Countries & Regions Archives - Page 89 of 381

April 11, 2017

Consider Republicans’ tax plan | Ross Garnaut

From Patrick Hatch:

“Our existing tax base for the corporate income tax is in deep trouble,” Professor Garnaut told the Melbourne Economic Forum on Tuesday. “It’s subject to egregious avoidance or evasions, with two of the main instruments of avoidance being arbitrary use of interest on debt to reduce taxable income and, more importantly, arbitrary use of payment for import of services as deductions.

“You have a lot of what must be fundamentally some of the most profitable enterprises in Australia paying no corporate income tax.

“Google and Microsoft and Uber, they manage to generate very large sales in Australia … but somehow make no profit from it because of payment for intellectual property, payments for services.”

Cutting rates while broadening the base is a step in the right direction. But the broader base has to offset the rate cut, so that tax revenues are not depleted.

One of the oldest tricks in the tax avoidance industry is to set up a structure where A receives a deduction for an expense while the receiving party (B) is either tax exempt or is resident in a tax haven, and does not pay tax on the income. The effect is to substantially reduce tax payable by A.

Disallowing all deductions would unfairly penalize legitimate transactions. A simpler method would be to require A to collect a withholding tax on the payment to B (or B provides a tax file number showing that the income will be taxed in Australia) else the deduction by A will be disallowed.

Source: Consider Republicans’ tax plan, says economist Ross Garnaut

April 9, 2017

Australia: Warning signs of a contraction

Australia faces shrinking inflationary pressures.

Inflation

Wage growth is falling.

Wage Price Index

Credit growth is shrinking.

Inflation

Growth of currency in circulation is also slowing. The fall below 5% warns of a contraction.

Currency in Circulation: Growth

One piece of good news is that Chinese monetary policy seems to be easing. After a sharp contraction of M1 money stock growth in January, February shows a partial recovery. Collapse of the Chinese property bubble may be deferred a while longer.

China M1 Money Stock

Which is good news for iron ore exporters. At least in the short-term.

April 9, 2017

Inflation surges

Inflation is rising, with CPI climbing steeply above the Fed’s 2% target. But core CPI excluding energy and food remains stable.

Consumer Price Index

Job gains were the lowest since May 2016.

Job Gains

But the unemployment rate fell to a low 4.5%.

Unemployment

Hourly wage rate growth has eased below 2.5%, suggesting that underlying inflationary pressures are contained.

Average Hourly Earnings Growth

The Fed is unlikely to accelerate its normalization of interest rates unless we see a surge in core inflation and/or hourly earnings growth.

April 9, 2017

Why we need to worry about the level of Australian household debt

From Elizabeth Knight:

The balance sheets of Australian households with a mortgage are dangerously exposed to any fall in house prices.

It isn’t just that household debt relative to disposable incomes has reached a record high of 189 per cent, it’s that households’ ability to service that debt is potentially a ticking time bomb…..

A recent Digital Finance Analytics survey found that of the 3.1 million mortgaged households, an estimated 669,000 are now experiencing mortgage stress.

“This is a 1.5 per cent rise from the previous month and maintains the trends we have observed in the past 12 months,” it found. “The rise can be traced to continued static incomes, rising costs of living, and more underemployment; whilst mortgage interest rates have risen thanks to out-of-cycle adjustments by the banks and bigger mortgages thanks to rising home prices.”

Source: Why we need to worry about the level of Australian household debt

April 7, 2017

Dow consolidation

Dow Jones Industrial Average is consolidating in a narrow band between 20400 and 20800. Narrow bands in an up-trend signal accumulation and breakout above 20800 would signal another advance.

Dow Jones Industrial Average

Declining 21-day Twiggs money Flow is typical of a consolidation, provided it respects the zero line. A trough above zero confirms medium-term buying pressure.

April 7, 2017

ASX 200 faces bank headwinds

The ASX 300 Banks Index continues to test support at 9000. Declining Twiggs Money Flow warns of selling pressure and reversal below 8900 would warn of a correction.

ASX 300 Banks

The ASX 200 continues its advance towards 6000, with rising Twiggs Money Flow signaling buying pressure. But it is vulnerable to a correction in the Banks Index, the largest sector in the broad index.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

The economy is still exposed to a property bubble and APRA is likely to keep the pressure on banks to increase their capital reserves, which would lower their return on equity.

April 7, 2017

Jobs, Inflation & the Fed | ECRI

From Lakshman Achuthan at ECRI:

Headline jobs growth came in well below expectations, and weather played some part in suppressing job growth, both in construction and retail.

But the jobless rate dropped to 4.5%, its lowest reading since 2007, so the Fed’s “full-employment” mandate has been met.

Their other mandate is on inflation, and over the past year I’ve discussed our U.S. Future Inflation Gauge, which anticipated the inflation cycle upturn shown by the chart. Today the forward looking USFIG remains near an 8¾ -year high.

The chart shows the year-over-year PCE inflation rising sharply to a 5-year high, and breaching the Fed’s 2% inflation target which is defined by this inflation measure.

For those who might think this is just about oil prices, please note that core PCE inflation, ex-food and energy, has also been rising, and now above 1¾%, the highest reading in over 2½ years.

This is what a cyclical upswing in inflation looks like.

Moreover, the U.S. economy has a good tailwind from rising global growth.

All of this helps explain why the Fed is finally able to implement a full-fledged rate hike cycle.

