Tag: Australia (page 1 of 9)

The Stage Has Been Set For The Next Financial Crisis

Authored by Constantin Gurdgiev via CaymanFinancialReview.com,

Last month, the Japanese government auctioned off some US$4 billion worth of new two-year bonds at a new record low yield of negative 0.149 percent. The country’s five-year debt is currently yielding minus 0.135 percent per annum, and its 10-year bonds are trading at -0.001 percent. Strange as it may sound, the safe haven status of Japanese bonds means that there is an ample demand among private investors, especially foreign buyers, for giving away free money to the Japanese government: the bid-to-cover ratio in the latest auction was at a hefty US$19.9 billion or 4.97 times the targeted volume. The average bid-to-cover ratio in the past 12 auctions was similar at 4.75 times. Japan’s status as the world’s most indebted advanced economy is not a deterrent to the foreign investors, banking primarily on the expectation that continued strengthening of the yen against the U.S. dollar, the U.K. pound sterling and, to a lesser extent, the euro, will stay on track into the foreseeable future. See chart 1

In a way, the bet on Japanese bonds is the bet that the massive tsunami of monetary easing that hit the global economy since 2008 is not going to recede anytime soon, no matter what the central bankers say in their dovishly-hawkish or hawkishly-dovish public statements. And this expectation is not only contributing to the continued inflation of a massive asset bubble, but also widens the financial sustainability gap within the insurance and pensions sectors. The stage has been set, cleaned and lit for the next global financial crisis.

Worldwide, current stock of government debt trading at negative yields is at or above the US$9 trillion mark, with more than two-thirds of this the debt of the highly leveraged advanced economies. Just under 85 percent of all government bonds outstanding and traded worldwide are carrying yields below the global inflation rate. In simple terms, fixed income investments can only stay in the positive real returns territory if speculative bets made by investors on the direction of the global exchange rates play out.

We are in a multidimensional and fully internationalized carry trade game, folks, which means there is a very serious and tangible risk pool sitting just below the surface across world’s largest insurance companies, pensions funds and banks, the so-called “mandated” undertakings. This pool is the deep uncertainty about the quality of their investment allocations. Regulatory requirements mandate that these financial intermediaries hold a large proportion of their investments in “safe” or “high quality” instruments, a class of assets that draws heavily on higher rated sovereign debt, primarily that of the advanced economies.

The first part of the problem is that with negative or ultra-low yields, this debt delivers poor income streams on the current portfolio. Earlier this year, Stanford’s Hoover Institution research showed that “in aggregate, the 564 state and local systems in the United States covered in this study reported $1.191 trillion in unfunded pension liabilities (net pension liabilities) under GASB 67 in FY 2014. This reflects total pension liabilities of $4.798 trillion and total pension assets (or fiduciary net position) of $3.607 trillion.” This accounts for roughly 97 percent of all public pension funds in the U.S. Taking into the account the pension funds’ penchant for manipulating (in their favor) the discount rates, the unfunded public sector pensions liabilities rise to $4.738 trillion. Key culprit: the U.S. pension funds require 7.5-8 percent average annual returns on their assets to break even on their future expected liabilities. In 2013-2016 they achieved an average return of below 3 percent. This year, things are looking even worse. Last year, Milliman research showed that on average, over 2012-2016, U.S. pension funds held 27-30 percent of their assets in cash (3-4 percent) and bonds (23-27 percent), generating total median returns over the same period of around 1.31 percent per annum.

Not surprisingly, over the recent years, traditionally conservative investment portfolios of the insurance companies and pensions funds have shifted dramatically toward higher risk and more exotic (or in simple parlance, more complex) assets. BlackRock Inc recently looked at the portfolio allocations, as disclosed in regulatory filings, of more than 500 insurance companies. The analysts found that their asset books – investments that sustain insurance companies’ solvency – can be expected to suffer an 11 percent drop in values, on average, in the case of another financial crisis. In other words, half of all the large insurance companies trading in the U.S. markets are currently carrying greater risks on their balance sheets than prior to 2007. Milliman 2016 report showed that among pension funds, share of assets allocated to private equity and real estate rose from 19 percent in 2012 to 24 percent in 2016.

The reason for this is that the insurance companies, just as the pension funds, re-insurers and other longer-term “mandated” investment vehicles have spent the last eight years loading up on highly risky assets, such as illiquid private equity, hedge funds and real estate. All in the name of chasing the yield: while mainstream low-risk assets-generated income (as opposed to capital gains) returned around zero percent per annum, higher risk assets were turning up double-digit yields through 2014 and high single digits since then. At the end of 2Q 2017, U.S. insurance companies’ holdings of private equity stood at the highest levels in history, and their exposures to direct real estate assets were almost at the levels comparable to 2007. Ditto for the pension funds. And, appetite for both of these high risk asset classes is still there.

The second reason to worry about the current assets mix in insurance and pension funds portfolios relates to monetary policy cycle timing. The prospect of serious monetary tightening is looming on the horizon in the U.S., U.K., Australia, Canada and the eurozone; meanwhile, the risk of the slower rate of bonds monetization in Japan is also quite real. This means that the capital values of the low-risk assets are unlikely to post significant capital gains going forward, which spells trouble for capital buffers and trading income for the mandated intermediaries.

Thirdly, the Central Banks continue to hold large volumes of top-rated debt. As of Aug. 1, 2017, the Fed, Bank of Japan and the ECB held combined US$13.8 trillion worth of assets, with both Bank of Japan (US$4.55 trillion) and the ECB (US$5.1 trillion) now exceeding the Fed holdings (US$4.3 trillion) for the third month in a row.

Debt maturity profiles are exacerbating the risks of contagion from the monetary policy tightening to insurance and pension funds balance sheets. In the case of the U.S., based on data from Pimco, the maturity cliff for the Federal Reserve holdings of the Treasury bonds, Agency debt and TIPS, as well as MBS is falling on 1Q 2018 – 3Q 2020. Per Bloomberg data, the maturity cliff for the U.S. insurers and pensions funds debt assets is closer to 2020-2022. If the Fed simply stops replacing maturing debt – the most likely scenario for unwinding its QE legacy – there will be little market support for prices of assets that dominate capital base of large financial institutions. Prices will fall, values of assets will decline, marking these to markets will trigger the need for new capital. The picture is similar in the U.K. and Canada, but the risks are even more pronounced in the euro area, where the QE started later (2Q 2015 as opposed to the U.S. 1Q 2013) and, as of today, involves more significant interventions in the sovereign bonds markets than at the peak of the Fed interventions.

How distorted the EU markets for sovereign debt have become? At the end of August, Cyprus – a country that suffered a structural banking crisis, requiring bail-in of depositors and complete restructuring of the banking sector in March 2013 – has joined the club of euro area sovereigns with negative yields on two-year government debt. All in, 18 EU member states have negative yields on their two-year paper. All, save Greece, have negative real yields.

The problem is monetary in nature. Just as the entire set of quantitative easing (QE) policies aimed to do, the long period of extremely low interest rates and aggressive asset purchasing programs have created an indirect tax on savers, including the net savings institutions, such as pensions funds and insurers. However, contrary to the QE architects’ other objectives, the policies failed to drive up general inflation, pushing costs (and values) of only financial assets and real estate. This delayed and extended the QE beyond anyone’s expectations and drove unprecedented bubbles in financial capital. Even after the immediate crisis rescinded, growth returned, unemployment fell and the household debt dramatically ticked up, the world’s largest Central Banks continue buying some US$200 billion worth of sovereign and corporate debt per month.

Much of this debt buying produced no meaningfully productive investment in infrastructure or public services, having gone primarily to cover systemic inefficiencies already evident in the state programs. The result, in addition to unprecedented bubbles in property and financial markets, is low productivity growth and anemic private investment. (See chart 2.) As recently warned by the Bank for International Settlements, the global debt pile has reached 325 percent of the world’s GDP, just as the labor and total factor productivity growth measures collapsed.

The only two ways in which these financial and monetary excesses can be unwound involves pain.

