Steroids and Chinese Medicine

Week ended February 24, 2024. interesting news items to look at this week were:

1. Steroids and Chinese Medicine: My eldest brother in Toronto Canada is a technologist who on his retirement successfully picked up TCM (Traditional Chinese Medicine) as an extension to his retirement life style. He said his approach to TCM is to deal with bodily imbalances and blockages. The TCM approach may take longer to show results than CWM (Conventional Western Medicine) but he is convinced the outcome of TCM would be less invasive and more beneficial in terms of holistic health than CWM. I totally agree with this philosophy and draw similar conclusion to how the Chinese economy is managed as compared with that of the US..

(i) Alibaba vs Amazon: In November 2021, the Chinese Regulators stopped the  IPO of Ant Financial Group in Shanghai and Hong Kong. Ant's $37 billion IPO, which would have been the world's largest.  

Had the IPO gone ahead, it would have added oil to the scorching hot China’s shadow banking bubble and turn into a systemic catastrophic disaster. At hind sight, the Chinese Regulators foresaw 12 months ahead that the unscrupulous western Covid money printing would lead to rampant inflation and a loud pop. This eventually began in November 2022 and the global financial market is still reeling from the printing spree and unsure of the next QE and a possible hyperinflation.  (Fig. 1).

I am sorry that some of us are emotionally stressed with respect to daily share price fluctuations. I take comfort,however,  that the Chinese Regulators knew what they were doing and if I am allowed to incorporate the Alibaba vs Amazon share price chart with those of BYD vs Tesla, than perhaps the macro picture would be more clearly understood. (Fig. 2).

Rather than feeding sugar to the already cancerous shadow banking and real estates sectors, slowing down these two sectors would free resources and energy and redirected growth in more promising cutting edge industries. The result is astounding. The Chinese economy in 2023 whilst on a strict diet grew at 5.2% whilst the US, with surplus liquidity from the Covid stimulus money and huge fiscal deficits grew at a more modest 2.5%. I expect for 2024 China will further distance US in terms of real economic progress.

(ii) Artificial Intelligence is very Artificial Indeed: The AI Proxy stock Nvidia this week reported its earnings and share price jumped 6.41% for the week. (Fig. 3).

This makes the market Cap of Nvidia topping $1,97 trillion, higher than the GDP of most G20 Countries including Brazil, Australia, South Korea, Mexico, Spain, Indonesia, Saudi Arabia,  Turkey, Argentina and South Africa. The price represents a trailing PE ratio of 66 times which is implicit of company’s next 5 year growth rate of 40% to 60% per annum. Part of stellar price performance was a severe short squeeze against those who shorted the stock just days before the results announcement with short sellers suffering a potential $3 billion loss. (Fig. 4).

In the same week Google suspended its Germini program from generating images as images of historic characters were generated of a different race. (Fig. 5).  

Gemini was launched earlier this month and advertised as Google’s “most capable family of models,” able to generate “captivating images.” Last Sunday a brother in Church asked a simple question on ChatGPT as to what day of the Chinese New Year was last Sunday. The Chatbot answer was two days out. I have already cast my vote on the whole AI stock phenomenon in last week’s Blog. Caveat emptor, my friends.

Genesis 11:1  Now the whole earth had one language and one speech. 2  And it came to pass, as they journeyed from the east, that they found a plain in the land of Shinar, and they dwelt there. 3  Then they said to one another, "Come, let us make bricks and bake them thoroughly." They had brick for stone, and they had asphalt for mortar. 4  And they said, "Come, let us build ourselves a city, and a tower whose top is in the heavens; let us make a name for ourselves, lest we be scattered abroad over the face of the whole earth." 5  But the LORD came down to see the city and the tower which the sons of men had built. 6  And the LORD said, "Indeed the people are one and they all have one language, and this is what they begin to do; now nothing that they propose to do will be withheld from them. 7  Come, let Us go down and there confuse their language, that they may not understand one another's speech." 8  So the LORD scattered them abroad from there over the face of all the earth, and they ceased building the city. 9  Therefore its name is called Babel, because there the LORD confused the language of all the earth; and from there the LORD scattered them abroad over the face of all the earth.

Calling Out the Naked Emperor

Week ended February 17, 2023. interesting news items to look at this week were:

1. Calling Out the Naked Emperor: Last week I wrote about Real GDP and its relationship to the Stock Market. Throughout this week, I felt it is a crucial time to address the intricacies of currency creation, stock prices and the physical economy. In particular the financial markets of the West, including Japan and China as I sensed something unpleasant is brewing in the horizon. Some of the readers of this Blog are seasoned bankers and investment bankers and others are respected professionals in their chosen field, so I hope the following discussion may invite their comments for my own education as this topic is rarely discussed in details.

