Author: ColinTwiggs

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BIS: High household debt kills growth | Macrobusiness

From Leith van Onselen, reproduced with kind permission from Macrobusiness:

Last month I showed how Australia’s ratio of household debt to GDP had hit 123% of GDP – the third highest in the world – according to data released by the Bank for International Settlements (BIS):

ScreenHunter_16670 Dec. 13 07.13

Martin North also compiled separate data from the BIS, which showed that Australia’s household debt servicing ratio (DSR) is also the third highest in the world:

Despite record low mortgage rates, Australia’s mortgage slaves are still sacrificing a far higher share of their income to pay mortgage interest (let alone principal) than when mortgage rates peaked in 1989-90:

ScreenHunter_16672 Dec. 13 11.05

Now the BIS has released a working paper, entitled “The real effects of household debt in the short and long run”, which shows that high household debt (as measured by debt to GDP) has a significant negative long-term impact on consumption and growth. Below are the key findings:

A 1 percentage point increase in the household debt-to-GDP ratio tends to lower growth in the long run by 0.1 percentage point. Our results suggest that the negative long-run effects on consumption tend to intensify as the household debt-to-GDP ratio exceeds 60%. For GDP growth, that intensification seems to occur when the ratio exceeds 80%.

Moreover, the negative correlation between household debt and consumption actually strengthens over time, following a surge in household borrowing. What is striking is that the negative correlation coefficient nearly doubles between the first and the fifth year following the increase in household debt.

As shown in the table above, Australia’s household debt-to-GDP ratio was 123% as at June 2016 (higher now) – way above the BIS’ 80% threshold by which GDP growth is adversely impacted.

According to Martin North:

This is explained by massive amounts of borrowing for housing (both owner occupied and investment) whilst unsecured personal debt is not growing. Such high household debt, even with low interest rates sucks spending from the economy, and is a brake on growth. The swelling value of home prices, and paper wealth (as well as growing bank balance sheets) do not really provide the right foundation for long term real sustainable growth.

Another obvious extrapolation is that there could be carnage when mortgage rates eventually rise from current historical lows.

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Gold retreats

Gold retreated below resistance at $1200/ounce, suggesting another decline. Follow-through below $1130 would offer a target of the December 2015 low at $1050*. Rising interest rates, a stronger Dollar and steps by the Chinese government to restrict private gold purchases — in an attempt to support the Yuan — all impact on demand.

Spot Gold

* Target short-term: 1130 – ( 1200 – 1130 ) = 1060

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ASX 200 strengthens

The ASX 200 is testing its new support level at 5600. Rising Twiggs Money Flow indicates medium-term buying pressure. Respect of 5600 is likely and would signal an advance to 6000*.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

Small cap stocks, represented by the ASX Small Ordinaries Index, are weaker, indicating the market remains risk-averse. Twiggs Money Flow below zero continues to indicate selling pressure.

ASX Small Ordinaries Index

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Intent as the enemy of truth | On Line Opinion

From Jennifer Marohasy:

When all 1,655 maximum temperature series for Australia are simply combined, and truncated to begin in 1910 the hottest years are 1980, 1914, 1919, 1915 and 1940.

…..Considering land temperature across Australia, 1914 was almost certainly the hottest year across southern Australia, and 1915 the hottest across northern Australia – or at least north-east Australia. But recent years come awfully close – because there has been an overall strong warming trend since at least 1960, albeit nothing catastrophic.

……there is compelling evidence that the Bureau of Meteorology remodels historical temperature data until it conforms to the human-caused global warming paradigm.

I would like to see more open debate around this issue rather than the typical “trust me I’m an expert” or “the science is settled” response.

Source: Intent as the enemy of truth – On Line Opinion – 9/1/2017

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Is Globalization to Blame? | Boston Review

From Dean Baker:

Among the many myths about globalization, the worst is that the loss of large numbers of manufacturing jobs in the United States (and Europe) was inevitable…..

Globalization need not have taken the course it did. There was nothing inevitable about large U.S. trade deficits, which peaked at almost 6 percent of GDP in 2005 and 2006 (roughly $1.1 trillion annually in today’s economy). And there was nothing inevitable about the patterns of trade that resulted in such an imbalance. Policy decisions—not God, nature, or the invisible hand—exposed American manufacturing workers to direct competition with low-paid workers in the developing world. Policymakers could have exposed more highly paid workers such as doctors and lawyers to this same competition, but a bipartisan congressional consensus, and presidents of both parties, instead chose to keep them largely protected…….

Source: Is Globalization to Blame? | Boston Review

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Peggy Noonan | ‘Everybody’s Been Shot’

Wonderful column from Peggy Noonan:

There’s a small but telling scene in Ridley Scott’s “Black Hawk Down” that contains some dialogue that reverberates, at least for me. In the spirit of Samuel Johnson, who said man needs more often to be reminded than instructed, I offer it to all, including myself, who might benefit from its message.

