E-mini jumps on Putin order for troops to return to bases (Reuters).
Breakout above 1850 is a bullish sign. S&P 500 follow-through above 1860 would signal an advance to 1950.
A Century of Policy Mistakes | Niels Jensen
In A Century of Policy Mistakes Neils Jensen describes the demise of Argentina over the last 100 years.
A century ago Argentina ranked as one of the wealthiest countries in world, behind the United States, the United Kingdom and Australia but ahead of countries such as France, Germany and Italy. Its per capita income was 92% of the G16 average; it is 43% today. Life in Argentina was good. It enjoyed the benefits of one of the highest growth rates in the world and attracted immigrants left, right and centre. Boom times galore.
Argentina’s wealth was based on agriculture, but also on its strong ties with the UK, the pre-World War I global powerhouse. Equally importantly, it understood the importance of free trade and took advantage of the relatively open markets which prevailed in the years leading to the Great War. Most importantly, though, it benefitted from, but also relied upon, enormous inflows of capital from the rest of the world. All of this is well documented in a recent piece in The Economist which you can find here.
Neils identifies three main causes:
- An over-reliance on commodities;
- Failure to invest in education; and
- An increasingly closed, inward-looking economy.
It occurred to me that, apart from education, Australia has made the same mistakes.
Read more at A Century of Policy Mistakes | Niels Jensen – Absolute Return Partners | PRAGMATIC CAPITALISM.
Realpolitik In Ukraine | Anatole Kaletsky , Gavekal
Quote from Anatole Kaletsky, Gavekal, in John Mauldin’s Outside the Box newsletter:
…..it is literally inconceivable that Putin will ever withdraw from Crimea. To give up Crimea now would mean the end of Putin’s presidency, since the Russian public, not to mention the military and security apparatus, believe almost unanimously that Crimea still belongs to Russia, since it was only administratively transferred to Ukraine, almost by accident, in 1954. In fact, many Russians believe, rightly or wrongly, that most of Ukraine “belongs” to them. (The very name of the country in Russian means “at the border” and certainly not “beyond the border”). Under these circumstances, the idea that Putin would respond to Western diplomatic or economic sanctions, no matter how stringent, by giving up his newly gained territory is pure wishful thinking.
Read more at John Mauldin: Outside the Box.
Vladimir Putin
“Anyone who doesn’t regret the passing of the Soviet Union has no heart. Anyone who wants it restored has no brains.” ~ Vladimir Putin
Canada: TSX 60 tests 2011 high
Canada’s TSX 60 encountered strong selling at the 2011 high of 820. Follow-through below 814 would test medium-term support at 800. Reversal of 21-day Twiggs Money Flow below zero indicates medium-term selling pressure. Breach of the rising trendline is unlikely, but would warn of another test of primary support at 770. Breakout above 820 is less likely, but would signal an advance to 840*.
* Target calculation: 805 + ( 805 – 770 ) = 840
S&P 500 persistent selling
The S&P 500 broke out above 1850, but the tall shadow/wick reflects persistent selling. The E-mini (Mar 2014) is currently sitting just above 1840. Index breakout below this level would warn of another correction. Follow-through above 1860 is now unlikely, but would signal an advance to 1950*. The long-term trend remains bullish, with repeated 21-day Twiggs Money Flow troughs above the zero line.
* Target calculation: 1850 + ( 1850 – 1750 ) = 1950
CBOE Volatility Index (VIX) is likely to rise because of developments in the Ukraine, but below 20 reflects a bull market.
Nasdaq 100 reversal below 3600 would warn of a test of primary support at 3400. Decline of 13-week Twiggs Money Flow below its recent low would strengthen the signal. Breakout above 3700 seems less likely, but would offer a target of 3800*.
* Target calculation: 3600 + ( 3600 – 3400 ) = 3800
Deflating Australia’s land bubble
Great post by Leith van Onselen
Reproduced with kind permission from Macrobusiness.com.au.
