China Stocks Moving Higher? – Shanghai – Hong Kong – Taiwan – US Bond Prices Rising Across the Board – Lower Interest Rates Baked into the Cake in the US? - [12-03-24]

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BOOM EDITORIAL THIS WEEK

ARE CHINA STOCKS CONSOLIDATING THEIR GAINS? Three months ago, in the 18^th August Editorial, regarding the Chinese stock market, BOOM said under the Headline CHINA STOCK MARKET POISED TO RISE? “If BOOM’s analysis is correct, this could be one of the greatest investment opportunities ever. Readers should watch closely over the next weeks and months. This is an historic moment. BOOM will report progress from time to time.”

It’s time to report progress. The chart shows what has happened. There was a dramatic turn-around in the share markets in Shanghai, Hong Kong, and Taiwan. Stock prices have surged higher and appear to be consolidating their gains. BOOM’s forecast was accurate.

And, by the way, BOOM’s major economic indicator for the Chinese economy has turned upward over the last two months. It has struggled to make positive headway since June so this recent move is a welcome sign of economic strength returning to China. The Hong Kong stock market has also surged upwards since BOOM’s comments in August.

The same surge also occurred in Taiwan stocks since August.

BOOM has previously suggested that the Chinese government must encourage its 1.5 billion citizens to buy stocks. Why? Because, if they don’t, then the productive capacity of China’s industries will fall into fewer and fewer ownership hands and an Oligarchy will inevitably develop.

Such a future is anathema to the communist ideals which the government is supposedly based upon. Chinese readers of BOOM must alert their government to this possible outcome. And the government must encourage its citizens to become owners of stocks. BOOM will report progress from time to time.

US BOND PRICES ARE RISING ACROSS THE BOARD? IS THE BOND MARKET ON TRACK TO MUCH HIGHER PRICES? IS INFLATION NO LONGER A THREAT? LOWER INTEREST RATES ARE INEVITABLE? US Bond prices may be starting to rise again. That is a signal that investors and analysts should be watching for, especially if it occurs right across the various Bond sectors. This week, BOOM will look at some of the major Bond ETFs traded on the major US markets.

Let’s look first at the so-called “Junk” Bond market by referring to USHY which is the Code on the American Stock Exchange for the iShares High Yield Corporate Bond ETF. That fund has over US$20bn Under Management and is issued by BlackRock. It is designed to track the ICE Bank of America US High Yield Constrained Index. By the way, the word “Junk” is definitely not applicable to many companies in this sector. Junk bonds are bonds that carry a higher risk of default than most bonds issued by corporations and governments. They are also called high-yield bonds since the higher yield is needed to help offset any risk of default.

The quality of junk bonds can vary significantly. Despite the name, junk bonds may be issued by companies that are in reasonably good financial shape, though they’re often issued by those in mediocre or poor shape. So it’s important to understand that not all junk bonds are the same, even if some of them are truly quite risky. Junk Bond ETF’s try to solve this problem by investing in a broad range of corporate bonds. It is a diversification strategy which offers lower risk to an investor.

The 5 Year chart for USHY shows a steep decline in early 2020 at the start of the Covid Panic-Demic. A strong recovery followed but that faltered in early-mid 2022. Rising CPI inflation was on everyone’s minds. Long term readers will know that BOOM observed the peak of US CPI inflation accurately in mid=October 2022.

On 16^th October 2022, BOOM wrote ” the peak of CPI inflation may be in the past. If we are past the peak, then the prices of stocks and bonds should start to rise from here”. USHY promptly started moving up in price the following week. Since then, the price action of USHY has strongly trended upwards in price just as BOOM was expecting. It has moved from below $29 to above $37 and is a gain of 13%. Its current Annual Yield is 6.64%. Any investors who bought USHY in mid-October have been well rewarded.

MUNI is the code for the PIMCO Intermediate Municipal Bond ETF traded on the New York Stock Exchange. Municipal Bonds are regarded as a relatively high risk sector in the US Bond market. Again, the 5 Year chart shows a steep decline at the start of the Covid Panic-Demic. However, MUNI recovered strongly into mid-2021 and then started to decline as CPI inflation began rising.

Fear of inflation drove the price down hard. However, in mid-October, just when BOOM was expecting a turn-around, it came almost immediately. MUNI has since risen by 13% and the current yield is 3.43%. Again, investors who bought in mid-October 2022 have been well rewarded.

LQD is the code for the iShares iBOXX Investment Grade Corporate Bonds ETF, traded on the New York Stock Exchange. The Fund is large with over $30bn in Funds invested. Its current Annual Yield is 4.35% and since BOOM predicted “inflation has peaked” forecast, it gained 22%. At present, the chart looks very strong.

TIPS are Inflation Protected Bonds or, more correctly, they are defined as Treasury Inflation Protected Securities (TIPS). TIP is the code for an ETF that tracks the ICE US Treasury Inflation Linked Bond Index. In theory, it should give investors in US Treasuries more protection from CPI inflation over the long term. There is theory and there is practice. TIPS did not give significant protection to investors during the surge of CPI inflation in the US that occurred from early 2021 to mid-2022.

As CPI inflation rose rapidly through 2021, TIP rose in price which is what would be expected. That was a pleasing performance. However, in early 2022, as CPI inflation rates continued to rise, TIP started falling in price. In other words, TIP provided protection against rapidly rising inflation but did not give protection against slowing or falling inflation.