The first path – currently favored by the status quo policy elites – is through another transfer of funds from the general population to the financial institutions that are holding the assets caught in the QE net. These transfers will likely start with tax increases, but will inevitably morph into another financial crisis and internal devaluation (inflation and currencies devaluations, coupled with a deep recession).

The alternative is also painful, but offers at least a ray of hope in the end: put a stop to debt accumulation through fiscal and tax reforms, reducing both government spending across the board (and, yes, in the U.S. case this involves cutting back on the coercive institutions and military, among other things) and flattening out personal income tax rates (to achieve tax savings in middle and upper-middle class cohorts, and to increase effective tax rates – via closure of loopholes – for highest earners). As a part of spending reforms, public investment and state pensions provisions should be shifted to private sector providers, while existent public sector pension funds should be forced to raise their members contributions to solvency-consistent levels.

Beyond this, we need serious rethink of the monetary policy institutions going forward. Historically, taxpayers and middle class and professionals have paid for both, the bailouts of the insolvent financial institutions and for the creation of conditions that lead to this insolvency. In other words, the real economy has consistently been charged with paying for utopian, unrealistic and state-subsidizing pricing of risks by the Central Banks. In the future, this pattern of the rounds upon rounds of financial repression policies must be broken.

Whether we like it or not, since the beginning of the Clinton economic bubble in the mid-1990s, the West has lived in a series of carry trade games that transferred real economic resources from the economy to the state. Today, we are broke. If we do not change our course, the next financial crisis will take out our insurers and pensions providers, and with them, the last remaining lifeline to future financial security.

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The Coming Economic Downturn In Canada

Authored by Deb Shaw via MarketsNow.com,

  • Canadian GDP growth has outperformed this year, helping the Canadian dollar
  • As GDP growth slows and the Bank of Canada turns neutral, catalysts turning negative
  • Crude oil and real estate look set for a downturn, with negative implications for the currency

Given its natural resource-based economy, Canada is a boom and bust kind of place. This year, the country has enjoyed a significant boom. Thanks to a government stimulus program, rising corporate capital expenditures and consumer spending, Canada’s GDP growth has been nothing short of spectacular in 2017. According to Statistics Canada, the latest reading for year-over-year GDP growth is a healthy 3.5% (as of August 2017). While this is stronger than all major developed countries, growth is decelerating from its most recent peak in May 2017 (when GDP growth was an astounding 4.7%). A visual overview of historical GDP growth is shown below for reference:

Turning a corner: Canadian growth comes back down to earth

11-17-2017 CAD GDP growth

Source: Statistics Canada

Following the crude oil bust in the second quarter of 2014, Canadian growth rates cratered. While the country avoided a technical recession, the economic outlook was poor until early 2016. After crude oil returned to a bull market in the first quarter of 2016, the fortunes of the country turned. Given limited growth in 2015, the economy had no problem delivering 2%+ year-over-year growth rates in 2016. As a substantial stimulus program ramped up government spending in 2017, growth rates have continued to accelerate this year.

Storm clouds on the horizon: crude oil and real estate

While Canada has delivered exceptional growth in the last two years, the future outlook is much more challenging. Beyond the issue of base effects (mathematically, year-over-year GDP growth will be much tougher next year), key sectors including the oil & gas industry and Canadian real estate look ripe for a downturn.

Crude bull market intact today, but at risk in 2018

As WTI crude strengthens beyond $55, crude oil is clearly in a bull market today. Looking at figures from the International Energy Agency, global demand growth continues to run ahead of supply growth. Thus the ongoing bull market is supported by fundamentals. Thanks to the impact of hurricanes and infrastructure bottlenecks in 2017, US shale hasn’t entirely fulfilled its role as the global ‘swing producer’ this year. The dynamics of supply growth versus demand growth are shown below:

Who invited American shale? US supply ruins the crude oil party

10-13-2017 crude oil supply demand

Source: International Energy Agency, forward OPEC supply estimates via US EIA

Unfortunately, the status quo looks set to change as US supply returns with a vengeance. According to estimates from the IEA, supply growth will outstrip demand growth in the first quarter of 2018. Digging deeper into supply estimates, US shale is once again to blame. Our view is that this changing dynamic will lead to a new bear market in crude oil. Looking back at recent history, crude prices formed a long-term top in the second quarter of 2014 once supply growth overtook demand. Similarly, crude prices bottomed in the first quarter of 2016 once supply growth fell below demand in early 2016. Given Canada's dependence on crude oil exports, a bear market for the commodity is likely to result in a weaker currency.

As China enters its latest real estate downturn, Canada not far behind

While Canadian real estate has enjoyed a great year, the future outlook is much tougher. Similar to its peers in Australia and New Zealand, Canadian real estate prices tend to lag real estate prices in China. This is both because Canada’s economy is deeply intertwined with China, and because the country is a big destination for overseas investment from China. While overseas investors make up a relatively small portion of buyers (around 5% according to government estimates), they serve an important role by acting as the marginal buyer for prime property. A comparison of new house prices in China versus Canada is shown below for reference:

Canadian real estate boom set to run out of steam

11-17-2017 China Canada real estate

Source: Statistics Canada, China National Bureau of Statistics

As Chinese new house prices accelerated significantly in early 2015, Canadian real estate prices followed in 2016. As the Chinese market is now decelerating, negative growth appears to be on the horizon. In March 2015, Chinese house price growth bottomed at -6.1%. While the Canadian bull market continues for now (September new house prices registered at 3.8%), a downturn is likely over the next 6-12 months. As real estate makes up 13% of Canadian GDP, a significant decline in the fortunes of the industry are likely to spill over to the broader economy.

Implications for the Canadian dollar

At the beginning of the year, the Canadian dollar enjoyed a wide number of bullish catalysts including accelerating GDP growth, rising rate hike expectations, a relatively strong crude oil market and speculator sentiment that was at a bearish extreme. These catalysts, and the Bank of Canada’s actions in particular, helped the currency strengthen until late September.

Today, almost every factor that drives the Canadian dollar is working against it. Future GDP growth rates are set to keep decelerating. Looking at the Bank of Canada, its outlook for future rate hikes is now “cautious”. This is a big change from its hawkish tilt earlier this year. While speculator sentiment is no longer at bullish extremes, waning interest in the Canadian dollar is weighing on the currency. The ongoing NAFTA negotiations are another source of potential political risk. Finally, an impending downturn for both crude oil and Canadian real estate further worsen the picture. Thus, our longer term outlook on the Canadian dollar is bearish.

 

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China Is Testing Weapons That Can Reach The US In 14 Minutes

A secretive hypersonic wind tunnel, nicknamed 'Hyper Dragon', is helping the experts 'reveal many facts that Americans have not found out', one Chinese researcher said in a propaganda documentary…

South China Morning Post's Stephen Chen reports that China is building the world’s fastest wind tunnel to simulate hypersonic flight at speeds of up to 12 kilometres per second.

A hypersonic vehicle flying at this speed from China could reach the west coast of the United States in less than 14 minutes.

Zhao Wei, a senior scientist working on the project, said researchers aimed to have the facility up and running by around 2020 to meet the pressing demand of China’s hypersonic weapon development programme.

“It will boost the engineering application of hypersonic technology, mostly in military sectors, by duplicating the environment of extreme hypersonic flights, so problems can be discovered and solved on the ground,” said Zhao, a deputy director of the State Key Laboratory of High Temperature Gas Dynamics at the Chinese Academy of Sciences in Beijing.

The ground tests will significantly reduce the risk of failure when test flights of hypersonic aircraft start.

The world’s most powerful wind tunnel at present is America’s LENX-X facility in Buffalo, New York state, which operates at speeds of up to 10 kilometres per second – 30 times the speed of sound.

Hypersonic aircraft are defined as vehicles that travel at speeds of Mach 5, five times the speed of sound, or above.

The US military tested HTV-2, a Mach 20 unmanned aircraft in 2011 but the hypersonic flight lasted only a few minutes before the vehicle crashed into the Pacific Ocean.

In March, China conducted seven successful test flights of its hypersonic glider WU-14, also known as the DF-ZF, at speeds of between Mach 5 and Mach 10.

