Contrary Opinion and Australian Elections

As political risk increases in all liberal democratic countries we can expect to see the contrary opinion factor playing a greater role in evaluating risk in elections and other important events.

One example is of course Brexit, while a close call, consensus opinion was that the UK would remain. Similarly, the Australian election consensus has continuously been that the Liberal Party of Australia would prevail. However, as previously posted (16/06/16), the Australian electorate is deeply cynical of its politicians and none of the contenders for the 2016 federal election are offering a way forward.

Economic, social  and political reform is needed to set Australia on course for the next phase of its 100 year odd history. Its clear that the electorate is exhausted by the constant personality bicker of politicians and their inability to tackle the big issues. The consistent message for over a decade is that political self interest is more important than the people. Accordingly many believe the economic and social decline experienced by many Australians is set to continue.

Little has been said by politicians that offers any resonance with voters. So with this dissonance there is room for the Law of Contrary Opinion to operate. The law suggests “if everybody thinks one thing then bet the other way.” This law works well at times of extremity. For example, consensus thinking at elections, stock market highs and lows, etc, etc. Traders of financial markets use this tool when market sentiment is strongly biased.

Based on contrary opinion then, expect an upset on July 2nd with either a hung parliament or an outright win to the Australian Labor Party.

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.

Australian Political Elections 2016

It seems Australian voters want another “hung parliament”. The main parties are both doing their best to lose winning government. Little they say offers any resonance with voters.

The Australian electorate is deeply cynical of its politicians and none of the contenders for the 2016 federal election are offering anything offering a way forward. Economic, social  and political reform is needed to set Australia on course for the next phase of its 100 year odd history. Its clear that the electorate is exhausted by the constant personality bicker of politicians and their inability to tackle the big issues. The consistent message for over a decade is that political self interest is more important than the Australian people. Accordingly many believe the economic and social decline experienced by many Australians is set to continue.

Confirming this, we see a lethargic economy and a growing sense of unease many Australians feel about their prospects. This reflects a deteriorating social mood. It won’t be long before this translates into a declining economy. Indeed, capital flows into and out of Australia indicate the tide is definitely running out and despite the best attempts of the RBA, we may soon see the downside of the business cycle in full flight. A good barometer highlighting this is the Australian stock market which remains stalled around the 5300 level ( ASX/SP 200) whilst US stock markets hover relatively near their all time highs.

 

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

Mapping Russia’s Strategy

Russia is in a geographically vulnerable position; its core is inherently landlocked, and the choke points that its ships would have to traverse to gain access to oceans could be easily cut off. Therefore, Russia can’t be Athens. It must be Sparta, and that means it must be a land power and assume the cultural character of a Spartan nation. Russia must have tough if not sophisticated troops fighting ground wars. It must also be able to produce enough wealth to sustain its military as well as provide a reasonable standard of living for its people—but Russia will not be able to match Europe in this regard.

So it isn’t prosperity that binds the country together, but a shared idealized vision of and loyalty toward Mother Russia. And in this sense, there is a deep chasm between both Europe and the United States (which use prosperity as a justification for loyalty) and Russia (for whom loyalty derives from the power of the state and the inherent definition of being Russian). This support for the Russian nation remains powerful, despite the existence of diverse ethnic groups throughout the country.

As a land power, Russia is inherently vulnerable. It sits on the European plain with few natural barriers to stop an enemy coming from the west. East of the Carpathian Mountains, the plain pivots southward, and the door to Russia opens. In addition, Russia has few rivers, which makes internal transport difficult and further reduces economic efficiency. What agricultural output there is must be transported to markets, and that means the transport system must function well. And with so much of its economic activity located close to the border, and so few natural barriers, Russia is at risk.

It should be no surprise then that Russia’s national strategy is to move its frontier as far west as possible. The first tier of countries on the European Peninsula’s eastern edge—the Baltics, Belarus, and Ukraine—provide depth from which Russia can protect itself, and also provide additional economic opportunities.

With regard to the current battle over Ukraine, the Russians have to assume that the Euro-American interest in creating a pro-Western regime has a purpose beyond Ukraine. From the Russian point of view, not only have they lost a critical buffer zone, but Ukrainian forces hostile to Russia have moved toward the Russian border. It should be noted that the area that the Russians defend most heavily is the area just west of the Russian border, buying as much space as they can.

