The recent peak in crude prices coincides with the bottom for the US oil rig count (discussed Monday).
US Light Vehicle Sales disappointing
June US Light Vehicle Sales came in at a disappointing seasonally adjusted annual rate of 16.689 million vehicles. Light vehicle sales, an important barometer of consumer confidence, have been trending lower since November 2015. Further falls would be cause for concern.
The real problem: Private Investment
Want to know the real cause of low GDP growth? Look no further than Private Investment.
Private Investment ran with peaks around 10 percent of GDP and troughs around 4 percent throughout the 1960s, 70s and most of the 80s. Since then Private Investment has declined to the point that the latest peak is close to 4 percent.
It is highly unlikely that the US will be able to sustain GDP growth if the rate of investment continues to decline. GDP growth is a factor of population growth and productivity growth. Productivity growth is not primarily caused by people working harder but by working more efficiently, with better tools and equipment. Using an earthmover rather than a wheelbarrow and shovel for example. Falling investment means fewer new tools and efficiencies.
The second graph plots the annual increase in private debt against GDP. You would think that this figure would fall — in line with falling rates of investment. Quite the opposite. Private debt growth is rising. While annual debt growth is nowhere near the red flag of 5 percent of GDP, if it crosses above the rate of private investment — as in 2006 to 2009 — I would consider that a harbinger of another crash.
Michael Pettis: Brexit could speed breakup of the Euro
On secular stagnation: “I don’t see growth picking up until you either redistribute income downwards — which is politically quite difficult and slow — or developed countries which are credible borrowers engage in massive infrastructure spending — which would be a great idea but politically difficult — so I’m afraid secular stagnation is going to last several more years.”
On BREXIT: “I’m not to optimistic that the Euro will be around in 10 years…BREXIT could speed up the process if England does well.”
On future crises: “It’s always the same thing: a huge switch from New York to Washington (in American terms) where policy begins to dominate the whole process…because the solutions to the problems are political solutions, not really economic or financial solutions…”
Jim Jefferies – Gun Control | from BARE Netflix Special
Highly relevant in today’s political climate.
Turn the sound off if bad language offends you 😉
S&P 500: Expect strong resistance
The S&P 500 is testing resistance at 2100, while declining 13-week Twiggs Money Flow warns of medium-term selling pressure. Expect strong resistance between 2100 and 2130 but reversal below 2000 is now unlikely.
CBOE Volatility Index (VIX) at 15 indicates calm is restored after the last two turbulent weeks.
The rise of tyranny
From Andrew Sullivan in NYMag:
…..In Eric Hoffer’s classic 1951 tract, The True Believer, he sketches the dynamics of a genuine mass movement. He was thinking of the upheavals in Europe in the first half of the century, but the book remains sobering, especially now. Hoffer’s core insight was to locate the source of all truly mass movements in a collective sense of acute frustration. Not despair, or revolt, or resignation — but frustration simmering with rage. Mass movements, he notes (as did Tocqueville centuries before him), rarely arise when oppression or misery is at its worst (say, 2009); they tend to appear when the worst is behind us but the future seems not so much better (say, 2016). It is when a recovery finally gathers speed and some improvement is tangible but not yet widespread that the anger begins to rise. After the suffering of recession or unemployment, and despite hard work with stagnant or dwindling pay, the future stretches ahead with relief just out of reach. When those who helped create the last recession face no consequences but renewed fabulous wealth, the anger reaches a crescendo…..
Sullivan argues that Donald Trump is riding this populist backlash to the White House. I believe that the same populist forces are behind the BREXIT vote. This is a major threat to stability of the Western world over the next decade.
WWI: The biggest mistake in modern history | Niall Ferguson
Niall Ferguson argues that Britain’s decision to intervene in 1914 turned the conflict between Germany and Russia from a continental war into a global war.
https://youtu.be/bT81WwCix4M
Ferguson argues that the consequences of that decision by Britain in 1914 lasted 75 years, until collapse of the Soviet Union in 1989. With the benefit of hindsight, and the resurgence of Russia, I would say we still live with those consequences today.