Other countries including Russia, India and Australia have also tested some early prototypes of the aircraft, which could be used to deliver missiles including nuclear weapons.

“China and the US have started a hypersonic race,” said Wu Dafang, professor at the school of aeronautic science and engineering at Beihang University in Beijing who received a national technology award for the invention of a new heat shield used on hypersonic vehicles in 2013.

Wu has worked on the development of hypersonic cruise missiles, a near space vehicle, high-speed drones and other possible weapons for the People’s Liberation Army.

He said there were a number of hypersonic wind tunnels in mainland China which had helped ensure the high success rate of its hypersonic weapon tests.

The new wind tunnel will be “one of the most powerful and advanced ground test facilities for hypersonic vehicles in the world”, said Wu, who was not involved in the project.

 

“This is definitely good news for us. I look forward to its completion,” he added.

In the new tunnel there will be a test chamber with room for relatively large aircraft models with a wing span of almost three metres.

To generate an airflow at extremely high speeds, the researchers will detonate several tubes containing a mixture of oxygen, hydrogen and nitrogen gases to create a series of explosions that can discharge one gigawatt of power within a split second, according to Zhao.

This is more than half of the total power generation capacity of the Daya Bay nuclear power plant in Guangdong.

The shock waves, channelled into the test chamber through a metallic tunnel, will envelope the prototype vehicle and increase the temperature over its body to 8,000 Kelvins, or 7,727 degrees Celsius, Zhao said.

That is nearly 50 per cent hotter than the surface of the Sun.

The hypersonic vehicle therefore must be covered by special materials with extremely efficient cooling systems inside the airframe to dissipate the heat, otherwise it could easily veer off the course or disintegrate during a long-distance flight.

The new tunnel would also be used to test the scramjet, a new type of jet engine designed specifically for hypersonic flights. Traditional jet engines are not capable of handling air flows at such speeds.

Zhao said the construction of the new facility would be led by the same team that built JF12, a hypervelocity denotation-driven shock tunnel in Beijing capable of duplicating flight conditions at speeds ranging from Mach 5 to Mach 9 at altitudes between 20 and 50 kilometres.

Jiang Zonglin, lead developer of the JF12, won the annual Ground Test Award issued by the American Institute of Aeronautics and Astronautics last year for advancing “state-of-the-art large-scale hypersonic test facilities”.

Jiang’s JF12 design “uses no moving parts and generates a longer test-duration and a higher energy flow than more traditionally designed tunnels”, according to the American institute.

According to state media reports, the JF12 tunnel has been operating at full capacity with a new test every two days since its completion in 2012 as the pace of hypersonic weapon development increased significantly in recent years.

In an article published in the domestic journal National Science Review last month, Jiang said the impact of hypersonic flights on society could be “revolutionary”.

“With practical hypersonic aeroplanes, a two-hour flight to anywhere in the world will be possible” while the cost of space travel could be cut by 99 per cent with reusable spacecraft technology, Jiang wrote.

 

“Hypersonic flight is, and in the foreseeable future will be, the driver of national security, and civilian transportation and space access,” he added.

The escape velocity, or the minimum speed needed to leave the Earth, is 11 kilometres per second.

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Is America Really ‘Up’ For A Second Cold War?

Authored by Patrick Buchanan via Buchanan.org,

After the 19th national congress of the Chinese Communist Party in October, one may discern Premier Xi Jinping’s vision of the emerging New World Order.

By 2049, the centennial of the triumph of Communist Revolution, China shall have become the first power on earth.

Her occupation and humiliation by the West and Japan in the 19th and 20th centuries will have become hated but ancient history.

America will have been pushed out of Asia and the western Pacific back beyond the second chain of islands.

Taiwan will have been returned to the motherland, South Korea and the Philippines neutralized, Japan contained. China’s claim to all the rocks, reefs and islets in the South China Sea will have been recognized by all current claimants.

Xi’s “One Belt, One Road” strategy will have brought South and Central Asia into Beijing’s orbit, and he will be in the Pantheon beside the Founding Father of Communist China, Mao Zedong.

Democracy has been rejected by China in favor of one-party rule of all political, economic, cultural and social life.

And as one views Europe, depopulating, riven by secessionism, fearful of a Third World migrant invasion, and America tearing herself apart over politics and ideology, China must appear to ambitious and rising powers as the model to emulate.

Indeed, has not China shown the world that authoritarianism can be compatible with national growth that outstrips a democratic West?

Over the last quarter century, China, thanks to economic nationalism and $4 trillion in trade surpluses with the United States, has exhibited growth unseen since 19th-century America.

Whatever we may think of Xi’s methods, this vision must attract vast numbers of China’s young — they see their country displace America as first power, becoming the dominant people on earth.

What is America’s vision? What is America’s cause in the 21st century? What is the mission and goal that unites, inspires and drives us on?

After World War II, America’s foreign policy was imposed upon her by the terrible realities the war produced: brutalitarian Stalinist domination of Eastern and Central Europe and much of Asia.

Under nine presidents, containment of the Soviet empire, while avoiding a war that would destroy civilization, was our policy. In Korea and Vietnam, Americans died in the thousands to sustain that policy.

But with the collapse of the Soviet Empire and the breakup of the USSR, it seemed that by 1992 our great work was done. Now democracy would flourish and be embraced by all advanced peoples and nations.

But it did not happen. The “end of history” never came. The New World Order of Bush I did not last. Bush II’s democracy crusade to end tyranny in our world produced disasters from Libya to Afghanistan.

Authoritarianism is now ascendant and democracy is in retreat.

Is the United States prepared to accept a world in which China, growing at twice our rate, more united and purposeful, emerges as the dominant power? Are we willing to acquiesce in a Chinese Century?

Or will we adopt a policy to ensure that America remains the world’s preeminent power?

Do we have what is required in wealth, power, stamina and will to pursue a Second Cold War to contain China, which, strategic weapons aside, is more powerful and has greater potential than the Soviet Union ever did?

On his Asia tour, President Trump spoke of the “Indo-Pacific,” shorthand for the proposition that the U.S., Japan, Australia and India form the core of a coalition to maintain the balance of power in Asia and contain the expansion of China.

Yet, before we create some Asia-Pacific NATO to corral and contain China in this century, as we did the USSR in the 20th century, we need to ask ourselves why.

Does China, even if she rises to surpass the U.S. in manufacturing, technology and economic output, and is a comparable military power, truly threaten us as the USSR did, to where we should consider war to prevent its expansion in places like the South China Sea that are not vital to America?

While China is a great power, she has great problems.

She is feared and disliked by her neighbors. She has territorial quarrels with Russia, India, Vietnam, the Philippines, Japan. She has separatists in Tibet and Xinjiang. Christianity is growing while Communism, the state religion, is a dead faith. Moreover, the monopoly of power now enjoyed by the Communist Party and Xi Jinping mean that if things go wrong, there is no one else to blame.

Finally, why is the containment of China in Asia the responsibility of a United States 12 time zones away?

For while China seeks to dominate Eurasia, she appears to have no desire to threaten the vital interests of the United States. China’s Communism appears to be an ideology disbelieved by her own people, that she does not intend to impose it on Asia or the world.

Again, are we Americans up for a Second Cold War, and, if so, why?

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Gun Control-Solution or Exploitation?

It’s been just over eight weeks since Stephen Paddock hauled an arsenal of weapons to his suite on the 32nd floor of the Mandalay Bay hotel in Las Vegas where he opened fire on an outdoor concert and killed 59 people while injuring more than 500. With the shock, grief, and disbelief, comes an overwhelming question: how do we stop this from happening again? It’s a question that’s been asked countless times after national tragedies like in Sandy Hook, Virginia Tech, and Orlando. The question is so vexing because it requires us to learn from our mistakes and to forge a better way forward. Unfortunately, in an age of deep skepticism, fierce political division, and 24/7 media attention, the pursuit of the right solution is often muddled by our preferred answers and our entrenched talking points. More specifically, in the wake of a tragedy like the one in Las Vegas, the national attention quickly turns to gun-control laws in an effort to ensure that something like this never happens again, but this is a misguided approach that is short-sighted and lacks the nuance truly required to solve such a potent problem.