The fact that this scenario leaves Russia in a precarious position means that the Russians are unlikely to leave the Ukrainian question where it is. Russia does not have the option of assuming that the West’s interest in the region comes from good intentions. At the same time, the West cannot assume that Russia—if it reclaims Ukraine—will stop there. Therefore, we are in the classic case where two forces assume the worst about each other. But Russia occupies the weaker position, having lost the first tier of the European Peninsula. It is struggling to maintain the physical integrity of the Motherland.

Russia does not have the ability to project significant force because its naval force is bottled up and because you cannot support major forces from the air alone. Although it became involved in the Syrian conflict to demonstrate its military capabilities and gain leverage with the West, this operation is peripheral to Russia’s main interests. The primary issue is the western frontier and Ukraine. In the south, the focus is on the Caucasus.

It is clear that Russia’s economy, based as it is on energy exports, is in serious trouble given the plummeting price of oil in the past year and a half. But Russia has always been in serious economic trouble. Its economy was catastrophic prior to World War II, but it won the war anyway… at a cost that few other countries could bear. Russia may be a landlocked and poor country, but it can nonetheless raise an army of loyal Spartans. Europe is wealthy and sophisticated, but its soldiers have complex souls. As for the Americans, they are far away and may choose not to get involved. This gives the Russians an opportunity. However bad their economy is at the moment, the simplicity of their geographic position in all respects gives them capabilities that can surprise their opponents and perhaps even make the Russians more dangerous.

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.

The power of population

Bernard Salt, Partner with KPMG writes:

The power of population
Australia is growing three times faster than China. That’s good for the economy.
The Australian economy may well be suffering from cut-backs in mining and manufacturing activity but this nation has a secret weapon. Our building and construction sector is underpinned by close to record rates of growth in population. The rise in numbers is depicted in our latest demographics infographic. It shows growth of close to 390,000 people per annum, up from around 220,000 per annum about a decade earlier.Australia's projected population and Australia's projected households
Australia’s projected population and Australia’s projected households
Based on these rates, Australia’s population is estimated to increase by 4.2 million people over the next decade. That means we are growing even faster than India and the United States, and three times faster than China.

Bernard Salt“Australia’s elevated and internationally significant rate of population growth will drive the demand for housing.” ~ Bernard Salt Partner in Charge, Demographics

People = jobs
Australia’s elevated and internationally significant rate of population growth will drive the demand for housing, for household formation and for housing finance. That translates into more jobs.

The capital cities are particularly well placed in this regard. Melbourne, Sydney and Perth have been all experiencing rapid expansion, their growth running at close to record rates.

In the year 2012-2013, Melbourne’s population jumped up by 95,000, with Sydney close behind at 81,000. Perth also saw a dramatic increase of 67,000 – although more recent data suggests that growth rates are slowing in the West.Fastest growing large cities 2012-2013
It is not surprising then that Sydney remains this nation’s biggest city with 4.8 million residents. It is followed closely by the faster-growing Melbourne at 4.3 million then Brisbane at 2.2 million.

Looking beyond our capitals
Yet our capital cities aren’t the whole story. In fact the biggest single market on the Australian continent is what might be termed the ‘Koala Conurbation’ with 5.5 million people connecting Sydney with Newcastle and Wollongong.

Melbourne-Geelong is also a heavy weight with 4.5 million people while South East Queensland – linking Brisbane, the Gold Coast, the Sunshine Coast and Toowoomba – packs some punch at 3.2 million. Perth tops out at barely 2 million.

The city vs suburbia
Our building and construction picture is more nuanced too. Building hotspots tell the two stories of Australia’s housing preferences: the inner city and suburbia.

Our figures show the top five spots for new residential housing unit approvals are relatively balanced between the city centres and inner city – such as the City of Melbourne and Sydney’s Mascot-Eastlakes – and the edge of suburbia in places like Perth’s Baldivis and Yanchep.

This may reflect the fact that families continue to dominate Australia’s households. While singles make up about a quarter of all households, families still lead at one in three.