The movie, as you know, is about the Battle of the Bakara Market in Mogadishu, Somalia, in October 1993. In the scene, the actor Tom Sizemore, playing your basic tough-guy U.S. Army Ranger colonel, is in charge of a small convoy of humvees trying to make its way back to base under heavy gun and rocket fire. The colonel stops the convoy, takes in some wounded, tears a dead driver out of a driver’s seat, and barks at a bleeding sergeant who’s standing in shock nearby:

Colonel: Get into that truck and drive.
Sergeant: But I’m shot, Colonel.
Colonel: Everybody’s shot, get in and drive.

“Everybody’s shot.” Those are great metaphoric words.

Let me tell you how they seem to apply metaphorically. An hour before I saw the movie, I was with friends at lunch, and they filled me in on the latest doings in our beloved country while I was away. Cornel West is very, very angry at Larry Summers for suggesting that Prof. West shouldn’t essentially perp-walk his way through the halls of academe. A Secret Service agent—a presidential Secret Service agent!—had a hissy fit when an airline pilot refused to let him board a plane carrying his gun with dubious paperwork. The agent is not only threatening a lawsuit, he says he doesn’t want money when he wins. He wants the airline to be forced to give sensitivity training. I thought: I think someone needs sensitivity training all right, but I don’t think it’s the airline.

Just after the movie, I picked up Ellis Cose’s latest book, “The Envy of the World,” about the “daunting challenges” that face black men in 21st-century America. I read and thought, Earth to Ellis: Everyone faces daunting challenges in 21st-century America.

Because everybody’s been shot.

What does that mean? It means something we used to know. It means everyone has it hard, everyone takes hits, everyone’s been fragged, everyone gets tagged, life isn’t easy for anyone…..

Source: Peggy Noonan | ‘Everybody’s Been Shot’

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Best time to short commodities since 2012

From Vesna Poljak:

….China’s stimulus is finite and demand for raw materials will collapse without it.

Australian Atul Lele, the Bahamas-based chief investment officer of private wealth manager Deltec, says all monetary and fiscal stimulus has a natural conclusion – “it just ends” – and traditional indicators of commodity prices such as global growth and liquidity conditions have been outrun by prices already.

“Right now, commodity prices are consistent with 8 per cent global industrial production. If we saw that, ex of the financial crisis recovery, it would be the strongest rate of global industrial production growth since 1981, at least. Now I’m bullish global growth and more bullish than most people, but it’s not going to happen and even if it does happen, all you’ve done is justify current commodity prices. So why would you buy a resource stock now?”

China continues to inject stimulus to revive its economy but that is making its financial system increasingly unstable. Credit growth in excess of 30% of annual GDP warns of a banking crisis according to the BIS. And shrinking foreign reserves flag that the currency is under pressure.

China faces the impossible trinity. According to David Llewellyn-Smith at Macrobusiness, a country pegged to the Dollar can only achieve two out of the following three:

  • a stable exchange rate
  • independent monetary policy
  • free and open international capital flows

At present all three are under pressure.

Source: Best time to short commodities since 2012 says Deltec’s Atul Lele

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China’s Day of Reckoning | The Market Oracle

From Michael Pento:

Therein lies China’s dilemma: Allow the yuan to intractably fall, which will increase capital flight and destroy its asset-bubble economy. Or, raise interest rates to stabilize the currency and risk collapsing asset bubbles that will crumble under the weight of rising debt carrying costs.

China embodies a Keynesian dystopia that results from central planning gone mad. It’s mirage of prosperity should soon be coming to an unpleasant end. The misguided belief any government can print unlimited amounts of money and issue a massive amount of new credit; while providing the conditions that are the antitheses necessary for viable growth, has one significant Achilles heel: eventually, it will destroy your currency. Currency is always the pressure valve that explodes in an economy that has reached the apogee of dysfunction. The Red nation isn’t the only offender on this front, but is certainly one of the worst. Therefore, China and the yuan may have finally run out of time.

Source: Chinese Yuan’s Day of Reckoning :: The Market Oracle ::

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Will China’s Financial Bust Ever Come?

From Paul Panckhurst and Adrian Leung at Bloomberg:

China’s reading is the nation’s highest on record in the gauge released by the Bank for International Settlements. It’s the single most reliable indicator of looming financial crises, according to the BIS, which found in a 2011 analysis of 36 countries that a majority of banking crises followed readings higher than 10 percent.

The credit-to-gross domestic product “gap” focuses on the amount of credit provided to households and businesses as a share of gross domestic product. It shows when the ratio of credit to GDP is blowing out – suggesting a credit boom and the risk of trouble brewing.

It isn’t advisable to place total reliance on a single indicator, but the rate of credit growth in China is alarming — and unsustainable in the long-term.

Source: Will China’s Financial Bust Ever Come?

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