BOOM as at 29th March 2020

HOW DANGEROUS IS THE CORONAVIRUS?

The Coronavirus can kill but so can car crashes, heart attacks, cancers and slipping in the shower. We must always remember that 60 million people die every year on this planet and 130 million are born. Well over 1 million die from road accidents while heart disease and stroke kills 15 million.

A senior UK Pathologist has written an excellent article in the Spectator Magazine. It gives an expert opinion about the epidemic and especially addresses the question “How Deadly is the Coronavirus?” BOOM suggests that you read it — but after reading today’s editorial in full.

https://www.spectator.co.uk/article/The-evidence-on-Covid-19-is-not-as-clear-as-we-think

DEATHS PER DAY

The critical metric to watch in the 2020 Coronavirus epidemic is the Deaths per Day per Nation. The statistics surrounding disease in any epidemic can be very confusing depending upon how they are collected and what is included. But a death is a death. So it is an absolute number, the ultimate measure of a lack of health. Death equals zero health. The only problem here is the cause of death. Someone may die WITH the Coronavirus. Or someone may die BECAUSE of the Coronavirus. And lots will die from other causes anyway.

Putting that problem to one side, the best way to monitor the progress of any fatal epidemic is to compare the number of deaths recorded per day (and attributed to the virus only). It is NOT a good idea to look at “New Cases” or “Total cases”. Why? Because the majority of people with a positive PCR Test for Covid -19 will have either no symptoms or a mild illness. Thus, they will have no impact upon the death rate. For them, it is a mild inconvenience.

The USA is now the epicenter of the epidemic. The mainstream media outlets are still reporting the increases in the total number of cases. This is very sensational and will help in selling advertising but it is unhelpful in understanding the overall impact. So what is the US Deaths per Day Number? Currently, it is 304 (recorded yesterday). But the number is increasing day by day. Thus, we can conclude that the epidemic is advancing there.

In China, the Deaths per Day number has been falling since the peak on February 13th. Yesterday, the official number of deaths was 5. At its peak, it was 248. Clearly, if the statistics are true, the epidemic has been in strong decline for 6 weeks there.

In Germany, the Deaths per Day is still rising. Yesterday, the number was 65. There are 80 Million people in Germany. So less than 1 person died per Million residents. That is a tiny number. Germans are sticklers for good statistics so maybe this is the real impact of the threat. Time will tell us, especially over the next 3 – 4 weeks.

To put all of these numbers into perspective, 61,000 people died in the USA last winter in 2019 from the Common Influenza Virus (Flu) and up to 650,000 worldwide — with no panic, no lock down, no stock market crash, no economic stand down.

Deaths Per Day Per Nation: 
https://virusncov.com/
Comparison Graphs: https://corona.help/compare

THE FED ATTACKS CORONAVIRUS — CHINA WOULD BE PROUD

Last week on Monday 23rd March, the US Federal Reserve, the central bank, decided to make loans to a number of newly established Government owned Special Purpose Vehicles to solve a credit money shortage problem for corporate America. This is a big deal to save America financially from the Coronavirus epidemic. However, it is aimed at increasing the availability of credit when the nature of the crisis generates a lack of demand for credit.  So it will have limited impact.

It is not Quantitative Boosting as BOOM has recommended but it is certainly a tentative start down that road. It is more an extension of Quantitative Easing as per what Japan has already been doing for some years. BOOM is content to see another major central bank move in that direction because it will increase the potential supply of fresh new money into the US economy without disturbing the US Treasury Bond market. But a full-on BOOM Quantitative Boosting Program would be much faster (almost immediate) in creating an impact in the real economy. The Fed would get a much bigger and more immediate BANG for their bucks if they sent fresh new (sovereign) money straight to the Treasury and then into the real economy as Government expenditure. Opening endless lines of credit only works if there are borrowers waiting in line.

Apart from dramatically lowering interest rates, buying US government issued bonds, establishing massive Currency Swap arrangements with other global central banks and watching their politicians deliver a $ 2 Trillion boost to fiscal spending, what exactly has the US central bank done?

