Understanding the Trouble Ahead

Friday, January 7, 2011
By Paul Martin

The Bernanke Arbitrage

by Michael Pollaro

At THE CONTRARIAN TAKE a lot of time and effort is spent compiling money supply data, analyzing its drivers and charting its course. The reason is quite simple. It is the ebb and flow of the money supply that shapes the ebb and flow of the financial markets and the economies in which they operate. This has been true throughout history, never more though than today, a time dominated by activist central banks the world over, central banks that can and regularly do create money in vast quantities whenever they deem fit. Having said this, all this data crunching would hardly be worth the effort if we were tracking an incorrect measure of the money supply. Luckily for us, we here at THE CONTRARIAN TAKE think we most definitely are not.

So what money supply measure are we tracking? It’s a metric called TMS, for True Money Supply, a formulation based on the monetary insights of the Austrian School of economics. Those mainstream M’s – like M1, M2 and M3 – although widely followed, we submit, are all seriously flawed, for their formulations are founded on a faulty definition of money. Not so TMS. We’re convinced the Austrians have it right.

Now, that doesn’t mean we aren’t all over those mainstream M’s. We are, and for good reason. As Kevin Duffy, co-manager of Bearing Asset Management, said:

Investment management is simply capturing the arbitrage available between perception and reality. It is paramount to know both.

The Rest…HERE

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