 

Nationally, violent crime has been on the decline for more than two decades. While the last two years have shown increases in the violent crime rate, The New York Times and others have concluded that this is primarily the result of significant spikes in violent crime in certain neighborhoods in specific cities including parts of Baltimore, Chicago, and Las Vegas. While the violent crime rate is rising slightly, this isn’t indicative of a less-safe America. Moreover, it’s challenging to draw comparisons between gun-laws and public safety because places like Chicago feature some of the most prolific gun-laws in the country but they also suffer from one of the worst crime rates in the nation.

 

It doesn’t take a particularly profound observer to notice that, without guns, there would be an absence of gun-related deaths. That’s the basis for comparisons between countries like the U.S. and Australia where residents are far less likely to be injured by a gun. According to CBS News, Americans are 10 times more likely to be killed by guns than people in other developed countries.” Therefore, the argument supposes, to eradicate the atrocities like the one we saw in Las Vegas, we must also eradicate guns. However, in addition to our right to own a firearm being enshrined in our constitution, that data doesn’t tell us everything that we need to know. As The Guardian reports, “enforcement and culture may also play important roles in preventing violence.” In short, the answer to gun violence is far more nuanced and far more involved than sweeping generalizations about fewer guns equaling less violent crime.

 

In many ways, the epidemic of mass shooters and our collective desire to prevent their destruction is a separate debate from the general conversation about anti-gun laws. As Congressman Jeff Duncan writes in Time Magazine “practically none of the then existing legislation made a difference in recent attacks.” Instead, turning our attention towards vigilance, reporting, and screening might be the best and most practical way forward. According to NPR, “Two recent studies provide evidence that background checks can significantly curb gun violence.” Background checks are a legal check on gun ownership. They ensure that only those who are mentally and legally fit to own a gun can legally purchase one.

 

More importantly, background checks are fortified by a vigilant populace that takes its reporting job seriously. On the New York Times’ popular podcast, The Daily, John Markell, a gun store owner, was interviewed by host Michael Barbaro. He explains that enough people aren’t reporting their concerns to the authorities to ensure that background checks are a safe and effective method for ensuring that weapons are purchased by people who can safely own and use a firearm. By reporting concerns, infractions, and altercations, we have the power to ensure that dangerous individuals will not have the opportunity to purchase weapons.

 

Tragedies like the one in Las Vegas drive us toward a desire for action and improvement – and they should. Action is required, but it’s often not what we expect. The liberal media demands sweeping changes to gun-laws, but, as always, the truth is more complex and more nuanced. However, we can begin right away by ensuring that we are adequately supporting state and federal background checks for all owners. Most importantly, we can engage in the process by reporting our concerns and giving our skilled and entrusted law enforcement officials the opportunity to do what they do best. It’s not a flashy solution, and it probably won’t make headlines on CNN, but real solutions rarely do. Nobody wants another Sandy Hook, Virginia Tech, Orlando, or Vegas – and more than we know, we already have the power to prevent that.

 

 

 

 

 

 

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China Gold Import Jan-Sep 777t. Who’s Supplying?

Submitted by Koos Jansen, BullionStar.com.

While the gold price is slowly crawling upward in the shadow of the current cryptocurrency boom, China continues to import huge tonnages of yellow metal. As usual, Chinese investors bought on the price dips in the past quarters, steadfastly accumulating for a rainy day. The Chinese appear to be price sensitive regarding gold, as was mentioned in the most recent World Gold Council Demand Trends report, and can also be observed by Shanghai Gold Exchange (SGE) premiums – going up when the gold price goes down – and by withdrawals from the vaults of the SGE which are often increasing when the price declines. Net inflow into China accounted for an estimated 777 tonnes in the first three quarters of 2017, annualized that’s 1,036 tonnes.

Exhibit 1.

Demonstrated in the chart above Chinese gold imports and known gold demand by the Rest Of the World (ROW) add up to thousands of tonnes more than what the ROW produces from its mines. One might wonder where Chinese gold imports come from, which is why I thought it would be interesting to analyse as detailed as possible who’s supplying China. Is one country, or only the West, supplying China? Although absolute facts are difficult to cement, my conclusion is that China is supplied by a wide variety of countries on several continents this year.

China doesn’t publish its gold import figures so we have to measure exports from other countries to the Middle Kingdom for this exercise. This year the primary hubs that exported to China have been Switzerland and Hong Kong. The Swiss net exported 18 tonnes to China in September, which brings the year to date total to 221 tonnes, down 4 percent year on year. Because Switzerland is the global refining centre, a storage centre and trading hub I’ve plotted a chart showing its gross imports and exports per region.

Exhibit 2.

I’ve included Asian countries with significant mining output that are net exporters at all times, like Uzbekistan, in ROW to get the best perspective of above ground stock movement.[/caption] In the above chart we can see that Switzerland was a net exporter to China in all months, but in most months Switzerland in total was a net importer, displayed by the red line; for each of those months Switzerland itself was not the supplier to China.

Combined with data from Eurostat (on the UK’s total net flow) and USGS (on the US’ total net flow) the Swiss data tells me that gold moving from Switzerland to China had several sources this year. In January, for example, it was the UK that was supplying – being a net exporter in total and a large exporter to Switzerland. I must add that in theory little gold from the UK arrived in China via Switzerland, as the numbers don’t say which bar from whom was sent to who. But we can say “the UK made it possible China bought an X amount of gold in the open market at the prevailing price that month”. The same approach suggests that in June it was the US and Switzerland (Switzerland being a net exporter that month), and in September it was Asia (including the Middle-East) supplying gold to customers of Swiss refineries at the prevailing prices. There was not one source of above ground stock that exported to China (via Switzerland) as far as I can see.

The Hong Kong Census And Statistics Department (HKCSD) has recently published data indicating China absorbed 30 tonnes from the Special Administrative Region in September, down 8 percent relative to August and down 44 percent compared to September last year. A decline was expected because China has stimulated direct gold imports circumventing Hong Kong since 2014. Nevertheless, Hong Kong net exported 515 tonnes to the mainland through the first three quarters of 2017 (down 15 percent year on year).

Exhibit 3.

Hong Kong is a gold trading hub too, though. If Hong Kong is a net exporter to China, the actual source can be any country. Have a look at the next chart that shows the net flows through Hong Kong per region: the West, East and ROW (1). I’ve also added the net flow with China.

Exhibit 4. I’ve included Asian countries with significant mining output that are net exporters at all times, like Uzbekistan, in ROW to get the best perspective of above ground stock movement. To be clear, the blue line + the grey line + the yellow line = the red line. All lines are “net import”, calculated as import minus export. While Switzerland is included in the West, gold from all over the world can flow via Switzerland to Hong Kong.

First observe the red line, “Hong Kong total net flow”. We can see that in 2013 Hong Kong became a massive net importer until about half way through 2015. The major suppliers to Hong Kong during this period were Switzerland and the UK, next to the ROW.  I’m not aware of what type of entities were accumulating in Hong Kong at the time. The largest net importer from Hong Kong was China (included in the East).

After 2015 supply from the West (through Hong Kong) has slowly dried up while demand by China continued, shown by the blue line coming to zero and the yellow bars remaining to trend sub-zero. And thus Hong Kong commenced net exporting gold itself as we can see the red line in the chart falling far below zero. Apparently, since 2015 Hong Kong is a net exporter.

How much gold is left in Hong Kong? Unfortunately, online data from the HKCSD goes back only to 2002. The HKCSD does keep physical records from its international merchandise trade statistics from before 2002 but strangely “gold export” from 1972 until 1998 is omitted in these books (2).

Exhibit 5.

As you can see in this last chart Hong Kong has suffered net exports from 2002 until 2008 and after 2015. It’s possible there is still bullion in Hong Kong if it had been accumulated before 1998, but since 1998 Hong Kong already “net lost” 727 tonnes. Another possibility is that refineries in Hong Kong import a lot of scrap gold, which is nearly impossible to track in customs reports and is not included in any of my data, that is being refined into bullion and exported. In this case Hong Kong is not a net exporter, or less of a net exporter. We’ll see in coming months or years if Hong Kong can continue net exporting bullion.