Relying on our immigrants
Ultimately, Australia’s economic prospects could well depend on immigration trends however – that is, if our tremendous growth rates are indeed our secret weapon.

In 2014, the first three quarters showed almost two-thirds of the country’s population growth came from net overseas migration. This shift is particularly significant when compared to around half over the previous four decades.

As long as immigration levels remain elevated, it may be that Australia has at least one sure-fire driver of demand for jobs.

Source: http://www.kpmg.com/au/en/beyond/new-thinking/pages/demographics-australia-population.aspx

European Inflation

Analysis of European inflation by Ophelie Gilbert.

The sovereign debt crisis in 2011-12 accentuated the downward trend in inflation for the Eurozone. In the aftermath, the core inflation of the Eurozone, which mostly reflects domestic inflation pressures, has declined as slack in the labour market jumped higher. Since 2013, the ongoing fall in international commodity prices has also caused the headline inflation rate to collapse, since this measure includes what economists call the volatile components: commodities and food. So the inflation rate that is prevailing today is not only about oil, but the result both of internal factors and the diffusion of global factors with many transmission channels. In 2015, core inflation even passed below 1%, which is a strong warning level for any central banker.
Why is a low inflation rate so critical? First, low inflation makes for less efficient central bank policy, as its means higher real interest rates. Second, low inflation becomes more troublesome if it is too low for too long, as it could result in a change in people’s expectations of future inflation. This could trigger a dangerous self-fulfilling loop if expectations are de-anchored, and it is very difficult to reverse disinflationary shocks – as shown in Japan
The European Central Bank (ECB) has – finally – implemented strong action to reflate the economy and stop the persistent decline in inflation, and seems to have had a particular focus on increasing the core rate. The ECB’s objective is for Consumer Price Index (CPI) inflation to be close to but below 2%, which was challenging throughout 2015.

2016 was supposed to be the year of the rebound for the headline inflation after the huge impact of the oil collapse on the 2015 inflation rate. The theory was that the negative base effects on energy prices would be removed from December onwards, and support a higher inflation rate next year. This remains true to an extent, however, once again, the oil price is playing the fool. The oil market is suffering from excess supply, and these imbalances need to be absorbed. Oil prices will remain the most important driving force for inflation, in both directions. The market is expecting a slight rebound of the oil price over next year, but if oil remains below $40 it will keep the headline inflation far from the ECB’s projection for 2016, and clearly it will again complicate the ECB’s job.

The ECB’s job is further complicated by the fact that economic growth in the Eurozone is actually on-going, firm and broad-based, and the fall in the oil price is very good news for consumer purchasing power. Nevertheless, consumer price inflation dynamics will be key to the ECB’s reaction function in 2016 in the Euro area.

Source: Allianz Global Investors

 

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

Malcolm Turnbull has plenty to smile about

Malcolm Turnbull’s personal popularity has improved over the summer parliamentary recess, according to a new poll, suggesting the prime minister’s electoral “honeymoon is not over yet.

A Seven News/ReachTel poll shows the Coalition retains a 55% to 45% lead over Labor on a two-party preferred basis, which is stable compared with the previous corresponding poll conducted in November.

Ministerial scandals, which led to Jamie Briggs resigning and Mal Brough standing aside just after Christmas with celebration using a pop events group to prepare everything, while at the Liberal party’s jostling over forthcoming preselections in New South Wales do not appear to have dented the Coalition’s support.

The proportion of people nominating Turnbull as preferred prime minister rose nearly 10 points to 80.8%, while those favouring Bill Shorten declined by the same number of points to 19.2%.

 

Respondents were unimpressed with Shorten’s performance as opposition leader, with just 13.8% saying it was good or very good (down 6.8 points) and 57.4% believing it was poor or very poor (up 9.9 points).

Shorten has embarked on a three-week national tour of marginal seats to campaign against increasing the goods and services tax, cutting penalty rates and reducing pathology incentive funding.

“We will oppose a 15% GST on everything with every breath in our body,” he said in Alice Springs on Friday.

The government has accused Shorten of mounting a “scare campaign” and it is yet to settle details of the tax package it will take to voters at this year’s election.

