Australian Housing Affordability

Housing affordability is attracting the attention of politicians as concern rises that a housing bubble has made homes too expensive. So far, none of the discussions have really addressed the problems. Several key points can be made here from a futurist perspective.

The housing problem…..

Sitting on the left wing agenda is the view that negative gearing of investment properties is a necessary step to making housing more affordable. Government is short of cash. You can see this happening in most liberal democratic countries around the world and should merely be seen as another tax grab. For this reason alone politicians will close the negative gearing window.

Cancelling negative gearing will have the long term effect of driving up rents causing a severe shortage of rental properties. That wont affect the politicians however who vote for the negative gearing “reform” as they will have disappeared into retirement.

Pre-2016 election talk suggested a grandfather clause to existing investment property holders. The time between initiating the legislation to when it goes into effect creates a window for people to grab up properties for investment purposes. The short and sharp buying frenzy in conjunction with this kind of policy or news would be typical of a major long term top for Australian property markets. This kind of event is common in financial markets when changes of trend occur at the end of a long term market. Policy or news has caught up too late. It always results in a major reversal. We might anticipate the peak of the Australian property market would last decades.

Other proposed measures include first home owners being allowed to access superannuation to form a deposit. When first home owner grants were introduced in 2000, property prices for new homes jumped by multiples of the $7000 grant. This reflected the increased purchasing power an extra $7000 had on loan to valuation ratios. If super is allowed into the equation we’ll see property prices once again jump higher as builders respond to improved loan ratios.

Part of the affordability solution……..

One issue that never gets discussed is the supply related issues created by government themselves. In many capital cities around the world, including Australia, housing affordability is often the unintended consequence of regulatory bottlenecks where zoning, building regulations and permits choke the flow of new supply and drive up the cost of housing. Clearly this needs to be addressed and would go a long way towards addressing the affordability issue.Another issue under the microscope where investors hold a property seeking only capital gains by leaving the property untenanted. If governments must be seen to be doing something, a tax on properties untenanted for longer than say 3 months would take the heat off buyers as they realize the benefits renting over buying bring in an overheated property market.

Suffice to say the long term direction of Australian property values are coming to a head in conjunction with other Australian and global social, political and economic issues. Housing affordability is just another issue along with many others whose origins lie decades in the past and whose solution cannot be answered by politicians or central planners

 

US Stocks for March 2017

We anticipate US stocks have entered a consolidation phase lasting a minimum of  several months.

Stocks have performed strongly off the back of the Presidential election. This has served to clarify where things are heading. Any short term ambiguity has now been cleared away. The recent top and pullback also coincides with the topping phase of the eight year stock market cycle that has continued for over 50 years. Note while March 2017 is the month time window for the peak, cycles of this length can take 1-2 years to complete their cycle top. Take the stock market top in 2000. While the highs occurred by March 2000. This was well before the 8 year cycle high of 2001. The then markets chopped around for another year close to the all time highs before pealing way into their 2003 lows.

The next 8 year cycle low will occur some time in 2025 and by that time stock market will be equal to, or lower than 2009 stock market lows. A lot  will have changed by then – politically, economically and socially.

We note the growing political, social and economic cross-currents that have been building over the last 2 decades. This is typical of major tops and is reflected by the difficulty investors and business people have in making business and investment decisions.

So anticipate US stocks pulling back between now and May to August of this year. into the  consolidation lows. The pullback should be quite steep and volatile with potential targets of DJIA 19500 – 19900, SP500 2000 – 2100. We note US money supply growth is declining rapidly which underpins the softening stock market.

Following the pullback we will see, once again, markets rise to new highs. The nature of the rise we foresee being accompanied by extremely bullish news. Typically, major corporate tax cuts would fit with this picture,  rising money supply growth and a rising, extremely bullish euphoria. This coming run should take the DJIA above 23000 to 25000.

We believe this is the last gasp of The End of the Long Game 2009-2018 and there is a high probability that it is ending in a 1929 style stock market blow off. Ironically the same factors that caused the 1929-1933 Great Depression are also causing the current bull market rally. This will be the peak in a 230 year cycle of human endeavor. We are witnessing history, a history that will stand for generations to come.

 

US Stocks Update 25/11/2016

We have reached an interesting juncture with this US stocks update. In the next few trading days – maybe as early as Monday 28/11, we anticipate stocks to open higher and then reverse to the downside. Failure to follow through with new highs within 5 trading days would indicate a major top has been made and a quick test of DJIA 15370 (SP500 1810) is due.

djia-3rd-qtr-2012-to-present

DJIA 3rd QTR 2012 to Present

It may be that the so called Trump rally is part of a larger consolidation phase and an even bigger rally is due to get underway after a sharp down move to shake out complacent longs.

