Canada’s TSX 60 is testing its 2008 high at 900. Rising 13-week Twiggs Money Flow troughs above zero indicate strong buying pressure. Expect resistance at 900, but this is unlikely to hold. Reversal below the rising (secondary) trendline is not expected, but would warn of a correction to 800/820.
Dow Jones Industrial Average found support at 16950, with long tails indicating short-term buying pressure. Recovery above 17075 would indicate a fresh advance; above 17150 would confirm. A close below 16950 is less likely, but would warn of a correction to 16500. The decline of 21-day Twiggs Money Flow indicates mild selling pressure typical of a consolidation.
* Target calculation: 16500 + ( 16500 – 15500 ) = 17500
The S&P 500 also displays a long tail indicative of buying pressure. Recovery above 1985 would indicate another attempt at 2000. Further consolidation below the 2000 resistance level is likely. Reversal below 1950, however, would warn of a correction to 1900.
* Target calculation: 1500 + ( 1500 – 750 ) = 2250
The CBOE Volatility Index (VIX), trading at low levels last seen in 2005/2006, is typical of a bull market.
The founder of Platinum Asset Management, billionaire investor Kerr Neilson, has released an interesting report warning about Australia’s frothy house price valuations and the risks of a correction once “conditions change, [and] a lot of the assumptions are found wanting”.
The report highlights four “facts” about Australian housing:
1. Returns from housing investment are often exaggerated and flattered by inflation.
2. Holding costs of rates, local taxes and repairs are estimated to absorb about half of current rental yields.
3. Long-term values are determined by affordability (wages + interest rates).
4. To be optimistic about residential property prices rising in general much faster than inflation is a supreme act of faith.
It then goes on to examine each of these facts.
On returns, the report notes that “the rise in the price of an average home in Australia…[has] been about 7% a year since 1986. In dollar terms, the average existing house has risen in value by 6.3 times over the last 27 years. No wonder most people love the housing market!”
But rental returns have gotten progressively poor:
…we earn a starting yield of say 4% on a rented-out home or if you live in it, the equivalent to what you do not have to pay in rent. But again, looking at the Bureau of Statistics numbers, they calculate that your annual outgoings on a property are around 2%. This takes the shape of repairs and maintenance, rates and taxes, and other fees. This therefore reduces your rental return to 2%, and what if it is vacant from time to time?
And the prospect for future solid capital growth is low due to poor affordability:
…the last 20 or so years has been exceptional. Australian wages have grown pretty consistently at just under 3% a year since 1994 – that is an increase of about 1% a year in real terms.
Affordability is what sets house prices and this has two components: what you earn and the cost of the monthly mortgage payment (interest rates).
…even though interest rates have progressively dropped, interest payments today absorb 9% of the average income, having earlier been only 6% of disposable income.
Today, houses cost over four times the average household’s yearly disposable income. At the beginning of the 1990s, this ratio was only about three times household incomes. As the chart over shows, this looks like the peak.
Finally, the report argues that for Australian home prices to significantly outpace inflation over the next ten years, as they have in the past, “would require a remarkable set of circumstances”, namely a combination of:
1. Continuing low or lower interest rates.
2. Willingness to live with more debt.
3. Household income being bolstered by greater participation in the income earning workforce.
4. Average wages growing faster than the CPI.The last point is improbable seeing that wages and the CPI have a very stable relationship, while the other points are not very likely.
Reproduced with kind permission from Macrobusiness.
US unemployment has fallen close to the Fed’s “natural unemployment rate” of close to 5.5%. Does that mean that all is well?
Chart: The unemployment rate vs. Fed's measure of "natural" unemployment rate (NAIRU) over the past 20 years – pic.twitter.com/zq2fxtcHLt
— SoberLook.com (@SoberLook) July 28, 2014
Not if we consider the participation rate, plotted below as the ratio of non-farm employment to total population.
Participation peaked in 2000 at close to 0.47 (or 47%) after climbing for several decades with increased involvement of women in the workforce. But the ratio fell to 0.42 post-GFC and has only recovered to 0.435. We are still 3.5% below the high from 14 years ago.
When we focus on male employment, ages 25 to 54, we exclude several obscuring factors:
The chart still displays a dramatic long-term fall.
From Vladimir Sorokin:
Yeltsin, who was tired after climbing to the top of the pyramid, left the structure completely undisturbed, but brought an heir along with him: Putin, who immediately informed the population that he viewed the collapse of the USSR as a geopolitical catastrophe. He also quoted the conservative Alexander III, who believed that Russia had only two allies: the army and the navy. The machine of the Russian state moved backward, into the past, becoming more and more Soviet every year.
In my view, this fifteen-year journey back to the USSR under the leadership of a former KGB lieutenant colonel has shown the world the vicious nature and archaic underpinnings of the Russian state’s “vertical power” structure, more than any “great and terrible” Putin….A country such as this cannot have a predictable, stable future….
Unpredictability has always been Russia’s calling card, but since the Ukrainian events, it has grown to unprecedented levels: no one knows what will happen to our country in a month, in a week, or the day after tomorrow. I think that even Putin doesn’t know; he is now hostage to his own strategy of playing “bad guy” to the West…..If you compare the post-Soviet bear to the Soviet one, the only thing they have in common is the imperial roar. However, the post-Soviet bear is teeming with corrupt parasites that infected it during the 1990s, and have multiplied exponentially in the last decade. They are consuming the bear from within. Some might mistake their fevered movement under the bear’s hide for the working of powerful muscles. But in truth, it’s an illusion.