Source: Jobs, Inflation & the Fed | News | News and Events | ECRI

April 6, 2017

The inconvenient truth behind the rise in energy prices

From Brian Robins:

“The inconvenient truth is that the increasingly high prices for increasingly unreliable electricity are a direct consequence of the increasingly high utilisation of renewable energy required by government regulation,” Gary Banks, a former head of the Productivity Commission, said in a speech to Infrastructure Partnership Australia on Thursday night.

…”Energy markets are admittedly complicated things. However the logic is unassailable that if a cheap and reliable product is penalised, while expensive and less reliable substitutes are subsidised, the latter will inevitably displace the former. No amount of sophistry, wishful thinking or political denial can change that basic economic reality.”

“Changing the mix of energy use away from low-cost but emissions-heavy fossil fuels has of course been the whole point,” he said. “The resulting costs and difficulties have been greatly compounded, however, by governments choosing a policy path that is essentially anti-market, one violating basic principles of demand and supply.”

Source: The inconvenient truth behind the rise in energy prices

April 6, 2017

Robots Take Over | Susanna Koelblin | LinkedIn

From Susanna Koelblin:

First large scale shoe robot factory unveiled: Adidas will use machines in Germany instead of humans in Asia to make shoes

Adidas, the German maker of sportswear, has announced it will start marketing its first series of shoes manufactured by robots in Germany from 2017. More than 20 years after Adidas ceased production activities in Germany and moved them to Asia, Adidas unveiled the group’s new prototype “Speedfactory” in Germany. As of this year, the factory will begin large-scale production. What’s more, Adidas will also open a second Speedfactory in the U.S. in 2017, followed by more in Western Europe. According to the company, the German and American plants will in the “mid-term” each scale up to producing half a million pair of shoes per year.

Does this pose a threat to Adidas’s traditional manufacturing base in China, Indonesia and Vietnam? After all, labor in the region is becoming less cheap these days, and manufacturers are increasingly turning to robots. The current model in the apparel industry is very much based on sourcing products from countries where consumers are typically not based. In the longer term Adidas could even produce the shirts of Germany’s national football team in its home country. The shoes made in Germany would sell at a similar price to those produced in Asia, where Adidas employs around one million workers. Arch-rival Nike is also developing its robot-operated factory.

This development in the shoe area is just the beginning and will be leveraged to the apparel industry as well….

Robot factories will not restore former employment levels, with operations run by a skeleton staff. And low employment leads to low consumption. But new factories will require intensive capital investment. This may portend increased demand for capital in the future. With current high debt levels threatening the stability of the financial system, equity investors may be in short supply.

Source: Robots Take Over – The Apparel Production | Susanna Koelblin | Pulse | LinkedIn

April 4, 2017

APRA: Wayne Byres warns banks need more capital

From APRA chairman Wayne Byres’ keynote address to the AFR Banking & Wealth Summit 2017, Sydney:

Haven’t we done enough already?

The third question is: haven’t we done enough already?

The banking system certainly has higher capital adequacy ratios than it used to. But overall leverage has not materially declined. The proportion of equity that is funding banking system assets has improved only modestly, from a touch under 6 per cent a decade ago to just on 6½ per cent at the end of 2016.

The difference between improved risk-based measures of capital adequacy, and the more limited improvement in non-risk based measures of leverage (Chart 6), is driven to a significant degree by changes in asset composition. In particular, it reflects the increasing concentration of the banking system in mortgage lending (which benefits from lower risk weights – Chart 7).

It implies the system has de-risked more than deleveraged. But that assessment is itself premised on a critical assumption: that a high and increasing concentration in mortgages is generating a lower risk banking system. In the current environment, it is certainly an assumption that deserves a bit more scrutiny. While it might be a reasonable proposition most of the time, we need to be wary of the fallacy of composition when concentrations grow.

….The case for the Australian banking system to be seen as unquestionably strong remains as valid today as it did when the FSI recommended it in 2014. And, as much as we would like international policy deliberations to be complete, we do not think it right to defer a decision on this issue any longer…..

Bank leverage has barely improved despite substantial increases in capital ratios as banks have increasingly concentrated their exposure in residential mortgages which have lower risk-weighting. Chart 7 above shows how the average risk-weighting of bank assets has declined over the last decade.

Neel Kashkari, president of the Minneapolis Fed, believes that banks need to hold far higher capital in order to avoid future bailouts. His proposal:

….force banks to finance themselves with capital totaling 23.5% of their risk-weighted assets, or 15% of their balance-sheets without adjusting for risk (the “leverage ratio”). This, says Mr Kashkari, would be enough to guard the financial system against a shock striking many reasonably-sized banks at once. Any bank deemed too big to fail would need a still bigger buffer, eventually reaching an eye-watering 38% of risk-weighted assets….

It’s widely accepted that Australia’s big four banks are too-big-to-fail. If that is the case, applying Kashkari’s measure would require them to increase bank capital by 200%.

Even without the too-big-to fail buffer, the major banks would require a 100% increase in bank capital to meet the 23.5% capital requirement for risk-weighted assets. And a 150% increase to match the 15% minimum without risk weighting.

The question needs to be asked: is APRA doing enough to protect Australians from a financial crisis? To me the answer is a clear NO.

Source: Pages – Fortis Fortuna Adiuvat: Fortune Favours The Strong

Hat tip to Macrobusiness.