Sentiment has become extremely bullish despite gathering storm clouds on the horizon (interest rate normalization, EU bank health, Trumponomics, US economic health). Stocks in the short term have become overbought so we anticipate corrections as a normal part of the process.

Quite likely we will see a low in gold and a high in the US dollar occurring near to this time. The Euro should take out its 1.04 -1.05 lows and gold should complete a low in line with our previous post around US$1180. Again, whether this is just a breather or something more substantial we shall have to wait for further clarification.

Brexit Impact 2016

Should the “leave” vote win the coming UK referendum you can expect the impact to have global consequences. It will challenge the survivability of the EU. At the same time it will create massive flights of capital around the world as investors seek refuge for their money. Anticipate the USD being strongly bid. This will have a huge impact on US stock markets at the expense of peripheral markets and their currencies. The nature of global economics has been apparent for some time, though not obvious.  Brexit will cause this to accelerate.

What is clear is the counter-intuitive nature of the Brexit situation. The narrative being promoted by the “in” vote is not what it seems. Democratic processes to do with EU politics have earned a reputation for not being so straight forward with several countries having the “will of the people” overturned in the last decade or so.

Should the UK decide to remain in the EU, we anticipate this will only serve to delay the inevitably. Namely the demise of the EU itself. A reading of history itself should remind that all political systems fail and a political system built on faulty premises to begin with, fail sooner. Thus, human nature expresses itself in a cyclical manner again and again.

The Structure of Collapse: 2016-2019

Charles Hugh Smith writing on his blog Of Two Minds:

The end-state of unsustainable systems is collapse. Though collapse may appear to be sudden and chaotic, we can discern key structures that guide the processes of collapse.

Though the subject is complex enough to justify an entire shelf of books, these six dynamics are sufficient to illuminate the inevitable collapse of the status quo.

1. Doing more of what has failed spectacularly. The leaders of the status quo inevitably keep doing more of what worked in the past, even when it no longer works. Indeed, the failure only increases the leadership’s push to new extremes of what has failed spectacularly. At some point, this single-minded pursuit of failed policies speeds the system’s collapse.

2. Emergency measures become permanent policies. The status quo’s leaders expect the system to right itself once emergency measures stabilize a crisis. But broken systems cannot right themselves, and so the leadership is forced to make temporary emergency measures (such as lowering interest rates to zero) permanent policy. This increases the fragility of the system, as any attempt to end the emergency measures triggers a system-threatening crisis.

3. Diminishing returns on status quo solutions. Back when the economic tree was loaded with low-hanging fruit, solutions such as lowering interest rates had a large multiplier effect. But as the tree is stripped of fruit, the returns on these solutions diminish to zero.

4. Declining social mobility. As the economic pie shrinks, the privileged maintain or increase their share, and the slice left to the disenfranchised shrinks. As the privileged take care of their own class, there are fewer slots open for talented outsiders. The status quo is slowly starved of talent and the ranks of those opposed to the status quo swell with those denied access to the top rungs of the social mobility ladder.

5. The social order loses cohesion and shared purpose as the social-economic classes pull apart. The top of the wealth/power pyramid no longer serves in the armed forces, and withdraws from contact with the lower classes. Lacking a unifying social purpose, each class pursues its self-interests to the detriment of the nation and society as a whole.

6. Strapped for cash as tax revenues decline, the state borrows more money and devalues its currency as a means of maintaining the illusion that it can fulfill all its promises. As the purchasing power of the currency declines, people lose faith in the state’s currency. Once faith is lost, the value of the currency declines rapidly and the state’s insolvency is revealed.

Each of these dynamics is easily visible in the global status quo.

As an example of doing more of what has failed spectacularly, consider how financialization inevitably inflates speculative bubbles, which eventually crash with devastating consequences. But since the status quo is dependent on financialization for its income, the only possible response is to increase debt and speculation—the causes of the bubble and its collapse—to inflate another bubble. In other words, do more of what failed spectacularly.

This process of doing more of what failed spectacularly appears sustainable for a time, but this superficial success masks the underlying dynamic of diminishing returns: each reflation of the failed system requires greater commitments of capital and debt. Financialization is pushed to new unprecedented extremes, as nothing less will generate the desired bubble.

