The ASX 200 penetrated its lower trend channel, indicating that the up-trend is slowing. This week’s long tail indicates short-term buying pressure but not necessarily a reversal. Breach of primary support at 5100 would warn of another decline (4700). Bearish divergence on Twiggs Money Flow indicates long-term selling pressure.
The ASX 300 Banks Index is consolidating between 7200 and 8000. Declining Twiggs Money Flow peaks warn of long-term selling pressure but this week’s blue candle suggests short-term support. A test of primary support at 7200 remains more likely but a failed swing that recovers to 8000 would be a bullish sign. Breakout above 8000 (still unlikely) would signal a primary up-trend.
Did the RBA just signal the end of rate cuts and no-one noticed?
Well, not exactly no-one. Goldman Sachs chief economist Tim Toohey reckons the speech RBA assistant governor Chris Kent delivered on Tuesday amounts to an explicit shift to a neutral policy stance.
Dr Kent spoke about how the economy has been doing since the mining boom, and in particular how its performance matched the RBA’s expectations.
Reflecting on the RBA’s forecasts of recent years, Dr Kent essentially framed the RBA’s earlier rate cut logic around an initial larger than expected decline in mining capital expenditure and subsequent larger than expected decline in the terms of trade, Mr Toohey said.
Having so closely linked the RBA’s easing cycle to the weakness in the terms of trade (and earlier decline in mining investment), Dr Kent’s key remark was to flag “the abatement of those two substantial headwinds” and highlight that this “would be a marked change from recent years”….
Washington-based International Strategic Studies Association warns that Australian banks’ crackdown on foreign investor lending may precipitate a collapse in the apartment housing market:
“The banks clearly believe Australian real estate values will decline, so they are attempting to avoid that risk. They’ve learned from the US collapse that seizing real estate collateral is a no-win scenario when the volume is great and the market slow.”
“In so doing, they precipitate the market collapse but are less exposed to it.”
It comes after Australia’s richest man, billionaire property developer Harry Triguboff, warned that a “very significant” number of Chinese buyers were now failing to settle their off-the-plan units and urgent action was needed.
But Mr Triguboff, founder of Australia’s biggest apartment builder Meriton, warned the real risk was looming in the new wave of developments. As apartment price growth stalls or goes backwards, the risk of buyers walking away from their deposits grows.
Spot Gold found support at $1325/ounce after retracing from resistance at $1350. Short candles suggest weak selling pressure. Respect of support at $1325 would signal another test of the July high at $1375. Follow-through above $1350 would confirm. Breakout above $1375 would offer a target of $1450* but expect strong resistance if the Fed appears intent on raising interest rates. Breach of support at $1300 is unlikely but would warn of a test of primary support at $1200/ounce.
In Australia the All Ordinaries Gold Index ($XGD) is testing support at 4500. Respect is likely and would signal a test of the recent highs around 5600. A weakening Australian Dollar/US Dollar would tend to mitigate the impact of a fed rate hike. Breach of 4500 is unlikely but would warn of trend reversal.
Spot Gold rallied to test resistance at $1350/ounce. Momentum above zero continues to indicate a primary up-trend. Short retracement (short candles and short duration) would signal a test of the July 2016 high at $1375. Breakout above $1375 would offer a target of $1450*. Breach of support at $1300 is unlikely but would warn of a test of primary support at $1200/ounce.
In Australia the All Ordinaries Gold Index ($XGD) found support at 4500. Expect a test of the recent highs around 5500. The Index is likely to follow the spot gold price, provided the Australian Dollar/US Dollar remains fairly stable. Breakout above 5500 would signal a fresh advance, with a target of 6500*. Breach of 4500 is unlikely but would warn of trend reversal.
Naive investors are likely to automatically pursue the asset classes that offer the highest yields. Recent performance is more likely to attract our attention than more stable longer-term performance. Josh Brown highlighted last year that mutual funds that attracted the most new investment tended to underperform funds that attracted the least new inflows. I suspect that the same applies to asset classes.
If we consider each of the asset classes highlighted, it is clear that performance over the next 10 years is likely to be substantially different from the last decade.