In exhibit 4 we can see a vague correlation between “Hong Kong net export to the China” and “Hong Kong’s total net export” for 2016 and 2017. It looks like Hong Kong is feeding its big brother. Or is it?

There is a gold kilobar futures contract listed on the COMEX that is physically deliverable in Hong Kong. The trading volume of this contract is neglectable, and so is physical delivery, but remarkably the designated vault (Brinks) throughput is sky-high. When looking at a chart of kilobars received and withdrawn at the Brinks vault in Hong Kong, supplemented by cross-border gold trade, there is a pattern revealed: the amount of kilobars received and withdrawn, and Hong Kong’s gold total import and re-export to China are correlated.

Exhibit 6.

The chart suggests that Hong Kong is mainly supplying China from its imports (and any gold supplying other countries than China was stored in Hong Kong in previous years or was sourced from scrap). As the imports are correlated to kilobars received in the Brinks vault and kilobars withdrawn are correlated to re-exports to China, both flows seem to be one and the same trade. I don’t know for sure, but I think this is largely true. The next question is from what countries does Hong Kong import bullion to dispatch to China? From countries all over the world. Have a look.

Exhibit 7.

The composition is quite diverse. From the first until the the third quarter of this year gold came in from Switzerland, South-Africa, the US, Australia and the Philippines, inter alia.

Next to gold flowing through Switzerland and Hong Kong to China, countries that supplied gold directly to China this year have been Australia at 20 tonnes (3), the US at 14 tonnes, Japan at 3 tonnes and Canada at 4 tonnes. The UK has practically exported zero gold directly to China this year. In total Hong Kong (515 tonnes), Switzerland (221 tonnes), Australia (20 tonnes), the US (14 tonnes), Japan (3 tonnes) and Canada (4 tonnes) net exported 777 tonnes to China mainland in the first three quarters of 2017 (4).

Conclusion

It must be mentioned that in theory gold import by China arrives in the Shanghai Free Trade Zone (which is not the domestic market) where the Shanghai International Gold Exchange (SGEI) operates. As most of you know the SGEI can serve foreign customers that can import gold traded on the SGEI, for example into India. Hence, it’s possible not all gold imported into China mainland arrives in the domestic market but ends up in the Shanghai Free Trade Zone or abroad. Global cross-border trade statistics by COMTRADE, however, show that barely any country is importing from China.

Until new evidence shows up my best guess is that China net imported 777 tonnes in the first nine months of 2017, sourced from all corners of the world: the UK, South-Africa, Australia, Switzerland, the US, Middle-East and Philippines. It seems Chinese banks are active all over the world looking to buy gold on the dips, snapping up physical metal when the time is right.

Chinese imports add to China's domestic mining output. The China Gold Association disclosed on November 1 that mine production accounted for 313 tonnes, down 10 % compared to last year. Nearly all this gold (313 + 777) is sold through the SGE. Withdrawals from the vaults of the SGE accounted for 1,505 tonnes over this period, implying 415 tonnes (1,505 – 313 – 777) was supplied by scrap and disinvestment (or partially recycled through the SGE system).

Since all non-monetary gold imported and mine production ends up in the private sector, my estimate for total gold owned by the Chinese people now stands at 16,575 tonnes. Added by a more speculative estimate of 4,000 tonnes held by the PBOC makes 20,575 tonnes.

Exhibit 8.

If you like to learn more about the Chinese gold market please read The Chinese Gold Market Essentials or visit the BullionStar University.

Footnotes

1) Hat tip to Nick Laird from Goldchartsrus.com for providing the HKCSD data from January 2002 until September 2017.

2) Huge hat tip to Winson Chik that went to the HKCSD office in Hong Kong for us to obtain the data from before 2002!

Exhibit 9. Courtesy Winson Chik.

3) The Australian Bureau of Statistics (ABS) amended its gold export data to China and Hong Kong until August 2016. Before that I had my own way of computing direct gold export from Australia to China – which is now obsolete. A few days ago I got confirmed by ABS they stopped amending the data as China has allowed gold import bypassing Hong Kong. ABS data on gold export to China can now be taken at face value. On November 10, 2017, ABS wrote me:

Previously ABS amended exports of gold bullion going to Hong Kong to China as at the time the ABS had been provided with information to suggest that the majority of gold exports to Hong Kong ultimately ending up in China. In 2016 a review of this methodology was undertaken, and it was determined that in recent years direct imports to the Chinese mainland have become increasingly common. by 2013-14, China eased restrictions on the direct importation of gold to ports outside of Hong Kong, and as a result users have abandoned using Hong Kong gold imports as an appropriate proxy measure for Chinese imports. The ABS implemented improvements to more accurately reflect the country of final destination of gold bullion, non-monetary (excl. unwrought forms and coins of HS 7118 and HS 9705) (AHECC 71081324) exported to Hong Kong and China in August 2016. The series were revised back to January 2012, inclusive. This impacted the country series only, as published in tables 14a and 36a-36j of International Trade in Goods and Services, Australia (cat. no. 5368.0) and detailed country statistics available on request. Total levels were not impacted, nor will there be any implications for other ABS collections. The ABS defines the country of final destination for exports as 'the last country, as far as it is known at the time of exportation, to which goods are to be delivered'. The ABS conducted a review of the country of final destination of gold bullion into China and Hong Kong. There was evidence that Hong Kong had ceased serving primarily as an intermediate shipping country of gold into China and was importing and transforming gold bullion in its own right.

4) Data from Australia and the US for September hasn’t been released yet, so the numbers disclosed are provisional.

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UN Diplomat Plunges To His Death After “Game Of Trust” Gone Wrong

Sometimes, being too trusting can be a fatal mistake – especially in diplomacy – as one member of the Australian delegation at the United Nations learned early Wednesday morning, when he plunged to his death from his Manhattan balcony during a night of boozing with friends and his wife. The circumstances of Julian Simpson’s death are bizarre, considering that he died during a “trust game” gone wrong, according to the New York Post.

Julian Simpson, 30, fell from the seventh floor to a second-floor landing at the Clinton Street building where he lived on the Lower East Side around 1:35 a.m., the sources said. Simpson was playing a “trust game” with a male pal when he accidentally took the fatal fall, a source said.

 

“I will prove it that you can trust me. Let’s play the trust game,” Simpson said to the 24-year-old man just moments before he slipped and fell, sources said.

Simpson and his wife were out with friends for dinner and drinks before the group returned to their Clinton Street residence, where they enjoyed views of the Empire State building from their building’s wraparound roof deck. The New York landmark was lit up in the colors of the Australian flag to celebrate the country’s same-sex marriage vote.

But things quickly took a dark turn as an apparently drunken Simpson climbed onto a higher roof with the wife of another party guest, and started dangerously swinging her around, according to the New York Post. Upon returning inside, the woman’s husband confronted Simpson, and the two stepped on to his balcony.

The details of what happens next are even stranger:

While on the roof, the diplomat, who serves as the second secretary to the UN for Australia, then climbed to a higher roof landing where he began swinging a female friend around, sources said. Once he put her down, everyone decided to go back inside.

 

While inside, the 24-year-old man, who is the husband of the woman Simpson had been swinging, confronted Simpson over the gesture, sources said. The two men then stepped out onto Simpson’s balcony, where Simpson told the husband that he meant no harm, according to sources.

 

To prove to the husband that he could trust him, Simpson suggested playing the “trust game” — in which Simpson would lean back on the ledge and trust the man to catch him before he would fall.

 

Simpson jumped up onto the balcony railing and sat on it facing the apartment before he fell backward, sources said.The man told investigators that he put his arm out to catch him, but Simpson slipped and fell to his death, according to sources.

 

Simpson was rushed to Mount Sinai Beth Israel hospital where he was pronounced dead.

 

Investigators say foul play is not suspected, sources said.