 Rising costs narrow the maneuvering room left to system managers. The central bank’s suppression of interest rates is an example. As the economy falters, central banks lower interest rates and increase the credit available to the financial system.

This stimulus works well in the first downturn, but less well in the second and not at all in the third, for the simple reason that interest rates have been dropped to zero and credit has been increased to near-infinite.

The last desperate push to do more of what failed spectacularly is for central banks to lower interest rates to below-zero: it costs depositors money to leave their cash in the bank. This last-ditch policy is now firmly entrenched in Europe, and many expect it to spread around the world as central banks have exhausted less extreme policies.

The status quo’s primary imperative is self-preservation, and this imperative drives the falsification of data to sell the public on the idea that prosperity is still rising and the elites are doing an excellent job of managing the economy.

Since real reform would threaten those at the top of the wealth/power pyramid, fake reforms and fake economic data become the order of the day.

Leaders face a no-win dilemma: any change of course will crash the system, but maintaining the current course will also crash the system.

Welcome to 2016-2019.

Source: http://www.oftwominds.com/blogjune16/collapse6-16.html

Why Globalization Reaches Limits

Gail Tverberg writes:

We have been living in a world of rapid globalization, but this is not a condition that we can expect to continue indefinitely.

Figure 1. Ratio of Imported Goods and Services to GDP. Based in FRED data for IMPGS.

Figure 1. Ratio of Imported Goods and Services to GDP. Based in FRED data for IMPGS.

Each time imported goods and services start to surge as a percentage of GDP, these imports seem to be cut back, generally in a recession. The rising cost of the imports seems to have an adverse impact on the economy. (The imports I am showing are gross imports, rather than imports net of exports. I am using gross imports, because US exports tend to be of a different nature than US imports. US imports include many labor-intensive products, while exports tend to be goods such as agricultural goods and movie films that do not require much US labor.)

Recently, US imports seem to be down. Part of this reflects the impact of surging US oil production, and because of this, a declining need for oil imports. Figure 2 shows the impact of removing oil imports from the amounts shown on Figure 1.

Figure 2. Total US Imports of Goods and Services, and this total excluding crude oil imports, both as a ratio to GDP. Crude oil imports from https://www.census.gov/foreign-trade/statistics/historical/petr.pdf

Figure 2. Total US Imports of Goods and Services, and this total excluding crude oil imports, both as a ratio to GDP. Crude oil imports from https://www.census.gov/foreign-trade/statistics/historical/petr.pdf

If we look at the years from 2008 to the present, there was clearly a big dip in imports at the time of the Great Recession. Apart from that dip, US imports have barely kept up with GDP growth since 2008.

Let’s think about the situation from the point of view of developing nations, wanting to increase the amount of goods they sell to the US. As long as US imports were growing rapidly, then the demand for the goods and services these developing nations were trying to sell would be growing rapidly. But once US imports flattened out as a percentage of GDP, then it became much harder for developing nations to “grow” their exports to the US.

I have not done an extensive analysis outside the US, but based on the recent slow economic growth patterns for Japan and Europe, I would expect that import growth for these areas to be slowing as well. If fact, data from the World Trade Organization for Japan, France, Italy, Sweden, Spain, and the United Kingdom seem to show a recent slowdown in imported goods for these countries as well.

If this lack of demand growth by a number of industrialized countries continues, it will tend to seriously slow export growth for developing countries.

Where Does Demand For Imports Come From?

Many of the goods and services we import have an adverse impact on US wages. For example, if we import clothing, toys, and furniture, these imports directly remove US jobs making similar goods here. Similarly, programming jobs and call center jobs outsourced to lower cost nations reduce the number of jobs available in the US. When US oil prices rose in the 1970s, we started importing compact cars from Japan. Substituting Japanese-made cars for American-made cars also led to a loss of US jobs.

Even if a job isn’t directly lost, the competition with low wage nations tends to hold down wages. Over time, US wages have tended to fall as a percentage of GDP.

Figure 3. Ratio of US Wages and Salaries to GDP, based on information of the US Bureau of Economic Analysis.

Figure 3. Ratio of US Wages and Salaries to GDP, based on information of the US Bureau of Economic Analysis.

Another phenomenon that has tended to occur is greater disparity of wages. Partly this disparity represents wage pressure on individuals doing jobs that could easily be outsourced to a lower-wage country. Also, executive salaries tend to rise, as companies become more international in scope. As a result, earnings for the top 10% have tended to increase since 1981, while wages for the bottom 90% have stagnated.

Figure 4. Chart by economist Emmanuel Saez based on an analysis IRS data, published in Forbes.

