In today’s Exponential Investor

  • Beer
  • Money
  • IoUs


From my office high up in the Millennium Tower, the view to the southeast is dominated by the mighty Danube, as it heads through Vienna’s suburbs in the general direction of the airport and the Black Sea.

The longest river in the European Union (EU) provides inspiration for the central concept in this edition of Exponential Investorflows and liquidity.

Every company these days is, to a certain extent, a technology company

Well known to readers of Exponential Investor, Sam Volkering is passionate about investing in technology-related companies that have the potential to deliver huge gains to shareholders.

Identifying such companies is Sam’s mission as editor of Frontier Tech Investor, one of Southbank Investment Research’s publications.

Sam’s job is made easier by the pervasiveness of technology in daily lives of people and daily operations of businesses.

The observation about how every company is a technology company – at least to some extent – comes directly from Sam.

It is, for instance, true of a company that owns pubs in England and that is a part of the recommended portfolio in Frontier Tech Investor.

In fairness to subscribers to that publication, I can’t mention that company’s name here.

The company attracted Sam’s attention because it is using gamified training technology to help its staff to be more productive and motivated.

So far, 8,600 people – or 90% of the staff who wait on customers at the company’s pubs – have used the technology so far.

The company’s human resources director describes the technology as a “game changer”.

More productive staff should lead to greater profitability and a stronger brand for the company.

Recently, the company’s business must surely have also received a boost from the Beautiful Game.

An estimated 13 million pints of beer were sold at licensed premises across England on 11 July, when some 31 million people watched the England versus Italy final of the 2020 UEFA Football Championship.

If your interested in Sam’s work, I suggest watching his Crypto Eruptions point event here.

Meanwhile, the summer high season – and the recent easing of Covid-19-related restrictions – should also help most pubs and pub companies.

There is one other point that I will note here: the share price of the technology-driven pub company has risen by nearly 80% over the last year.

Capturing the risk of inflation in just one chart

Rob Marstrand, the editor of UK Independent Wealth, another Southbank Investment Research publication, drew my attention recently to the long-term trend in money supply in the United States, with this chart:

Bank deposits at US commercial banks, weekly, 3 January 1973 to 7 July 2021 in billions of US dollars

Source: Federal Reserve Bank of St. Louis

The chart shows the total of deposits of households, businesses and other organisations, with commercial banks across the United States.

The figures in the chart do not include US dollar notes and coin that are in circulation. However, these are a relatively small part of overall money supply.

The blue columns in the chart show periods when the US economy was in recession.

In his analysis of the chart, Rob highlights two aspects.

The first is that, at $17,085 billion (or, if you prefer, just under $17.1 trillion), this measure of US money supply has grown by 28% over the last 18 months.

This expansion is, of course, one consequence of the Federal Reserve’s programme of quantitative easing (QE – the creation of money to buy US Treasury bonds and other securities)…

… and of the US government’s pumping of money into the economy to counter the disruption caused by the Covid-19 pandemic.

In the context of the longer-term history, the increase in bank deposits since mid-January 2020 is truly extraordinary.

The second aspect is that, until August 1971 – almost exactly 50 years ago – the US dollar was fixed against gold at a price of $35 per ounce.

Currently, the gold price is just over $1,800 per ounce; as Rob notes, that means that the US dollar has lost about 98% of its value relative to gold over half a century.

Inflation is the loss of purchasing power of money as its supply is increased relative to other things…

… and the US money supply has grown by over one quarter since mid-January last year.

TARGET2 and what it says about the euro area

To my discredit, I had been living here in the heart of the euro area for about two years before I learned about the TARGET2 balances at the European Central Bank (ECB).

These balances – and what they tell you about the euro area – were brought to my attention by John Butler, an investment guru who was writing for Fortune & Freedom, another Southbank Investment Research publication, in June.

TARGET2 is an acronym for “Trans-European Automated Real-time Gross Settlement Express Transfer System 2”: this is the system whereby money is moved between central banks and commercial banks across the euro area (and some other countries).

As the ECB puts it:

To avoid each euro area central bank having a separate balance with all of the other euro area central banks and the ECB, at the end of each day all bilateral balances are simplified to one single balance with the ECB.

In a nutshell, if banks in one country have – overall – sent more money through TARGET2 than they have received, then the central bank of that country would have a negative balance. If they have received more than they sent, the central bank would have a positive balance. If payments out and payments in were to be exactly equal, the TARGET2 balance for that central bank would be zero.

If a company in country A sells goods/services to a customer in country B for X, then – everything else being equal – A’s balance will go up, and B’s will go down, by X.

Similarly, if a bank in country A lends X to a bank in country B, the same will happen.

You can think of the TARGET2 system as a book of IoUs.

Some countries will have positive balances, which means that the IoUs from other countries that they hold exceed the IoUs that they have given to other countries.

Conversely, those countries who have given more IoUs to other countries than they have received have negative balances.

All the balances should sum to zero.

As of the end of May 2021, the countries with the largest positive balances were Germany (€1,077 billion), Luxembourg (€300 billion) and Finland €94 billion).

The countries with the largest negative balances were Spain (€503 billion), Italy (€494 billion) and Greece (€91 billion).

As John points out, one of the largest questions for governments in the euro area – and the wider EU – is: for how much longer will the countries with the large positive balances continue to tolerate the large negative balances?

At some point, a lot of the IoUs just might be called in.

If you need an EU river as a shorthand for the size of this question, think of the Elbe/Vltava – the second longest in the Union.

As for the Danube, which receives honourable mention at the beginning of this edition of Exponential Investor – there is an even larger financial/monetary question for the euro area.

However, we will cover that question on another day.

Until next time,

Andrew Hutchings
Managing Editor, Southbank Investment Research