Simpson, a deputy secretary for the Australian delegation to the UN, was 30 at the time of his death. The Australian consulate has so far not commented on the strange circumstances surrounding his death. However, Police said excessive drinking likely played a role in the fatal accident, noting that the apartment reeked strongly of booze when they arrived.

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Australia Votes Overwhelmingly For Gay Marriage After Heated Campaign

It was only twenty years ago that the last Australian state, Tasmania, decriminalised male homosexuality. Whether one is in favour or not, Australia had a lot of catching up to do with other western nations.

In an Australian general election, there is no such thing as a “low turnout” since voting is compulsory for citizens. In contrast, the vote on gay marriage was voluntary and conducted by post, following two failed attempts by the government to hold a compulsory national vote that was denied twice in the Australian Senate. Senators opposing a compulsory vote had expressed concern that it would be more costly and exacerbate hate campaigns. Nevertheless, it was costly (A$100million or $76 million) and, at times, the campaign became violent. For example, a man was charge last month after former Prime Minister, Tony Abbott, an opponent of same-sex marriage, was headbutted. Abbott called the incident “politically motivated violence.” Police were called to intervene in a confrontation between rival groups at the University of Sydney, while some workers complained that they were harassed if they did not show support for the “Yes” vote.

Despite its voluntary nature, 12.7 million people, 79.5% of those eligible to vote, participated in the poll during an eight-week period. It asked one question.

"Should the marriage law be changed to allow same-sex couples to marry?"

With the votes counted, the “Yes” vote gained more than 60%, as the BBC reports.

Australians have overwhelmingly voted in favour of legalising same-sex marriage in a historic poll. The non-binding postal vote showed 61.6% of people favour allowing same-sex couples to wed, the Australian Bureau of Statistics said. Jubilant supporters have been celebrating in public spaces, waving rainbow flags and singing and dancing. A bill to change the law was introduced into the Senate late on Wednesday. It will now be debated for amendments. Prime Minister Malcolm Turnbull said his government would aim to pass legislation in parliament by Christmas.

 

"[Australians] have spoken in their millions and they have voted overwhelmingly yes for marriage equality," Mr Turnbull said after the result was announced. "They voted yes for fairness, yes for commitment, yes for love."

The Yes campaign argued that it was a debate about equality. The No campaign put the focus on the definition of family, raising concerns about how issues like gender will be taught in schools. Australia's chief statistician David Kalisch said about 7.8 million people voted in support of same-sex marriage, with approximately 4.9 million against it. He said participation was higher than 70% in 146 of Australia's 150 electorates. All but 17 electorates supported changing the law.

 

"This is outstanding for a voluntary survey and well above other voluntary surveys conducted around the world," Mr Kalisch said. "It shows how important this issue is to many Australians."

As the FT reports, “Yes” supporters celebrated after the result was announced, with high-profile business and celebrity figures getting involved.

The resounding victory for the Yes campaign sparked celebrations across the country, with supporters wearing rainbow colours and glitzy costumes at events to reflect on the eight-week campaign for marriage equality. Alan Joyce, the Irish-born Qantas chief executive who donated A$1m to the Yes campaign, performed a jig on stage at an event in Sydney, declaring it was an “amazing result, on an amazing day”. Tiernan Brady, director of Australians for equality, a lobby group that co-ordinated the Yes campaign, said voters had reaffirmed that most deeply-held Australian value — a “fair go for all”.

 

“Their message today is one of confidence in their values and their country. Their message to LGBTI people is one of generosity and inclusion. Their message to politicians is clear — it is time for them to do their jobs and pass marriage equality,” he said.

 

The vote in favour of marriage equality marks a watershed moment for gay rights in Australia, which remains one of the last English speaking developed nations that has not yet implemented the reform.

While the draft bill to legalise same-sex marriage is expected to pass the Australian parliament by Christmas, it has ignited division within the ruling political party, according to the FT.

However, Mr Turnbull is likely to face a tricky internal battle within his own party from a group of conservative lawmakers, who have used the issue as a proxy war for control of the ruling Liberal party. They are pushing for exemptions to individuals or companies who did not want to provide services to gay weddings due to religious or “conscientious” objections. The exemptions would allow parents to withdraw their children from school classes that do not accord with their own understanding of marriage. They would also enable people to discuss their traditional views about marriage without fear of legal penalties. Tony Abbott, a prominent No campaigner and former prime minister, said this week more protections were needed to guarantee freedom of conscience and freedom of religion.

 

“I look forward to a parliamentary process that improves on (the draft bill) to implement same-sex marriage with freedom of conscience for all, not just the churches,” he said. Critics say approving such exemptions would roll back years of anti-discrimination laws and encroach on protections for gay and lesbian people.

The following infographic from the FT shows the 26 nations which had legalised same-sex marriage before Australia’s landmark “Yes” vote.


 

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Why Australia’s Economy Is A House Of Cards

Authored by Matt Barrie via Medium.com,

Co-authored with Craig Tindale.

I recently watched the federal treasurer, Scott Morrison, proudly proclaim that Australia was in “surprisingly good shape”. Indeed, Australia has just snatched the world record from the Netherlands, achieving its 104th quarter of growth without a recession, making this achievement the longest streak for any OECD country since 1970.

 

Australian GDP growth has been trending down for over forty years
Source:
Trading Economics, ABS

I was pretty shocked at the complacency, because after twenty six years of economic expansion, the country has very little to show for it.

For over a quarter of a century our economy mostly grew because of dumb luck. Luck because our country is relatively large and abundant in natural resources, resources that have been in huge demand from a close neighbour.

That neighbour is China.

Out of all OECD nations, Australia is the most dependent on China by a huge margin, according to the IMF. Over one third of all merchandise exports from this country go to China- where ‘merchandise exports’ includes all physical products, including the things we dig out of the ground.

Source: Austrade, IMF Director of Trade Statistics

Outside of the OECD, Australia ranks just after the Democratic Republic of the Congo, Gambia and the Lao People’s Democratic Republic and just before the Central African Republic, Iran and Liberia. Does anything sound a bit funny about that?

Source: Austrade, IMF Director of Trade Statistics

As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.

Unfortunately for Australia, that “lucky” free ride is just about to end.

Societe Generale’s China economist Wei Yao said recently, “Chinese banks are looking down the barrel of a staggering $1.7 trillion?—?worth of losses”. Hyaman Capital’s Kyle Bass calls China a “$34 trillion experiment” which is “exploding”, where Chinese bank losses “could exceed 400% of the U.S. banking losses incurred during the subprime crisis”.

A hard landing for China is a catastrophic landing for Australia, with horrific consequences to this country’s delusions of economic grandeur.

Delusions which are all unfolding right now as this quadruple leveraged bubble unwinds. What makes this especially dangerous is that it is unwinding in what increasingly looks like a global recession– perhaps even depression, in an environment where the U.S. Federal Reserve (1.25%), Bank of Canada (1.0%) and Bank of England (0.25%) interest rates are pretty much zero, and the European Central Bank (0.0%), Bank of Japan (-0.10%), and Central Banks of Sweden (-0.50%) and Switzerland (-0.75%) are at zero or negative interest rates.

Summary of Current Interest Rates from Central Banks (16th October 2017). Source: Global-rates.com

As a quick refresher of how we got here, after the Global Financial Crisis, and consequent recession hit in 2007 thanks to delinquencies on subprime mortgages, the U.S. Federal Reserve began cutting the short-term interest rate, known as the ‘Federal Funds Rate’ (or the rate at which depository institutions trade balances held at Federal Reserve Banks with each other overnight), from 5.25% to 0%, the lowest rate in history.

When that didn’t work to curb rising unemployment and stop growth stagnating, central banks across the globe started printing money which they used to buy up financial securities in an effort to drive up prices. This process was called “quantitative easing” (“QE”), to confuse the average person in the street into thinking it wasn’t anything more than conjuring trillions of dollars out of thin air and using that money to buy things in an effort to drive their prices up.

Systematic buying of treasuries and mortgage bonds by central banks caused the face value of on those bonds to increase, and since bond yields fall as their prices rise, this buying had the effect of also driving long-term interest rates down to near zero.