Figure 4. Chart by economist Emmanuel Saez based on an analysis IRS data, published in Forbes. “Real income” is inflation-adjusted income.

If wages of most workers are lagging behind, how is it possible to afford increased imports? I would argue that what has happened in practice is greater and greater use of debt. If wages of American workers had been rising rapidly, perhaps these higher wages could have enabled workers to afford the increased quantity of imported goods. With wages lagging behind, growing debt has been used as a way of affording imported goods and services.

Inasmuch as the US dollar was the world’s reserve currency, this increase in debt did not have a seriously adverse impact on the economy. In fact, back when oil prices were higher than they are today, petrodollar recycling helped maintain demand for US Treasuries as the US borrowed increasing amounts of money to purchase oil and other goods. This process helped keep borrowing costs low for the US.

Figure 5. US Increase in Debt as Ratio to GDP and US imports as Ratio to GDP. Both from FRED data: TSMDO and IMPGS.

Figure 5. US Increase in Debt as Ratio to GDP and US imports as Ratio to GDP. Both from FRED data: TSMDO and IMPGS.

The problem, however, is that at some point it becomes impossible to raise the debt level further. The ratio of debt to GDP becomes unmanageable. Consumers, because their wages have been held down by competition with wages around the world, cannot afford to keep adding more debt. Businesses find that slow wage growth in the US holds down demand. Because of this slow growth in the demand, businesses don’t need much additional debt to expand their businesses either.

Commodity Prices Are Extremely Sensitive to Lack of Demand

Commodities, by their nature, are things we use a lot of. It is usually difficult to store very much of these commodities. As a result, it is easy for supply and demand to get out of balance. Because of this, prices swing widely.

Demand is really a measure of affordability. If wages are lagging behind, then an increase in debt (for example, to buy a new house or a new car) can substitute for a lack of savings from wages. Unfortunately, such increases in debt have not been happening recently. We saw in Figure 5, above, that recent growth in US debt is lagging behind. If very many countries find themselves with wages rising slowly, and debt is not rising much either, then it is easy for commodity demand to fall behind supply. In such a case, prices of commodities will tend to fall behind the cost of production–exactly the problem the world has been experiencing recently. The problem started as early as 2012, but has been especially bad in the past year.

The way the governments of several countries have tried to fix stagnating economic growth is through a program called Quantitative Easing (QE). This program produces very low interest rates. Unfortunately, QE doesn’t really work as intended for commodities. QE tends to increase the supply of commodities, but it does not increase the demand for commodities.

The reason QE increases the supply of commodities is because yield-starved investors are willing to pour large amounts of capital into projects, in the hope that commodity prices will rise high enough that investments will be profitable–in other words, that investments in shares of stock will be profitable and also that debt can be repaid with interest. A major example of this push for production after QE started in 2008 is the rapid growth in US “liquids” production, thanks in large part to extraction from shale formations.

Figure 6. US oil and other liquids production, based on EIA data. Available data is through November, but amount shown is estimate of full year.

Figure 6. US oil and other liquids production, based on EIA data. Available data is through November, but amount shown is estimate of full year.

As we saw in Figure 5, the ultra-low interest rates have not been successful in encouraging new debt in general. These low rates also haven’t been successful in increasing US capital expenditures (Figure 7). In fact, even with all of the recent shale investment, capital investment remains low relative to what we would expect based on past investment patterns.

Figure 7. US Fixed Investment (Factories, Equipment, Schools, Roads) Excluding Consumer Durables as Ratio to GDP, based in US Bureau of Economic Analysis data.

Figure 7. US Fixed Investment (Factories, Equipment, Schools, Roads) Excluding Consumer Durables as Ratio to GDP, based in US Bureau of Economic Analysis data.

Instead, the low wages that result from globalization, without huge increases in debt, make it difficult to keep commodity prices up high enough. Workers, with low wages, delay starting their own households, so have no need for a separate apartment or house. They may also be able to share a vehicle with other family members. Because of the mismatch between supply and demand, commodity prices of many kinds have been falling. Oil prices, shown on Figure 9, have been down, but prices for coal, natural gas, and LNG are also down. Oil supply is up a little on a world basis, but not by an amount that would have been difficult to absorb in the 1960s and 1970s, when prices were much lower.

Figure 9. World oil production and price. Production is based on BP, plus author's estimate for 2016. Historical oil prices are calculated based on a higher than usual recent inflation rate, assuming Shadowstats' view of inflation is correct.

