Past Inflation Peak? - Billions Lost on Crypto Market Collapse - US Corporate Profits Rise but Workers Denied — America Asleep at the Wheel — US & China Mortgage Loans Slowing - [11-13-2022]

Direct from BOOM Finance and Economics at the links below - Note - BOOM uses American English whereas AP uses British English.

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THIS WEEK’S EDITORIAL

PAST THE PEAK?  As BOOM predicted on 16th October, the Peak of global CPI inflation may now be in the past. This is especially so in the US where last week’s price data showed an annual inflation rate slowing for a 4th month to 7.7% in October, the lowest since January, and well below forecasts of 8%. The peak in the US seems to have been in June at 9.1%. July’s reading was 8.5%, August came in at 8.3% and September’s was 8.2%. Thus, 7.7% in October is a very good data point.

Stock markets rose strongly in response to the US data, as expected and predicted by BOOM. The rises were stronger than expected so BOOM is now looking for a pull-back and a consolidation of equity prices. The US Bond market responded positively with prices rising across all sectors.

The threat of US and European economic recession is looming along with a slowing of the Chinese economy.  US Consumer Sentiment as measured by the University of Michigan was released on Friday and fell to 54.7.  The previous month’s figure was 59.9 and the expected forecast was for a reading of 59.5. Thus, 54.7 is much lower than expected. US consumers are tightening their belts.

CRYPTO MARKET COLLAPSE — BILLIONS LOST:  On Wednesday and Thursday last week, the so-called Crypto “currency” market collapsed spectacularly. The culprit was yet another exchange failure. This time, it was the FTX exchange that suddenly became aware of its insolvency and stopped all withdrawals.  It has since filed for Chapter 11 protection along with its 130 (?) subsidiary companies. “This is the direct result of a rogue actor breaking every single basic rule of fiscal responsibility” said a spokesman from Binance, another well-known crypto exchange.

The entire Crypto market capitalization was just above US$1 Trillion early Wednesday. Then the FTX scandal broke. In just over 24 hours, it declined by US$200 Billion. For investors, that is a catastrophic loss of capital, 20% in just over 1 day. On Friday, the Crypto associated with the FTX Exchange fell from US$26 to $2.26. That is a 90% decline in “value”.  But, in reality, there is Zero value to be found there.

Over the last 7 days, the prices of Bitcoin, Ethereum, BNB, XRP all plunged by over 20%. Solana, the Crypto rated number 13 by market capitalization, has fallen by more than 50%. Believe it or not, there are now 9,248 Cryptos trading somewhere around the globe. Or, more correctly, in Cyberspace.  It is a 24 hour a day casino and not much else. Some describe it as a haven for criminals. At best, it can be described as a US Dollar proxy or perhaps more correctly, a Eurodollar proxy. In effect, it is an offshore storehouse for US Dollars because Cryptos are most often purchased with US Dollars.  Let’s see what BOOM wrote on 2nd October — just 6 weeks ago.  Quote from BOOM Editorial:

“BOOM has predicted the decline of the Crypto market in several editorials over the last 12 months and stated clearly that the total market capitalization of the entire Crypto market would fall from US$3 Trillion to below US$1 Trillion.  It is now at $935 Billion — below $ 1 Trillion. And it has been below $1 Trillion for 2 weeks, since September 14th. This is starting to look like a permanent decline in confidence.”

In the Executive Order 14067 issued by Joe Biden on March 9th 2022, the President of the United States ordered “strong steps” to reduce the risks associated with so-called “digital assets”. That is a warning that only a fool would ignore.

BOOM does not see these products as financial assets (securities) or real assets. They are a peculiar form of asset which is better referred to as a digital or binary coded commodity. Remember, fresh air is a commodity and so are horse droppings. When something is a commodity, it may (or may not) have real value. Value is always in the eye of the beholder.

For the park attendant, horse droppings are a nuisance, something to be disposed of as quickly as possible. To a gardener, they may be collected and treasured as a fertilizer.

However, there is no general acceptance by the community at large. Thus, they are not seen as an asset and will certainly not be accepted as a community recognized currency as settlement for all or most transactions.

CORPORATE PROFITS AFTER TAX RISE BUT AMERICA ASLEEP AT THE WHEEL:  Corporate profits after tax in the United States have skyrocketed over the last 12 years. Data released on FRED, the St Louis Federal Reserve’s database, show that company net profits after tax have doubled since 2010 to over $3 Trillion — up by 100%. This is an extraordinary result.

