“Economics Lecturer Number 14,000,006” Originally aired on ABC TV: 30 May 2013
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Forex: Aussie, Yen and Euro find support
The Aussie Dollar broke support at $0.96 against the greenback before retracing, the long tail indicating buying pressure. Expect a weak bear rally to test resistance at parity before another decline breaches primary support, offering a target of $0.90*.
* Target calculation: 0.96 – ( 1.02 – 0.96 ) = 0.90
The euro has so far respected primary support at $1.27. Breakout above resistance at $1.30 would suggest a primary up-trend; confirmed if the euro follows through above $1.32. Breach of support is unlikely, but would offer a target of $1.20/$1.22*.
* Target calculation: 1.27 – ( 1.32 – 1.27 ) = 1.22
The greenback retreated sharply against the yen as Japanese investors repatriate offshore bond and stock investments — see Mrs Watanabe Brings Home the Bacon. But the longer term trend is unchanged. Respect of support at ¥100 would signal a fresh primary advance. Breach of the long-term declining trendline indicates the 30-year secular bear trend is over. Long-term target for the advance is the 2007 high at ¥125*.
* Target calculation: 100 – ( 100 – 75 ) = 125
Shanghai rising but Nikkei, ASX selling pressure
Germany’s DAX is retracing to test the new support level at 8000. Respect would confirm a primary advance, but bearish divergence on 13-week Twiggs Money Flow warns of selling pressure — a fall below zero would warn of a reversal. Breach of 8000 would test the rising trendline around 7500.
Dow Jones Europe encountered strong resistance at 290, but remains in a primary up-trend. Penetration of the rising trendline would warn that the trend is losing momentum, while failure of support at 270 would signal a reversal.
The Nikkei 225 ran into massive selling between 15000 and 16000. The gravestone on the monthly chart, supported by bearish divergence on 13-week Twiggs Money Flow, warns of a reversal.
India’s Sensex is headed for a test of long-term resistance at 21000, but bearish divergence on 13-week Twiggs Money Flow warns of selling pressure. Respect of resistance would indicate another test of primary support at 18000.
The Shanghai Composite Index respected support at 2150 and is headed for another test of resistance at 2500. Breakout above 2500 would complete an inverted head and shoulders reversal (as indicated by orange + green arrows), signaling a primary up-trend. That is still some way off but would be good news for Australia’s beleaguered resources stocks.
The ASX 200 is headed for a test of primary support at 4900. Breach would also penetrate the rising trendline, indicating reversal to a primary down-trend. Bearish divergence on 13-week Twiggs Money Flow has been warning of strong selling pressure. The falling Aussie Dollar is forcing a retreat of offshore investors from the market, but the boost to export earnings is likely to present a buying opportunity for Australian investors when the correction is over.
Charter schools study shows better outcomes with less public funds
Charter schools receive less funding than equivalent public schools, but in many cases are achieving improved outcomes for disadvantaged kids. Ray Fisman writes:
Minnesota’s charter school law allowed educators and other concerned individuals to apply to the state for permission to operate a government-funded school outside of the public education system. In order to obtain and keep their licenses, these new schools needed to show they were serving their students effectively, based on goals laid out in the school’s “charter.” City Academy, America’s first charter school, opened in St. Paul the following year. Its mission was to get high-school dropouts on track to vocational careers, and it is still operating today.
Principals are able to operate outside the constraints of the public education system and are assessed on results.
…..While they’re funded with public money, they generally operate outside of collective bargaining agreements (only about one-tenth of charter schools are unionized) and other constraints that often prevent principals in public schools from innovating for the good of their students (so the argument goes). In exchange for this freedom, they generally get less funding than public schools (though they’re free to look for private donations, and many do) and have to prove that they are making good on the promises set out in their charters, which often means showing that they improve their students’ performance on statewide standardized tests.
The program has been so successful that there are now almost 6000 charter schools nationwide. Fisman reports on a study of enrolments at six Boston charter schools between 2002 and 2008:
“….Getting into a charter school doubled the likelihood of enrolling in Advanced Placement classes (the effects are much bigger for math and science than for English) and also doubled the chances that a student will score high enough on standardized tests to be eligible for state-financed college scholarships. While charter school students aren’t more likely to take the SAT, the ones who do perform better, mainly due to higher math scores. The upshot of this improvement in college readiness is that, upon graduation, while charter and public school students are just as likely to go on to post-secondary education, charter students enroll at four-year colleges at much higher rates. A four-year college degree has historically meant a better job with a higher salary……. a ticket to a better life for many students.”