Figure 9. World oil production and price. Production is based on BP, plus author’s estimate for 2016. Historical oil prices are calculated based on a higher than usual recent inflation rate, assuming Shadowstats’ view of inflation is correct.

Developing Countries are Often Commodity Exporters 

Developing countries can be greatly affected if commodity prices are low, because they are often commodity exporters. One problem is obviously the cutback in wages, if it becomes necessary to reduce commodity production.  A second problem relates to the tax revenue that these exports generate. Without this revenue, it is often necessary to cut back funding for programs such as building roads and schools. This leads to even more job loss elsewhere in the economy. The combination of wage loss and tax loss may make it difficult to repay loans.

Obviously, if low commodity prices persist, this is another limit to globalization.

Conclusion

We have identified two different limits to globalization. One of them has to do with limits on the amount of goods and services that developed countries can absorb before those imports unduly disrupt local economies, either through job loss, or through more need for debt than the developed economies can handle. The other occurs because of the sensitivity of many developing nations have to low commodity prices, because they are exporters of these commodities.

Of course, there are other issues as well. China has discovered that if its coal is burned in great quantity, it is very polluting and a problem for this reason. China has begun to reduce its coal consumption, partly because of pollution issues.

Figure 10. China's energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

Figure 10. China’s energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

There are many other limiting factors. Fresh water is a major problem, throughout much of the developing world. Adding more people and more industry makes the situation worse.

One problem with globalization is a long-term tendency to move manufacturing production to countries with ever-lower standards in many ways: ever-lower pollution controls, ever-lower safety standards for workers, and ever-lower wages and benefits for workers. This means that the world becomes an ever-worse place to work and live, and the workers in the system become less and less able to afford the output of the system. The lack of buyers for the output of the system makes it increasingly difficult to keep prices of commodities high enough to support their continued production.

The logical end point, even beyond globalization, is for automation and robots to perform nearly all production. Of course, if that happens, there will be no one to buy the output of the system. Won’t that be a problem?

Adequate wages are critical to making any system work. As the system has tended increasingly toward globalization, politicians have tended to focus more and more on the needs of businesses and governments, and less on the needs of workers. At some point, the lack of buyers for the output of the system will tend to bring the whole system down.

Thus, at some point, the trend toward globalization and automation must stop. We need buyers for the output from the system, and this is precisely the opposite of the direction in which the system is trending. If a way is not found to fix the system, it will ultimately collapse. At a minimum, the trend toward increasing imports will end–if it hasn’t already.

Source:  https://ourfiniteworld.com/2016/03/01/why-globalization-reaches-limits/

Crude Oil Lows?

We are still waiting confirmation that crude oil prices have completed their forecast lows. Notwithstanding one more low, potentially down to our target of US$12 per barrel, we anticipate the recovery of the oil market.

We expect oil prices to recover slowly, reaching as high as US$80 – $95 per barrel before entering a stagnating, equilibrium phase lasting many years and keeping oil prices in a long term trading range between US$30 per barrel and US$60 per barrel. Long term over supply will continue to keep this market under pressure despite the potential for geopolitical shocks occurring from time to time.

The coming oil price movement is typical of a commodity market that has been through a major boom and bust phase. Once we have confirmed the lows are in, we can more accurately define the next phase of the crude oil market.

Why Big Banks are So Interested in the Blockchain Technolgy

It turns out that the blockchain technology (which drives Bitcoin) creates an environment that is easy for government to track transactions.

Blythe Masters, former major player at JPMorgan, left the bank to start the blockchain firm Digital Asset Holdings.

Masters during an interview with The Australian Financial Review explained bankster interest in the technology (my bold):

Our investors, some of whom are large investment and commercial banks, are making a major investment in Digital Asset to help us develop solutions that will address reducing risk, reducing cost, improving transparency and offering new sources of revenue…

Rregulators were understandably initially concerned about the potential for blockchain applications to bypass certain controls, their thinking has evolved…

They are learning that distributed-ledger technology brings many benefits and efficiencies to wholesale financial markets, including reduced cost, reduced counter-party risk, reduced latency, enhanced security, increased transparency, ease of reporting, and reduced errors.  These are all important to regulators.

This technology is offering regulators a bird’s-eye view into activity in certain markets that they never had before. As such, distributed-ledger technology is actually an enhancement to transparency, rather than a mechanism for bypassing it.

Bitcoin operates on an extremely dangerous platform for those seeking anonymity.

