BOOM as at 23rd February 2020

STOCK MARKET DISCONNECT WITH CORONA VIRUS

The world is being bombarded with mainstream media messages of Corona Virus attacks in many nations especially in China with 76,000 cases and 2,236 deaths.

Other nations affected include South Korea 204, Japan 105, Singapore 85, Hong Kong 68, Cambodia, Thailand 35, United States 34, Taiwan 26 , Malaysia 22, Italy 20, Australia 19, Iran 18, Vietnam 16, Germany 16, France 12, Macau 10,  UAE 9, UK 9, Canada 9, Philippines 3, India 3, Russia 2, Spain 2, and one case each in Egypt , Israel, Lebanon, Nepal,  Sweden, Cambodia, Sri Lanka, Belgium, Finland.

The data is up to date at the time of writing on 22nd February and can be seen at a website called Corona.help, but the caravan seems to be moving on quickly, especially in South Korea —  https://corona.help/

These are clearly alarming and very sad statistics. Meanwhile, the head of the World Health Organization (WHO) has expressed concern at the number of coronavirus cases with no clear link to China or other confirmed cases.

“Dr Tedros said the number of coronavirus cases outside China was “relatively small” but the pattern of infection was worrying.
“We are concerned about the number of cases with no clear epidemiological link, such as travel history to or contact with a confirmed case,” he said.

The new deaths and infections in Iran were “very concerning”, he said.

Source:  BBC https://www.bbc.com/news/world-asia-51591091   —

But this is a finance editorial. So BOOM asks what impact has this had on the stock markets of the world?

The Chinese stock markets were initially hit hard. The Shanghai Composite Index fell 13% in just 2 weeks in late January. But then it bounced up strongly and the index recovered very sharply. It is now just 2% below the peak it reached in mid January.

The SZSE Index in Shenzhen, Southern China, also fell hard initially by about 13.8% but is also now rising strongly and has gained 22 % over the last 3 weeks. That is an amazing performance, considering the blanket negative media coverage of the viral epidemic.

The South Korean stock market index, the KOSPI, fell by 1.5% last week but previous to that fall, it too had regained its previous trading range from a steep initial fall in early February.

Stock market indices in Taiwan, Malaysia, Japan, India and Singapore markets have also all shown a strong bounce since early February. However, the Thailand and Indonesian stock markets have not shown any significant recovery from the initial impact and continued to fall through last week.

The major European markets in Germany, France and Italy have been very resilient and have shown good investor demand since early February. Of those three, believe it or not, Italy has been the standout performer.  And the US stock indices have all performed well since the beginning of February.

So — what’s happening?

There seems to be a big disconnect between the official disease numbers, the mainstream media panic and the world of stock market performance. Investors in many nations have obviously been unimpressed by the virus.

Maybe they don’t listen to the television news shows or read newspapers?

ANOTHER DISCONNECT — COBALT AND LITHIUM — ELECTRIC CARS

The current rage is electric cars and the promise is that they are the future, replacing conventional cars and trucks along the way. Such vehicles require Cobalt for their batteries. So it makes sense to take a look at the price chart for Cobalt. It is certainly revealing.

The price of Cobalt is now US$ 33,750 per MT. In early 2016, it began a meteoric rise and went from $ 23, 000 to just above $ 95,000 within 12 months. The price had tripled and more. Then it proceeded to collapse back to US$ 23,000 in July 2019. The round trip was completed in three and a half years. At present, the price is trading in a relatively tight trading range and does not appear to be subject to any huge demand pressures. The hype surrounding electric cars has presumably passed.

Lithium prices tell a very similar story. They started rising in early 2016, reached a peak around late 2017/early 2018 and have been falling ever since. Lithium is in abundant  supply on planet  Earth, so this is probably to be expected. However, with the current “huge” demand for batteries, its fall from grace is a little surprising.

Then there is Graphite. The Flake Graphite price also shot up in early 2016 then reached a peak trading range for quite some time but it has been steadily falling over the last 12 months.