The TIP price finally hit bottom in October 2023. However, since then, it has been rising in price again and has gained 8%. Its current yield is 2.73%. Overall, BOOM was not impressed by the performance of TIP during a period of increased CPI inflation from early 2021 to the end of 2022.

TLT Is an ETF managed by iShares and traded on the Nasdaq exchange in the US. Its Net Assets are currently valued at over US$60bn. It invests in bonds with 20 years or greater left to reach maturity and is designed to be sensitive to any movements in long term interest rates. Thus, as with all Bonds, any significant rises in price suggest that the market is anticipating lower interest rates and vice versa.

It tracks a market-weighted index of debt issued by the US Treasury, the ICE US Treasury 20+ Year Index. TLT’s current Annual Yield is almost 4%. To BOOM, that seems a bargain as it is essentially “risk free”. BOOM expects buyers to keep buying in the next few years, driving up the price of TLT to a yield below 2.5%.

Over the last five years, TLT has been hit hard by rising (and falling) CPI inflation. It is only now showing signs of possible recovery. If this upward price trend since October 2023 continues, then the inflation dragon in the US will have been comprehensively slayed.

BOOM is expecting this to be the case. However, Trump’s calls for higher Tariffs on imported goods could be inflationary and may be a negative influence. Then again, if Trump decreases US Government expenditures by significant amounts, then lower rates of inflation may occur.

BOOM is expecting continued strength in TLT prices moving forward into the Trump Presidency. Why? Because BOOM expects Trump to be less aggressive on Tariffs than promised. Tariff wars are dumb and he will (eventually) learn that lesson (hopefully).

The last 5-year period has been a terrible time for US Bond investors, However, most hold their investments through to maturity and that can be 20-30 years away for current buyers of long-dated bonds. So the long term view must be respected.

TARIFF WARS ARE DUMB. Trump is dreaming that the 19th Century was some sort of economic nirvana for the US. It was not. He has probably seen graphs such as this one and has been sold on the idea that this can happen in a modern, connected, rapidly responsive global economy.

If you wish to learn what really happened in the 19th century US economy, please read BOOM’s essay titled ‘HOW SOUND MONEY POLICY FAILED TO PROTECT THE PEOPLE - The Panic of 1837.

On July 12 this year, the White House released a paper on “Tariffs as a Major Revenue Source: Implications for Distribution and Growth” from the Council of Economic Advisers. It is worth reading. QUOTE: “It is mathematically unlikely that a broad tariff could ever replace the revenue raised by the individual income tax. For example, given the value of goods imports during FY2023 ($3.12 trillion), an across-the-board 70 percent tariff would be required to replace the equivalent revenue raised by the individual income tax under the overly simplistic assumption that consumers, producers, and our trading partners would have made no changes to their behavior in response to the tariffs. There are several reasons to believe, however, that this “static” exercise is a substantial revenue overestimate.

First and foremost, an across-the-board tariff is likely to spark retaliatory tariffs that reduce U.S. exports and subsequently induce transfers of collected duties to impacted U.S. businesses. For example, U.S. farmers facing retaliatory export tariffs during the 2018-2019 trade war received Federal subsidies that totalled 92 percent of the collected duties.

Thus, even in the context of targeted tariffs impacting a relatively small fraction of overall imports, the Federal government ultimately collected only 8% of the tariff revenue.

As the scope of this tariff increases, the scale of retaliatory tariffs and cost of offsetting subsidies for affected businesses is likely to increase. Moreover, consumption and production patterns are likely to respond to avoid the expense of this tariff, further reducing expected revenue. As a result, across-the-board tariff rates would likely need to be much larger than 70 percent to raise tax revenue that is equivalent to the individual income tax.

Further, this type of across-the-board tariff is likely to negatively impact the US macroeconomy.”

In Summary — “Strategically targeted tariffs are an important tool to protect economic and international interests of the U.S. However, the potential for a broad tariff to serve as a major revenue raiser in a modern, global economy is limited. Moreover, elevating the reliance of the Federal government on tariff revenue would likely exacerbate long-running trends in income inequality by shifting more of the burden of taxation onto lower-income households. It is also highly like to generate large, negative distortions to the macroeconomy.” Reference: https://www.whitehouse.gov/cea/written-materials/2024/07/12/tariffs-as-a-major-revenue-source-implications-for-distribution-and-growth/

COMING NEXT:

• The Financial Jigsaw Part 2 (34) Chapter 7– CORPORATE PROTECTOR – Saturday, December 7, 2024

• BOOM Global Financial Review, Tuesday December 10, 2024

In economics, things work until they don’t. Make your conclusions and do research. BOOM does not offer investment advice.

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BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY: LOANS CREATE DEPOSITS — this is how almost all new money is created in the economy (by commercial banks making loans). https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy. Watch the short 15-minute video and see Professor Richard Werner brilliantly explaining how global banking systems work.

In 2014, Richard Werner provided the first empirical evidence that banks create credit out of thin air. They do this whenever they issue a loan or, more specifically, purchase a promissory note. This is a walk-through of exactly how they do it.

Many economists are unaware of this and even ignore the banking & finance sectors in their econometric models. Prof Richard Werner explains how things are going now with CBDCs:

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