(i) Prices and Market Valuation: The financial market and the real estate market has a unique characteristic in the sense that the entire market is valued on the basis of daily transaction prices. I value my apartment in Hong Kong or my house in Brisbane at a certain figure by mirroring some recent transactions in the same block or in the same street. In 2023, the average daily transactions of properties in Hong Kong was only 159 units and from that most people determine the value of the entire 1.7 million property units in Hong Kong on that basis. Daily transactions that only represented 0.009% of the entire inventory. In fact it was reported in the financial press yesterday, Hong Kong properties has lost $2.6 trillion in value over the past 2 years. (Fig. 1).

This valuation concept is even more prevalent in financial markets as stocks, bonds, commodities to cryptocurrencies used the same method. On similar basis, the Magnificent 7 Tech Stocks (Apple,  Amazon, Google, Meta, Microsoft, Nvidia and Tesla) has combined added US$ 5.25 trillion to the “wealth” of the US since the inception of ChatGPT on November 30, 2022. This increase in “value” in just over 15 months is larger than the GDP of Japan or Germany and by this 7 stocks, it would rank third in terms of value just behind US and China annual GDP.  It doesn’t matter what “real” value added has actually been generated within the intervening period as all it takes was an average of 0.7% daily transactions to the total number of shares in issue to generate this new found wealth. (Fig. 2).

Away from the limelight, the Russell 2000 index (represent mid to small cap stocks) and the other 493 stocks within the S&P 500 languished with difficult business environment. In a nation of get rich quick momentum traders, ETF which skewed towards allocation to large cap stocks, algo driven high frequency trading and unstoppable debt/currency increase, this illusory wealth creation is not at all difficult to achieve.

(ii) The Driver and Achilles heel of the Dollar Hegemony: The rise of the dollar as a global reserve currency came in 3 stages. The first was World War II which saw the European and Asian economies ravaged by war and in ruins. With most of European and Asian gold already in custody in the US (fear of the Hitler and Hirohito’s looting), Asians and Europeans was willing to receive US Credit for post-war reconstruction. Gold was the collateral and the credit extension was in USD. This adoption comes with certain conditions as the Europeans were not all in favour for US to hold a monopoly on the currency for world trade. The conditions were:  (a) that USD can be exchangeable for gold at will at a fixed rate. (b) That an IMF be set up and be headed by France for postwar reconstruction funds distribution. (c) There is the additional requirement for two industrial centers to be established respectively in Europe and Asia with two strong regional currencies as counter weight to the USD. As politics goes, Germany and Japan (the WWII adversaries) were chosen by US and thereafter became US puppets. Twenty six years later, with the massive money printing on account of the Vietnam War, US could no longer honor the fixed rate conversion of USD into gold.  In 1971 US defaulted on the Bretton Woods Agreement. To preserve the status of USD as a reserve currency, US had to (a) contract credit and money supply by raising interest rates to over 20%, (b) sacrifice domestic manufacturing to generate trade deficits in order to place massive amount of USD into the Treasury of exporting countries, and (c) restricting the global oil trade in USD only. There is also a secret side deal with Saudi Arabia and subsequently US also defaulted. Given an opportunity, I will share this interesting tidbit later. This extension of life by the Petrol Dollar mechanism was the second stage of the USD Hegemony. To a majority of people Henry Kissinger was credited as the architect for the Petrol Dollar but the real founding father of fiat currency, central banking and grand deception was John Law in 1716. I venture to say Henry Kissinger adopted the idea from John Law and even today as oil began to trade in other currencies, US is still trying to extend the USD hegemony by meta-morphing the Petrol Dollar into the Chip Dollar and later AI Dollar.  When we understand the logic and methodology behind John Law’s fiat currency and the Mississippi Bubble, we will also have a good grasp of how the global currency war will evolve. I shall digress here to present a few data points on John Law and the Mississippi Bubble before coming back to stage 3 of the USD hegemony and how it must end.

