Perceived vs. Real Value Accrual

As most of you know, The Federal Reserve is the central bank of the United States.

The Fed uses a number of levers to influence monetary policy in the United States (and the rest of the world via world reserve status) to achieve it’s economic mandates.

The Fed can increase or decrease the amount and scope of assets or liabilities on its balance sheet, which in turn, increases or decreases the money supply within the economy.

Assets include various Treasuries and mortgage-backed securities purchased in the open market and loans made to banks. Liabilities include currency in circulation and bank reserves held at commercial banks. During economic crisis, the Fed expands it’s balance sheet

Treasury Securities:

• Aug ’07: $870 billion
• Dec ’09: $2.23 Trillion
• Mar ’20: $4.7 Trillion
• Mar ’21: $7.6 Trillion
• Jun ’21: $7.9 Trillion

In this presentation, instead of the US Dollar, we substitute the Fed Balance Sheet as the denominator when looking at a number of asset classes. We seek to determine what actually has been increasing in value, versus increasing in value because the US Dollar is going down (via expansionary monetary policy.)

Initially, we denominated the CPI in Fed Balance Sheet terms. As you can see — while there is some noise, there is generally a high correlation between the two. In this sense, it validated our theory that the Fed Balance Sheet would be a great measure of true value accrual vs. just monetary expansion.

US Housing Values / Fed Balance Sheet

Anyone and everyone has recognized, or felt, the ever-increasing cost of home ownership. Below is a chart of Average US Housing Value since 2003:

Now, in Fed Balance Sheet terms, the narrative is flipped on its head. While housing prices have indeed been increasing, they have not kept pace with the rapid expansion of the money supply. While it may feel like houses are going up in value… is this just a reflection of increased dollars in circulation? One that can’t even keep pace with the rate at which the dollar is being devalued?

S&P 500 / Fed Balance Sheet

Surely though, the stock market is increasing in value. It’s at all time highs, right?!

In Fed Balance Sheet terms — since 2008, the S&P is essentially flat. Is it possible the stock market is going up, simply as a reflection of the increased money supply?

GOOG — MICROSOFT — AMAZON / Fed Balance Sheet

To dig deeper, we ditched the indices and did the same comparisons for some of the best-performing equities of recent times.

Okay, they are going up vs. the Fed balance sheet — but it is more muted than when you don’t change the denominator. They are outperforming Fed Balance Sheet expansion, but they aren’t performing at quite the rate it appears on the surface.

GOLD / Fed Balance Sheet

Surely, gold, the inflation and anti-crisis hedge has to be keeping pace with the Fed Balance Sheet expansion.

As you can tell, Gold did a very bad job as an inflation hedge when you change the denominator to the fed balance sheet

Finally….

BTC & ETH / Fed Balance Sheet

The real heroes of value accrual over the last several years have indeed been crypto-assets like Bitcoin and Ethereum.

The change in denominator is hardly noticeable on the charts. It’s possible they outperform so drastically because of Metcalfe’s Law and the network effects it posits. For every additional user, more than 1 connection is made.

They move in exponential terms, not linear terms as do most equities or other commodities. They are networks…. Of money and value like we’ve never seen.

In conclusion — the Fed balance sheet has been expanding at somewhere between 15–20%/year. If you aren’t earning 15%+, your wealth is being destroyed when denominated in the monetary supply of the world’s reserve currency. While it appears all assets are performing well, it’s important to identify those that are actually going up in value when denominated in the Fed’s Balance Sheet.

Many asset classes are at all time highs in US dollar terms - the stock market, housing prices etc. In many cases it appears the true value accrual may not be real. The citizenry of Weimar Germany thought they were getting rich before hyper-inflation kicked in. Something to ponder.

Presented and created by Tyler Murray, Kelsey Heimmer & Eric Frost