There is a tenuous relationship between stock market performance and economic conditions. Some say that stock markets are good predictors of future economic prospects. Some say the exact opposite. BOOM prefers to observe both phenomena as independent but loosely related, more a symbiosis than a cause and effect relationship.
BOOM watches a number of indicators that give general Risk ON versus Risk OFF signals in the global financial markets. Risk ON signals can simply indicate a rush of speculative blood to the heads of participants but, on some occasions, they can mean that economic conditions are improving.
Twelve months ago, all of those indicators indicated a general Risk OFF signal during the first week of October 2018. Today, twelve months later, things may be changing.
It is early days yet but it is beginning to look like the first week of October 2019 was the date for a Risk ON signal and specifically in regard to the large US banks. This ties in nicely with the Federal Reserve’s recent announcement to support the US banking sector with more liquidity injections via special (and large) Open Market Operations which inject cash into the banks.
So far, these are very short term signals of only 4 weeks duration. More time is needed to see if the signals are more meaningful in the longer term. However, for the time being, they are continuing to show Risk ON and, if those signals are reliable, then it may be time to become more Bullish on US shares versus US bonds (for example). This may reflect a forthcoming improvement in the US economy. Or it may be just a speculative aberration. Only time will tell.
In regard to the US stock market, BOOM has always watched the Dow Transportation Index closely — for many decades. Generally speaking, it is nice to see it strongly supporting the larger Dow Industrials Index or, better still, leading the way. This is an old analysis trick and it is called Dow Theory. At present the Transportation Index seems to be moving steadily in favor of Risk ON in the US market. But, again, it is early days yet as this signal is only a few weeks old at this stage.
LONG TERM PREDICTIONS
Please note that BOOM does not make predictions about the long term future.
Probability assessments concerning Risk ON versus Risk OFF can be made many times but BOOM does not get wedded to any one assessment.
In regard to probability assessments, BOOM has found that such assessments hold very strongly indeed over the 24 second period. Over 24 minutes, they are not too bad either. But over 24 hours, BOOM finds it essential to always make yet another assessment.
Over 24 days, weeks or months — forget it — prediction is just an entertainment game over such long periods.
The famous philosopher, Yogi Berra would often say — “It’s tough to make predictions, especially about the future”.
John Maynard Keynes, perhaps the greatest economic thinker ever, would say “When the facts change, I change my mind. What do you do, sir?” and “The market can remain irrational longer than you can remain solvent.”
COMMODITIES PRICES HOLDING
BOOM has also often referred to a special group of indicators that he watches that gives excellent information about the propensity of the Chinese economy to import raw materials and which have continued ever upwards in direction since 2016. Those are all still rising or stable at present but have shown some hesitation over the last 2 weeks. This suggests a slowdown in Chinese GDP growth. But it is too early to tell.
The week-by-week review of these indicators needs to become more highly focused to see if this is a turning point in Chinese import strength or just a pause. Interestingly, the major indicator in the group remained strong throughout last week.
Global commodity prices were also generally strong throughout last week, in US Dollar terms. This is worth noting. In fact, any strength in commodities prices is surprising in a situation where many advanced economies are struggling to maintain positive GDP growth.
The NASDAQ market in the US finished strongly on Friday night. Large US bank shares and regional banks also showed strength. Some of the large global banks such as HSBC and Barclays are showing strength in their share prices since early October as are some of the large global engineering companies with ABB and Siemens leading the way. Also worth noting is the strength in the US semi-conductor companies and especially Intel — which BOOM always watches closely as a leading indicator of improved economic performance in the USA.
The Japanese stock market index, the Nikkei 225, which has seen growing investor interest since early October, also continued to move higher. Nomura, a large Japanese bank which is listed in the US and whose shares have struggled for many, many years has even started showing some strength.
Russian stocks are moving higher, especially since early October, indicating strong investor interest. And stock markets in Singapore, Taiwan, Switzerland, France, Germany, Spain and the Netherlands also seem to have shrugged off any recent negativity.
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.
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
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.“
Quarterly Bulletins Index
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).”
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