Niall Ferguson: The “age of debt” has come to an end
Apologies for the sub-titles but this Hard Talk interview has an important message.
S&P500 consolidation suggests another downward leg
The S&P 500 is consolidating between 2120 and 2150 after a rounding top. Short-term consolidation (I would hesitate to call this a pennant) suggests another downward leg is likely, with a target of 2080. Respect of primary support at 2000 remains likely. Recovery above 2200 would complete a bullish rounded top (an inverted “U”) or a stronger inverted scallop pattern (resembling an inverted fishing hook) depending on the length of the right-hand leg. Twiggs Money Flow high above zero continues to indicate long-term buying pressure. Breach of primary support at 2000 is unlikely but would warn of another test of 1800.
* Target calculation: 2200 + ( 2200 – 2000 ) = 2400
Conversation with Hillary Rodham Clinton (2013) | Chatham House
This is not an endorsement. I don’t agree with a lot of her policies. But Hillary Clinton is likely to be the next president of the United States and this 2013 conversation gives an insight into what makes her tick.
Niall Ferguson: The West and the Rest – The Changing Global Balance of Power
Niall Ferguson is the Laurence A. Tisch Professor of History at Harvard University.
I would love to see Ferguson re-visit this 2011 talk every five years. One certainty about the future: it isn’t what we think it’s going to be. China’s economic rise seems to be slowing far more rapidly than was expected. Foreign reserves have declined by $800 billion in the last two years (from a peak of $4 trillion) through PBOC efforts to prevent the collapse of the Yuan in the face of rising interest rates from the Fed. China’s growth-through-infrastructure-investment model seems to have run its course and is now facing diminishing returns. Transition to a consumer society is not going to be easy. And China’s property bubble has created an extremely fragile banking system with massive bad debts.
On the plus side, Ferguson seems to have been right about rising Chinese nationalism — to deflect the population’s attention from enormous inequality in the distribution of wealth — and the CCP’s ability to maintain tight political control. Let’s hope that he is also right about China’s inability to suppress personal and political freedom in the long-term if it wants to maintain stable growth.
Bayer, Monsanto in $88b deal that could reshape the world’s food supply
From Drew Harwell:
The German chemical company Bayer said it will take over US seed giant Monsanto to become one of the world’s biggest agriculture conglomerates.
The $US66 billion ($88 billion) deal – the largest corporate mega-merger in a year full of them – could reshape the development of seeds and pesticides necessary to fuelling the planet’s food supply…..
Bayer in the US is known largely for its pharmaceuticals, with scientists who developed modern Aspirin and Alka-Seltzer. But the deal would pivot the 117,000-employee company more towards its farm-targeting business in agriculture chemicals, crop supplies and compounds that kill bugs and weeds.
Monsanto is the world’s largest supplier of genetically modified seeds, which now dominate American farming but are still a major source of environmental protests in Europe and abroad. The 20,000-employee company also develops Roundup, the weed-killing herbicide.
This is a merger of two giants in the agricultural and chemicals sectors and could lead to some interesting new developments in the future.
Source: Bayer, Monsanto in $88b deal that could reshape the world’s food supply
Rising debt—not a crisis, but a serious problem | Brookings
Testimony by Alice M. Rivlin, Senior Fellow – Economic Studies, Center for Health Policy, before the Joint Economic Committee of the United States Congress on September 8, 2016:
…..our national debt is high in relation to the size of our economy and will likely rise faster than the economy can grow over the next several decades if budget policies are not changed. Debt held by public is about 74 percent of GDP and likely to rise to about 87 percent in ten years and to keep rising after that.
This rising debt burden is a particularly hard problem for our political system to handle because it is not a crisis. Nothing terrible will happen if we take no action this year or next. Investors here and around the world will continue to lend us all the money we need at low interest rates with touching confidence that they are buying the safest securities money can buy. Rather, the prospect of a rising debt burden is a serious problem that demands sensible management beginning now and continuing for the foreseeable future.
