Typography

A few months ago Vijay Boyapati asked me to " steel-man " the bubble theory of money. The bubble theory of money, which can originally be found in a few old Moldbug posts , has been used by Vijay and others to explain the emergence of bitcoin and make predictions about its future. So here is my attempt. I am using not only an article by Vijay as my source text, but also one by Koen Swinkels, a regular commenter on this blog. Both are interesting and smart posts, it's worth checking them out if you have the time. Steel-manning the bubble theory of money and bitcoin 1. Unlike a stock or a bond, which is backed by productive assets, bitcoin cannot be valued using standard discounted cash flow analysis. And since it has no intrinsic uses, it can't be valued for its contribution to various manufacturing processes, nor for its consumption value. Rather, bitcoin is a bubble. Its price is driven by a speculative process whereby people buy bitcoins because they think that...

Thanks to a floating exchange rate and one of the longest undefended frontiers in the world, the U.S.-Canada border is the thoroughfare for what may be one of the world's most popular ongoing consumer arbitrages. Canada and the U.S. interlist all sorts of goods, services and financial assets. We both sell McDonald's hamburgers, we both offer tickets to NHL games, and we both list Valeant Pharmaceutical shares. The relative price of Valeant shares, which trade in New York and Toronto, will rapidly adjust to any change in the exchange rate. If not, then upon an appreciation of the U.S. dollar an investor will be able sell Valeant short in New York at an artificially high price, buy Canadian dollars with the proceeds, and acquire shares in Toronto on the cheap, using those shares to cover the short position in New York at a profit. Exploitation of this opportunity will realign Valeant's New York and Toronto share price until the window closes, thus cannibalizing the potential ...

The Swedes really don't like cash. First, consider that Sweden is the only country in the world that I'm aware of where reliance on paper money is in decline. Second, no country's central bank has produced a nominal deposit rate as negative as Sweden's, for as long. Yet even at -0.85% per year, Swedish banks who own those deposits haven't fled into 0% cash, providing some indication of the degree to which they hold banknotes in disdain. ABBA won't accept paper As the chart below shows, cash outstanding continues to grow in almost every country except Sweden. Japan and Denmark are the only countries that come close to pacing the Swedes, although both nations continue to show incremental growth in demand for banknotes. Even Kenya, where m-pesa has taken hold, shows strong cash demand. Sweden reached "peak-cash" somewhere between 2007 and 2008. The reason for this change of heart is public preferences, not government diktat. The monetary authorities can ...

Jeremiah, the prophet of impending disaster. By Rembrandt, 1690. See full version . The 1929 analog model has resurfaced. The 1929 analog is a recurring visual meme, usually a chart, that periodically plagues financial markets. All versions of this meme invariably map the bobbing and weaving of the 1929 Dow Jones Industrial Average onto movements in the present Dow, with the inevitable conclusion being that we are, by analogy, on the verge of a repeat of the 1929 crash. The most recent reincarnation originates from noted market timer Tom DeMark . His claim has been amplified by newsletter writer Tom McClellan and irresponsibly blared all over the internet by Marketwatch (see here , here , here ). I produce the chart below: Source: Marketwatch I've been following various flareups of the 1929 analog for over a decade. They usually crop up in September, just before the anniversary date of the October 29 crash. Extended bull markets are particularly fertile ground for 1929 analog beh...

Before 2008, visualizations of central bank activity largely focused on interest rates. These visualizations were easy to make, just a line graph showing a central bank's target rate and the actual overnight rate, perhaps within a narrow channel bounded at the top by the central bank's lending rate and at the bottom by its deposit rate. The one below, pinched from the Economist, is a decent example. But then the credit crisis hit. Rates plunged to zero where they have stayed ever since. Central bank policy moved away from conventional manipulation of the short term rate towards more unconventional policies, thus rendering the classic line graph less relevant. Two of the more important of these new unconventional tools are quantitative and qualitative easing. A good chart must be capable of illustrating the expansion of a central bank's balance sheets (quantitative easing) and contortions within that balance sheet (qualitative easing). In this context, stacked area charts ha...

1,682 is the number of days that the Dow Jones Industrial Average has spent rising since hitting rock bottom back in March 6, 2009. It also happens to be the number of days between the Dow's July 8, 1932 bottom and its March 10, 1937 top. From that very day the Dow would begin to decline, at first slowly, and then dramatically from August to November when it white-knuckled almost 50%, marking one of the fastest bear market declines in history. Comparisons of our era to 1937 seems apropos. Both eras exhibit near zero interest rates, excess reserves, and a tepid economic recovery characterized by chronic unemployment. Are the same sorts of conditions that caused the 1937 downturn likely to arise 1,682 days into our current bull market? The classic monetary explanation for 1937 can be found in Friedman & Schwartz's Monetary History . Beginning in August 1936, the Fed announced three successive reserve requirement increases, pushing requirements on checking accounts from 13% t...

I've been teaching myself a Javascript visualization library called D3 . It gives the chart creator an incredible degree of control in making interactive web-based charts. My previous interactive charts, including my interactive Eurosystem balance sheet tool , have all used the Google Vizualization API, which is far less powerful than D3. You may want to read my last post was on bitcoin alternatives in order to understand what I'm trying to get at in this post. In visualizing the cryptocoin market, I think it's important to convey information about both the relative size of each cryptocoin and the date on which it was born. In doing so I'm trying to illustrate how being the first mover engenders network effects -- early cryptocoins tend to attract the largest market share. I also want to capture the mini boom in new coins since May 2013. Below I've pasted a D3 visualization of this data. Users can interact with it by hovering the mouse over each circle. The code is...