The reality of these metals prices does not seem to match the hype of a future driven by batteries. Something doesn’t add up. Investors in most nations have obviously been unimpressed by the battery powered future promised by mainstream journalists.
Perhaps they don’t listen to the television news shows or read newspapers either?

CHINA IMPORTS

Regular BOOM readers will know that BOOM watches imports into China closely, especially a special indicator that has been extremely reliable in the past for correlating well with financial market performance. That indicator has been in a holding pattern during the Coronavirus outbreak. Last week, it started falling below the holding pattern. However, it is a fall of rather small magnitude when the long term perspective is taken into consideration. It has now fallen just 6.4% (slowly) from its recent high point way back in October last year. That is not a big fall over a 5 month period. So this indicator is saying “be mildly alarmed but certainly don’t panic”.

CHINA TOTAL SOCIAL FINANCING

China’s monetary system is different to the money systems used in the advanced economies. It pretends to be the same but, in practice, it is much more centrally controlled. Last week, the Total Social Financing figure was released for January. It rose by 5.1 Trillion Yuan. In Dollar terms, that is an increase of US$ 733 Billion in just one month.  Think about that for a moment. It amounts to almost 75% of a Trillion Dollars in just a single month.

Clearly this new money supply was not generated by fresh new borrowers lining up at Chinese banks in the freezing January cold and enthusiastically applying for bank loans.  But it was, at least theoretically.

The official bank loan number is part of the Total Social Financing number and it was US$ 504.5 Billion of that total figure, much the same as last year. A January peak in bank loans has become the norm in China over the last 5 years so this is quite “normal”. Apparently, the Chinese people like to line up in large numbers in deep winter and borrow to kick off the new year.
The other sources of Total Social Finance that did increase significantly from last year were in Foreign Currency Bank Loans which were at the highest level since 2015 and in Equity Financing in the Domestic Stock Market by Non Financial Enterprises. The latter figure shows that Chinese companies are investing heavily in either their own shares or in other Chinese company shares. The former figure suggests that they are also borrowing in foreign currencies more than they have done since 2015. But that number is not a big one — only US$ 9 Billion in January (after being a negative number for most months over the last 5 years).

CHINA BANK LOANS

But, let’s go back to bank loans. The China numbers show that the total amount of bank loans outstanding is equivalent to US$ 22.6 Trillion while the same total in the US is just US$ 10 Trillion. And the Chinese number has doubled in the last 7 years since 2013. US bank loans have increased very slowly in comparison in the same time frame, despite a “booming” US economy (according to Donald Trump).

This mismatch sounds “dangerous” but it can be explained by looking at the bond market in the US. The United States has a very deep, active bond market and it is where companies, municipal bodies and government bodies go to seek much of their financing. They do not use bank loans as much as the Chinese. This is critical to understanding the difference in performance between the US economy and the Chinese economy.

If American corporate and institutional borrowers used bank loans more in preference to the bond market, then the US economy would be growing as impressively as the Chinese economy. Why? Because bank loans increase the money supply while bond issuance does not. It’s as simple as that.

Please note that the US corporate bond and municipal bond market totals US$ 14 Trillion outstanding. That explains the so called “dangerous” gap outlined above between China bank loans and US bank loans.

As BOOM always says, the supply of fresh new money is critical to an economy’s health. New money (in the form of bank loans) is like fresh new water to a garden. The Chinese have worked this out and the Americans have not.
However, BOOM will (yet again) refer to Winston Churchill’s famous comment —

“The Americans will eventually do the right thing after exhausting all other alternatives”

SAVE THE PLANET — Read the Link — and send it to your politicians and central bankers. Quantitative Boosting Explained —
https://boomfinanceandeconomics.wordpress.com/2019/12/15/boom-as-at-15th-december-2019/
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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EMAIL: gerry [@] boomfinanceandeconomics.com

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

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).”

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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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.

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MOLS Denmark

 

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