Source: EconomicPolicyJournal.com

High Risk Stock Market Situation

The US stock market has the potential for large, rapid falls over the next couple of weeks. As long as the DJIA stays above 11258 (SP500 1219.8) the market remains in a correction phase.

Completion of the selloff phase above 11258 (SP500 1219.8) would indicate a potential move to new highs over the next few years accompanied by stronger inflation and strong prospects for the US economy.Such a scenario has the potential to unfold with rising interest rates, a strong US dollar and a strong domestic US economy.

A breach of 11258 (SP500 1219.8) followed by a corrective rally would indicate a major bear market was unfolding and provide the momentum swing to take out the 2009 lows.

While this prediction is valid for the US stock market we see signs the US dollar will continue to strengthen over the course of 2016 leading to a potential top. The strengthening US dollar and rising interest rates will have bearish implications for the rest of the world economy where funds are being sucked from the periphery to the centre.

Subdued Demand, Diminished Prospects

IMF looks at the World Economic Outlook.

Global growth, currently estimated at 3.1 percent in 2015, is projected at 3.4 percent in 2016 and 3.6 percent in 2017. The pickup in global activity is projected to be more gradual than in the October 2015 World Economic Outlook (WEO), especially in emerging market and developing economies.

In advanced economies, a modest and uneven recovery is expected to continue, with a gradual further narrowing of output gaps. The picture for emerging market and developing economies is diverse but in many cases challenging. The slowdown and rebalancing of the Chinese economy, lower commodity prices, and strains in some large emerging market economies will continue to weigh on growth prospects in 2016–17. The projected pickup in growth in the next two years— despite the ongoing slowdown in China—primarily reflects forecasts of a gradual improvement of growth rates in countries currently in economic distress, notably Brazil, Russia, and some countries in the Middle East, though even this projected partial recovery could be frustrated by new economic or political shocks.

Risks to the global outlook remain tilted to the downside and relate to ongoing adjustments in the global economy: a generalized slowdown in emerging market economies, China’s rebalancing, lower commodity prices, and the gradual exit from extraordinarily accommodative monetary conditions in the United States. If these key challenges are not successfully managed, global growth could be derailed.

Source: International Monetary Fund

Emerging Market and Developing Economies

IMF looks at emerging markets outlook.

Growth in emerging market and developing economies is projected to increase from 4 percent in 2015—the lowest since the 2008–09 financial crisis—to 4.3 and 4.7 percent in 2016 and 2017, respectively.

Growth in China is expected to slow to 6.3 percent in 2016 and 6.0 percent in 2017, primarily reflecting weaker investment growth as the economy continues to rebalance. India and the rest of emerging Asia are generally projected to continue growing at a robust pace, although with some countries facing strong headwinds from China’s economic rebalancing and global manufacturing weakness.

Aggregate GDP in Latin America and the Caribbean is now projected to contract in 2016 as well, albeit at a smaller rate than in 2015, despite positive growth in most countries in the region. This reflects the recession in Brazil and other countries in economic distress.

Higher growth is projected for the Middle East, but lower oil prices, and in some cases geopolitical tensions and domestic strife, continue to weigh on the outlook.

Emerging Europe is projected to continue growing at a broadly steady pace, albeit with some slowing in 2016. Russia, which continues to adjust to low oil prices and Western sanctions, is expected to remain in recession in 2016. Other economies of the Commonwealth of Independent States are caught in the slipstream of Russia’s recession and geopolitical tensions, and in some cases affected by domestic structural weaknesses and low oil prices; they are projected to expand only modestly in 2016 but gather speed in 2017.

Most countries in sub-Saharan Africa will see a gradual pickup in growth, but with lower commodity prices, to rates that are lower than those seen over the past decade. This mainly reflects the continued adjustment to lower commodity prices and higher borrowing costs, which are weighing heavily on some of the region’s largest economies (Angola, Nigeria, and South Africa) as well as a number of smaller commodity exporters.

Source: IMF

Bitcoin a Failure?

Potential of Bitcoin Tech

By Nathaniel Popper.

A well-known former JPMorgan Chase executive, Blythe Masters, has raised $52 million from several big banks for a start-up built on the technology underlying the Bitcoin virtual currency.

The start-up Digital Asset Holdings, based in New York, said on Thursday afternoon that it had raised the money from 13 financial institutions, including Ms. Masters’s former employer, JPMorgan, as well as Citi, BNP Paribas and Santander.

At the same time, the company also announced that it had signed a deal with Australia’s primary stock exchange, ASX, to provide technology that would speed up the settlement and transfer of money after stock trades. ASX Limited is also making a big investment in Digital Asset Holdings.