The treasurer, Scott Morrison, rubbished speculation about an early election. “The election is at the other end of this year,” he said on Friday.

The prime minister has returned to Australia after visiting troops in Iraq and Afghanistan and travelling to the US for a meeting with Barack Obama.

In the final ReachTel before Turnbull challenged for the Liberal leadership in September, Shorten led Tony Abbott as preferred prime minister, 57.9% to 42.1%.

Source: Guardian

JP Morgan to Leave UK if it Quits EU

JP Morgan, one of the leading banks in the world has threatened to quit UK if it decides to leave EU after the proposed referendum on the matter.

Jamie Dimon, the chairman and chief executive of JP Morgan, says his bank might quit the UK if Britain exits the European Union. “Britain’s been a great home for financial companies and it’s benefited London quite a bit. We’d like to stay there but if we can’t, we can’t,” he said in Davos, Switzerland and the World Economic Forum meetings.

The bank employs 19,000 people in Britain.

For JPMorgan, British membership in the EU is important since it provides the bank with “passporting” rules that allow it to do business across the 28-member bloc.

For the UK, membership is not as important. Overall trade does not require EU membership. Non-members such as Norway or Switzerland, trade with the EU makes up a bigger share of the total than it does for Britain.

Britain’s Prime Minister’s David Cameron hopes to  hold an EU referendum in June.

Source: EconomicPolicyJournal.com

Technology’s impact on Labor Market

James Manyika analyses the report of McKinsey Global Institute (MGI) and its impact on the Labor Market.

Digital America: A tale of the haves and have-mores, a new report from the McKinsey Global Institute (MGI), highlights the enormous gap as the leading sectors, companies, and individuals deploy technology in a way that leaves everyone else in the dust. The companies leading the charge are capturing market share, posting record profit growth, and even reshaping entire industries. Their competitors, by contrast, are struggling just to keep up. Workers with the most sophisticated digital skills are in high demand, and those in the most digitized industries enjoy wage growth that is twice the national average. But incomes have stagnated for the majority of US workers in other sectors.

There are huge opportunities ahead, but unsettling shifts could hit the labor market as digital technologies develop capabilities to automate more of the tasks humans are paid to do. You should check out the labor posters that should be in a common room. MGI research found that some 60 percent of occupations could have 30 percent or more of their activities automated. We estimate that automation could displace anywhere from 10 to 15 percent of US middle-skill jobs in the decade ahead.

As companies integrate these technologies, they will redefine roles and business processes. The United States will need to adapt its institutions and training pathways to help workers cope. While technology is causing this disruption, it can be part of the solution, too. Online talent platforms might be one of the keys to creating a labor market that can respond more dynamically to continually changing demand for new skills.

Companies, too, face more churn as digitization changes the dynamics in many industries. These shifts are empowering for entrepreneurs but anxiety-producing for established companies. The standard for what it means to be highly digitized today will be outdated tomorrow––and the digital leaders never stop streamlining and innovating.

For companies, this is a wake-up call. No organization can afford to sit still while industries transform around it.

This article originally ran in LinkedIn.

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

 

Future of Self-Driving Cars

Self-Driving Cars are predicted to be taking over the US highways by 2020; however, they may be facing some regulations from the government according to a story in Futurism.

At the North American International Auto Show, US Transportation Secretary Anthony Foxx will announce plans for the development of self-driving cars. Ultimately, the government aims to speed up the process of having autonomous cars on the roads as, to date, only a few states are currently allowing these self-driving cars, which include Michigan, California, and Nevada, which could eventually replace the cars that are used now a days, but people could easy remove these old cars with junk car.removal services from sites as ScrapMyCarMontreal.com.

The goal is to ensure that there are federal laws regarding the development of the tech.

It has been reported that the regulatory framework is scheduled to be set before President Obama leaves his office at the end of 2016.

How will this impact the plans of Car Manufacturers?

The major challenge of car companies now is the varying laws being implemented by the different states. Recently, Google was disappointed with California’s requirement of having a licensed driver behind the wheel of self driving cars at all times.

The executive director of  California Foundation for Independent Living Centres, Teresa Favuzzi, believes that the Department of Motor Vehicles was discriminating people with disabilities the ability to use these vehicles.