He warns that “Not every charter school is right for every kid” but they do highlight the benefits of a decentralized education system where schools are assessed on outcomes rather than conformity to a program. Other studies have shown that increased public funding does not improve education outcomes. Ever wondered why bureaucrats continue to promote this as a solution?
Read more at Do charter schools work? Slate | Ray Fisman
Australia: Ford is the tip of the crisis
By Houses and Holes — cross-posted from Macrobusiness.com.au
It’s fascinating to watch the exit of Ford shake up commentary alliances and ideology.
The loon pond that dominates Australian business media is out in force with soothing words that Australian car manufacturing needs to be let go gently into that good night.
Bill Scales appears at the AFR to argue:
…..while it will be tempting to see this as a sign of the demise of Australian automotive manufacturing, it’s not. This decision is a direct result of the well-recognised, well-understood and deliberate decisions by Ford in Australia and the US.
However it does have important implications for public policy in Australia. This is a good example why governments should not provide company or industry- specific assistance. Governments and bureaucrats can never understand the strategic or commercial imperatives of individual businesses. So they cannot hope to successfully design company or industry-specific assistance programs that make any fundamental difference to the underlying economics of that company or industry. If the strategic direction or intent of a government policy for any company or any industry is not consistent with the strategic or operational direction of that company or industry, and it rarely is, then money provided to them by governments is likely to be wasted.
High priestess of the pond, Jennifer Hewitt, wants outright liquidation:
The national sympathy and attention given to 1200 Ford workers who will be out of a job in three years’ time shouldn’t obscure economic reality. Car manufacturing in Australia has been living on borrowed time – and permanently borrowed tax-payer money for far too long.
That can never be solved by additional government assistance or new industry plans or emotive rhetoric about how car manufacturing in Australia is so special. This only delays the inevitable.
But the response is part of the national semi-panic about the future of manufacturing in Australia. Both Julia Gillard and Tony Abbott stress the need for Australia to be a place that continues to “make” things. Just what new things should be made remains elusive. What is clear is it is will not be cars long term. That is despite the billions of dollars in government subsidies.
…the end of Ford manufacturing shouldn’t in itself be the sort of national crisis suggested by the massive reaction to the company’s announcement.
The Ford Falcon is an iconic loss rather than an economic one, a dream of the past rather than the future.
The AFR editorial and Judith Sloan at The Australian, card carrying members of the pond, are also happy to see Ford go. However, some of the more sane commentators are as well. Alan Mitchell at the AFR, John Durie at The Australian and Bernard Keane at Business Spectator are all for it.
What is missing, as usual, is the only thing that actually matters to the reader and the nation: context.
In 2009, the US faced an analogous decision about whether to let one of its big three auto-makers go to the wall (there were many differences as well). As the GFC tore its GDP to pieces, the government stepped into the breach and saved Chrysler, bankrupted the company, broke its union contracts, reorganised its cost base, sold much of it to FIAT and the company relaunched. Why did the global home of “free market capitalism” bother?
The cheap answer is to save jobs. But there is more to it than that. It is about productivity and not in the way you might think.
We all know that productivity is the key to national standards of living. Only through productivity growth do we sustainably increase our competitive advantage, capital formation, incomes and employment. But, I hear you ask, propping up dud car companies is bad for productivity, right?
Wrong, or at least, overly simplistic.
The issue is this. Manufacturing accounts for a huge slice of productivity potential in all economies. Without it, any economy will struggle to generate long term high productivity growth. Mechanisation, improved processes, innovation and technical progress are the bread and butter of productivity growth. They simply do not exist to the same extent in services, nor, for the most part, in mining (though the runoff in the boom will be good for the next few years). The following chart from McKinsey makes the point. Manufacturing contributes disproportionately to productivity, innovation and exports:
This is the first question that Ford’s departure raises about Australia’s long term economic context. The car industry may or may not survive the shakeout but Australian manufacturing has already declined to only 7% of GDP and is clearly set to plunge further as capex expectations run at levels first seen in the 1980s.
Of the thirty developed economies in the world comprising the OECD, this level of contribution to GDP is last, tied with the tax haven of Luxembourg.
Our elite – the government, mining magnates and the media – have decided that manufacturing will be let go and we will instead rely entirely upon highly priced dirt and houses. Australia’s elite policy makers are engaged in a gigantic experiment that flies in the face of economic history.