Digital Asset Holdings has based its technology on the blockchain concept that was introduced by the virtual currency Bitcoin. The blockchain is the database in which all transactions on the Bitcoin network are recorded. Unlike typical databases, the blockchain is maintained by users in a decentralized fashion. That has led many in the financial industry to hail it as a faster — and more reliable — alternative to existing transaction systems.

Many financial institutions have been looking at ways to use a blockchain to modernize financial transactions by cutting out various middlemen from the markets. The Nasdaq stock exchange has already integrated blockchain technology to improve stock trading.

Ms. Masters gave the technology a big boost when she announced her involvement with Digital Asset Holdings in early 2015. She left JPMorgan the previous year after a career during which she became one of the best-known figures in the financial industry.

Big questions remain, however, about how blockchain technology can be used in the real world, and so far talk of its potential has raced ahead of real-world uses.

In recent months, this disparity has caused some concern about the companies that are trying to raise money to build start-ups on the blockchain concept, including Digital Asset Holdings.

Potential investors said that it took Ms. Masters longer than expected to pull together her funders — and that some big-name banks ultimately declined to participate.

But Ms. Masters ended up raising more money than the $35 million that had been previously discussed. This round of fund-raising values Digital Asset Holdings at $100 million.

The Australian exchange company said that Digital Asset Holdings would help it develop new technology for the processes that take place after a stock is actually traded.

“Distributed Ledger Technology could provide a once-in-a-generation opportunity to reduce cost, time and complexity in the post-trade environment of Australia’s equity market,” the chief executive of ASX, Elmer Funke Kupper, said in a statement.

The other investors include CME Ventures, ABN AMRO, Santander’s innovation arm, Deutsche Börse Group, Accenture, Broadridge Financial Solutions, the Depository Trust and Clearing Corporation, and PNC Financial Services.

Source: NYTIMES

Figuring out the Value of Yuan

John Mauldin looks at the true value of Yuan and its impact.

Recent Chinese stock market volatility has had more to do with China’s currency than its stocks. Donald Trump and other politicians (yes, he is one) often assail Beijing for devaluing its currency and acquiring an unfair advantage.

First, the Chinese have actually been manipulating their currency upwards. While countries in the rest of the world have been letting their currencies devalue against the dollar, China has maintained an effective dollar peg until very recently. And then the “move” that seems to have everybody in a dither was only about 4%. To be fair, what really had the markets worried was that this move might presage an effective devaluation. And considering that China has watched the euro, the yen, and nearly every emerging-market currency drop anywhere from 30 to 50% against the yuan – a rather painful experience for its export sector – the Chinese have been quite patient.

Beijing think it can boost exports by manipulating its currency lower? I don’t think so. Remember how their business model works. Unlike, say, Saudi Arabia, China doesn’t simply extract resources from the ground and export them. Chinaimports raw materials, transforms them into finished goods in its factories, and then exports those goods. Their gain lies in the value added in the manufacturing process.

That means that China can’t grow exports without also growing imports. Pushing the yuan lower helps, but it’s a relatively inefficient tool for reducing the trade surplus.

Cheapening the currency has another consequence China doesn’t want. It makes imported products more expensive for Chinese consumers. The country’s abilities are growing fast, but it still depends on outside sources for many important goods. Making them cost more doesn’t help build the consumer-driven economy Beijing says it wants.

For those reasons and more, China Beige Book has a contrarian view on the Chinese currency. They believe Beijing wants the yuan to rise, not fall. So what is happening with all these interventions the Chinese authorities are making in the currency market?

The first point to remember is that the adjustments have all been quite small – far smaller than the hoopla suggests. For all the clamor that erupted last year, the yuan fell just over 4.5% against the dollar. That’s quite a lot if you are leveraged 10x, as currency traders often are, but for most merchants and consumers the change was hardly noticeable.

Recall all that happened in 2015. Aside from the stock market fireworks, China won acceptance of the yuan into the IMF’s reserve currency basket. It also watched the Federal Reserve finally make a first, tentative move toward higher rates and a correspondingly stronger dollar. If all that couldn’t crush the yuan, it’s not clear to me that anything will.

 

The second point is critical: China controls its currency by both central bank action and subtler tools. They have immense power to nudge the currency up or down. Tightening and loosening the controls is like turning a volume knob. They can crank the yuan up or turn it down.

Presently they are clamping down harder than usual in order to deter speculation. Much of this is happening under the radar, one business and industry at a time. Nevertheless, people are starting to feel the consequences.

