BOOM as at 14th June 2020

PHANTOM STOCK MARKET CRASH?
 
Last week we had a stock market crash — but only in New York. And it only lasted a day. It happened on Thursday but the tip-off happened in the futures markets during Wednesday night (New York Time).
 
BOOM noticed then that the US stock index futures markets were showing suspicious activity. The S & P and Dow Index Futures were clearly indicating that a large fall was coming the next day when the US stock market would open. And that is exactly what happened. The Dow fell 1,860 points on Thursday — almost 7 %.  But, interestingly, the daily volume traded that day was only marginally elevated. The NASDAQ Index fell by 5.2 % and, again, the increase in volume traded was marginal. In fact, it was only 1.3 Billion trades versus 1.1 Billion the day before. The Russell 2000 Index fell by 7.5%.
 
The mainstream media had to invent an explanation. So it rolled out the expected stories of “stocks crash as fear spreads of Covid-19 second wave”. But that was clearly not an adequate explanation.
 
In summary — big drops occurred very suddenly in US stock prices for no special reason while there were no big volume increases.
 
Following that dramatic fall, the world’s stock markets opened sequentially and they all fell, as you would expect, but by a much lesser amount. The New Zealand market fell by only 0.8%. The Australian ASX 200 Index fell by 3 %. Hong Kong’s Hang Seng fell by 2.3%. Shanghai fell by only 0.8%.  Japan’s Nikkei Index fell by only 1.6%. Germany’s Dax Index fell by only 2%.
 

However, let’s go back to New York where the big action was (in stocks). BOOM has witnessed and written about similar events in the past and has always noted in previous editorials that these sudden US stock market corrections are not accompanied by any similar (expected) plunges (or rises) in the bond markets, the currency markets or the precious metals markets. And that is what happened yet again this time.

 
The total bond market as measured by the broad ETF (code BND) had a modest fall of just 0.18 % in price with a very modest volume increase compared to its usual degree of volatility in volume in recent weeks. The investment grade corporate bond ETF (code LQD) fell by just 1.2%.
 
In the currency markets, the ETF for the Euro (code FXE) fell by just 0.8 % with a decrease in volume over the previous days trade. The Swiss Franc ETF (code FXF) rose by just 0.11% with no significant increase in daily volume. And finally, the US Dollar Index ETF (code UUP) rose by only 1 % with no increase in daily volume traded. There was no great rush into the “safe haven” US Dollar currency or into US bonds.
 
Now, let’s look at the precious metals ETFs. The ETF for Gold (code GLD) fell by 0.72% in price with a decrease in volume compared to the previous day’s trade. The ETF for the Gold Mining companies (code GDX) shockingly fell by almost 5 % and with a normal day’s volume recorded. The Silver market as represented by the ETF (code SLV) also fell by over 3 % with no significant change in volumes noted. There was no rush into the precious metals as “safe havens”, quite the opposite.
 
In other words, there was a stock market crash last Thursday in New York with no corresponding dramatic actions seen in the US bond markets, the currency markets or the precious metals markets.
 
BOOM has described a number of similar stock crash events over the last few years in New York.  The market regulators in New York and Chicago seem to have not noticed these now regular events. The rest of the world, however, does seem to have noticed and foreign stock markets no longer react as dramatically to such events in New York as they have done in the past.
 
Is the rest of the world losing faith in the integrity of the US financial markets? If so, that would not be good for global capitalism. BOOM suggests that the regulators of those US markets take a closer and more detailed look.
 
Next week will be an interesting week in global stock markets to see the follow on from this particular event.
 
ECONOMIC DECLINE IN THE UK
 
The UK economy has taken a steep fall from grace recently. It was very fragile previously but then Covid-19 turned up to push it off the cliff.
 
It contracted 10.4 % in the three months to April this year. That is a record plunge in GDP. The impacts of the coronavirus were seen everywhere. Hotels, education, health, car sales, car manufacturing and house building were the worst hit sectors. The services sector fell by 9.9 %, production fell by 9.5 % and construction crashed by 18.2 %. These were all record quarterly decreases. But if you consider April by itself, the economy crunched by 20.4 % compared to March. This was also a record fall.
 