They have decided to loan fresh new money directly to some new Special Purpose Vehicles — SPV’s — which will be owned by the Federal Treasury.

Obviously, the central bank had some problem with offering such loans directly to the Treasury as an unsecured, recourse basis loan (BOOM’s QB Plan). So – Hey Presto – they have “solved” that problem by loaning the money to these SPV’s instead. The Treasury has used $ 40 Billion of the funds in its Exchange Stabilization Fund (the ESF) for investment into the equity (shares) of four of the Special Purpose Vehicles and $ 10 Billion as “credit protection” for another. The Fed loans to the SPV’s are on a recourse basis which means that the Treasurer (the US Taxpayer) has to pay them back (whenever) regardless of what happens to any assets purchased. In other words, a recourse loan gives the creditor full autonomy to pursue the borrower for the total debt owed in the event of default.

Let’s be blunt — these SPV’s are really de facto State owned investment banks, owned by the US Treasury Department. State owned banks — China would be proud of them. The Federal Reserve Loans are starting with an initial total allocation of $ 300 Billion. BOOM suspects that a Zero will soon be added and more SPV’s created as we move forward. Why not? China does it but they are honest and call them State Owned Banks. The “big four” state-owned commercial banks in China are the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China, and the Agricultural Bank of China, all of which are among the largest banks in the world as of 2018. The US has been slow to catch on.

By law, the Secretary of the Treasury has considerable discretion in the use of ESF resources. The legal basis of the ESF is the Gold Reserve Act of 1934. Essentially he can buy shares in these new SPV corporations if he wishes and if the President agrees. As of the end of February 2020, the ESF held $93.7 billion in U.S. dollars, euros, Japanese yen, and Special Drawing Rights, an international reserve asset created by the IMF.

There are 5 of these Special Purpose Vehicles (newly established limited liability companies) and they are all described in a Press Release from the Federal Reserve on Monday 23rd March.

Let’s break the Press Release down into simple language (to the best of BOOM’s ability) that BOOM readers can understand — The US Treasury will buy shares in these SPV corporations using its Exchange Stabilization Fund (ESF) and the central bank will loan fresh new money to these SPV’s.

PMCCF — the Primary Market Corporate Credit Facility — in effect, via owning the SPV shares and borrowing from the Federal Reserve, the US Treasury will buy fresh new corporate bonds directly from corporate issuers

SMCCF — the Secondary Market Corporate Credit Facility –in effect, again via the ownership of shares in the SPV and borrowing from the Federal Reserve, the US Treasury will buy old corporate bonds and bond ETF’s in the secondary market from investors

TALF — the Term Asset-Backed Securities Loan Facility — the US Treasury will provide a funding backstop for the securitization of certain unsecured medium term loans. This will allow the issuance of securities that may be bundles of student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration (SBA). In effect, the US Treasury will be taking the risk of these loans on board.

CPFF — the Commercial Paper Funding Facility —  the US Treasury will, in effect, buy commercial paper directly from the issuers. This means that they will, via the SPV, loan money unsecured over short terms to issuers of such securities but especially to local municipalities.

MMFL — Money Market Mutual Fund Liquidity Facility — the US Treasury will also provide a backstop for the flow of credit to municipalities by expanding the Money Market Mutual Fund Liquidity Facility (MMLF)

MSBLP — the Main Street Business Lending Program – Details are to come “soon”, but this next SPV will, in effect, lend to eligible small and medium-size businesses. Thus, this US Treasury owned SPV will become an alternative commercial bank for longer term loans to business.

Text from the Press Release — March 23, 2020 — Excerpt attached as Addemdum

link: https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm

A REVOLUTION IN CAPITALISM?