Despite all the grey areas, this announcement is definitely a gigantic step for the future of autonomous vehicles.

Source:Self-Driving Cars

How will falling Oil Prices impact the Economy?

Gail Tverberg is a researcher on subjects related to energy and the economy and writes for OurFiniteWorld.com. Gail Tverberg raises an interesting question on the impact of falling Oil Prices on the growth of the economy. With popular perception being that the significant decline in oil prices will bring about a positive change in the growth of the economy but is that likely? Gail lays out the reasons as to why this might not be the case with the following reasons:

Reasons

1. Oil producers can’t really produce oil for $30 per barrel.

2. Oil producers really need prices that are higher than the technical extraction costs, making the situation even worse.

3. When oil prices drop very low, producers generally don’t stop producing.

4. Oil demand doesn’t increase very rapidly after prices drop from a high level.

5. The sharp drop in oil prices in the last 18 months has little to do with the cost of production.

6. One contributing factor to today’s low oil prices is a drop-off in the stimulus efforts of 2008.

7. The danger with very low oil prices is that we will lose the energy products upon which our economy depends.

8. The economy cannot get along without an adequate supply of oil and other fossil fuel products.

9. Many people believe that oil prices will bounce back up again, and everything will be fine. This seems unlikely.

10. The rapid run up in US oil production after 2008 has been a significant contributor to the mismatch between oil supply and demand that has taken place since mid-2014.

Conclusion

Things aren’t working out the way we had hoped. We can’t seem to get oil supply and demand in balance. If prices are high, oil companies can extract a lot of oil, but consumers can’t afford the products that use it, such as homes and cars; if oil prices are low, oil companies try to continue to extract oil, but soon develop financial problems.

Decision makers thought that peak oil could be fixed simply by producing more oil and more oil substitutes. It is becoming increasingly clear that the problem is more complicated than this. We need to find a way to make the whole system operate correctly. We need to produce exactly the correct amount of oil that buyers can afford. Prices need to be high enough for oil producers, but not too high for purchasers of goods using oil. The amount of debt should not spiral out of control. There doesn’t seem to be a way to produce the desired outcome, now that oil extraction costs are high.

Unfortunately, what we are facing now is a predicament, rather than a problem. There is quite likely no good solution. This is a worry.

Source:Why oil under $30 per barrel is a major problem

US Dollar to strengthen further

Our research shows the USD has further to strengthen. We are still targeting 0.98 to 1.04 for the Euro/USD, Aud/USD between 0.65-0.675 cents and US$/Yen above 125. This would place the US$ Index around the 103 level for a major top followed by a major pull back. We anticipate this happening in the first 6 months of 2016. We at Emerging Events believe selling US dollars above 103 basis the US$ Index represents good selling.

Why governments need to ‘self-disrupt’

Columnist Mohamed A. El-Erian writing for Bloomberg, republished in Marketwatch

Technical innovation is all around us, yet countries including the U.S. don’t know how to adapt to change.

Mohamed El-Erian: ‘Western political and economic structures are, in some ways, specifically designed to resist deep and rapid change, if only to prevent temporary and reversible fluctuations from having an undue influence on underlying systems.’

One of the most difficult challenges facing Western governments today is to enable and channel the transformative — and, for individuals and companies, self-empowering — forces of technological innovation.

They will not succeed unless they become more open to creative destruction, allowing not only tools and procedures, but also mindsets, to be revamped and upgraded. The longer it takes them to meet this challenge, the bigger the lost opportunities for current and future generations.

Self-empowering technological innovation is all around us, affecting a growing number of people, sectors, and activities worldwide. Through an ever-increasing number of platforms, it is now easier than ever for households and corporations to access and engage in an expanding range of activities — from urban transportation to accommodation, entertainment, and media. Even the regulation-reinforced, fortress-like walls that have traditionally surrounded finance and medicine are being eroded.

This historic transformation will continue to gain momentum as it expands in both scale and scope. But its benefits will not be fully realized unless governments take steps to empower the forces of change, ensure that the massive positive externalities are internalized, and minimize the negative impacts. Unfortunately, this is proving extremely difficult for many advanced-country governments, partly because the failure to recover fully from the recent crisis and recession has undermined their credibility and functioning.

