Can Stocks Crash with Strong Economic Growth? — Tesla Shares in Steep Decline — Friday Stock Market Crash Halted — Covid Vaccine Stocks Falling

TESLA SHARES IN STEEP DECLINE

Tesla shares have now plunged from a high of $ 900 per share 6 weeks ago to a low of $ 540 during Friday’s extremely volatile trading session. In percentage terms, that is a decline of 40 %. Investors do not appear happy with Elon Musk’s decision to invest $ 1.5 Billion of company funds into Bitcoin. After all, they can buy Bitcoin themselves. They do not need their car company to do so for them. It looks like a critical error of judgement by Musk which he will find very difficult to reverse. He is in for the ride and it may be a rough one.

ARK Innovation (Stock Code ARKK), which is a major investor in Tesla, has fallen 33 % since Mid February. Bitcoin has dropped from $ 58,042 on February 22nd to its recent low $ 46,654 on Friday. That is a 20 %  plunge.

Tesla cannot go bankrupt quickly as it has Billions in reserve cash. But it is now facing very serious competition from the major car companies such as VW, BMW, Hyundai, Kia, Mitsubishi,  and Ford plus a rash of new EV car makers in China. There are more than 60 electric car brands on the market or promised in China, the world’s biggest (by far) EV car market. This list of Chinese brands will stagger you.

List: https://wattev2buy.com/list-chinese-electric-cars-list-chinese-ev-car-brands/

FRIDAY STOCK MARKET CRASH HALTED

During the morning trading session on Friday both ARKK and Tesla had serious falls in price of around 10 % and 13 % intraday. A major stock market crash looked extremely likely in the NASDAQ Index with the Broad Nasdaq ETF code QQQ also plunging. At 11.28 am, however, determined buyers appeared as if by magic to rescue all three and lots of other falling stocks. At exactly 11.28 am all three suddenly stopped falling and started to rise. And at exactly 11.28 am, the ETF for the Russell 2000 Index (IWM) also hit a sharp low, stopped falling and started rising. And at exactly 11.28 am, the ETF for the broad S & P 500 index (SPY) also miraculously turned and spiked upwards. And at exactly 11.28 am, the ETF for the Dow Index, FDN, stopped falling and reversed in a spike towards an upwards direction.

Was that the much discussed Plunge Protection Team in action? Many suspect so. It certainly seemed like a well organised, well coordinated buying team using computer BUY algorithms, working to rescue the US stock market from collapse at a pre-determined timestamp. But that couldn’t have happened. Because that would mean that a centrally planned, coordinated action rescued the “free markets” of America, the home of capitalism.

This begs the question — are the “free” markets in the United States so weak and vulnerable that they need a Protection Team?

COVID VACCINE STOCKS FALLING

Moderna, Novavax, Pfizer, Astra Zeneca, Johnson & Johnson are the leading  Covid vaccine suppliers. You may be surprised to learn that their stock prices have all been falling for some time now. Novavax has fallen 50% from its February high. Moderna has fallen 34% in the same timeframe. Astra Zeneca is down 22 % since August last year and has sold out of its Moderna stock. Pfizer is down 21 % since its December high while Johnson and Johnson has fallen by 10%  over the last 6 weeks. Investors are leaving town.

The virus is in steep decline since early January all over the world and in almost all nations as measured in New Cases per day and Deaths per day attributed to Covid 19.  There are reports that up to 25 % of frontline hospital staff are refusing the vaccine in London. Many people are worried about the rush to vaccinate for a disease that seems to be disappearing. They are also worried about safety especially in regard to the new messenger vaccine technology that has never been used on humans previously. Politicians and the mainstream media seem inordinately desperate to induce (or force) people to have this medical intervention.

There is much talk of so-called “Covid Passports” and, again, the politicians and the mainstream media seem to be on one side of the argument and the people on the other. It all seems very strange when we don’t know if any of the vaccines actually stop transmission of the virus and we don’t know how long any protection they give will last. 

CAN STOCKS CRASH WITH STRONG ECONOMIC GROWTH?

In 1987, the US stock market crashed badly on October 19th, Black Monday. The Dow Jones Industrial Average fell 508 points — 22.6%. It was the biggest one-day drop by percentage in the index’s history and was largely unexpected. Three major stock markets dropped the next day by more than 40% — in Australia, Hong Kong and Singapore. Absolute carnage.

The Dow Jones had risen by 44 % from January through to August during the year of 1987. So the stock market was on a Bull Run. One theory is that redemptions from mutual funds in the days leading up to the crash caused a rush by fund managers to sell stocks on the Monday when the market opened. But why were the redemptions increasing? Was it led by nervous investors anticipating the end of the run? A huge storm with hurricane like winds had occurred on the previous Thursday and Friday in the UK and seemed to be a harbinger of doom.

Wikipedia describes The Great Storm of 1987 –“Forests, parks, roads and railways were strewn with fallen trees and schools were closed. The British National Grid suffered heavy damage, leaving thousands without power. 22 people were killed in England and France. The highest wind gust in the UK of 106 kn (196 km/h; 122 mph) was recorded at Gorleston-on-Sea. The storm has been termed a weather bomb due to its rapid development.” Was there a global psychological effect from such a terrible event?
But, meanwhile, what was happening in the US economy?

Interestingly, GDP growth in the US during that year was strong, averaging 4.47 % per annum. The CPI inflation rate was at 4.5 % in the latter part of the year. So, strong inflationary economic growth was firmly established. The Federal Funds Interest Rate at the time was set at 7.2 % by the Federal Reserve to control inflationary price pressures in the economy. There was strong employment growth with the unemployment rate having fallen from around 11 % in 1983 to 6 % in late 1987.

The US economy was in good condition at the time of the 1987 Black Monday Crash. There is a lesson here that stock prices sometimes do unexpected things, even when good economic conditions prevail. Stocks and the economy do not always move in sync.

Perhaps it is time to look carefully at mutual fund redemption rates and ETF volatility in the US? In late January, there was a sharp rise in the VIX that lasted for 4 days. Similar spikes of volatility occurred in June, September and November last year. Since mid February, there has been a steady rise in the VIX persisting over the last 2 weeks. As they used to say in outposts of the colonial empires during the 19th century — “the natives seem to be a little restless”. 

However, the VIX has not hit the high levels seen in January or during last year — yet.

REDEMPTION RATES AND VOLATILITY

Equity Mutual Funds have been suffering from large redemptions by investors throughout each month in 2020 and in January this year. In fact, it is clear that funds have actually been flowing out of mutual funds for 4 years since 2016 and into two destinations — Bond mutual funds and Equity ETF’s.

If large numbers of Equity ETF holders suddenly demand cash for their ETF positions, the ETF managers must sell the underlying stocks as quickly as possible. This could be a reason for increasing volatility in the world’s major stock markets. The average volatility in the US stock market as measured by the VIX Volatility Index has doubled over the last 12 months, indicating a level of persistent volatility almost twice the previous average.

The individual ETF investor can liquidate their position with the click of a mouse. If this happens in sharply increased volumes, then the ETF manager has no choice but to sell as soon as possible. A cascade of rapidly falling stock prices can be the result. Sell, sell. And vice versa.

The best advice to stock investors may be — Hold onto your hats (!), the ride could get rocky on the stock casino roller coaster.  

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.

CLICK HERE FOR PODCASTS:   OUR BRAVE NEW ECONOMIC WORLD

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”.

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 Index

http://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.html
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.”

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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