Source: 2016 Russell Investments/ASX Long-term Investing Report
Australian Shares
Australian Shares endured a (hopefully) once-in-a-lifetime financial crisis in 2008. 10-Year performance is going to look a lot different in two years time (20-years is 8.7% p.a.). Prices of Defensive stocks, on the other hand, have since been inflated by record low interest rates.
Residential Property
Residential property prices boomed on the back of low interest rates and an influx of offshore investors. But growth is now slowing.
Listed Property
REITS were smashed in 2008 (20-years is 7.7% p.a.). But before contrarians leap into this sector they should consider the impact of low interest rates, with many trading at substantial premiums to net asset value.
Bonds & Cash
Low interest rates again are likely to impact future returns.
Global Shares
Global Shares also weathered the 2008 financial crisis (20-year performance (unhedged) is 6.4% p.a.). Subsequent low interest rates had the greatest impact on Defensives, while Growth & Cyclicals trade at more conservative PEs.
I won’t go through the rest of the classes, but there doesn’t seem to be many attractive alternatives. It may be a case of settling for the cleanest dirty shirt, and the least smelly pair of socks, in the laundry basket.
During the Federal Election campaign, Labor’s shadow treasurer, Chris Bowen, confirmed that the overall tax burden would hit 24.8% GDP by 2026-27 under Labor, up from 23.5% in 2019-20:
Mr Bowen told The Australian Financial Review that his number was lower than the 25.7 per cent of GDP that Treasurer Scott Morrison claimed Labor would deliver, but higher than the Coalition’s ceiling of 23.9 per cent.
Mr Bowen said the alternative would be spending cuts to essential services.
“Let me be clear: tax-to-GDP will be higher over the medium term under both the Coalition and Labor government. Either that, or the Coalition will continue to deliver more savage cuts to Medicare and education,” he said.
The admission was immediately seized upon by Treasurer Scott Morrison, who claimed that a higher tax burden would damage the Australian economy’s growth:
“Labor might want to think you can have a tax-to-GDP ratio approaching 26 per cent and that will have no impact on the Australian economy. They are kidding themselves…”
The Coalition’s 23.9% of GDP ceiling on tax is based on the National Commission of Audit’s recommendation that taxation revenue as a share of GDP should be capped at 24%.
The assumption that higher tax equals less economic growth is a popular one among conservatives, not just in Australia.
However, four American academics have published an important new book, entitled “How Big Should our Government Be?”, which examines in detail the vexed issue of government size and growth.
According to the Washington Post, which provides a good summary of the book, there is actually a positive correlation between the size of government and economic growth per capita:
Using data on 12 advanced economies from 1870, the authors of the book conclude with the following:
“In the century and a half since then, government expenditures as a share of GDP have risen sharply in these countries. Yet they didn’t experience a slowdown in their long-run economic growth rates. The fact that economic growth has been so stable over this lengthy period, despite huge increases in the size of government, suggests that government size probably has had little or no impact on growth.”
The authors also note that “A national instinct that small government is always better than large government is grounded not in facts but rather in ideology and politics,” and that the evidence “shows that more government can lead to greater security, enhanced opportunity and a fairer sharing of national wealth.”
In particularly, the authors call for more investment in infrastructure, education, as well as proper safety nets for the unemployed and those that get sick.
The Turnbull Government should take note as it considers taking an axe to Australia’s public services.
MY REBUTTAL:
Let me start by saying that I am not in favor of austerity as a response to a major economic slow-down. If anything that will exacerbate unemployment and prolong the contraction. Instead I advocate major infrastructure programs to stimulate the economy. But with two caveats: (1) investments must generate a market-related return on investment; and (2) there must be strong involvement from the private sector. Investment in assets that do not generate direct revenue leaves future taxpayers with a pile of debt and no income (or saleable assets) that can service (or repay) it. Involvement of the private sector should be structured to ensure that the benchmark of market-related returns is not superseded by projects selected to win the most votes. Also, the private sector should have skin in the game to restrict cost blowouts. They are not immune to cost blowouts but are not in the same league as big government.
I also believe that weak government will harm an economy. We need strong regulators, rule of law, police and military to ensure stability. Also spending on education and science to foster growth.