Prosper Australia has provided a submission to the Senate Inquiry into Housing Affordability, which is well worth a look. The submission first provides nine metrics illustrating Australia’s residential property bubble, which include the following:
It took forty years from 1950 to 1990 for housing prices to double, but only fifteen years between 1996 and 2010 to double again. The surge in housing prices is driven by the tremendous growth in household debt, as owner-occupiers and investors take out ever larger mortgages to speculate on housing. The household debt to GDP ratio reached a record high of 98 per cent in 2010, the same year real housing prices peaked. In 2013, the mortgage and personal debt ratios were 86 and 9 per cent, respectively, for a combined household debt ratio of 95 per cent.
As mortgage debt escalated, investors’ net rental losses increased rapidly from 2001 onwards. In that year, net rental income losses were just over $1 billion, rising to $9.7 billion in 2008 as the cash rate peaked at 7.2 per cent. By 2010, when mortgage debt reached its historical peak relative to GDP, investor losses eased to $5.1 billion as the cash rate fell to a then historic low of 3 per cent in 2009 following the global financial crisis (GFC). The latest data shows income losses rose to $8.2 billion in 2011, the second largest absolute loss on record…
The housing market meets economist Hyman Minsky’s definition of a Ponzi scheme, as gross rental incomes minus expenses are clearly insufficient to meet principal and interest repayments. As 67 per cent of property investors are negatively-geared as of 2011, investment decisions are predicated upon expected rises in land values, not rents. This strategy will inevitably fail, as the escalation in real housing prices can only be sustained by a continual acceleration or exponential rise in mortgage debt.
The price to income (P/I) ratio, otherwise known as the median multiple, is another measure of residential property valuation…
From the mid-1990s onwards, housing prices outpaced household incomes, and the P/I ratio increased from 4 to 7 nationwide. It is impossible for household incomes to match the rise in housing prices during the boom phase of a property bubble, as wages grow more slowly, usually just above the rate of inflation…
Land is the largest tangible market in Australia… Our housing bubble is actually a residential land bubble, as the total land values to GDP ratio doubled between 1996 and 2010, when it reached a record high of 298 per cent ($4.1 trillion). In real terms, residential land values rose from $895 billion in 1996 to a peak of $3.2 trillion in 2010, a relative increase of 262 per cent. This ratio is closely matched by a similar rise in the value of the residential housing stock. The rise in residential land values, rather than structures, is responsible for almost all of the increase in the value of the housing stock…
Prosper then places the blame for Australia’s expensive housing on convergence of factors, with Australia’s inefficient tax system front-and-centre:
A convergence of factors are responsible: a large cohort of irrational investors gambling on housing prices, a FIRE sector willing and able to facilitate a credit boom, and low property and land taxes attracting speculators to this asset class…
A positive feedback loop has emerged between housing prices and mortgage debt, with rising prices prompting the take-up of more debt in an upwards spiral…
An inefficient taxation system, comprised of low property and land taxes, allows landowners to expropriate ‘geo-rent’ (economic rent derived from land) by capturing the uplift in land values generated by taxpayer-funded infrastructure and rising economic productivity… Government willingness to tax wages and business ahead of land has elevated its privileged status, resulting in larger capital sums being paid by owner-occupiers and investors.
It also advocates land tax reform, which it claims would significantly improve incomes, affordability, and productivity:
Counter-intuitively, reducing wage and business taxation and increasing land tax would not necessarily lower fundamental land prices, given the offsetting boost to disposable wages, profits and hence rents, but it would certainly lower bubble-inflated land prices. Land tax reform – urged on government by every independent tax review in living memory – would firmly correct the price to rent and income ratios. If Australia wishes to escape or ameliorate the profound financial destruction of a bursting land bubble, the solution lies in this equation…
Prosper also slams housing-related tax expenditures, which undermine the integrity of the tax system:
The generous scope of tax expenditures relating to the housing market has served to further increase prices. Tax expenditures are defined as a deviation from the commonly accepted tax structure, whether it is a tax exemption, concession, deduction, preferential rate, allowance, rebate, offset, credit or deferral. Australia has the highest rate of tax expenditures among our OECD peers, at more than 8 per cent of GDP. Tax expenditures are vulnerable to lobbying, and often compromise the fairness and efficiency of the tax system. Lavish tax expenditures for both owner-occupied and investment property has significantly worsened housing affordability because they allow landowners to capture greater amounts of geo-rent and prioritise unearned wealth and income over what is earned. Existing home owners capture the most benefit, ahead of first home buyers, investors and tenants.