Source: Mauldin Economics

 

 

 

Understanding the Chinese Transition

John Mauldin looks at the latest happenings in the Chinese Economy and their significance.

China Beige Book’s fourth-quarter report revealed a rude interruption to the positive “stable deceleration” trend. Their observers in cities all over that vast country reported weakness in every sector of the economy. Capital expenditures dropped sharply; there were signs of price deflation and labor market weakness; and both manufacturing and service activity slowed markedly.

That last point deserves some comment. China experts everywhere tell us the country is transitioning from manufacturing for export to supplying consumer-driven services. So if both manufacturing and service activity are slowing, is that transition still happening?

The answer might be “yes” if manufacturing were decelerating faster than services. For this purpose, relative growth is what counts. Unfortunately, manufacturing is slowing while service activity is not picking up all the slack. That’s not the combination we want to see.

Something else China Beige Book noticed last quarter: both business and consumer loan volume did not grow in response to lower interest rates. That’s an important change, and probably not a good one. It means monetary stimulus from Beijing can’t save the day this time. Leland thinks fiscal stimulus isn’t likely to help, either. Like other governments and their central banks, China is running out of economic ammunition.

One quarter doesn’t constitute a trend. Possibly some transitory factors depressed the Chinese economy the last few months, and it will soon resume its “stable deceleration” course. It is hard to imagine what those factors might have been, though. The data is so uniformly negative that it sure looks like something big must have changed.

What does this economic weakness say for Chinese stocks? Probably nothing. It should be clear to all that the Chinese stock market is completely unrelated to the Chinese economy. They don’t move together, nor do they move opposite each other. They have no consistent connection at all – or at least not one we can use to invest confidently. I went to Macau when I was in Hong Kong a few weeks ago, just to observe the fabled fervor with which the Chinese gamble. The place did indeed have a different “feel” than Las Vegas does. I’m not the only one to think that the Chinese stock market is just an outpost of Macau, but one in which leverage and monetary stimulus can overload the system.

Let me say that there are real companies with real value in China. But the rules on the ground, not to mention the accounting, make it a particularly treacherous market to invest more than your own “gambling money.”

Source: Mauldin Economics

Chinese Economy braced for a Reality Check

Valentin Schmid evaluates the Bank of America Report on the Chinese Economy.

The Chinese regime still has considerable power over the markets. After a 7 percent crash of the Shanghai Composite on January 4, it managed to reverseanother 3 percent drop on January 5.

So, in the very short term, all is well. In the long term and even in 2016, Bank of America sees big problems ahead for the Chinese economy. According to their analysts, the regime has to fight multiple battles at once and will ultimately lose to market forces.

“We judge that China’s debt situation has probably passed the point of no-return and it will be difficult to grow out of the problem,” states a report by Bank of America’s chief strategist David Cui.

The report points out that a spike in private sector debt almost inevitably leads to a financial crisis. China’s private debt to GDP ratio went up 75 percent between 2009 and 2014, bringing total debt-to-GDP to about 300 percent. Too much to sustain.

This is “a classic case of short-term stability breeding long-term instability. It’s our assessment that the longer this practice drags on, the higher the risk of financial system instability, and the more painful the ultimate fallout will be,” Cui writes.

For the coming crisis, Cui believes China will probably have to devalue its currency, write off bad debts, recapitalize the banks, and reduce the debt burden with high inflation.

After the events of last August, and after the International Monetary Fund finally included China in its reserve currency basket, the regime completely abandoned the stable currency objective and let the yuan drift lower. The regime promises reform, and even follows through in some cases. But if push comes to shove, it resorts to central planning to mould the market according to its needs, with less and less success.

“It seems to us that the government’s policy options are rapidly narrowing-one only needs to look at how difficult it has been for the government to hold up GDP growth since mid-2014. A slowdown in economic growth is typically a prelude to financial sector instability,” writes Cui, and predicts the Shanghai Composite to drop by 27 percent in 2016.

Source: Bank of America Report

 

Oil Selling Climax

As crude oil falls below US$28.00 per barrel we see a selling climax developing. The final low on this sell off could be anywhere between $12.00 to $27.00 and would lead to a major turning point for the beleaguered oil market. This will complete our oil market predictions first made in 2011 when we predicted US$12.00 per barrel. The final oil market low may well occur in conjunction with a bottom in US stock markets.

Once the lows are in we will release our predictions for oil for the next couple of years. We will also shortly update our “End of the Long Game 2009-2018” scenario.