BOOM as at 12th July 2020

CHINA STOCKS SURGING

Just two weeks ago, BOOM pointed out to readers that the Chinese economy was recovering nicely as shown by the key China economic indicator that BOOM watches very closely. That indicator has continued to rise last week. BOOM’s secondary key indicator for the Chinese economy has also now started to rise. It moved higher by almost 5 % in the last 5 days of trading. So BOOM is quietly confident that the Chinese economic recovery may be on track.

BOOM also pointed out two weeks ago that the Taiwanese, Korean and Japanese stock markets were all moving upwards in unison in strong rises after March’s steep fall which occurred during the initial onslaught of the Corona Virus Panic Demic. That has continued but the big news to be aware of is that last week, Chinese stocks exploded higher. And “exploded” is the only term that describes what happened. The Shanghai Composite Stock market Index went vertical — up by 13 % in just the last 2 weeks. The chart is extraordinary to say the least. The Shenzen Component rose by 17%.

In that same editorial two weeks ago, BOOM pointed out that the US economy was in grave danger of contracting viciously in the second quarter. The Atlanta Federal Reserve GDPNow estimate for real GDP Growth has improved since then marginally. However, it is now showing a 35.5 % contraction expected in the April, May, June period.

Quote: “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2020 is -35.5 percent on July 9”.

This spells disaster for the US economy.

TRUMP TO THE RESCUE

In that same editorial two weeks ago, BOOM pointed out that the US Federal Government had increased its budget deficit by $ 3 Trillion in the 3 months from March to end of May.
So what has happened to the deficit in June?

Answer: It has exploded higher by almost another One Trillion Dollars. In just one month.
Here are the exact numbers. On June 1st, the US Federal Government Total Debt to The Penny stood at $ 25,751, 470, 039, 699.29 (that’s $ 25.75 Trillion).  On June 30th, it was $ 26,477,240,853,124.76 (that’s $ 26.48 Trillion).

Remember that when Donald Trump came to office less than 4 years ago, the ANNUAL Total Federal Government Deficit for the whole last year of the Obama Presidency 2016 was $ 585 Billion. Currently, the US Federal Government is expanding its deficit by almost that amount EVERY TWO WEEKS.

Let’s be honest, the US economy would be paralyzed by collapse if that was not happening. There is simply no alternative. They call it TINA in the world of politics.

MILITARY SUPPLIERS FALLING

Where is all this deficit spending going? The usual answer is “into the US military industrial complex” — the MIC. However, it is not as simple as that this time. The shares of the big suppliers to the MIC are all now falling while US stock markets (especially Nasdaq) continue to rise.

Take a look at Raytheon, Boeing, Lockheed Martin, Northrop Grumman, CACI Intl, Mantech, Textron, KBR, SAIC, L3 Harris Technologies. Their shares are all falling steadily over the last month in apparent unison. Presumably, they are not the beneficiaries of this huge increase in Federal Government deficit spending. The war in Syria is over, the war in Iraq is over and the military presence in Afghanistan is contracting. It is getting harder to find a battlefield outside of the US.

BOOM’s guess is that welfare spending is where the money is all going as the US desperately tries to prevent complete societal breakdown and the outbreak of street warfare inside the US.

THIS IS WHERE IT WENT

Spending on the Public Health Social Services Emergency Fund rose from $ 300 Million last year to $14 billion this June.

Spending for the Food and Nutrition Service was $5 billion higher. Almost 40 Million Americans need Federal Government help to avoid starvation. The SNAP program was previously called the Food Stamps program. The actual official number of persons on the SNAP program in March 2020 was 37,347,458. That number would have grown significantly since then to be close to 40 Million in BOOM’s estimation.

Spending increased from $80 million to $511 billion by the Small Business Administration, mainly because of loans and loan guarantees to small businesses.

Spending on unemployment compensation increased from $2 billion in June 2019 to $116 billion this year.

Spending on the Coronavirus Relief Fund totaled $3 billion in June. There was no such spending last year.

BANANA REPUBLICS

Quite often, when Banana republics fail, their economic failure becomes evident to the citizens at an early stage and they take action to protect their personal financial position versus the failing government. This reaction is driven by loss of faith in the government (to guarantee them a stable future) and loss of faith in the mainstream media (to tell them the truth). In past editorials, BOOM has often referred to what happens in such circumstances and one of the key findings is a surging stock market. Savings are taken from banks and put to work in speculation. For example, the stock markets of Argentina, Venezuela, and Zimbabwe have all shown such huge surges in the past.

Over the last 5 years, for example, the Argentine Stock Index — the MerVal Index — has risen from 10,000 to about 45,000. It fell during the Corona Virus Panic to 22,000 but is now recovering strongly to be at 42,747.  It actually doubled in the three months from March to early June.

Meanwhile, the Zimbabwe Industrial Stock Index has risen from 540 to 5,870. A tenfold increase. That’s called a “Ten Bagger” in the world of investment.  But its performance has been nowhere near as good as Venezuela.

In the last 12 months, the Venezuela stock market index has increased by a multiplication factor of almost 30. It has doubled 5 times. It has risen from about 13,000 to 350,000 in early June. It is currently at 333,994 and rising again.

US STOCKS LAGGING

Over the last 5 years, the Nasdaq Stock Index in the US has only doubled once from 5,000 to 10,000. The Dow Jones Stock Index has risen from 16,000 to almost 30,000 but has fallen back to 26,000.  These are sluggish performances by comparison with the stellar results seen in Argentina, Venezuela and Zimbabwe. Certainly not exceptional. But the future is coming so maybe they can catch up?

ROBINHOOD

It looks like some US citizens have lost faith in their financial position and are now engaging in desperate stock market speculation. Robinhood is a commission-free stock broker and its business is booming. Clients are forming tribes and buying stocks in apparent unison, sometimes driving the stock prices up. Commission free stock trading is rapidly becoming the norm in the United States. There are now 14 brokers that do not charge commissions on stock trades. Some of them are very large companies so this looks like the future of stockbroking.

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 LOANSBANKS 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 Indexhttp://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.htmlThe 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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Neither the information nor any opinion expressed constitutes a solicitation to buy or sell any securities nor investments. Do NOT ever purchase any security or investment without doing your own and sufficient research.  Neither BOOM Finance and Economics.com nor any of its principals or contributors are under any obligation to update or keep current the information contained herein. The principals and related parties may at times have positions in the securities or investments referred to and may make purchases or sales of these securities and investments while this site is live. The analysis contained is based on both technical and fundamental research.

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MOLS Denmark

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