BOOM as at 6th October 2018

POWELL — REMARKABLY POSITIVE OUTLOOK
NON FARM PAYROLLS BOOM
HOW NOT TO WIN A TRADE WAR
THE INSCRUTABLE JAPANESE

Jerome Powell, the Chairman of the US Federal Reserve (US central bank), said last week that he saw a “remarkably positive outlook” for the U.S. economy that he feels is on the verge of a “historically rare” era. He gave the impression that he was very bullish about the US economy. Further interest rate rises seem inevitable.

The US Treasury Mid Term and Long Bonds fell hard (in price), resulting in higher interest rates. That will move the Treasury yield curve higher overall with a more positive slope, allowing room for more short term interest rate rises in future if CPI inflation gets rolling. BOOM is sure that the Federal Reserve would be happy about that and US banks should feel content as well. Such optimism will fade if these changes happen quickly but if they happen slowly, slowly then the optimism will persist.

NON FARM PAYROLLS BOOM

On 16th September, the BOOM editorial stated — “the new job creation numbers in the US are very poor by historical standards reaching barely 200,000 new jobs per month when that number would often top 400,000 per month during the mid-1990’s (with some months achieving 500,000 new jobs).” …………. “Thus, GDP growth in the US should continue to expand with this expansion in government spending. But a jobless expansion is not good. So the next key variable to watch for every month is the new job creation number. This is called the Non Farm Payrolls report. If new job creation does not happen sustainably, then the whole economy simply becomes more fragile as it becomes bigger, much like a sand castle or a house of cards.”

The Non Farm Payrolls number came in at 134,000 on Friday. This number is tiny — new jobs creation in the US is moribund, despite Trump’s claims. BOOM?

Of course, the prevailing narrative is now “we can’t employ more people because the unemployment rate is so low”. If you believe that, then you must believe in an economy growing endlessly without new job creation and BOOM has a bridge to sell you. The Labor Force Participation Rate in the United States is stuck at 62.7% which is 5 % below the boom years around 1998 – 2000.

HOW NOT TO WIN A TRADE WAR

The US trade deficit is worsening. The deficit climbed to $53.2 billion from $50 billion in July. The U.S. trade deficit was almost $390 billion since January. That compared to about $361 billion in the same 8 months in 2017. The nation’s trade deficit rose 6.4% in August to a six-month high as Americans bought a record number of imports. For the calendar year, the trade deficit is up $31 billion or 8.6 percent from a year ago.

Agricultural exports in the United States are down 9.5% from July and a whopping 15.2% since June. Industrial supplies exported are down 5.9% from July to August. This is what Trump & his band of merry men in the White House call “winning a trade war for the farmers”. In a Tweet at 3.26 AM 27th September, Trump said “we are beating them on Trade, opening markets and the farmers will make a fortune when this is over!”.

Nearly all the GDP Growth in the US at present is happening in residential construction and sales. None of that has anything to do with the Trade War. And the farmers appear to be losing their export markets. Never mind, Trump will just increase their subsidies and call it winning.

Meanwhile, the US has increased its Gross National Debt by US$ 1.27 Trillion in the last 12 months. That is the real annual Deficit, not the one reported to be just $ 895 Billion by the CBO (Congressional Budget Office). This huge increase in governmental expenditure is what is setting the US economy on its pathway of strong jobless GDP growth.

THE INSCRUTABLE JAPANESE

Japan’s Gross Government Debt to GDP Ratio is now 253 %. It is by far the highest national debt on the planet. But is it “debt”? As many readers will know, BOOM does not call it debt because government debt is not collateralized, it does not increase the money supply (unless it is funded through QE from the central bank) and there is virtually no risk of borrower default (in well managed, advanced economies with stable political systems). As a bonus, it is also usually not inflationary, unless a government wants it to be. Governments issue Bonds, they do not borrow from banks.

The next three nations are not even close in the Government debt to GDP Ratio stakes — Greece has a ratio of 178%, Lebanon’s is 149% and Italy’s is 131%. The United States level is at 105%. Germany is at 64% and the UK is at 85%. Australia is way, way down the list at 41.9%.

BOOM has been examining the accounts of the Bank of Japan (their central bank). The BOJ has a capital base of 100 Million Yen. That is just US$ 880,000. From that capital base, it currently owns Japanese Government Bonds and Treasury Bills worth 460,205,496,513,000 Yen (460 Trillion Yen). It also owns Foreign Assets valued at 6,713,236,864,000 Yen, Japanese REITs (Real Estate Investment Trusts) valued at 491,536,669,000 Yen, Japanese ETFs (Exchange Traded Funds) valued at 21,422,797,013,000 Yen, Corporate Bonds valued at 3,088,618,853,000 Yen and Japanese Commercial Paper valued at 2,494,529,025,000 Yen.

Yes — those are incredibly big numbers. Let’s convert them into US Dollar values. Here is the summary.

Japanese Government Bonds and T Bills US$ 4,000 Billion (US$ 4 Trillion)
Foreign Assets US$ 59 Billion
Japanese REITs US$ 4.3 Billion
Japanese ETFs US$ 188.5 Billion
Corporate Bonds US$ 27 Billion
Commercial Paper US$ 22 Billion

Total Assets = US$ 4.8 Trillion (approx) (there are a few other asset items as well).
Capital Base = US$ 880,000
Total Liabilities = $ 4.8 Trillion (includes Capital Base)
Current Deposits = US$ 3.468 Trillion

In banking, Deposits are Liabilities because banks borrow deposits off depositors. So who has deposited US$ 3.468 Trillion into the Bank of Japan’s coffers? Perhaps 3,468 Japanese Billionaires? No. Maybe the 50 million Japanese households have deposited $ 70,000 each? No, that is unlikely. And none of them can open accounts at the central bank. The answer is the commercial banks of Japan — they have created loans out of thin air on their ledgers and sent the resultant funds thus created to the BOJ where they appear as deposits in the liability section of the BOJ Balance Sheet. The Bank of Japan then used those funds to purchase all of those assets listed above as part of their Asset Purchase Program (Quantitative Easing).