(iii) John Law and the Mississippi Bubble: During the long reign of Louise XIV of France, there were 5 major wars between 1667 and 1714 that nearly bankrupted France. As a consequence, there was a shortage of coins and business and trade significantly slowed down. John Law, a Scottish financier and economist persuaded the Duke of Orleans (who was Regent for the young king Louise XV) to merge Duke of Orléans’Banque Générale Privée ("General Private Bank") with Law’s Mississippi Company. Banque Générale Privée later became Banque Royale (Royal Bank) in 1718, meaning the notes issued by the bank were guaranteed by the king, Louis XV of France. The Mississippi Company was also expanded to hold a monopoly of all overseas trade of France including the French colony in Louisiana, West Indies and China. Shares in the Mississippi Company were offered to the public with payment by instalment. Through exaggerated marketing, the market capitalization of the Mississippi Company quickly grew to the equivalent of US$6.5 trillion  in today’s money terms. The value of the initial instalment for the Mississippi Company’s share of 500 grew to 10,000 within 6 months. (Fig. 3)

Whilst the speculation on the value of the Mississippi Company was whipped into a frenzy, paper currency (the Livre) issued by Banque Royale also had no problem in being accepted as money because shares in the Mississippi Company had to be transacted in Livres. Although the official exchange value of the Livre was one pound of silver, it did not matter that Banque Royale never had the sort of silver that can allow a complete exchange of all outstanding Livre.  The speculative bubble collapsed after 2 years and is known as the Mississippi Bubble. Though history of the Mississippi Company was short, its refinement through a combination of elements like scarcity is value, a monopoly to protect its use and deception through exaggerated marketing and human greed has availed the fiat USD to last over 50 years.

(iv)  Final Stage of the USD Hegemony: The Petrol Dollar was chugging alone just fine until two things happened. First, the development of shale oil which significantly reduces US oil imports and even allow some oil exports in competition with OPEC. The second factor was the rise of China as the world’s largest oil importer. These two factors combined guaranteed the demise of the Petrol Dollar. With the loss of a monopolistic product, US quickly attempted a switch to a complete control of microchips as an alternative. Microchip is a less effective tool than the Oil Trade, Oil trade ranks number 1 in world trade but microchip only ranks 20^th in terms of value ($951 billion vs $126 billion). With the  launch of Huawei Pro 60 and its 5G Chip in August 2023, the hold on a high end chip monopoly to support the dollar also faced a serious challenge. The entire US establishment went into a shock and it took them 7 months to come up with a Plan B. First the launch of CharGPT to ceate public awareness, then 4 months later a concerted push of the Magnificent 7 stock price. Without the $5.25 trillion increase in value of the Magnificent 7 stocks, how does one convince US debt holders that the increase of $2.85 trillion in Federal Debt in the intervening period is still financially sound. Most people would be skeptical of price of penny stocks in share margin financing but would be totally fooled by the same tactic on a national level. Remember it was only in 2022 that FAANG stock was all the rage and now the flavour of the month became the Magnificent 7. In my thinking, the adoption of AI in the US will be much slower than the internet revolution. The internet was a free for all, everyone is given the same set of tools and people all over the world embraced the new frontier. With AI, the US set up 7 gate keepers which everyone has to be licensed, pay a fee for its use and be under the thumbs of these 7 gate keepers as how to use the AI. Besides after the tech sanctions imposed against countries in BRIC and the Global South, all countries should be extremely weary of adopting unique US technologies. I said in last week’s Blog, we have to discern carefully between the benefits of technology and financial engineering packaged as technology.  The Magnificent 7 is a prime setup so far as share value is concern and with it the entire USD denominated asset value. Shall I remind readers again that behind every stock of the Magnificent 7, there are serious challengers from China at only a fraction of the value. Just this week, reports have surfaced that foreign institutions and hedge funds are buying Alibaba again.  

Here I am not saying the Magnificent 7 stocks will crash tomorrow. Should you trade, long or short, just keep an eye open on the politics behind. Be warned and be prepared my friends.

2. Watching Brief on US Market Liquidity: An Update of US Reverse Repo Balances which is a good approximation of financial market liquidity indicate a crunch time towards the third week in March 2024.  (Fig. 4)

3. Federal Reserve Weekly Trading Losses: Weekly Trading Losses of the Federal Reserve for the week of February 14 2024 was $149 billion. (Fig. 5).

It is trading with negative equity with assets insufficient to cover its liabilities. Cumulatively, its losses since September 2022 exceeded 5 times its capital. These losses are recorded as Deferred Assets and not recognized in the US Government Books.

Proverbs 4:5  Get wisdom! Get understanding! Do not forget, nor turn away from the words of my mouth. 6  Do not forsake her, and she will preserve you; Love her, and she will keep you. 7  Wisdom is the principal thing; Therefore get wisdom. And in all your getting, get understanding. 8  Exalt her, and she will promote you; She will bring you honor, when you embrace her. 9  She will place on your head an ornament of grace; A crown of glory she will deliver to you." 