The second question is more immediate. What our elite forget or ignore is that selling dirt is a highly cyclical business. Put simply, they never expected the current cycle to end. But it is. Right now. And is about to become a MASSIVE drag on the economy:
Manufacturing is supposed to be one of those sectors picking up the slack along with other exports and more houses. Obviously the departure of Ford will damage any upside for a manufacturing bounce and it will also put a sizable dent in consumer confidence, making it harder for other sectors to rebound as well.
Short term and long, cyclically and structurally, this is a crisis, a crisis of our elite’s own making.
ASX 200 & All Ords selling pressure
The ASX 200 is testing medium-term support at 5150. Breakout would indicate a correction to 4900. Reversal of 21-day Twiggs Money Flow below zero — and the longer-term bearish divergence — warn of selling pressure.
* Target calculation: 5150 + ( 5150 – 4900 ) = 5400
The All Ordinaries weekly chart displays a longer-term bearish divergence on 13-week Twiggs Money Flow. Expect a test of the rising trendline at 4900.
The Large Cap ASX 50 rising faster than the ASX Small Ords confirms this is not a typical bull market. There is a high degree of risk aversion and sentiment of retail (mom+pop) investors is more accurately captured by the Small Caps index which represents the ASX 300 excluding ASX 100 stocks.
Australia: Property risk highest in a long time
Posted by Houses and Holes in Australian Property, May 20th 2013:
MB contributor, Rumpletstatskin, wrote an interesting post on the Australia property cycle this morning. In it he mused that:
The crucial lesson in all this is that Australian nominal asset prices have been supported by fiscal policy during the financial crisis, ongoing monetary policy adjustments, and foreign investment (including in mining infrastructure), which all supported employment and incomes.
This support allowed a slow melt adjustment since the financial crisis. Home prices have fallen, mortgage rates are down, and rents have increased. This means that buying a home is more affordable compared to renting than it has been for 15 years.
My message, if it wasn’t clear, is that if you have been holding off purchasing a home because of the risk of capital losses, then these risks are probably lower now than at any time in the past decade. Maybe prices will be a couple of percent lower at the end of next year, but I have a hard time wrapping my mind around downward price movement more severe than a couple more years of the slow melt, or around 3% in nominal terms. The chances of price gains is also now much higher.
Unfortunately this coming 2 year period is also likely to be economically unstable, with low wage growth and a fragile labour market. That is the catch with trying to time the residential property cycle – it is a game for players with lots of capital.
Cameron argues his post well but I vigorously disagree with these conclusions.
Australian property prices are not affordable on any spectrum that looks beyond the current cycle. Indeed, they remain at nose-bleed levels on any historical comparison.
Yet, prices have held at these high levels for over a decade and there is no saying that they won’t continue to do so. Throughout the GFC and afterwards I argued that the time of reckoning for the Australian housing bubble was not yet at hand. This was based largely upon the assumption that the nation had lots of firepower left in monetary and fiscal policy that would protect the downside. And so it turned out to be.
But each successive challenge has sapped these supports and insurance policies. Monetary policy is at 2.75% and probably has, at best, 1% of cuts left before it is exhausted. Fiscal policy too has limits now that the Budget guarantees bank borrowings. Not to mention the political paralysis preventing spending. We will never see another post-GFC stimulus program.
Most importantly, these limitations are apparent as the Australian economy enters a very serious challenge in the form of declining mining investment. In its editorial this morning the AFR wrote:
If Professor Garnaut is right, Chinese steel use per capita – the great driver of Australia’s resources boom – may not grow much further. He believes Australian resource investment will slide from 8 per cent of gross domestic product to just 2 per cent, effectively taking out about two years’ worth of national economic growth. This is already showing up in a string of profit warnings from mining services companies and an emerging slump in profitability in coal.
Think about that a moment. 6% of Australian GDP disappearing over the next three years before we even start to grow. This is the same forecast currently projected by ANZ and Goldman Sachs. It must be taken very seriously.
If this comes to pass, then it will be very difficult for Australia to avoid a recession and property bust of some kind. There will be very big falls in the dollar and they will protect Australian property prices to an extent. The fall will trap Asian investors already in the market but it will also deter future investors as currency risk becomes the new reality.
But the fall in the dollar is also going to hit consumers, much more quickly than it is going to benefit tradable sectors. Consumers will see purchasing power eroded as high inflation in oil and all imported goods overwhelms income growth. This will keep confidence under the cosh.