This all sounds like a revolution in capitalism where the Government steps in to rescue it. But that revolution is actually a path that has been used previously. To learn more about US Special Purpose Vehicles used in the past and the US Treasury’s Exchange Stabilization Fund, you can start at these links. A real revolution will come eventually as far as BOOM can see and it will involve a huge increase in Sovereign money (cash in its most easy to understand form) not Credit money.

https://en.wikipedia.org/wiki/Maiden_Lane_Transactions

https://home.treasury.gov/policy-issues/international/exchange-stabilization-fund

BUYING OIL AND GOLD

Gold has a certain fascination. It looks good as jewellery and is kept in vaults as gold bars which also look good. Oil is the base energy source of our economic prosperity and we use $ 1 Trillion of it every year. So perhaps its time to examine their past performance as investments?

Gold has not been a stellar long term investment this century. It has doubled in US Dollar price just a little more than twice in 20 years since the year 2000.  Back then, one gram of Gold bought you US$ 10 and now it will buy you 52 US Dollars. The purchasing power of your gram of gold exceeded CPI inflation over that period of time. That is OK but certainly not stellar compared to some other assets.

For example, a patient investor invested in a portfolio of dividend paying stocks on the Australian stock market and re-investing the dividends has seen each $10 double and then double again plus some more. This calculation is made easy by simply looking at the Australian Accumulation Index – the XJOA.  The result has been almost identical to holding Gold in the 20 year time frame.

The latest stock market crash has dented that result but not by much. Any moderate recovery in the stock market will see that initial $ 10 investment recover $ 40 of purchasing power.

An investment in Oil would have been a disaster in that same time frame. If an investor had bought US $ 10 of West Texas Oil in 2000, it would now have less than $ 10 of purchasing power. The investor would have not even preserved the initial value. As Warren Buffett so famously said — “price is what you pay and value is what  you get”.

A US$ 10 investment in Microsoft shares in early January 2000 would now have $ 150 of purchasing power.  Now that is a good return. Far better than Gold or Oil. But it is a poor effort compared to owning Apple stock. That has increased from $ 10 in the first week of 2000 to $ 200 of purchasing power today. Stunning. But if you had delayed your purchase until December 2000 and bought at Apple’s price then at around $ 1 (the January price was $ 4), you would have been able to convert your $ 10 into $ 3,200 of purchasing power today.

You see — timing (and dumb luck) is everything in investing and don’t let anyone tell you otherwise. Some really dumb, uninterested but extremely lucky investors invested $ 10 in Apple stock in October 2001 and they have reaped their lucky reward, an increase of 320 times in purchasing power. That’s plenty to defeat CPI inflation or other general asset inflation.

Being dumb can be a big advantage in the world of investing. Just ask Forest Gump.

So — will Apple, Gold or Oil rise in price (and value) in the future?  The answer is that no-one knows. However, if the number of US Dollars present inside and outside the US rises very, very sharply, then theoretically, the price of Gold and Oil should rise in US Dollar terms. But by how much?

BOOM prefers to look for the next Apple. Or even half an Apple. With worms.

Check it out here if you don’t believe me: https://www.macrotrends.net/stocks/charts/AAPL/apple/stock-price-history

ADDENDUM:
Press Release From US Federal Reserve 23rd March 2020 (Excerpt Only)

https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm

Federal Reserve announces extensive new measures to support the economy

“These actions include —
Supporting the flow of credit to employers, consumers, and businesses by establishing new programs that, taken together, will provide up to $300 billion in new financing. The Department of the Treasury, using the Exchange Stabilization Fund (ESF), will provide $30 billion in equity to these facilities.

Establishment of two facilities to support credit to large employers – the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.

Establishment of a third facility, the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses. The TALF will enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.

Facilitating the flow of credit to municipalities by expanding the Money Market Mutual Fund Liquidity Facility (MMLF) to include a wider range of securities, including municipal variable rate demand notes (VRDNs) and bank certificates of deposit.

Facilitating the flow of credit to municipalities by expanding the Commercial Paper Funding Facility (CPFF) to include high-quality, tax-exempt commercial paper as eligible securities. In addition, the pricing of the facility has been reduced.

In addition to the steps above, the Federal Reserve expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses”.

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 {at} 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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MOLS Denmark

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