For the full version, go here . The chart below only includes Eurosystem assets, not liabilities. It goes back just a few years. The full version goes back to 2000 and includes liabilities. To remove a data series, either click on its legend label or the line on the chart. Remove as many series as you want to get a better understanding for how balance sheet items interact. This is in beta, so it may be a bit buggy. Expect redraw delays. ECB Balance Sheet Tool Redraw all assets (May take a second or two)

www.financialgraphart.com

Ok, readers. Here's a chance for you to flex your muscles. The following chart shows various short-term interest rates: Why are these rates all so different? Can the differentials between them be arbitraged away? What sorts of institutional rigidities might be preventing arbitrage? For instance, we know certain institutions like Fannie Mae and Freddie Mac can't get interest on reserves held at the Fed. What other sorts of fine details might be important? Or are the differentials between these various rates not currently open to arbitrage? Can they be explained by term risk? How much do other sorts of risk, like liquidity risk, counterparty risk, default risk etc drive spreads?  A few specific questions: a) The DTCC Treasury General Financial Collateral (GCF) repo rate used to trade at or below the fed funds rate. The Treasury GCF repo rate is a collateralized rate. Since collateral reduces risk, it makes sense it would trade below the fed funds rate. But why is the riskier rate...

Here's a fun tool you can play around with. You may have to download the Flash player : I made this chart back in 2009 but never quite finished it. A few days ago I decided to get 'er done, but when I opened the old document the dismal realization hit me that I had completely forgotten how to make charts in Adobe Flash. What a slog the last 46 hours have been. Anyways, enjoy. The original is available here if you want to use it in your own posts, or if Blogger of  Google Reader won't play it for you.

Other central bank balance sheets I've illustrated include that of the Bank of Canada , Federal Reserve , and People's Bank of China . Making these charts reminds me of a great xkcd cartoon. 

I listened to a good Econtalk podcast last night with guest Steve Hanke . Few people in the world know as much as Steve does about hyperinflation. His catalogue of 56 hyperinflations (with Nicholas Krus) inspired me to do this chart. Most of us have been lucky enough not to have lived through hyperinflation. Here's what it might feel like if we did.

The US is currently importing significantly less crude oil and crude oil products than it did in 2005. Now if you were listening to the Presidential debates, then you probably heard Barack Obama take credit for this improvement. But the real driver has been improvements in technology, namely fracking and horizontal drilling. The chart below disaggregates the flow of petroleum into its constituent parts. The US is certainly importing less crude oil than seven years ago. It is also now exporting significant quantities of refined crude products. The largest contributor to this shift comes from the distillate/diesel category. A lot of this diesel is going Rotterdam and from there to the rest of Europe. The switch from importing to exporting products isn't confined to diesel though, note how almost all the black arrows in the products section are now red.

David Glasner and Scott Sumner have posts on Chinese monetary policy. They both inquire about the People's Bank of China (PBoC) balance sheet. I've affixed a chart of it below. Here's a quick rundown of how the PBoC balance sheet changes. The PBoC sets the yuan-to-dollar exchange rate at some rate below what it would in a free market. Chinese exporters thereby enjoy a subsidy. The law requires that the foreign currency that exporters earn overseas be repatriated and exchanged for yuan. The PBoC prints yuan (bottom green area) or provides deposits (bottom purple area), receiving this foreign exchange in return (top green area). (scribd pdf ) By creating such large quantities of liquid currency and reserves, the PBoC will force the domestic price level  to rise. In order to prevent this inflation, the Bank must "sterilize", or mop up the liquidity it has created. It does this by issuing bonds (dark blue area at bottom) to domestic banks in exchange for currency an...

I'm currently updating my History of the Fed chart . As a side project, here's what's happened to the various Federal Reserve credit programs initiated during the crisis. Most of them have rolled off the Fed's balance sheet. Even the most toxic of them - Maiden Lane I and III - seem set to be paid off. Go to scribd to see a higher resolution pdf. Alternatively, my public gallery has a high-res GIF. This chart illustrates one role of a central bank, that of lender of last resort role. A central banking facing a crisis is supposed to lend to everyone on any sort of collateral and buy all sorts of assets. If you read through the fine print of the chart, you'll see that the Fed's new facilities accepted a broad range of assets - from commercial paper to CDOs to RMBS, and opened themselves up to a fairly wide array of counterparties. What is really happening here is that the Fed is providing liquidity insurance. Liquidity insurance is like any other form of insuran...

Barry Ritholtz at The Big Picture spotlighted my most recent chart, "The size of major bull markets." You can purchase it on paper format here . While the improvement in GDP and employment since 2009 has been tepid, you can't complain about the stock market's performance. That being said, the current rally pales in comparison to the speed and vigor of the 1933-37 rally. Thoughts? Comments?

By yours truly: scribd version

I've been having fun with the visually-striking infograph Profitable Colours . Go here . It classifies company logos by colour, then ranks them according to worth, stock performance, and sorts them into industries. Finance companies tend to be blue while consumer goods logos tend to be red. I wonder why.