#24 Signal 2 Noise

micksonmatch
March 19, 2024

In today’s issue:

The Bank of Japan (BOJ) exits negative interest rates
The Reserve Bank of Australia (RBA) holds interest rates steady
Are your SP500 returns as good as you think?

S2N Updates

I have received some very valuable insights over the past few days that necessitate some changes. The main feedback is that most people want the money shot as soon as possible. They are time-poor and want to walk away with a well-researched signal that will potentially make them money. The other bit of advice was to shift the performance tables, charts, and calendar to the bottom, as they are adding a bit of noise to the newsletter. I still believe these daily reports are important and should be part of the email as a resource for those who do not want to go somewhere else to find the information and also to have on hand for when you do want to look up a particular performance metric when reading.

New Signals

In the coming weeks, I will be focusing on bringing this section to life with at least one in-depth signal analysis each day. This section will be the money shot.

S2N Insights

BOJ & RBA

The BOJ is targeting interest rates of 0–0.1%, which ends an era of negative interest rates for the world’s largest central banks. The RBA has kept rates steady for the 3rd consecutive meeting, saying it “is not ruling anything in or out”. My big worry is that Japan is the largest foreign holder of US Treasuries if I am not mistaken. With interest rates going up in Japan and rates potentially coming down in the US, the spread narrows and takes away the incentive to hold or buy treasuries. With less demand that means yields are likely to drift higher.

Are your SP500 returns as good as you think?

I want to share an important way of thinking that is just not how we are conditioned to think. We tend to think in headline or nominal terms. We have been witnessing one new all-time high after another with the SP500, so it seems like it has been an incredible investment. What we are not so well trained to do is look at the returns of these investments in the asset that stores your wealth.

Let me start with the blue line, which shows the total outstanding US debt at over $33 trillion and 8,842% cumulative growth since 1970. We know that with a lot of debt, we usually see inflation close by.

We have seen plenty of inflation in the economy since 1970. Inflation is usually not a good thing, as it erodes the purchasing power of one’s currency and often leads to increased income inequality.

A store of wealth against inflation with a few thousand-year track record is gold. So I have adjusted the SP500 returns for inflation and for gold as a store of wealth to see what the “real” picture is.

The blue line is the nominal SP500 return, which is what we are used to seeing. The green line is the inflation-adjusted SP500, which is near its all-time highs. What is very interesting is that the SP500, based in gold, is well below its all-time high set in 2000.

The takeaway from the above is that gold has been a much better store of wealth than an inflation adjustment. The question is: will the US dollar be able to hold its reserve value status over the coming years? There is a lot to consider. Will inflation become the way for the government to reduce its debt burden? Will bitcoin become a genuine substitute for gold? I am not going to answer these questions now. I will let you think about it.