What makes reducing the debt burden so challenging is that we need to tackle two aspects of the debt burden at the same time. We need policies that help grow the GDP faster and slow the growth of debt simultaneously. To grow faster we need a substantial sustained increase in public and private investment aimed at accelerating the growth of productivity and incomes in ways that benefit average workers and provide opportunities for those stuck in low wage jobs. At the same time we need to adjust our tax and entitlement programs to reverse the growth in the ratio of debt to GDP. Winning broad public understanding and support of basic elements of this agenda will require the leadership of the both parties to work together, which would be difficult even in a less polarized atmosphere. The big uncertainty is whether our deeply broken political system is still up to the challenge.
…..There are three necessary elements of a long-run debt reduction plan:
- Putting the Social Security program on sustainable track for the long run with some combination higher revenues and reductions in benefits for higher earners.
- Gradually adjusting Medicare and Medicaid so that federal health spending is not rising faster than the economy is growing….
- Adjusting our complex, inefficient tax system so that we raise more revenue in a more progressive and growth-friendly way and encourage the shift from fossil fuels to sustainable energy sources…..
Source: Rising debt—not a crisis, but a serious problem to be managed | Brookings Institution
Credit bubbles and GDP targeting
In 2010 Scott Sumner first proposed that the Fed use GDP targeting rather than targeting inflation, which is prone to measurement error. Since then support for this approach has grown, with Lars Christensen, an economist with the Danish central bank, coining the term Market Monetarism.
Sumner holds that inflation is “measured inaccurately and does not discriminate between demand versus supply shocks” and that “Inflation often changes with a lag… but nominal GDP growth falls very quickly, so it’ll give you a more timely signal….” [Bloomberg]
The ratio of US credit to GDP highlights credit bubbles in the economy. The ratio rises when credit is growing faster than GDP and falls when credit bubbles burst. The graph below compares credit growth/GDP to actual GDP growth (on the right-hand scale). The red line illustrates a proposed GDP target at 5.0% growth.
What this shows is that the Fed would have adopted tighter monetary policies through most of the 1990s in order to keep GDP growth at the 5% target. That would have avoided the credit spike ahead of the Dotcom crash. More importantly, tighter monetary policy from 2003 to 2006 would have cut the last credit bubble off at the knees — avoiding the debacle we now face, with a massive spike in credit and declining GDP growth.
While poor monetary policy may have caused the problem, correcting those policies is unlikely to rectify it. The genie has escaped from the bottle. The only viable solution now seems to be fiscal policy, with massive infrastructure investment to restore GDP growth. That may seem counter-intuitive as it means fighting fire with fire, increasing public debt in order to remedy ballooning private debt.
Rising public debt is only sustainable if invested in productive infrastructure that yields market-related returns. Not in sports stadiums and public libraries. Difficult as this may be to achieve — with politicians poor history of selecting projects based on their ability to garner votes rather than economic criteria — it is our best bet. What is required is bi-partisan selection of projects and of private partners to construct and maintain the infrastructure. And private partners with enough skin in the game to enforce market discipline. I have discussed this at length in earlier posts.
S&P 500 looks promising
The inverted fish hook on the S&P 500 looks promising, with a strong blue candle reversing most of Friday’s losses. Completion of an inverted fish hook (normally called an inverted scallop but I find the former more descriptive) requires a breakout above 2190/2200. Completion of the pattern would offer a strong bull signal with a target of 2400, calculated from the base of the pattern at 2000*.
* Target calculation: 2200 + ( 2200 – 2000 ) = 2400
Gold finds support
Spot Gold found support at $1325/ounce after retracing from resistance at $1350. Short candles suggest weak selling pressure. Respect of support at $1325 would signal another test of the July high at $1375. Follow-through above $1350 would confirm. Breakout above $1375 would offer a target of $1450* but expect strong resistance if the Fed appears intent on raising interest rates. Breach of support at $1300 is unlikely but would warn of a test of primary support at $1200/ounce.
* Target calculation: 1375 + ( 1375 – 1300 ) = 1450
In Australia the All Ordinaries Gold Index ($XGD) is testing support at 4500. Respect is likely and would signal a test of the recent highs around 5600. A weakening Australian Dollar/US Dollar would tend to mitigate the impact of a fed rate hike. Breach of 4500 is unlikely but would warn of trend reversal.
* Target calculation: 5500 + ( 5500 – 4500 ) = 6500