Proverbs 9:10  "The fear of the LORD is the beginning of wisdom, And the knowledge of the Holy One is understanding. 

 

So what's the fuss about a Currency War

Week ended February 10, 2023, it is Chinese NY Day, the Year of the Dragon, let me first wish everyone a peaceful, healthy and prosperous New Year. For the past 8 days, I was on holidays with my wife to far north Queensland. For most days I did not have internet access by choice and I could only gleam some headline news through BBC and the Sky Channel. As such I considered myself remarkably ill informed of what really happened around the world throughout that period. Just as I returned to my home base in Brisbane, I received a message from a good friend regarding the disparity between economic performance and the stock market indexes around the Globe and I thought I may join the discussion by offering my two cents worth of opinion here.

1. Real GDP Growth Rate and Stock Index Performance: I took the liberty to reproduce a table from my friend that captured Real GDP Growth Rate and Stock Index Performance for various economies around the world. (Fig. 1).

My friend’s thesis was solid GDP growth need not give rise to good stock market performance. Case in point, China and Hong Kong with significant stock market decline against a backdrop of solid GDP growth. That capital flow is far more important in determining stock market performance than real economic considerations. That I totally agree when one takes a snap shot of the two numeric factors over a relatively short time span. Nonetheless, I also agree with Jack Ma’s observations about the Flying Pig. (Fig. 2).

So how do we navigate against extreme turbulent head winds. Where is the updraft coming from? When will the wind direction change? Who is the real Pig? Under what circumstances will a bird turn into a pig? What happens when the underlying currency depreciates faster than the rising stock prices? The Argentinian Main Stock Index (MERVAL) went up by over 360% in 2023 and its single country ETF was the Best Performing Fund globally according to Bloomberg, but all this in the background of a 211.4% inflation.  (Fig. 3).

Sadly, the financial market is littered with dead pigs: the South Sea Bubble, The Tulip Mania, The Roaring Twenties, The Japanese Bubble Economy, The Dot Com Bubble, the Subprime Fiasco and Finally the QE to Infinity and Everything Bubble.

2.  Life Cycle of A Fiat Currency: A Fiat Currency by definition is a government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed. Most modern paper currencies, such as the U.S. dollar, are fiat currencies. The Average Lifespan of a Fiat Currency is About 35 Years because the enormous powers given to Central Banks tends to corrupt sound monetary policies. Hyperinflation is one of the most common precursors to a fiat currency's collapse. Although the USD is the current world reserve currency and has been for 90 years. In its current form, not backed by Gold, the age of USD as a Fiat Currency is in its 50^th year. From the inception of the Federal Reserve, USD has lost 98% of its purchasing power. (Fig. 4).

Within the life span of a Baby Boomer, we have seen some spectacular collapse of Fiat Currencies like the Peruvian Intis (1989), Russian Ruble (1992), Zaire Zaires (1992), Hungry Pengo (1945), Germany Mark (1923), Greece Drachmas 1943).  The USD has an atypical long life span based upon US exceptional ability to destabilize Asian and European economies by Proxy Wars and Color Revolutions. Nonetheless US military prowess is under severe strain with the Russian/NATO/Ukraine War, the Israel/Hamas War and its failure to contain the rise of China. For those mathematically inclined, major currency collapse typically works on the law of exponential decline meaning a long gestation period but a sharp and swift demise. Take a look at the Weimar Republic Final Two Years of Hyperinflation and mark time when the Federal Reserve starts QE again sometimes in 2024. (Fig. 5).

3. Smoke Screens and Mirrors of the Magnificent 7 versus the S&P 493 (500 minus 7): We have discussed before the entire US Stock Market performance was propped up by 7 Tech Stocks which combined rose 79% in 2023. (Fig. 6).

