Apologies for the sub-titles but this Hard Talk interview has an important message.
Gold approaches a watershed
Expectations of interest rate rises are growing, with 10-year Treasury yields advancing towards 2.0 percent after breaking out above 1.60.
The Chinese Yuan is easing against the US Dollar, in a managed process from the PBOC which will use up foreign reserves more slowly than a direct peg. It is also likely to minimize selling pressure on the Yuan, both from capital flight and from Chinese borrowers covering on Dollar-denominated loans.
Spot gold is easing, in a falling wedge formation, towards a test of medium-term support at $1300/ounce. This is a watershed moment. Breach of $1300 would warn of a test of primary support at $1200. But respect of support would suggest another test of the July high at $1375.
* Target calculation: 1375 + ( 1375 – 1300 ) = 1450
Rising interest rates and low inflation increase downward pressure on gold but uncertainty over US elections, Europe/Brexit, and the path of the Chinese economy contribute to buying support. Gold stocks serve as a useful counter-balance to growth stocks in a portfolio. If there are positive outcomes and a return to economic stability, then growth stocks will do well and gold is likely to underperform. If things goes wrong and growth stocks do poorly, gold stocks are likely to outperform.
In Australia the All Ordinaries Gold Index ($XGD) continues to test support at 4500. Respect (recovery above 5000) would signal another test of the recent highs at 5600. A weakening Australian Dollar/US Dollar would tend to mitigate the impact of a fed rate hike. Breach of 4500 is less likely but would confirm a primary down-trend.
* Target calculation: 4500 – ( 5000 – 4500 ) = 4000
Did the RBA just signal the end of rate cuts?
From Jens Meyer:
Did the RBA just signal the end of rate cuts and no-one noticed?
Well, not exactly no-one. Goldman Sachs chief economist Tim Toohey reckons the speech RBA assistant governor Chris Kent delivered on Tuesday amounts to an explicit shift to a neutral policy stance.
Dr Kent spoke about how the economy has been doing since the mining boom, and in particular how its performance matched the RBA’s expectations.
Reflecting on the RBA’s forecasts of recent years, Dr Kent essentially framed the RBA’s earlier rate cut logic around an initial larger than expected decline in mining capital expenditure and subsequent larger than expected decline in the terms of trade, Mr Toohey said.
Having so closely linked the RBA’s easing cycle to the weakness in the terms of trade (and earlier decline in mining investment), Dr Kent’s key remark was to flag “the abatement of those two substantial headwinds” and highlight that this “would be a marked change from recent years”….
Source: Did the RBA just signal the end of rate cuts and no-one noticed?
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.
Australia weeks from a housing collapse, US report warns
Washington-based International Strategic Studies Association warns that Australian banks’ crackdown on foreign investor lending may precipitate a collapse in the apartment housing market:
“The banks clearly believe Australian real estate values will decline, so they are attempting to avoid that risk. They’ve learned from the US collapse that seizing real estate collateral is a no-win scenario when the volume is great and the market slow.”
“In so doing, they precipitate the market collapse but are less exposed to it.”
It comes after Australia’s richest man, billionaire property developer Harry Triguboff, warned that a “very significant” number of Chinese buyers were now failing to settle their off-the-plan units and urgent action was needed.
But Mr Triguboff, founder of Australia’s biggest apartment builder Meriton, warned the real risk was looming in the new wave of developments. As apartment price growth stalls or goes backwards, the risk of buyers walking away from their deposits grows.
Source: Real estate: Property price crash ‘six weeks’ away, US report warns
Hat tip to Macrobusiness.
US weekly earnings slow
The Institute for Supply Management updated their Non-Manufacturing Index on September 6th:
In August, the NMI® registered 51.4 percent, a decrease of 4.1 percentage points when compared to July’s reading of 55.5 percent, indicating continued growth in the non-manufacturing sector for the 79th consecutive month. A reading above 50 percent indicates the non-manufacturing sector economy is generally expanding; below 50 percent indicates the non-manufacturing sector is generally contracting……
But there is weakness in Manufacturing, as the ISM reported last week :
Manufacturing contracted in August as the PMI® registered 49.4 percent, a decrease of 3.2 percentage points from the July reading of 52.6 percent, indicating contraction in manufacturing for the first time since February 2016 when the PMI registered 49.5. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting…..
