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A top Polish MoD official, a man of “sober and strongly pro-American views” opines about Barack Obama and his national security staff:
“…You have no idea how many promises we’ve been given, even by the President himself, but there’s never any follow-up, it’s all talk. He thinks he’s on Oprah.” When I asked if he thought America would come to Poland’s aid in a crisis, he said laconically, “I’d flip a coin.”
Read more at Poland Prepares for Russian Invasion | The XX Committee.
Michael Pettis’ argues that not only are SOEs “destroying value in the aggregate on a huge scale” but misallocated investment is endemic in China.
I have to confess that the reason I started saying in 2006-07 that China was eventually going to replace 1980s Japan as the global archetype of investment misallocation was not because I had a lot of data proving my case. Overinvestment is almost impossible to prove until after the fact, especially when you consider the circularity of the data – the growth assumptions feed into the valuation of the investment, which then feeds back into the growth assumptions.
My reasons were much more “systemic”. I did not believe it was possible for any country not to experience significant wasted investment after so many years – more than a decade in this case – of the highest investment growth rate in the world funded by massive credit expansion at such incredibly low lending rates roughly one-third the nominal GDP growth rate, and 1-3 percentage points below the GDP deflator. Add more spicy ingredients to the stew – first, the very limited experience of Chinese bankers and regulators, and most of that in a one-way market, second, widespread moral hazard, third, weak corporate governance, fourth, very fuzzy data, and finally, no enforced system of accountability – and I found it impossible to doubt that investment was being dangerously misallocated.
He also dispels the counter-argument that “Western” models don’t apply to China and that “a very poor, low-capital-stock country far from the technological frontier like China” is able to absorb higher levels of investment.
In 2008 (Red Star) I compared China to a red star in astronomy:
Students of astronomy will tell you that a red star, far from indicating heat, is cooling appreciably. While its diameter may expand, its core is contracting and its temperature falling. Eventually it will either explode or shrink to become a dwarf star….
My warning of an imminent collapse may have been premature, but no economy can survive such high levels of investment misallocation without major upheaval. China risks following the boom-bust growth path of Japan and the Asian tigers in the 1980s and 1990s.
Read more at Should Beijing raise subway fares? | Michael Pettis' CHINA FINANCIAL MARKETS.
The yield on ten-year Treasury Notes recovered above the former support level at 2.30%, suggesting another test of 2.50% and the descending trendline. Reversal below 2.30%, however, would warn of another test of primary support at 2.00%. 13-Week Twiggs Momentum below zero continues to signal a primary down-trend.
* Target calculation: 2.30 – ( 2.60 – 2.30 ) = 2.00
The Dollar Index respected its new support level at 84.50 and recovery above 86.5 would confirm a primary advance to 89*. Rising 13-week Twiggs Momentum suggests a healthy (primary) up-trend. Failure of support at 84.50 is unlikely, but would warn of correction to the primary trendline.
* Target calculation: 84 + ( 84 – 79 ) = 89.00
Market capitalization as a percentage of (US) GNP is climbing and some commentators have been predicting a reversion to the mean — a substantial fall in market cap.
But corporate profits have been climbing at a similar rate.
Wages surged as a percentage of value added in the first quarter (2014) and profit margins fell sharply, adding fresh impetus to the bear outlook. But margins recovered to 10.6% in the second quarter.
Further gains in the third quarter would suggest that profits are sustainable. Research by Morgan Stanley supports this view, revealing that improved profit margins are largely attributable to the top 50 mega-corporations in the US:
Mega cap companies (the largest 50 by size) have been able to pull their margins away from the smaller companies through globalization, productivity, scale, cost of capital, and taxes, among other reasons. We argue against frameworks that call for near-term mean reversion and base equity return algorithms off the concept of overearning. Why? The margins for the mega cap cohort in the last two downturns of 2001 and 2008 were well above the HIGHEST margins achieved during the 1974-1994 period. To us, this is a powerful indication that the mega cap cohort is unlikely to mean revert back to the 1970s to 1990s average level.
(From Sam Ro at Business Insider)
Also interesting is The Bank of England’s surprise at the lack of inflation in response to falling unemployment. One would expect wage rates to rise when slack is taken up in the labor market, but this has failed to materialize. It may be that unemployment is understated — and a rising participation rate will keep the lid on wages. If this happens in the US it would add further support for sustainable profit margins.
Sir Jon Cunliffe, Deputy Governor for Financial Stability at the Bank of England:
“The big surprise, therefore, for the [Monetary Policy Committee] … has been the extent to which employment has been able to grow without generating more inflationary pressure through higher pay increases. Understanding why that has happened and how long it will persist is, in my view, now key to deciding policy.”
