BOOM as at 18th August 2019

BOOM TRADE INDICATORS STILL STRONG

BOOM has previously written about his key indicators of future global trade. They have not wavered lately, still showing continued strength in global trade for the future. Please note that these indicators are heavily reliant upon China and its economic health. BOOM will become worried if they begin to show weakness. However, at this juncture, that is not the case so it is a “steady as she goes” situation between Charybdis and Scylla.

In Greek mythology, Charybdis was a sea monster in the Strait of Messina, between Sicily and mainland Italy. Charybdis lived under a rock on one side of the narrow passage while another sea monster called Scylla lived inside a rock on the other side.  Sailors had to make their way carefully between the two monsters. The global economy is currently in such a perilous situation. Danger is everywhere but let’s not get too worried. The situation has been like this for over 12 years since the Global Financial Crisis hit in 2008.

THE PANIC NOW BUTTON

Over the last week, the mainstream media in the Western world has hit the Panic Now Button. They have filled their headlines and news bulletins with multiple warnings of imminent economic recession.  They have declared discovery of the Yield Curve and brought this arcane subject forward for discussion around the kitchen table as if it is some newly formed object of delirium or perhaps some fascinating old artifact from Ancient Egypt.

Whatever the method of presentation, the conclusion from the “professional” mainstream commentariat has been consistent. They state that this amazing new phenomenon that they have discovered called the Yield Curve MUST be a reliable indicator of an economic contraction, maybe a depression. Some “expert” commentary has even foretold of Economic Armageddon (whatever that is). The protagonists of that scenario seem not content with just a slowing of economic growth or even a stagnation of growth. They seem desperate to see total economic carnage where everyone ends up in rags, begging from the Enlightened Holders of Gold.

So, BOOM went back to see what an earlier editorial had to say on the subject. And here it is. The BOOM Editorial from 31st March — 20 weeks ago. BOOM thought it worthy of re-publication and re-reading.

PANIC GREATLY EXAGGERATED — PUBLISHED 31st MARCH 2019

Since the US Federal Reserve (their central bank) put up the white flag 2 weeks ago, capitulated and agreed to cease raising interest rates immediately and to also cease the sell down of its bond portfolio in September, there has been a quick re-alignment of investment capital flows preferencing bonds over stocks. Some mainstream media analysts and “expert” economic bloggers have reported fulsomely that “a recession is imminent as the US Treasury yield curve is inverted”. They have tried to create fear and panic as a means of attracting attention to their publications and TV shows. They have forecast mayhem for the stock market, often suggesting “a crash is imminent”.
But as Mark Twain once said “Reports of my death have been greatly exaggerated”.

BOOM is a close watcher of Yield Curves. And yield curve inversions can certainly be ominous if they occur during a period of frenetic bull market action in the stock market, over-enthusiastic optimism, rollicking asset and CPI inflation and high interest rates. They are then an indicator of a central bank slamming on the brakes and desperately trying to slow the economy. But, at present, these circumstances simply do not apply. So we can all calm down. Can the Gold Bugs rest easy especially?

The central banks of the advanced western economies for over a decade have been actually trying to trigger optimism, CPI inflation and economic growth. They have succeeded to various degrees in various nations but, overall, they have been flogging an economic dead horse. Please note — they have NOT been trying to stop it from frenetically galloping over the hills in an uncontrolled fashion.

BOOM consistently outlines the current circumstances and future long term outlook for the advanced economies as one of continued low growth, low CPI inflation and low interest rate settings. This is linked to huge demographic changes in the advanced economies plus the effects of low energy costs, dis-inflation and deflation triggered by robotization and the off-shoring of jobs to China (and other low wage nations). Also the advanced western nations are persistently moving steadily towards becoming more predominantly service oriented economies. In the US, for example, services now make up 79.7 % of total GDP. So the goods economy in the US is barely 20 % of the total. In Japan, services make up 71.4 % of the total GDP. In Germany, it is  71.1 % and in the UK, it is 78.3 %.