A 10-year graph of Manufacturing PMI shows that whipsaws around the 50 level are fairly common and not cause for alarm. A decline below the December 2015 low of 48.0, however, would be cause for concern.
Source: quandl.com
Of greater concern is the declining growth of estimated weekly employee earnings which closely follows GDP. Weekly employee earnings — estimated by multiplying Total Non-farm Payrolls by Average Weekly Hours (Total Private) and Average Hourly Earnings — have held around the 4.0 percent level since early 2014 but are now tracking the decline of GDP. Further falls in Nominal GDP, below 2.43% p.a. in the second quarter, now appear likely.
Gold steady as rates fall
Interest rates retreated this week, with 10-year Treasury yields falling below support at 1.60 percent.
Falling interest rates reduce downward pressure on gold. Spot Gold steadied above support at $1300/ounce. Momentum above zero continues to indicate a primary up-trend. Respect of support at $1300 would confirm. Breach of support is unlikely but would signal trend weakness and a test of primary support at $1200/ounce.
* Target calculation: 1300 + ( 1300 – 1050 ) = 1550
Gold trend continues
Interest rates have stabilised with an ascending triangle formation on 10-year Treasury yields suggesting reversal to an up-trend. Recovery above 1.60% would confirm.
Rising interest rates increase downward pressure on gold. Tall shadows for the last three weeks indicate selling pressure and a test of support at $1300 is likely. But the metal remains well above the rising trendline on a weekly chart and Momentum holding above zero indicates a healthy primary up-trend. Respect of support at $1300 would confirm. Breach of support is unlikely but would signal weakness.
* Target calculation: 1300 + ( 1300 – 1050 ) = 1550
Does Government Spending Create Jobs?
By William Dupor, Assistant Vice President and Economist
The most recent U.S. expansion, however lackluster, entered its eighth year in June.1 In anticipation of the possibility (or perhaps inevitability) of another recession, observers have remarked on how and whether countercyclical fiscal policy should be used to combat an economic downturn….
Gauging Effects through Military Spending
Research Analyst Rodrigo Guerrero and I took up the issue of the efficacy of government spending at increasing employment. We looked specifically at over 120 years of U.S. military spending, which provides a kind of “natural experiment” for our analysis.Looking at government spending more generally suffers from the problem that the spending may be correlated with economic activity: The government may spend more during a recession (as with ARRA) or more during an expansion (when tax revenues are high). This might bias the results, which economists call “an endogeneity bias.”
Military spending, on the other hand, is likely to be determined primarily by international geopolitical factors rather than the nation’s business cycle.
….We used a similar methodology and found that military spending shocks had a small effect on civilian employment. Following a policy change that began when the unemployment rate was high, if government spending increased by 1 percent of GDP, then total employment increased by between 0 percent and 0.15 percent. Following a policy change that began when the unemployment rate was low, the effect on employment was even smaller.
In the event of another recession, policymakers have a number of stabilization tools at their disposal, including quantitative easing, negative interest rates and tax relief. The research discussed above suggests that one other device, namely countercyclical government spending, may not be very effective, even when the economy is slack.
I think the authors of this research come to the wrong conclusion. Instead they should have concluded that military spending is not very effective in creating jobs.
Military spending provides no lasting benefit to the economy in terms of tax revenue or saleable assets, leaving future taxpayers with public debt and no means of repayment. Other than an austerity budget which would risk another recession.
Whereas infrastructure projects can be selected on their ability to generate market-related returns on investment, providing revenue to service the public debt incurred…..and saleable assets that can be used to repay debt.
But there are two caveats.
First, project selection must not be a political decision. Else projects likely to win votes will be selected ahead of those that generate decent financial returns.
Second, the private sector must have skin in the game to ensure that #1 is adhered to. Also to reduce cost blowouts. Private companies are not immune to blowouts but government projects are in a league of their own.
The added benefit of infrastructure spending is the free lunch government gets from reduced unemployment benefits. Money they would have spent anyway is now put to a more productive use.