Meanwhile, over the same period, Federal Taxation revenue from corporate taxes have not kept up, rising by only 73%.  And the total corporate tax revenue is only 10% of the corporate profits total after tax which means it is a lower percentage before tax.

A Federal corporate tax take of less than 10% is a bonanza for American companies. America is clearly a tax haven for companies, probably the greatest tax haven on Earth. This gives the US corporate sector a major advantage over other nations’ corporations.

However, meanwhile, again over the same time-frame, wages and salaries in the Private industry sector have risen by only 36%, or at best on a different FRED measure, by 42%. The employees are not winning this battle for US corporate profits, despite the fact that they do all the work.

Owners and investors in US companies are benefiting much more from company business activity than their workers. This is a policy mistake which is guaranteed to weaken the economy over time. Workers are clearly being discriminated against when they are the major cog in the wheel of consumption. They consume most of the goods and services that make up the real economy as opposed to the financial economy. GDP is a measure of total transactions in the real economy.

Inevitably, if the workers are mistreated like this for a long period, they will be unable to maintain their contribution to growth in the level of consumption. With an economy that is 80% or more based upon consumption, the United States clearly cannot maintain growth if this continues. This is one of the reasons why the US economy will soon falter and reduce in growth or contract into a strong recession.

Henry Ford understood the importance of his workers’ share of the profits from his car manufacturing business. He wanted them all to be buyers of his cars. And that is why his business thrived over such a long time. Ford paid his workers $5 a day in 1914 when the average wage for a worker was more like $2.25 a day. This ensured a happy, contented, faithful, stable workforce which could afford to buy a car if sufficient credit finance was available.

He also offered eighteen paid days off for vacation and illness, an uncommon practice at the time, especially for unskilled workers. There was also a profit-sharing system rather than a simple wage. He paid African American workers the same wages as white workers while many employers paid black workers less than white ones.

By 1926, Ford was able to reduce the work week from six days to five. He was instrumental in the establishment of modern employment standards that we all take for granted these days — the forty-hour working week, the eight-hour day, paid vacations and sick days and standardized wages. He was a man with many personal faults that are well documented but he knew how to run a good, stable, profitable business.

The workers are being denied their fair share of corporate profits. The US government is asleep at the wheel and so are the US labor unions.

US LOAN GROWTH STALLING — SUPPLY OF FRESH NEW MONEY SLOWS: The US Federal Reserve released its figures for the Senior Loan Officer Survey last week. It revealed that US commercial banks are lending less and have tightened access to credit for borrowers. This is especially so for mortgage lending. Home loans form the crux of the new credit money supply in any economy. So, if this continues or worsens, this is a disaster for the supply of fresh new money to the real economy. Fresh new money is like water for a garden — essential.

In China, credit growth is also slowing. Again, mortgage loans are showing a significant decline. In October, they grew by only 33 Billion Yuan. This is a very low monthly number. Overall credit expansion was down 75% on the number generated in September.

So — with credit expansion declining in both the US and Chinese mortgage markets, we are expecting both economies to slow in the fourth quarter of 2022. The US economy may even enter a negative growth period, a recession.

INFLATION CHAMPIONS:  If you are excessively concerned about your CPI inflation figures and thinking that “things are bad”, spare a thought for the people of Turkey where the annual inflation rate just hit 85.5%.  Or the people of Argentina where the annual inflation rate is now 83%. Then there is Zimbabwe at 269%, Lebanon at 162%, Syria at 130%, Sudan at 117% and Venezuela at 114%, or Sri Lanka at 66%.

If you really want to escape the panic about CPI inflation, you could consider moving to the current champions of low annual CPI inflation, the three nations where the official rate is a negative number. They are South Sudan, Benin and the Solomon Islands. The lowest annual CPI inflation rate in advanced economies is to be found in China where it is 2.8% and Taiwan where it is 2.75%. Japan and Switzerland are also low at 3%.

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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BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY: LOANS CREATE DEPOSITS — that 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 this short 15 minutes video and learn as Professor Richard Werner brilliantly explains how global banking systems really work.

AND Watch for 4 minutes, this Bank of England explanation: Money is essential to the workings of a modern economy, but its nature has varied substantially over time. This video describes what money is today.

Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.  EMAIL: gerry{at}boomfinanceandeconomics.com

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