IEX Group Gains Approval for Stock Exchange | The New York Times
By NATHANIEL POPPER:
America is getting a new stock exchange from the most prominent critics of high-frequency trading.
After months of delays and a brutal lobbying battle that divided Wall Street, the IEX Group won approval on Friday from the Securities and Exchange Commission to become the nation’s 13th official stock exchange.IEX is run by the people at the center of the Michael Lewis book, “Flash Boys: A Wall Street Revolt,” which profiles the early efforts of the IEX team to create a trading exchange that would be somewhat shielded from high-frequency traders.
Other exchanges and trading firms had urged the S.E.C. to reject the IEX application to become an exchange.
Opponents of IEX, including the other stock exchanges, have argued that the structure of the new exchange will add unnecessary new complexities into an already complex stock market, and potentially end up hurting small investors.
…..The most novel and controversial feature of the IEX exchange is a so-called speed bump that would slow down trading slightly to throw off traders that rely only on speed.
The speed bump slows trades down by only 350 microseconds — or millionths of a second — but that is an eternity in a stock exchange universe in which computers can buy and sell stocks in nanoseconds — or billionths of a second.
The Nasdaq, and other existing exchanges, have said that the IEX’s speed bump will violate rules mandating that exchanges make their prices available to all parties at the same time.
Judging from the barrage of objections from other exchanges, they see IEX as a threat. Not as a threat to small investors as they so eloquently argued in their submissions — and whose interests they have ignored for years — but a threat to the billions of dollars in fees they receive from high-frequency traders for privileged co-location and access to stock exchange data feeds. Why would any investor want to trade on an exchange that encourages HFT when there is another exchange that offers a level playing field?
Source: IEX Group Gains Approval for Stock Exchange – The New York Times
Hope isn’t a strategy
Cautious optimism has evaporated after poor recent polls favoring a BREXIT. I hope that sanity prevails but, as the saying goes: “Hope isn’t a strategy”.
Better to have a Plan A and a Plan B to cope with the two alternatives. But if enough investors decide their money is safer in the bank, then expectations of a fall are likely to become a self-fulfilling prophecy.
The S&P 500 does not appear unduly alarmed but a sharp fall on 13-week Money Flow warns of selling pressure. Reversal below 2000 would warn of another test of primary support (1820 to 1870).
Dow Jones Industrial Average shows a similar picture. Breach of medium-term support at 17400 to 17500 would warn of another test of primary support at 15500 to 16000.
A CBOE Volatility Index (VIX) spiked to 20, indicating increased market risk. Long-term measures remain unaffected.
Europe
Germany’s DAX retreated below medium-term support, warning of another test of primary support. 13-Week Money Flow below zero suggests a primary down-trend.
The Footsie broke support at 6000 warning of a test of 5500. Reversal of Money Flow below zero would suggest a primary down-trend.
* Target calculation: 6400 + ( 6400 – 6000 ) = 6800
Asia
The Shanghai Composite Index continues to range between 2700 and 3100.
Japan’s Nikkei 225 Index broke support at 16000 and its lower trend channel, warning of another decline.
* Target calculation: 15000 – ( 18000 – 15000 ) = 12000
India’s Sensex remains bullish, with a short retracement below 27000. Bearish divergence on 13-week Money Flow would end if the descending trendline is penetrated.
Australia
The ASX 200 broke medium-term support at 5200, warning of another test of primary support at 4750. Expect support at the former level of 4900 to 5000 but it is questionable whether this will hold. Combination of a seasonal sell-off and BREXIT fears are going to test buyers’ commitment.
The Banks Index fell sharply and breach of support at 7200 would offer a target of 6400*.
* Target calculation: 7200 – ( 8000 – 7200 ) = 6400
Health Care is experiencing a strong sell-off, led by CSL. This is a good long-term stock but exposure to the UK/Europe has spooked the market.