The emergence of anti-establishment and non-traditional political parties and candidates on both sides of the Atlantic is complicating even the most basic elements of economic governance, such as enactment of an active budget in the United States. In this context, taking the steps needed to upgrade economic systems, including infrastructure in the U.S. and the incomplete union in Europe, or to meet historical challenges like the refugee crisis, seems all but impossible.

In fact, Western political and economic structures are, in some ways, specifically designed to resist deep and rapid change, if only to prevent temporary and reversible fluctuations from having an undue influence on underlying systems. This works well when politics and economies are operating in cyclical mode, as they usually have been in the West. But when major structural and secular challenges arise, as is the case today, the advanced countries’ institutional architecture acts as a major obstacle to effective action.

The political influence of financial donors and lobby groups add to the challenge. Rather than promoting actions aimed at improving the long-term well-being of the system as a whole, these actors tend to push micro objectives, some of which help the traditional, often wealthy elements of the establishment maintain their grip on the system. In doing so, they block the small and emerging players that are so vital to upgrading and transformation.

All of this serves to complicate an imperative that is relevant not just to governments, but also to companies and individuals that must adapt to changing circumstances by upgrading their structures, procedures, skills, and mindsets. Few are eager to self-disrupt, a process that takes us out of our comfort zone, forcing us to confront our long-standing blind spots and unconscious biases and adopt a new mindset. But those who wait until the disruptions are unavoidable — easy to do when governments do not mount a timely response — will miss out on the huge advantages that technology offers.

Even when governments decide to implement policies that enable economic upgrading and adaptation, they cannot do so in isolation. With technology enabling unprecedented mobility and connectivity, the jurisdictional power of nation-states is being eroded, meaning that a truly effective response — one that unleashes the full benefits of disruptive technologies — is impossible without multilateral cooperation and coordination.

But multilateralism is undergoing a transformation of its own, driven by doubts about the legitimacy of existing structures. With reforms of the traditionally Western-dominated institutions having stalled, there have been moves to create alternatives; China’s Asian Infrastructure Investment Bank, for example, competes directly with the World Bank and the Asian Development Bank in some areas. All of this makes global-level responses more difficult.

Against this background, a rapid and comprehensive transformation is clearly not feasible. (In fact, it may not even be desirable, given the possibility of collateral damage and unintended consequences.) The best option for Western governments is thus to pursue gradual change, propelled by a variety of adaptive instruments, which would reach a critical mass over time.

Such tools include well-designed public-private partnerships, especially when it comes to modernizing infrastructure; disruptive outside advisers — selected not for what they think, but for how they think — in the government decision-making process; mechanisms to strengthen inter-agency coordination so that it enhances, rather than retards, policy responsiveness; and broader cross-border private-sector linkages to enhance multilateral coordination.

How economies function is changing, as relative power shifts from established, centralized forces toward those that respond to the unprecedented empowerment of individuals. If governments are to overcome the challenges they face and maximize the benefits of this shift for their societies, they need to be a lot more open to self-disruption. Otherwise, the transformative forces will leave them and their citizens behind.

Mohamed A. El-Erian, chief economic adviser at Allianz and a member of its International Executive Committee, is chairman of U.S. President Barack Obama’s Global Development Council and the author, most recently, of “When Markets Collide.”

Source: http://www.marketwatch.com/story/why-governments-need-to-self-disrupt-so-theyre-not-left-behind-2015-10-13

October, October

An interesting month ahead for October should see a spike down in US stock markets. Potentially this will be the low of the sell off since the highs this year (DJIA 183350.46, SP500 2132.02). The nature of the rally from the lows will reflect on the the longer term trend and we will advise accordingly. If the move proves to be larger (breaching DJIA 11258.01, SP500 1219.80), it will indicate a major change of trend.

At the same time we anticipate gold will also spike up above US$1225 and further. These events may well be precipitated by some flash news. Rumors abound at present of European bank failures and the shock of this would certainly impact global financial markets.

We are currently updating our big picture The End of the Long Game 2009-2018 and will show how this juncture represents a pivotal time for global economies and financial markets.