Both short and long term rates were driven to near zero by interest rate policy and QE. Source: Bloomberg, CME Group

In theory making money cheap to borrow stimulates investment in the economy; it encourages households and companies to borrow, employ more people and spend more money. An alternative theory for QE is that it encourages buying hard assets by making people freak out that the value of the currency they are holding is being counterfeited into oblivion.

In reality, the ability to borrow cheap money was mainly used by companies to buy back their own shares, and combined with QE being used to buy stock index funds (otherwise known as exchange traded funds or “ETFs”), this propelled stock markets to hit record high after record high even though this wasn’t justified the underlying corporate performance.

Almost all flows into the equity market have been in the form of buybacks. Source: BofA Merrill Lynch Global Investment Strategy, S&P Global, EPFR Global, Convexity Maven

In literally a “WTF Chart of the Day” on September 11, 2017, it was reported that the central bank of Japan now holds 75% of all ETFs. No, not ‘owns units in three out of four ETFs’?—?the Bank of Japan now owns three quarters of all assets by market value in all Japanese exchange traded funds.

In today’s world Hugo Chavez wouldn’t need to nationalise assets, he could have just printed money and bought them on the open market.

Bank of Japan now owns 75% of all Japanese ETFs. Source: Zerohedge

Europe and Asia were dragged into the crisis, as major European and Asian banks were found holding billions in toxic debt linked to U.S. subprime mortgages (more than 1 million U.S. homeowners faced foreclosure). One by one, nations began entering recession and repeated attempts to slash interest rates by central banks, along with bailouts of the banks and various stimulus packages could not stymie the unfolding crisis. After several failed attempts at instituting austerity measures across a number of European nations with mounting public debt, the European Central Bank began its own QE program that continues today and should remain in place well into 2018.

In China, QE was used to buy government bonds which were used to finance infrastructure projects such as overpriced apartment blocks, the construction of which has underpinned China’s “miracle” economy. Since nobody in China could actually afford these apartments, QE was lent to local government agencies to buy these empty flats. Of course this then led to a tsunami of Chinese hot money fleeing the country and blowing real estate bubbles from Vancouver to Auckland as it sought more affordable property in cities whose air, food and water didn’t kill you.

QE was only intended as a temporary emergency measure, but now a decade into printing and the central banks of the United States, Europe, Japan and China have now collectively purchased over US$19 trillion of assets. Despite the lowest interest rates in 5,000 years, the global economic growth in response to this money printing has continued to be anaemic. Instead, this stimulus has served to blow asset bubbles everywhere.

Total assets held by major central banks. Source: Haver Analytics, Yardeni Research

This money printing has lasted so long that the US economic cycle is imminently due for another downturn- the average length of each economic cycle in the U.S. is roughly 6 years. By the time the next crisis hits, there will be very few levers left for central banks to pull without getting into some really funny business.

It wasn’t until September 2017 that the U.S. Federal Reserve finally announced an end to the current program, with a plan to begin selling-off and reducing its own US$4.5 trillion portfolio beginning in October 2017.

How these central banks plan to sell these US$19 trillion in assets someday without completely blowing up the world economy is anyone’s guess. That’s about the same in value as trying to sell every single share in every single company listed on the stock markets of Australia, London, Shanghai, New Zealand, Hong Kong, Germany, Japan and Singapore. I would think a primary school student would be able to tell you that this is all going to end up going horribly wrong.

To put into perspective how perverted things are right now, in September 2017, Austria issued a 100 year euro denominated bond which yields a pathetic 2.1% per annum. That’s for one hundred years. The buyers of these bonds, who, on the balance of probability, were most likely in high school or university during the global financial crisis, think that earning a miniscule 2.1% per annum every year over 100 years is a better investment than well anything else that they could invest in- stocks, real estate, you name it, for one hundred years. They are also betting that inflation won’t be higher than 2.1% on average for one hundred years, because otherwise they would lose money. This is even though in 20 years time they’ll be holding a bond with 80 years left to go to be paid out in a currency that may no longer exist. The only way the value of these bonds will go up is if the world continues to fall apart, causing the European Central Bank to cut its interest rate further and keep it lower for 100 years. Since the ECB refinancing rate is currently zero percent, that would mean that if you wanted to borrow money from the European Central Bank, it would literally have to pay you for the pleasure of borrowing money from it. The other important thing to remember is that on maturity, everyone that bought that bond in September will be dead.

So if one naively were looking at markets, particularly the commodity and resource driven markets that traditionally drive the Australian economy, you might well have been tricked into thinking that the world was back in good times again as many have rallied over the last year or so.

The initial rally in commodities at the beginning of 2016 was caused by a bet that more economic stimulus and industrial reform in China would lead to a spike in demand for commodities used in construction. That bet rapidly turned into full blown mania as Chinese investors, starved of opportunity and restricted by government clamp downs in equities, piled into commodities markets.

This saw, in April of 2016, enough cotton trading in a single day to make a pair of jeans for everyone on the planet, and enough soybeans for 56 billion servings of tofu, according to Bloomberg in a report entitled “The World’s Most Extreme Speculative Mania Unravels in China”.

Market turnover on the three Chinese exchanges jumped from a daily average of about $78 billion in February to a peak of $261 billion on April 22, 2016?—?exceeding the GDP of Ireland. By comparison, Nasdaq’s daily turnover peaked in early 2000 at $150 billion.

While volume exploded, open interest didn’t. New contracts were not being created, volume instead was churning as the hot potato passed between speculators, most commonly in the night session, as consumers traded after work. So much so that sometimes analysts wondered whether the price of iron ore is set by the market tensions between iron ore miners and steel producers, or by Chinese taxi drivers trading on apps.

Average futures contract holding times for various commodities. Source: Bloomberg

In April 2016, the average holding period for steel rebar and iron ore contracts was less than 3 hours. The Chief Executive of the London Metal Exchange, said “Why should steel rebar be one of the world’s most actively-traded futures contracts? I don’t think most people who trade it know what it is”.

Steel, of course, is made from iron ore, Australia’s biggest export, and frequently the country’s main driver of a trade surplus and GDP growth.

Australia is the largest exporter of iron ore in the world, with a 29% global share in 2015–16 and 786Mt exported, and at $48 billion we’re responsible for over half of all global iron ore exports by value. Around 81% of our iron ore exports go to China.

Unfortunately, in 2017, China isn’t as desperate anymore for iron ore, where close to 50% of Chinese steel demand comes from property development, which is under stress as house prices temper and credit tightens.

In May 2017, stockpiles at Chinese ports were at an all time high, with enough to build 13,000 Eiffel Towers. Last January, China pledged “supply-side reforms” for its steel and coal sectors to reduce excessive production capacity. In 2016, capacity was cut by 6 percent for steel and and 8 percent for coal.

In the first half of 2017 alone, a further 120 million tonnes of low-grade steel capacity was ordered to close because of pollution. This represents 11 percent of the country’s steel capacity and 15 percent of annual output. While this will more heavily impact Chinese-mined ore than generally higher-grade Australian ore, Chinese demand for iron ore is nevertheless waning.

Over the last six years, the price of iron ore has fallen 60%.

Iron ore fines 62% Fe CFR Futures. Source: Investing.com

While the price of iron ore briefly rallied after the U.S. election in anticipation of increasingly less likely Trumponomics, DBS Bank expects that global demand for steel will remain stagnant for at least the next 10–15 years. The bank forecasts that prices are likely to be rangebound based on estimates that Chinese steel demand and production have peaked and are declining, that there are no economies to buffer this slowdown in China, and that major steel consuming industries are also facing overcapacity issues or are expected to see lower growth.

Australia’s second biggest export is coal, being the largest exporter in the world supplying about 38% of the world’s demand. Production has been on a tear, with exports increasing from 261Mt in 2008 to 388Mt in 2016.

Australian Coal Exports by Type 1990–2035 (IEA Core Scenario). Source: International Energy Agency, Minerals Council of Australia

While exports increased by 49% over that time period, the value of those exports has collapsed 38%, from $54.7 billion to $34 billion.