But the article by Jared Bernstein in the Washington Post typifies the kind of rubbish pedaled to voters around election time. And seems to have been swallowed hook-line-and-sinker by the author of the MB article.
Where do I start?
First, the fact that a book by four unnamed academics is cited as proof in itself should tell us how much credibility to attach to their claims.
Second, the author mentions that there is “a positive correlation between the size of government and economic growth per capita…”. A positive correlation is any correlation coefficient greater than zero. The highest correlation is a value of 1.0 which represents a perfect fit. No correlation coefficient is provided in either article and judging from the graph I would assume it is closer to zero than 1, meaning there is only a vague correlation. If you ignore the line drawn on graph, the data looks randomly scattered with no clear trend.
Also the author overlooks that he is only dealing with a sample of 12 countries, which again would give a low level of confidence in any result.
Further, in the WP article the author concedes that correlation is not equal to causation: “That positive slope in the figure on the left above could easily be a function of reverse causality: As economies grow, their citizens demand more from them.” This is omitted in the MB report.
Then the study of data for the 12 economies from 1870 up top the present is used to argue that growth in government expenditures does not hinder GDP growth. I would be surprised if the data didn’t show growth in government across all countries as it spans the era from horse-drawn carts up to the area of modern jets and space travel. From the country GP with a stethoscope to modern nuclear medicine and MRIs. From slate and chalk to super-computers and digital technology. Of course the demand for infrastructure has grown exponentially over that time. To argue otherwise would be stupid.
But that is not an argument in favor of a welfare state or increased government expenditure. In fact, most of those advances in technology were driven by private individuals and not by government.
Finally, I will use another graph from “How big should our government be,” Bakija et al in the same Washington Post article to argue the case for lean government (as opposed to small government circa 1870):
The graph shows that tax revenues as a percentage of GDP have steadily declined, since the late 1990s, for every country except France. Why has this occurred in even model welfare states like Sweden and, to a lesser extent, Canada? Simply because they reached “peak welfare” in the 1990s and realized that the only way to revive GDP growth was to reduce the role of government in the economy.
The only one who hasn’t accepted the evidence is France. Which may well be contributing to their poor economic performance.
The ASIC review of investments banks found that not only do the heavyweights of Australia’s financial system have difficulty in managing their conflicts of interest they also financially reward staff for potentially conflicted behaviour.
…..So ugly is the result the Australian Securities and Investments Commission has warned the people often known as the smartest men and women in the room it will take action against the culprits if the poor behaviour continues.
……Managing conflicts of interest are crucial for investment banks because often one part of the bank is advising on an asset sale or an initial public offering while the bank’s research arm is producing research for the investment banks’ investor clients about the quality of the assets or the IPO.
….ASIC said it had also found “instances of remuneration structures where research remuneration decisions, including discretionary bonuses, took into account research analyst involvement in marketing corporate transactions”.
The review also found “instances with mid-sized firms where research reports on a company were authored by the corporate advisory team that advised the company on a capital-raising transaction or had an ongoing corporate advisory mandate”.
Results of the review come as no surprise. When there is a conflict between profits with multi-million dollar bonuses and independence the outcome should be obvious.
Having worked in the industry, I believe that the only way to achieve independence is to separate investment banks from research houses, with no financial linkage. A professional body for research houses would ensure independence in much the same way as the auditing profession. There is no better way of enforcing good behavior than the threat of censure from a professional body that has the power to prevent its members from practicing.
The CLARA private consortium claims a high speed rail network between Sydney and Melbourne could be paid for at no cost to the government through a technique known as value capture. What is still not clear is whether there will be enough value created by the project to capture in order to pay for the project.
Value capture is well established techniques used by governments to offset some of the costs of new transport infrastructure, for instance the taxes paid on apartments built near a new train station help to offset the cost of the transport investment. The taxes paid by warehouses or factories built near new freeways are another good example of value capture.
CLARA’s proposal is that the high speed rail can be paid for by purchasing land cheaply in regional New South Wales and Victoria then developing a string of new towns alongside the High Speed Railway. The sale of land would fund the High Speed Railway’s construction and the new residents would provide patronage for the railway.
This form of development was once common place with the suburban railways of London and the urban railways of Tokyo and Hong Kong being the most famous examples. However, this sort of value capture by private investors is much rarer today and unprecedented on this scale.
