Fake Money

June 5, 2022 – Weekly Comment

Bondo – Ed Paschke – 2004

When I was in college I took a basic art class that was being taught by Ed Paschke (needed the credit). He was becoming more acclaimed at the time. He invited the students to his studio, which was located on Howard Street, the dividing line between Chicago and Evanston, about a block away from the el station, on the second floor of a storefront building. It was a shabby neighborhood; at the time I lived in an apartment about four blocks away. A couple of his early paintings were on easels, and he said that one of the inspirations for his work was currency, (more obvious with respect to the works in his studio, if not the painting attached here). Paschke was a pretty cool character, lanky and street smart…looked a little bit like Hugh Laurie, who played the leading doctor role in the TV series House.

In any case, Paschke talked about his art and career, and said he had sold several artworks to Playboy for use in their publication. He explained that Playboy would pay by the page. So, he always made long rectangular pieces for that work, because if the image in the print edition (and that’s all there was at the time) spilled over on to the next page, you would get paid double, yet another more pragmatic take on currency as inspiration.

I, too, like paper currency. I have old high denomination Reichsmarks and of course a $100 trillion bill from Zimbabwe. I also like stories of counterfeiters. I have previously recounted a piece on JSG Boggs, who would go to a fine restaurant, order an expensive meal and wine, then take out pen and ink and draw fictitious currency, and offer to pay with either cash or his art. Needless to say, Boggs’ art appreciated while USD DE-preciated in the ensuing period.

This past Monday, my brother mentioned he had watched an amazing documentary on another contemporary counterfeiter named Arthur J Williams, from the working-class Bridgeport neighborhood in Chicago. This guy might be a new favorite. He is the subject of a book, The Art of Making Money, Story of a Master Counterfeiter and there are a couple of video clips linked below.

His main claim to fame was counterfeiting the 1996 $100 bill; it had all sorts of new features to thwart fakes. He tells of the quest to find the right paper that would pass the store cashier’s marker test -where the line would show as (authentic) yellow rather than turning brown. It took countless hours of tests on various samples ordered from the world over. In a serendipitous fit of frustration his partner Natalie marked the telephone book. The line was yellow! He tells of wracking his brains over how to duplicate the way the corner 100s change color when tilted one way or the other. He was taking a walk when he saw a parked car with a cool paint job, which also modulated when observed from different angles. He found the paint manufacturer, called for a sample order, and later learned this company also happened to supply the treasury! This guy is a dedicated craftsman and problem solver. It’s a long story, but after serving his jail sentence, he became an artist and owns a gallery in LA.

The lines between craftsmanship and art and currency and value can blur over time. Advertisements for fractional shares of artworks as an investment almost inexplicably make me angry on several levels. An expression of the soul isn’t meant to be fractionally owned on the slender hope that it can be profitably sold to some other jackass.

Fractional ownership is meant to be the mechanism by which entrepreneurs raise capital to fund productive new enterprises. And by productive, I mean companies that will generate a stream of positive earnings. However, Bloomberg highlights a research piece by Dan Su, a PhD from the University of Minnesota (linked at bottom). Here are a couple of links from the BBG piece:

New research shows that over the last five decades, the percentage of US firms trading publicly with zero earnings had more than tripled to more than half of the total market.

…the study measures characteristics tied to intangible assets – elevated customer-spending and R&D expenses – and plots them against loss-making firms. It finds a very high correlation between the two, suggesting most of these companies went public on the assumption their intangible assets will one day pay off in earnings.

And here’s the kicker:

“…if we focus on the business-cycle perspective, monetary policy is important for these companies’ market valuation as they cannot make positive profits until many years later.”

In many ways, there’s nothing earth shattering here: When there are no interest rates (or a hurdle-to-capitalism as Druckenmiller says) then “investments” based on thin reeds of hope tend to increase. As rates increase, all sorts of activities based on zero or low financing rates (to buy market share) no longer make sense. The gains on these intangible investments are counterfeit.

Here’s Brainard from a speech on Sept 1, 2020, commenting on the August ’20 change in the Fed’s policy framework: “This change implies that the Committee effectively will set monetary policy to minimize the welfare costs of shortfalls of employment from its maximum and not preemptively withdraw support based on a historically steeper Phillips curve that is not currently in evidence and inflation that is correspondingly much less likely to materialize.”

Here’s Brainard from a couple of weeks ago, May 25: “Price stability is of greatest importance for lower income families because they spend more than three-quarters of their paychecks on essentials like groceries, gas or bus fare, and rent – more than double the 31% spent by higher income households. High inflation is our most pressing challenge.”

The August change in framework had the overt goal of letting the inflation target surpass 2%, thereby reducing purchasing power of the dollar. That’s what increased inflation does, now belatedly recognized. The plan succeeded, in spades. In earlier sales pitches, FAIT was couched as a cost-free benefit for labor. There’s no free lunch.

On May 17, the Atlanta Fed GDP Now estimate for Q2 was 2.5%. It has steadily come down as data has filtered in. As of June 1 the estimate is 1.3%, with the next reading due on Tuesday.

Note that the most tangible input to the economy, oil, is near $120/bbl (WTI), within a stone’s throw of the 2008 record $140. German 2- and 10-year yields soared 30 bps this week (30.9 bps and 1.273%), the high since 2011 on the former and 2014 on the latter. XOM, once the most valuable listed company is near its all-time price high at 99.09, but now with a market cap of $417b, paling in comparison to big-cap techs. For now.

By the way, the US five-year led the US curve in terms of yield, rising 21.7 bps to 2.951%. I opened with an image of Paschke’s ‘Bondo’. The cash US 30y bond ended at a yield of 3.11%, and appears destined to soon test the recent high set on May 6 of 3.23%.

News highlights this week include:
Tuesday: Consumer Credit for April (typically not important but the March figure was an astonishing $52.4 billion). Expected $35b. Atl Fed GDPNow.

Thursday: ECB meeting, likely the last before rate hikes commence
Thursday: Z.1 report for Q1 which summarizes Net Worth and Debt Levels across the economy
Friday: CPI, expected 8.3% yoy and Core 5.9% from 6.2%
Auctions
Tuesday $44b 3-yr
Wednesday: $33b 10-yr re-open
Thursday: $19b 30-yr re-open With only $23b maturing in these maturities, these auctions raise $73b in new cash

	5/27/2022	6/3/2022	chg
UST 2Y	249.6	266.7	17.1
UST 5Y	273.4	295.1	21.7
UST 10Y	274.7	295.5	20.8	wi 296.5/296.0
UST 30Y	297.6	310.9	13.3	wi 312.0/311.0

GERM 2Y	35.3	66.2	30.9
GERM 10Y	96.3	127.3	31.0
JPN 30Y	99.3	102.3	3.0
CHINA 10Y	274.7	280.7	6.0
EURO$ U2/U3	59.0	72.0	13.0
EURO$ U3/U4	-24.0	-31.5	-7.5
EURO$ U4/U5	-8.5	-8.0	0.5

EUR	107.36	107.19	-0.17
CRUDE (active)	115.07	118.87	3.80
SPX	4158.24	4108.54	-49.70	-1.2%
VIX	25.72	24.79	-0.93