#5 Celebration and Mourning:

Equities and Japanese Whisky

Celebrating money supply

Buoyant Share Prices

Nobel laureate Milton Friedman said that “Inflation is always and everywhere a monetary phenomenon.” Meaning that - other things being equal -  when more money is available, the price of goods will go up. 

When COVID unleashed itself, central bankers all over the world pumped money into the financial system, providing cheap cash to help banks and businesses tide over the massive disruptions to earnings. The biggest central bank, the US Federal Reserve, doubled the size of its balance sheet in less than 2 years, from 4.17 bn. USD in Jan 2020, to 8.65 bn. this December, setting off a global flood of liquidity.  US money supply, which flows around the globe, went up by 38% between Jan 2020 and October 2021.

Though much of this money found its way into households, their consumption was restricted by reduced mobility, so consumer prices did not move up much. Meanwhile, the cash piled up in bank accounts, got invested in shares and other financial assets, and bid up their prices. Through 2020 and the first half of 2021, the inflationary impact of all the extra cash was felt in asset markets, rather than super-markets. Unlike consumer prices,  asset-price inflation doesn’t bother most policy makers, and it certainly doesn’t bother politicians, who point to stock markets as a sign that all is well. Now that prices of goods and services are climbing, it's a whole different story, though, and there is genuine concern that the inflation genie has been let out of the bottle.

Raoul Pal, who runs the macro-advisory firm Real Vision, introduced his followers to the notion that asset prices should not be measured in dollars, which had been devalued by the massive surge in money supply. Rather, they should be measured against the supply of  money into the system. If you applied this thought, you could  read Friedman as saying, “Asset price inflation is always and everywhere a monetary phenomenon.” 

Between Jan 2020 and October 2021, the world’s most actively traded stock index, the S&P 500, went up by 35.73%, just a little less than the increase in US money supply. Our own Nifty went up by 44%, but in rupee terms; when you measure the Nifty in dollars, it went up by 35.42%. We marched in lockstep with the US stock markets, which marked in lockstep with US money supply. The extent of the match is uncanny.

The major UK stock index, the FTSE, actually dropped during this period, because of fears around both COVID and Brexit. The one major index which stood out in the last two years was the Nasdaq, which represents the world’s leading technology companies. Between Jan 2020 and October 2021, tech stocks gained 63%. Investors saw value in these stocks beyond the influence of extra cash sloshing around the world. And, in a category of their own, crypto currencies were on a mega-dose of steroids. Bitcoin went up almost 6 times, from 7240 to 44000 US, and ETH by 25 times, from 132 to 3430.

What happens next? The US Fed has fast-tracked its intent to stop inflating money supply, and the Bank of England promptly followed suit. If nothing happens to make them change their mind, global money supply will flatten out in 2022. Stock prices will no longer be automatically inflated by more dollars and fatter bank accounts. The hunt for capital gains looks a lot tougher.

Japanese Whisky vanishes

I often tell start-up founders that managing failure is much easier than managing success. The latest story I have in my repertoire is of Japanese whisky. 

I had sampled the excellent Hakushu label on my sole visit to Japan in 2013, but I am not much of a drinker, and when I gave away the only bottle I brought back, I never made an effort to replace it. But I did occasionally pick up a sense of the increasing buzz around Japanese whiskey, most especially in 2018, when a 50-year-old Yamazaki was sold at  over $340,000 USD. It had been launched in 2005, at 9,000 USD, which meant a return of 3,800 % in 13 years. 

My son seemed to recall my experience with Japanese whisky; last week, when he was looking for a special present for an uncle in Chicago, he asked me for a recommendation. I suggested he look for a Hakushu, or a Yamazaki. “They’re just not available”, he reported the next day.

Sales of Japanese whisky had languished toward the end of the last century, and between 1989 and 2008, consumption fell by nearly a third. Leading producer Suntory launched a campaign to stem the tide, promoting its products in both Japanese and overseas markets. Aged bottles began winning global tasting competitions. In 2014, Japanese media house NHK made a film, Massan, about Masataka Taketsuru, the Japanese man who dreamed of producing a bottle of Japanese whisky and his Scottish wife, Rita.

The film was viewed widely and enthusiastically, and may have contributed to the global visibility of Japanese whiskey. Whatever the reasons, between 2008 and 2017, exports of Japanese whiskey went up nearly ten-fold. This was success way beyond expectation, and Japanese distilleries were simply unprepared for this surge in demand.

By 2015, Suntory had to discontinue the 12-year old Hibiki, and in 2018, stopped selling both the 12 year old Hakushu and the 17- year old Hibiki. According to the site Gear Patrol, if you can find a bottle of the younger Hibiki in the US, you will end up paying about 400 dollars for it, against its last recommended street price of 85. The 17-year old will set you back between 500 and 600 dollars. Suntory continues to produce the Yamazaki label, but bottles disappear fast, and sell at twice the recommended price.

If my son does find that bottle of Japanese whisky, I suspect it's going to be one with ‘No Age Statement’, which is a lovely way of saying that the distillery has pushed it out before it had time to age.

Suntory and other Japanese distilleries have invested in stills and storage, and ramped up production of fresh whisky. But fresh stocks of 12-year old and 17-year old whiskeys are going to be several Christmases away.