These tax expenditures provide a strong incentive to speculate on housing prices, and are reinforced by already low property taxes. Investors perceive rental income as secondary to expected rises in capital prices, while first home buyers over-leverage themselves to enter a bubble-inflated market…
Tax expenditures, combined with the ongoing deregulation of the banking and financial system, has transformed the housing market into a casino. Residential property is commonly viewed as a speculative asset to flip, rather than shelter to raise a family in…
Finally, Prosper provides two recommendations to the Senate Inquiry:
Recommendation 1: Reform Land Value Tax. The ideal tool to moderate land bubbles and properly fund infrastructure already exists in the hands of state and territory governments: state land tax (SLT). Unfortunately, this tax has been so riddled with exemptions and concessional treatments it must be considered dormant…
We suggest the current government introduce a nationwide one per cent federal land tax (FLT) – fully rebatable on SLT paid – to oblige the states and territories to use their taxing powers properly. State governments could adjust their tax rules and keep every dollar the FLT raises, to the benefit of all Australians. The Commonwealth Parliament would be entitled to argue this intervention is for sound economic reasons and dissipate the political fallout. Placing state and territory finances on sound bases would vastly improve the federal system mandated by Australia’s Constitution. Transitional arrangements would need to be considered. Rebating all stamp duty paid against a hypothetical past SLT obligation would address concerns of fairness and equity…
Recommendation 2: Macroprudential Regulation. A range of macro-prudential tools are needed to moderate housing price inflation and subdue credit growth in a pro-cyclical financial system, such as those affecting the loan to value, (LVR), debt servicing (DSR) and debt servicing to income (DSTI) ratios.26 Quantitative restrictions should be placed on the share of new mortgages with moderately high LVRs…
To reduce systemic risk, a large rise in capital and liquidity ratios (buffers) is required to ensure banks can withstand a future economic downturn, bank run or large fall in the value of collateral. Research suggests the probability of a banking crisis can be reduced to a 1 in 100 year event by raising core equity (Tier 1) capital ratios to 11 per cent in isolation or raising core equity to 10 per cent with an addition rise in liquid assets of 12.5 per cent (the rise in liquid assets over total assets). For the Big Four banks, this would represent a rise of around 3 per cent in core equity…
The full submission is available here.
Gold rallies as stocks hesitate
Spot gold continued its rally, as stocks hesitate, and is likely to reach $1400/ounce before encountering strong resistance. Bullish divergence on 13-week Twiggs Momentum strengthens the signal and recovery above zero would indicate a primary up-trend. Breakout above $1400 would confirm the signal, but seems a long way off.
ASX 200 stalls as Aussie Dollar retreats
The Aussie Dollar retreated from resistance at $0.91. Breakout below primary support at $0.885 against the greenback would warn of a primary decline, with a long-term target of $0.81*. Follow-through below $0.865 would confirm. Recent Twiggs Momentum peaks below zero also indicate a primary down-trend. Respect of primary support and recovery above $0.91 is unlikely, but would suggest that a bottom is forming.
* Target calculation: 0.89 – ( 0.97 – 0.89 ) = 0.81
The ASX 200 is consolidating below resistance at 5450, waiting for a lead from US markets. Bearish divergence on 13-week Twiggs Money Flow suggests long-term selling pressure, but completion of a large trough above zero (TMF recovery above 30%) would change this. Breakout above 5450 would signal an advance to 5800*. Reversal below 5400, however, would warn of another correction.
* Target calculation: 5400 + ( 5400 – 5000 ) = 5800
ASX 200 VIX below 15 indicates low risk typical of a bull market.
China faces challenges
I have kept Michael Pettis January summary of the four challenges facing China:
- China is over-reliant on credit to generate growth;
- Attempts to boost consumption will reverse the long-standing subsidy of new investment;
- Attempts to resolve excess capacity also slow growth; and
- Unrecognized bad debt on bank balance sheets means that growth is overstated.
China’s Shanghai Composite Index is again testing support around 2000. Follow-through below 1990 would signal a primary decline to 1850*. Reversal of 21-day Twiggs Money Flow below zero would warn of medium-term selling pressure. Respect of support is less likely, but would suggest another attempt at 2150/2250.
* Target calculation: 2000 – ( 2150 – 2000 ) = 1850
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