How can we check this? Simply by looking at the combined Balance Sheet of all the regional Japanese Commercial Banks where those loans should appear as Assets.

And here they are —

Assets of Domestically Licensed Banks (Loans) = 508,515,500,000,000 (508 Trillion Yen)
Question: Who has borrowed that 508 Trillion Yen? ($ 4.4 Trillion US Dollars)
Answer: Their many clients including the households of Japan but the central Bank of Japan has borrowed the vast majority of about 400 Trillion Yen of that (about US$ 3,500 Billion).

These loans are held as Reserve Assets by the Commercial Banks — they cannot be used for any purpose outside of the banking system by the commercial banks. They will only ever be repaid if the Bank of Japan unwinds its whole Asset Purchase Program. So, can they stay intact forever? BOOM’s guess is Yes, of course. There is really no need to unwind these positions unless the currency needs to be defended or if very high CPI inflation occurs in the economy. Both scenarios are unlikely to occur as Japan is dramatically shrinking demographically and is beset by many dis-inflationary forces (even deflation).

When did this huge expansion of the balance sheets of Japan’s commercial banks and central bank begin? Answer: Around October 2012 (just 6 short years ago).

Create money FAST. Spend money FAST. That is the brave new economic world we are now living in, created by our central planners at (most of) our central banks and Treasury departments and Japan is simply leading the way. Perhaps Karl Marx would be proud?

They are desperately trying to create CPI inflation and trying to keep their banks solvent. Modern economies rely on bank loans to create 97% of the fresh new money supply. To survive, banks need at least 2% CPI inflation. Inflation serves no other purpose.

In economics, things work until they don’t. Until next week …………  Make your own conclusions, do your own research.  BOOM does not offer investment advice.

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Return to the BOOM Main Website –  BOOM Finance and Economics at  http://boomfinanceandeconomics.com/

EMAIL: gerry [@] boomfinanceandeconomics.com

PRICE PULSE DOMINANCE CHANGES DURING LAST WEEK Ended 6th October 2018:

1. INDIAN STOCKS — Changed to NO Arrow Dominant
2. BRAZIL STOCK INDEX — Changed to UP Arrow Dominant
3. COMMODITIES INDEX (USCI) — Changed to NO Arrow Dominant
4. US LONG BOND PRICE (TLT) — Changed to DOWN Arrow Dominant
5. DENMARK STOCKS — Changed to DOWN Arrow Dominant
6. YEN (AGAINST $US) — Changed to DOWN Arrow Dominant

=======================================================

1. INDIAN STOCKS — Changed to NO Arrow Dominant
INDIAN STOCK INDEX

2. BRAZIL STOCK INDEX — Changed to UP Arrow Dominant
BRASIL STOCK INDEX

3. COMMODITIES INDEX (USCI) — Changed to NO Arrow Dominant
COMMODITIES

4. US LONG BOND PRICE (TLT) — Changed to DOWN Arrow Dominant
TLT

5. DENMARK STOCKS — Changed to DOWN Arrow Dominant
DENMARK STOCKS

6. YEN (AGAINST $US) — Changed to DOWN Arrow Dominant
YEN

NOTE — RED ARROWS INDICATE BOOM PRICE PULSE DOMINANCE in the present moment (as indicated by the date of the chart and taking into account the 3 year time frame shown).  The charts are now arranged in PRICE PULSE RED ARROW DOMINANCE.    NOTE: All Charts are WEEKLY Charts over the last 3 YEARS time frame.  Arrows indicate PAST price action (not future).  No predictions are implied from past action.

Comments refer to past PRICE PULSE (Red Arrow DOMINANCE) over the last 3 years, the week ended 6th October 2018.  You can RIGHT CLICK a chart and OPEN in a New Tab.   Make your own conclusions, do your own research. BOOM does not offer investment advice. 

PLEASE NOTE — Many charts are ETF’s from NY Market  (not the base commodity or currency etc). The NY Stock Code is in the Top Left Hand Corner of each chart.
Charts are produced from http://www.stockcharts.com

Return to the BOOM Main Website –  BOOM Finance and Economics at  http://boomfinanceandeconomics.com/

Disclaimer: All content is presented for educational and/or entertainment purposes only. Under no circumstances should it be mistaken for professional investment advice, nor is it at all intended to be taken as such. The commentary and other contents simply reflect the opinion of the authors alone on the current and future status of the markets and various economies. It is subject to error and change without notice.The presence of a link to a website does not indicate approval or endorsement of that web site or any services, products, or opinions that may be offered by them.

Neither the information nor any opinion expressed constitutes a solicitation to buy or sell any securities nor investments. Do NOT ever purchase any security or investment without doing your own and sufficient research.  Neither BOOM Finance and Economics.com nor any of its principals or contributors are under any obligation to update or keep current the information contained herein. The principals and related parties may at times have positions in the securities or investments referred to and may make purchases or sales of these securities and investments while this site is live. The analysis contained is based on both technical and fundamental research.

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MOLS   Denmark
MOLS Denmark

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