Don’t feed your problems and starve your opportunities.
~ The Effective Executive (Five Deadly Sins in Business)
Federal budget 2015: worst cumulative deficits in 60 years | Chris Joye
Chris Joye (AFR) on the budget deficit:
There are two critical differences in 2015 that make Australia’s current debt burden [42.2% of GDP] much more troubling than that serviced by previous generations. Back in the 1977 and 1983 recessions, the household debt-to-income ratio was only 34 per cent and 37 per cent, respectively. Even in the 1991 recession, it was just 48 per cent, which is one reason why home loan arrears were so benign. Yet by 2015, the household debt-to-income ratio had jumped 3.2 times to an incredible 154 per cent, which is above its pre-GFC climax because families haven’t deleveraged….
Public and private debt levels are important to our economic health, but where the money is borrowed domestically it is far less serious than when it is borrowed offshore. In the former case, net debt in the economy is effectively zero — one sector runs a surplus while the other runs a deficit — but where money is borrowed offshore, the nation as a whole becomes a net debtor. Which is why short-term borrowing in international markets by Australian banks — used to fund the housing bubble in the run up to the GFC — was so dangerous.
From Greg McKenna (House & Holes) at Macrobusiness:
“….The funding gap is estimated to be $600 billion. In a speech on Friday, Westpac deputy chief executive Phil Coffey cited research from PwC which estimated the gap could grow to $1.325 trillion if there was a pick-up in credit growth.”
Here is the latest chart from the RBA showing the rising borrowing, it’s quarterly and likely lagging:
Notice how the article is focused entirely upon the “funding gap” as a tactical challenge in which the banks are innocent players. In reality there is no “funding gap”. Rather, our financial system is addicted to unproductive mortgage-lending and that crowds out the kind of business lending that would generate income growth and local savings. The “funding gap” is created by the banks not serviced by them.
International borrowing to fund a domestic property bubble is double trouble.
Read more at Federal budget 2015: worst cumulative deficits in 60 years | afr.com.
And at Macrobusiness: Australia ramps the risk as banks borrow abroad
Ludwig von Mises: The Causes of Economic Crisis (1931)
Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not a real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth [i.e. the accumulation of savings made available for productive investment]. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later, it must become apparent that this economic situation is built on sand.
Hat tip to John Hussman
Vince Lombardi: Work and success
The only place success comes before work is in the dictionary.
Gold, inflation and the Dollar
The (5-year) inflation breakeven (Treasury yield – TIPS) recovered from the oil price fall to post 1.66% on May 8.
Growth in average hourly earnings (manufacturing – production and non-supervisory employees) also recovered to 1.49% at the end of April.
The stronger inflation outlook lifted the yield on 10-year Treasury notes above resistance at 2.25%. Recovery of 13-week Twiggs Momentum above zero also signals an up-trend. Target for the breakout is 2.65%*. This is a bearish sign for bonds, but only breakout above long-term resistance at 3.00% would signal that the secular bull market is over.
* Target calculation: 2.25 + ( 2.25 – 1.85 ) = 2.65
The Dollar Index found support at 94 in response to rising yields. 13-Week Twiggs Momentum is declining, but recovery above 96 would suggest that the correction is over and another test of 100 likely. Otherwise, expect strong support at the primary trendline around 92.
Gold
Gold is testing medium-term support at $1180/ounce. Breach would test the primary level at $1140. 13-Week Twiggs Momentum holding below zero suggests continuation of the primary down-trend. Failure of $1140 would test the long-term target of $1000*.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
S&P 500 Ichimoku Cloud
The S&P 500 has struggled to break resistance at 2120 since February, but weekly Ichimoku Cloud continues to show a strong primary up-trend, with Tenkan-sen (blue) and Kijun-sen (red) above a long green cloud and Tenkan-sen respecting Kijun-sen since December 2012.
Long tails on the last two completed candles suggest short-term support, while 13-Week Twiggs Money Flow floating above the zero line indicates strong long-term buying pressure.
Crude: Reversal or bear rally?
Inflation-adjusted crude oil prices are close to their 2008 low, but if we look back to the 1980s and 1990s, prior to China’s entry into the markets (apart from a brief spike in September 1990) that was the 20-year high.
Nymex light crude rallied since breaking resistance at $54/barrel, but this does not necessarily indicate a reversal. Only retracement that respects the new support level (at $54) would confirm this a primary up-trend rather than a bear market rally.
Gold and the $1200 ‘support’ level
Barrick Gold failed to break resistance at 13.50 and looks set to continue ranging between 10.00 and 13.50. The consolidation is not an indication of reversal in the primary down-trend.
Inflation-adjusted price of gold (USD price divided by US consumer price index) is well above its historic long-term average, indicating that the bear trend is likely to continue.
On the daily chart spot gold recovered from its March test of primary support at $1140, but has encountered strong resistance around $1200/ounce. 13-Week Twiggs Momentum continues to oscillate below zero, suggesting continuation of the primary down-trend. Reversal below $1180 would warn of another test of $1140, while breach of the primary support level would signal a decline to $1000/ounce*. Breakout above $1220 is unlikely, but would signal a (bear) rally to $1300/ounce.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
GDP, the Dollar and Treasury yields
Interesting to see how Treasury yields and the Dollar reacted — or failed to react — to the sharp fall in first quarter GDP growth. But first a great summary by Matt Phillips at Quartz:
Move along. There’s nothing to see here.
Well, if you must know, US GDP growth fell to a 0.2% annualized rate, which looks pretty bad.
We told you it would be bad. How did we know? Windows. If you looked out any of them between January and March you were treated to a slush-bound hellscape of icy misery. Thankfully, spring has sprung. And there are all sorts of indications that US growth is bouncing back.
…interpreting the numbers rather than simply informing readers of the latest “bad news”. Good journalism.
Ten-year Treasury Note yields broke resistance at 2.00%. Not what one would expect if the economy was slowing and the Fed planned to sit on its hands rather than raise interest rates. Breakout above resistance indicates an advance to 2.25%. Recovery of long-term yields, however, is likely to be gradual, with much testing of support before we see a breakout above long-term resistance at 3.00%.
The Dollar Index surprised in the opposite direction, breaking support at 96. Not what one would expect if yields are rising. Breach of support suggests a test of the primary trendline at 92.
More effective than the riot police: your mama
This mother didn’t take kindly to her son participating in the Baltimore riots sparked by the death of Freddie Gray. The angry Baltimore mom recognized her masked son throwing rocks at police on television. That didn’t sit well with her.