One possible explanation may be a longer-than-usual lag between falls in unemployment and pay pressure emerging, which could mean that inflationary pressure is building in the pipeline that will be more difficult to curtail if the Bank does not act now. However, another is that a combination of factors has caused labour supply – the amount of hours of labour available to the economy – to be much stronger than in previous recoveries, for example due to the increase in women’s state pension age and changes to the incapacity benefits regime. And the fall in unemployment has included a high number of long-term unemployed, who probably act as less of a drag on pay.
Yet despite the biggest squeeze on real incomes for nearly a century, there appears to be little evidence that workers are demanding a catch-up in pay, Jon observes, possibly due to a shift in the psychology of UK workers resulting from the sharpness of the recession and the years of austerity that have followed it.
Read more at Bank of England | Publications | News Releases | News Release – Monetary policy one year on – speech by Sir Jon Cunliffe.
From Isabella Steger and Fiona Law in Hong Kong and
Chun Han Wong in Beijing:
A leading Hong Kong politician was stripped of his seat on China’s main advisory body after contradicting Beijing’s views, in another step to quiet dissent during month-long protests in the former British colony.
The Chinese People’s Political Consultative Conference voted Wednesday to boot Hong Kong lawmaker and businessman James Tien, who last week called on the city’s chief executive to resign over his handling of demonstrations seeking freer elections.
Mr. Tien, the head of Hong Kong’s pro-business Liberal Party, was removed over “improper remarks,” according to China’s state-run Xinhua News Agency.
A telltale sign of a leader about to crash and burn: when they sack advisers who speak out and question the official party line.
Read more at China Advisory Body Boots Hong Kong Lawmaker James Tien – WSJ – WSJ.
The Australian Dollar continues to test resistance at $0.8900. Tall shadows in the past few weeks suggest committed sellers. Breach of primary support at $0.8650 would warn of another decline. 13-Week Twiggs Momentum below zero also indicates a primary down-trend.
* Target calculation: 0.87 – ( 0.94 – 0.87 ) = 0.80
ASX 200 broke resistance at 5440, suggesting another test of 5660. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure. Reversal below 5440, however, would warn of a test of support at 5250.
The ASX 200 VIX below 15 continues to indicate low risk typical of a bull market.
Hong Kong’s Hang Seng Index is testing support at 23000. Narrow consolidation warns of continuation to test primary support at 21200. Reversal of 13-week Twiggs Money Flow below zero suggests a primary down-trend. Breach of support at 21200 would confirm.
China’s Shanghai Composite Index is retracing after penetration of its secondary trendline, but at this stage it’s no more than a secondary correction. Hong Kong could weigh on the index, however. Reversal of 13-week Twiggs Money Flow below zero would warn of a primary down-trend.
* Target calculation: 2250 + ( 2250 – 2000 ) = 2500
India’s Sensex broke clear of its recent flag formation and is again testing resistance at 27000. Bearish divergence on 13-week Twiggs Money Flow remains a concern, but breakout above 27000 would indicate an advance to 28000*. Reversal below 26000 would signal a correction to the primary trendline.
* Target calculation: 27000 + ( 27000 – 26000 ) = 28000
Germany’s DAX is testing resistance at 9000. Reversal below 8900 would suggest another decline with a target of 8000*. 13-Week Twiggs Money Flow below zero warns of long-term selling pressure; a peak below zero would confirm a primary down-trend. Recovery above 9000 is unlikely, but would suggest a rally to 9800.
* Target calculation: 9000 – ( 10000 – 9000 ) = 8000
The Footsie has also run into resistance, at 6400/6500. Respect would signal a decline to 6100*. Declining 13-week Twiggs Money Flow indicates medium-term selling pressure, but nowhere near as weak as the DAX.
* Target calculation: 6500 – ( 6900 – 6500 ) = 6100
Dow Jones Industrial Average penetrated its descending trendline, suggesting that the correction is over. Recovery above 17000 would signal an advance to 18000* — confirmed if follow-through above resistance at 17300. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure. Respect of resistance at 17000 is unlikely, but would warn of another test of 16350.
* Target calculation: 17000 + ( 17000 – 16000 ) = 18000
The Nasdaq 100 recovered above its descending trendline and resistance at 4000, signaling an advance to 4500*. Follow-through above 4100 would confirm. Recovery of 13-week Twiggs Money Flow above 35% would flag buying pressure. Reversal below 4000 is unlikely, but would warn of a test of another test of the rising trendline.
* Target calculation: 4100 + ( 4100 – 3700 ) = 4500