These 7 Stocks accounted for 30% of the entire S&P 500 Market Cap. The rest of the 493 rose by around 10% but due to the 7 stocks, the entire index rose by 24% for 2023. As at market close on Friday, market cap of Tesla was $606.55 billion versus BYD market cap of $71.87 billion (Tesla is more expensive than BYD by a factor of 8.4 times). ByteDance (Parent Co of TikTok) was valued at $268 billion as against Meta of $1.19 trillion ( a factor of 4.44 times), market cap of Amazon was $1.81 trillion vs Alibaba of $180.7 billion (a factor of 10 times). Cost of a US Aircraft Carrier is $13 billion as against China’s $2 billion (a factor of 6.5 times). Prices can be a measurement of something but not necessarily of wealth, value or strength. Using the Buffet Indicator the current US Stock Market to GDP Ratio is 181%. The equivalent measurement for China is only 60%. and for India is 122.8%. The Stock Market in China is just part of the economy but for US, the Stock Market is the economy. To protect the sanctity of the stock market, the last bold facade of the Anglo American, it is not news to find creative reporting of US employment, inflation, GDP and other government statistics and unsubstantiated MSM negative campaign against successful non-US enterprises.  Whether a cup is half empty or half full is purely a matter of perspective and interpretation. It takes many data points to establish a clear resolution of a true picture and it also depends on what picture you want to see.  

4. Examples of once Mighty Eagles that became Pigs and Crashed: Here I name just two companies that once represented technological and engineering excellence in the US. The first is General Electric. In the Year 2000, it ranked number 2 in terms of global market capitalization. GE had a credit rating even at times higher than US Federal Government. But then the CEO, Jack Welch, found it easier to grow earnings by issuing debt papers at low interest rates and on-lend to consumers via its financial subsidiary GE Credit than the long hard road of industrial innovation. And with that Jack Welch achieved 100 consecutive quarterly earnings growth unmatched by any corporation in the world. But those who live by the sword die by the sword. With the turbulent ebbs and flows of finances in the US, GE crashed in a mountain of debt and in Sep 2020 GE had the same stock price as April 1996, some 24 years earlier. (Fig. 7).

The second company is Boeing. I need not elaborate further on the engineering problems of Boeing. (Fig. 8).

It is sufficient for me to mention that part of Boeing’s problem is the senior executives at  Boeing found more satisfaction to invest in stock buy backs than invest funds for product improvement. Are these two companies unique in the American Corporate culture, what do you think? How about Crypto Exchange FTX with the nerd like CEO Bankman-Fried or shared space platform WeWork. Their rise and spectacular fall of these companies has honestly nothing to do with technologies but financial engineering packaged as technology. I venture to say the present bull run in AI stocks is exactly the same financial engineering packaged as technology. One can trace its theatrically staged starting bell and its path of concerted push on stock prices. Here I am not belittling the AI technology, but like Amazon and Tesla, it is a decade of work before one can expect a big financial harvest. (Fig. 9)  

 

5. International Capital Flow: Periodically I table at this Blog international capital flow into and out of US. (Fig. 10) is a chart showing International Capital Flow into and out of US from January 2020 to November 2023.

The November figures are the latest available from the US Treasury Department. As evidenced from the recent Israel/Hamas Conflict in Gaza. The White House Administration is not so much controlled by the US Voters and Congress but by Zionist Capitalist outside of US. US is the largest Debtor in the World and does not control Capital Flow, it is the Capitalist outside of US that dictates the flow into and out of US. In Fig. 10, one will see US took a beating in 2022 that saw $4.5 trillion capital departed from her shores but was a beneficiary in 2023 with influx of $3 trillion.  Let’s now narrowly focus on how US Capital affected China and Hong Kong. The Combined US Residents’ Stock holdings in China and Hong Kong at the end of 2022 was US$342.6 billion and as at end November 2023, the value was $300.7 billion. This means a drop in value of  US$41.9 billion. When compared with a total Market Cap of the China & HK of US$14.8 trillion, the decline in value was only 0.28%. I won’t call such a sell down earth shattering. In the same corresponding period, China & Hong Kong actually increased their equity holdings in US by $68.3 billion thus giving US a Funds Flow advantage of $110.2 billion in 2023. Whether the direction of Funds Flow was the right choice taken is all dependent upon a difference in perspective of being a momentum trader or a contrarian value investor. 

6. So what’s the fuss about a Currency War - In conclusion, a Fiat Currency is a simple Promise. A Promise that one can use the paper it is written on to retire a debt in the Country of Issue. The basis of a Currency is Credit, deriving from the Latin Root Word “Credo” meaning “I Believe”. A Currency War is a “Psychological Warfare” with all the lies, trickery, smoke screens and mirrors that comes with it. The Psychological Tools is “Greed” and “Fear”. Currency and Currency Wars is as old as mankind but sadly even with all the advance education, only one in a million understands how it is played and less than one in a million can overcome the emotions of “Greed” and “Fear”.

Isaiah 41:10 - Fear not, for I am with you; be not dismayed, for I am your God; I will strengthen you, I will help you, I will uphold you with my righteous right hand.