Translated from the Russian by Jamey Gambrell.
Read more at Let the Past Collapse on Time! by Vladimir Sorokin | The New York Review of Books.
Bill Moyers interviews the American Enterprise Institute’s president Arthur C. Brooks on how to fight America’s widening inequality.
“The problem is we have a bit of a conspiracy between the right and left to have people now who are tending to be more part of the machine…We need a new kind of moral climate for our future leaders.”
Bill Moyers seems a bit light on the economics of the Walmart situation. Raising the minimum wage would reduce welfare payments to Walmart employees, but WMT is a rational entity with the primary goal of maximizing profits and shareholder value. An increase in the minimum wage would increase the appeal of automation and result in a reduction in staff numbers, causing an increase in unemployment, or alternatively WMT will pass on the additional cost in the form of increased prices to consumers, causing a rise in inflation. The only sustainable long-term solution is not an easy one: to increase economic growth and employment so that market-driven wage rates rise. Interference with the pricing mechanism in a market — whether through legislated minimum wages, price controls or Fed interest rates — is misguided and unsustainable. It may defer but also amplifies the original problem.
From Jeff Borland, Professor of Economics at University of Melbourne:
…95% of the time a government spends thinking about unemployment should be spent thinking about ways to promote economic growth.
Read more at Work for the Dole doesn't work – but here is what does.
From Ambrose Evans-Pritchard:
Russia is battening down the hatches. The central bank was forced to raise interest rates this morning to 8pc to defend the rouble and stem capital flight, $75bn so far this year and clearly picking up again.
The strange calm on the Russian markets is starting to break as investors mull the awful possibility that Europe will impose sanctions after all, shutting Russian banks out of global finance.
…Lars Christensen from Danske Bank said the inflexion point will come if the EU does in fact impose “Tier III” measures aimed at crippling the Russian banking system, as now seems likely. “That is when the lights will turn off for the Russian market. We will see capital flight of a whole different nature,” he said.
The world is entering a dangerous phase. Having escalated the conflict in Eastern Ukraine into a proxy war, the Kremlin seems unwilling or unable to back down despite rising US and EU sanctions. This is not another Afghanistan. The stakes are far higher. The 100th anniversary of the outbreak of WWI reminds us that Eastern Europe is a tinder box for major global conflicts. While a ‘hot war’ is unlikely — both sides have too much to lose — Eastern Ukraine could well ignite another cold war. Peace proves elusive.
Peace is an armistice in a war that is continuously going on.
~ Thucydides ( c. 460 – c. 395 BC), History of the Peloponnesian War
Read more at Calm before the storm as Europe poised to join economic war against Russia – Telegraph Blogs.
Posted by Houses & Holes:
Bloomberg has a penetrating piece today hammering RBA/APRA complacency on house prices, which will be read far and wide in global markets (as well as MB is!):
Central banks from Scandinavia to the U.K. to New Zealand are sounding the alarm about soaring mortgage debt and trying to curb risky lending. In Australia, where borrowing is surging, regulators are just watching.
Australia has the third-most overvalued housing market on a price-to-income basis, after Belgium and Canada, according to the International Monetary Fund. The average home price in the nation’s eight major cities rose 16 percent as of June 30 from a May 2012 trough, the RP Data-Rismark Home Value Index showed.
“There’s definitely room for caps on lending,” said Martin North, Sydney-based principal at researcherDigital Finance Analytics. “Global house price indices are all showing Australia is close to the top, and the RBA has been too myopic in adjusting to what’s been going on in the housing market.”
Australian regulators are hesitant to impose nation-wide rules as only some markets have seen strong price growth, said Kieran Davies, chief economist at Barclays Plc in Sydney.
…“The RBA’s probably got at the back of its mind that we’re only in the early stages of the adjustment in the mining sector,” Davies said. “Mining investment still has a long way to fall, and also the job losses to flow from that. So to some extent, the house price growth is a necessary evil.”
…The RBA, in response to an e-mailed request for comment, referred to speeches and papers by Head of Financial Stability Luci Ellis.
…The RBA and APRA have acknowledged potential benefits of loan limits “but at this stage they don’t believe that this type of policy action is necessary,” said David Ellis, a Sydney-based analyst at Morningstar Inc. “If the housing market was out of control and if loan growth, particularly investor credit, grew exponentially then it’d be introduced.”
What do you call this, David:
Reproduced with kind permission from Macrobusiness
Robert Kraft, owner of the New England Patriots, says Vladimir Putin stole his prize Super Bowl ring in 2005:
“I took out the ring and showed it to [Putin], and he put it on and he goes, ‘I can kill someone with this ring.’ I put my hand out and he put it in his pocket, and three KGB guys got around him and walked out.”
Kraft revealed that he hadn’t intended to part with his prize from the Patriots’ win over the Philadelphia Eagles in Super Bowl XXXIX. He claims that a call from the White House kept him from attempting to recover it. The official overcame Kraft’s objections, repeatedly saying:
It would really be in the best interest of US-Soviet relations if you meant to give the ring as a present.
This may have been a mistake by the Bush administration, considering that Vladimir Putin has graduated to seizing parts of Georgia, the Crimea and now has his eyes on Eastern Ukraine. As Winston Churchill would have said:
An appeaser is one who feeds a crocodile hoping it will eat him last.
Read more at Kraft: Putin stole Bowl ring | NY Post.
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