Now consider this — if wages growth is poor in the service sectors of the advanced economies, then CPI inflation simply cannot get traction there. Most people in the advanced economies just don’t have excess funds to spend on higher priced goods and services (or higher interest rate settings). They are worried about their financial future, their job security and “tight” with their money.

ATTACK ON TURKEY

Back to August 2019 —

The attack on the Turkish currency in September last year seems to have failed so far. The Turkish Lira dropped alarmingly against the US Dollar during the first week of August 2018. The Turkish 10 Year Sovereign Bonds also collapsed to a peak yield of 22.82%.

Since then, 12 months have passed and the Turkish stock market index has held within its current trading range, the currency has strengthened and stabilized and the 10 Year Bond yield has fallen to 15%. Turkey, a NATO member nation, has completed its purchase of the Russian S 400 Missile Defense system and the President (of Turkey) has even discussed further cooperation with the Russian weapons manufacturers.

This is an extraordinary turn of events. Somehow, Turkey has avoided the fate of Venezuela and has seen its financial markets rendered stable. BOOM wonders now as back then — who attacked Turkey? And who has helped Turkey in this crisis? Someone has been busy buying Turkish stocks and bonds.

The bonds may well be still a golden speculative opportunity (be it extremely high risk). Buyers of Turkey’s bonds may see their capital value increase if Turkish interest rates start falling and they may get a double whammy profit if the Lira actually starts to become progressively more valuable in US Dollar terms. And, if that scenario were to happen, the holder of those Turkish Bonds will also enjoy an annual return of 15%. So the gamblers in the bond market must be feeling very tempted right now to get 15% return plus a possible big capital gain plus a possible currency kicker.

Sounds exciting. Before you decide to throw in your day job or your boring investment portfolio to become a bond gambler, please consider that there are extenuating factors to consider here. Turkey’s economy is contracting with a CPI inflation rate of 16.65% and the official unemployment rate is 12.8%. But the gamblers will still gamble. That is how they make their living.

BOOM will not be joining them because BOOM is not a gambler.

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.
 

CLICK HERE FOR PODCASTS:   OUR BRAVE NEW ECONOMIC WORLD

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

EMAIL: gerry [@] boomfinanceandeconomics.com

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HOW MOST MONEY IS CREATED

BANKS CREATE FRESH NEW MONEY OUT OF THIN AIR
(but they always need a Borrower to do so)
THERE IS NO SUCH THING AS A DEPOSIT
BANKS PURCHASE SECURITIES, THEY DON’T MAKE LOANS
BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY

Watch this short 15 minutes video and learn as Professor Richard Werner brilliantly explains how the banking system and financial sector really work.

https://www.youtube.com/watch?v=EC0G7pY4wREhttp://

How is Most New Money Created ?

LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans).

From the Bank of England Quarterly Bulletin Q1 2014    —

“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

“Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves”.

Youtube Video —  https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-in-the-modern-economy-an-introduction

and

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

Paper:  Money in the Modern Economy  PDF —  CLICK HERE

Quarterly Bulletins Index

http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx

Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.

On 25th April 2017, the central bank of Germany, the Bundesbank, released a statement on this matter —

“In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry: according to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – i.e. that banks can only grant credit using funds placed with them previously as deposits by other customers”. By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).”

Reference: https://www.bundesbank.de/Redaktion/EN/Topics/2017/2017_04_25_how_money_is_created.html

The Reserve Bank of Australia (Australia’s central bank) has also contributed to the issue in a speech by Christopher Kent, the Assistant Governor on September 19th 2018.

“…… the vast bulk of broad money consists of bank deposits”

“Money can be created …….. when financial intermediaries make loans

“In the first instance, the process of money creation requires a willing borrower.”

“It’s also worth emphasizing that the process of money creation is not the result of the actions of any single bank – rather, the banking system as a whole acts to create money.”

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MOLS Denmark

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