More to the point, a 6% draw down in business investment will hit the labour market hard and potentially trigger forced selling in property markets. Perth and Darwin especially are going to be at risk of property busts as the many project labourers on our major mining projects flood back into town with nothing to do. Not to mention the trouble we’ll see in the many sundry industries that have benefited from the mining boom. Brisbane is at risk of this dynamic too but has already corrected sharply so has less downside.
These factors, along with a generalised stalling in income growth, have the potential to feed bad loans back into the banking system. The majors can absorb serious losses. But how serious? And how much credit rationing would it take to pop the grossly oversupplied Melbourne and Canberra property markets, the latter afflicted with big job losses from a new government as well? Sydney is strong but only so long as credit keeps flowing.
There are of course arguments about high immigration, underlying demand, under supply and rising rents to support the market. And they will play some part. But none of these will matter in the circumstances I’m describing. If there are not enough jobs then people will move in together. Shortage will turn to surplus.
Cameron’s argument that the property cycle could be approaching a turning point will hold if these turn out to be normal times. A moderate retrenchment in mining investment will allow time to rebalance the economy so long as the dollar falls. Even so, things will seem abnormal. Inflation be high and property prices may rise in nominal terms but not so much in real.
But that is far from certain, indeed, may not even be the base case.
I am not saying any of this will happen. But if the mining investment cliff turns out to be precipitous in the next two years then the risk of a property shakeout is higher than at any time I can remember.
Reproduced with kind permission from Macrobusiness Australia.
ASX 200 selling pressure builds as Aussie Dollar falls
The ASX 200 broke resistance at 5200, but bearish divergence on 13-week Twiggs Money Flow continues to warn of selling pressure.
The daily chart also shows a bearish divergence, suggesting a test of support at 5100/5120. Failure would indicate a correction, while respect would confirm an advance to 5400*.
* Target calculation: 5150 + ( 5150 – 4900 ) = 5400
Bipolar behavior of the market is highlighted by comparison of the ASX 50 Large Caps to the ASX Small Ords (ASX 300 – ASX 100). Small Caps tend to outperform Large Caps during a bull market, as can be seen from 2003 to 2007. But the current “bull market” gives out mixed signals, with Large Caps powering ahead while Small Caps remain in a down-trend. Demand for Large Caps seems to have been inflated by international capital flows.
And the falling Aussie Dollar, with a target of $0.96* against the greenback, is likely to lead to retreat of the ASX 50 and ASX 200 indices.
* Target calculation: 1.01 – ( 1.06 – 1.01 ) = 0.96
Forex: Aussie breaks support while Yen soars
The Aussie Dollar broke primary support at $1.015 and is testing parity against the greenback. Parity is not expected to hold and we are likely to see a test of the next major support level at $0.95/$0.96. Narrow fluctuation of 63-day Twiggs Momentum around zero continues to suggest a ranging market.
The euro is retreating, headed for another test of $1.2750. Respect would signal another attempt at $1.37, while failure would indicate a primary down-trend — testing long-term support at $1.20. The failed advance to $1.50 would be bearish; and breach of $1.20 would offer a target of $1.05*.
* Target calculation: 1.20 – ( 1.35 – 1.20 ) = 1.05
Rapid expansion of the monetary base by the Bank of Japan is fueling inflation fears and weakening the yen. Lars Christensen points out that, with competitive devaluation from all quarters, exports are not likely to play a major part in a Japanese recovery. What is more likely is a consumption and investment boom as households invest in real assets as a hedge against inflation.
The greenback broke resistance at ¥100 against the Japanese Yen — a one-third appreciation from the lows of 2011/2012. Expect retracement to test the new support level, but breach of the long-term declining trendline indicates the 30-year secular bear trend is over. Long-term target for the advance is the 2007 high at ¥125*.
* Target calculation: 100 – ( 100 – 75 ) = 125
Aussie Dollar shrugs off rate cut
The Aussie Dollar rallied off primary support at $1.015 despite a 25 basis points rate cut by the RBA, to a historic low of 2.75 per cent. Narrow fluctuation of 63-day Twiggs Momentum around zero suggests a ranging market. Follow-through above $1.03 against the greenback would suggest another test of $1.06.
Fall of the Aussie has long been predicted as commodity prices weakened, but capital inflows from investors and central bank diversification of their traditional dollar and euro holdings have shored up the AUD above parity. Capital flows, however, are fickle and will increase the severity of any eventual fall — so don’t grow complacent.