The first stage proposal involves a A$13 billion link from Melbourne to the Greater Shepparton region of Northern Victoria, the full link to Sydney with a branch to Canberra would cost many times this much. The CLARA consortium is claiming the exact figure as commercial in confidence, but a cost of around $200 billion has been suggested in the media.
CLARA haven’t released the full business case for the network but value of the project can be assessed by its benefits and whether or not the project will capture them.
High speed rail creates benefits for two types of travellers, longer distance commuters and intercity travellers. Previous proposals for high speed rail have floundered in Australia because the benefits to intercity travellers have just not been enough to justify the costs of developing and running it.
Australian cities are just too far apart for a high speed rail to be competitive on travel time and fares with aviation. Perhaps this will change over the 40 years that it will take to build the network but there is no evidence that this is happening at the moment.
Unlike previous plans, CLARA is emphasising the potential of the longer distance commuter market (e.g. Canberra or Goulburn to Sydney). There is a developing market for commuting by High Speed Rail in the UK amongst other countries.
There is no doubt that high speed rail would be faster over these sorts of distances than the alternatives (ordinary rail, coaches, private car) although it might be a challenge to schedule high speed intercity services alongside slower commuter services and building dedicated high speed rail lines into the Central Business Districts of Sydney and Melbourne will be very expensive. These travellers will gain benefits from a faster service and also from being able to purchase houses in more affordable regional areas.
Land prices are a capitalisation of the benefits that accrue to people who use that land. In the case of residential land, it reflects the benefits to be had in terms of access to schools, jobs, recreation facilities, etc.
Improved transport services reduce the time it takes to get to existing jobs and activities plus makes it possible to travel to additional jobs and activities within a reasonable time and, finally, encourages new jobs and activities to be created through the process of economies of scale and agglomeration.
Some of these benefits accrue to the travellers, others to the owners of the businesses who can hire from a bigger pool of potential employees and service a bigger pool of customers. Because of these benefits travellers and businesses bid up the price of land in places near the improved transport services thus sharing the benefits with the land owners (and with governments in the form of the taxes paid on income, property transactions and developments). It is this increase in land that CLARA hopes to tap into to fund the new high speed rail.
This project will only be successful if the new rail service generates enough benefits and this will only happen if people really will be prepared to pay higher fares for high speed rail or prefer lower fares on traditional train services from cities closer in (i.e. Wollongong). If not, will governments have to ban development in other cities to force people to move to CLARA’s townships in order to support the developers of the HSR?
Value capture is a rediscovered form of financing major projects that could prove an innovative source of funds but it does not remove the need for a project’s benefits to exceed its costs.
In a blistering attack on decades of common government practice, Australian Competition and Consumer Commission chairman Rod Sims said the sale of ports and electricity infrastructure and the opening of vocational education to private companies had caused him and the public to lose faith in privatisation and deregulation.
“I’ve been a very strong advocate of privatisation for probably 30 years; I believe it enhances economic efficiency,” Mr Sims told the Melbourne Economic Forum on Tuesday. “I’m now almost at the point of opposing privatisation because it’s been done to boost proceeds, it’s been done to boost asset sales and I think it’s severely damaging our economy.”
Mr Sims said privatising ports, including Port Botany and Port Kembla in NSW, which were privatised together, and the Port of Melbourne, which came with conditions restricting competition from other ports, were examples where monopolies had been created without suitable regulation to control how much they could then charge users……
Deregulating the electricity market and selling poles and wires in Queensland and NSW, meanwhile, had seen power prices almost double there over five years, he said.
I have also been a strong advocate of privatising state assets, but Rod Sims raises some important concerns that need to be addressed.
There is a strong trend in capitalist economies away from free enterprise and towards privatised “monopolies”. Investors place a great deal of emphasis when evaluating stocks on a company’s “economic moat” or competitive advantage. Both of which imply the ability to restrict competition. While this may maximize revenue for the individual economic unit, it is harmful for the economy as a whole.
Which brings me back to Mr Sims’ point. Higher prices paid for infrastructure services destroy the competitiveness of the economy as a whole, with profound implications for exports and productivity.
