that I feel the grown ups are once again behaving like children. If they have found it difficult to put the inflation genie back in the bottle now then they are only creating a much harder job for the next cohort of central bankers. I guess that is not really their problem. That is what happens when you don’t have skin in the game. I am pretty sure a business owner would take a different path than a beauracrat.
I have taken the Federal Fund 30-Day Futures curve and inverted to make it more readable. Not sure why they quote it as a price. The contract will trade at 95 for example which means it is trading at a 5% interest rate. As you can see below the Fed Futures curve is pricing in a rate cut by August with it dropping to 4% by the middle of 2026 and then rising again.
I wrote a few weeks ago about GameStop and the Roaring Kitty meme punter. I have added GameStop into my Mikes Stock Table below, the hype is something I will never quite understand. This guy Keith Gill is certainly a master manipulator. I say that with respect, he has the whole financial world talking about him and an army of punters doing the work for him. Yesterday he earned I am pretty sure his biggest payday yet. He made $250 million (I am a little wary that it is such a round number) yesterday taking his gains to $382 million.
While talking about the incredulous, the volume in Nvidia yesterday was just crazy. More money $66 billion was traded in Nvidia than the top 20 companies combined. I see GameStop made the top 6 as well. What the hell does GameStop actually do. I have never even bothered looking.
I am sharing this next chart because I have seen it posted a couple of times by a Fintwit superstar who I greatly admire. I have not recreated with his symbols as he is using ETF’s which have shorter data, I used the actual S&P500 large cap versus small cap index. His chart only shows the period where I have drawn a black line. Based on the way he has framed it you might think it is a big deal. I have included more data and have no clue what it means.