These are grim statistics indeed.  In the next months of 2020, the UK government will find its taxation revenues falling dramatically while its expenditures will be surging to cope with the huge increase in unemployment numbers and business failures. In this situation, its budget deficit will increase dramatically and the government will have no option but to issue more and more bonds to the financial markets to raise the funds necessary to bridge the gap.
 
The Yields of all UK Bonds currently on issue are now falling right along the yield curve. This means that their prices are rising. Buyers are willing to pay more for the older bonds issued previously. Thus, the market is expecting that future bonds will be issued at even lower yields.
 

In a situation like this, the British Pound could fall out of favor with foreign investors and then CPI inflation may start to rise inside the UK if the currency falls significantly. If that happens, you will see Boris Johnson’s unruly hair actually stand on end.

 
The Bank of England will be forced to increase its QE program and become an even bigger purchaser of its government’s bonds. However, because QE does not re-energize economies as much as expected, more help will perhaps be necessary.
 
The British Pound has been in steady decline against the US Dollar for 12 years now. This is a symptom of US Dollar relative strength. That trend is ultimately not good for the United States economy so it must reverse it. BOOM suspects that soon the US will have no choice but to become the real “lender of last resort” to the British government. They will have to buy fresh new British Bonds in large volumes in order to lower their own currency and to increase the volume supply of US Dollars in the Eurodollar world (US Dollars outside of the US). That world is principally based in the City of London and in the British tax havens scattered on islands around the Atlantic ocean.
 
THE BIGGEST HEDGE FUND EVER
 
BOOM will watch for this process to begin sometime in the future. But first, for that scenario to happen, the US Federal Reserve must embrace the idea of Quantitative Easing for external economies. THAT is a difficult transition indeed. However, it is likely that it will be forced to do so if it wishes to maintain its US Dollar currency volumes and availability dominance on foreign central bank balance sheets. The alternative is to see US Dollar dominance go into a steady decline as the US Dollar continues to rise and global CPI inflation slowly turns to global CPI deflation.
 
Thus, if this happens, we will see the US Federal Reserve become the biggest Hedge Fund the world has ever seen.
 
The Swiss National Bank (the central bank of Switzerland) is commonly described as that now. They create huge volumes of Swiss Francs out of thin air and send them “offshore” to buy foreign assets in the EU and the USA — all aimed at keeping the Swiss currency from rising against other currencies.
 
THE MULTI-POLAR WORLD
 
The alternative scenario (which actually appears inevitable) encompasses the rise and rise of other currencies in larger volumes on the balance sheets of the world’s central banks — the Chinese Yuan, the Japanese Yen, the Euro (despite all its failings) plus the other lesser currencies such as the Australian Dollar, the Canadian Dollar, the Swiss Franc etc. That would be a multi-polar currency world — a major change from the US Dollar dominance that we have all accepted as “normal” since 1945 and especially so since 1971. International trade settlements would then be conducted in many currencies by mutual agreements. However, such a multi-polar currency world cannot be constructed quickly. BOOM estimates that it will take up to 100 years. Such a world should theoretically be a much more stable world both in an economic and Geo-political sense. Hopefully, it will arrive much earlier.
 
Currently Foreign Exchange Reserves held by central banks are dominated by the US Dollar at 58% and the Euro at 20%. But the reality of trade settlement is much more complex.
 
A good review of this subject published by the Bank for International Settlements in 2019 can be found here: The Currency Composition of Foreign Exchange Reserves  (FX Reserves)  https://www.bis.org/publ/work828.pdf
 

Their conclusion contains this revealing sentence —  Although long-shrouded in secrecy, the currency composition of FX reserves has emerged into the light in a fair fraction of economies. Now, the spottiness of data on currency invoicing of trade constrains the analysis of the interaction of various uses of  international  currencies.  We  understand  that  the  ECB  and  the  IMF  are  working  together  to  improve  the  data  on  currency  invoicing  of  trade.  Reserve  managers  around the world can only cheer such efforts.”

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

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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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