The only bright side for Australian coal in 2017 was that, unexpectedly, Cyclone Debbie wiped out several railroads and forced the closure of ports and mining operations, which has caused a temporary spike in coal prices.

Australian Thermal Coal Prices. (12,000- btu/pound, <1% sulfur, 14% ash, FOB Newcastle/Port Kembla, US$ / metric ton). Source: IMF, Quandl

Australian Premium Coking Coal FOB $/tonne. Source: Mining.com

There are two main types of coal- thermal coal, which is burnt as fuel, and coking coal, which is used in the manufacture of steel. The prospects for coking coal are obviously tied to the prospects of the steel market, which are not particularly good.

Thermal coal, on the other hand, is substantially on the nose, and while usage is still climbing in non-OECD nations, it is already in terminal decline in OECD nations. Recently, in April 2017, the United Kingdom experienced its first day without burning coal for electricity since the industrial revolution in the 1800s.

World Coal Consumption by Region 1980–2040 (forecast). Source: US Energy Information Administration

Australia’s main export markets for coal are Japan and China, two markets in which the use of coal is forecast to decline through 2040.

Australia’s top export market for coal is Japan, and the unfortunate news is that the ramp up in coal exports here is a short lived adaptation after power companies idled their nuclear reactors in the wake of the Fukushima disaster. Between a zombie economy and fertility levels far below the replacement rate, Japan’s population is shrinking and thus naturally net electricity generation has also been declining in Japan since 2010.

Japan net electricity generation by fuel 2009–15. Source: US Energy Information Administration

Coal consumption in China has dropped three years in a row, and in January 2017, 100 coal fired power plants were cancelled. China has announced that it is spending a whopping $360 billion on renewables through 2020, and this year is implementing the world’s biggest cap-and-trade carbon market to curb emissions.

Blind to the reality of this situation, Australia is ramping up coal production while China commits to ending coal imports in the very near future in what can only be described as a last-ditch “dig it up now, or never” situation.

Major Export Markets for Australian Coal (2014). Source: Wikipedia

Coal Consumption in China, the US and India 1990–2040. Source: US Energy Information Administration

Coal exports rely on substantial investment by investors who build significant infrastructure, like ports and rail, the cost of which is shared among users according to volume. If a coal company defaults then the remaining coal companies pay extra to collectively cover the loss. A single failure can significantly increase the cost to the other users and can in turn cause pressure on the remaining partners. As this happens, their bonds get downgraded causing balance sheet erosion that ultimately can impact project viability.

Moodys recently downgraded the ratings of several Australian coal ports including Adani’s Abbot Point- after U.S. coal miner Peabody Energy, which ships through these ports, defaulted on several of its bonds.

Despite all of this, some in government can’t get their head around why the Big Four banks and major investment banks including, Citigroup, JPMorgan, Goldman Sachs, Deutsche Bank, Royal Bank of Scotland, HSBC and Barclays are not keen to fund the gargantuan Carmichael coal project in Queensland’s Galilee Basin.

The now former deputy Prime Minister of Australia, Barnaby Joyce, a New Zealand-Australian politician who served unconstitutionally as the Deputy Prime Minister of Australia, wants Australian taxpayers to be the lenders of last resort to Adani, an Indian miner, for $900 million to build a rail line from their proposed Carmichael Thermal Coal Mine to the port at Abbot Point, where it would be shipped to India. Adani is looking for a handout because, unsurprisingly, the banks knocked them back because the project was too risky and the public backlash against the project has been overwhelming. If it does go ahead, it is likely to be a rail line to nowhere, because by the time it opens, there is a chance that the project will be unviable.

Unless the government steps in, it’s increasingly more likely that the project will go the way of the Wiggins Island coal export terminal, the fraught development originally conceived by Glencore and seven other project partners in 2008, at the literal top of the market for coal. Since conception, three of the project’s original proponents?—?Caledon Coal, Bandanna Energy and Cockatoo Coal?—?have gone into administration. Only one of the project’s three stages has been completed, at twice the estimated cost. The five remaining take-or-pay owners have been left with more than US$4 billion in debt to repay and hope is fading on any any chance of refinancing before it all falls due.

What makes the Adani project so absurd is that India has recently cancelled more than 500 gigawatts of planned coal projects and the Indian government has said, however realistic that may be, that it intends to phase out thermal coal imports- precisely the type of coal Carmichael produces- entirely by 2020.

It’s even more perplexing when you consider that 2016 was the year that solar became cheaper than coal, with some countries generating electricity from sunshine for less than 3 cents per kilowatt-hour (which is half the average global cost of coal power) and by October 2017, wind power is now cheaper than coal in India.

Furthermore, global policy to limit the rise in temperatures by 2% could result in a 40% drop in the trade of thermal coal, which would cut Australia’s exports of such by 35%, according to a study by Wood Mackenzie. In 2014, thermal coal was 51% of our coal exports by volume, and this is precisely the type of coal that will be mined by Adani at Carmichael.

Given that Baarnaby’s service was ruled invalid, one can only hope that his actions regarding Government funding for the Adani project might also be invalidated and we can put this flawed project to bed.

Recent events have given manifest life to Mark Carney’s landmark 2015 speech in which Carney, the Governor of the Bank of England, warned that if the world is to limit global warming to below 2 degrees, then the estimates for how much carbon the world can burn makes between 66% and 80% of global oil, gas and coal reserves unusable.

In an essay last year, David Fickling wrote “More than half the assets in the global coal industry are now held by companies that are either in bankruptcy proceedings or don’t earn enough money to pay their interest bills, according to data compiled by Bloomberg. In the U.S., only three of 12 large coal miners traded on public markets escape that ignominious club, separate data show”.

So while our politicians gaze wistfully in parliaments at a lump of coal, undoubtedly the days are clearly numbered for our second largest export.

Losing coal as an export will blow a $34 billion dollar per annum hole in the current account, and there’s been no foresight by successive governments to find or encourage modern industries to supplant it.

Australian Treasurer Scott Morrison gazes wistfully at a lump of coal. Source: AAP, Lukas Coch

What is more shocking is that despite the gargantuan amount of money that China has been pumping into the system since 2014, Australia’s entire mining industry- which is completely dependent on China- has struggled to make any money at all.

Across the entire industry revenue has dropped significantly while costs have continued to rise.

China credit impulse leads its manufacturing index (which in turn fuels commodities). Source: PIMCO

According to the Australian Bureau of Statistics, in 2015–16 the entire Australian mining industry which includes coal, oil & gas, iron ore, the mining of metallic & non-metallic minerals and exploration and support services made a grand total of $179 billion in revenue with $171 billion of costs, generating an operating profit before tax of $7 billion which representing a wafer thin 3.9% margin on an operating basis. In the year before it made a 8.4% margin.

Collectively, the entire Australian mining industry (ex-services) would be loss making in 2016–17 if revenue continued to drop and costs stayed the same. Yes, the entire Australian mining industry.

 

Collectively, the entire Australian mining industry (ex-services) would be loss making in 2016–17 if revenue continued to drop and costs stayed the same. Source: Australian Bureau of Statistics

Our “economic miracle” of 104 quarters of GDP growth without a recession today doesn’t come from digging rocks out of the ground, shipping the by-products of dead fossils and selling stuff we grow any more. Mining, which used to be 19% of GDP, is now 6.8% and falling. Mining has fallen to the sixth largest industry in the country. Even combined with agriculture the total is now only 10% of GDP.

Operating profit before tax by Australian Industry- the entire small and medium mining industry collectively has been loss making from 2014–16 on an operating basis. Source: Australian Bureau of Statistics

Mineral production in regional Western Australia, where 99% of Australia’s iron ore is mined, contributed only 6.5 percent to Australia’s GDP growth in 2016.

To make matters worse, in 2017 there has been a sharp downturn in Chinese credit impulse (rate of change), which is combined with a negative, and falling global credit impulse. According to PIMCO’s Gene Fried “the question now is not if China slows, but rather how fast”. This will cause even more problems for Australia’s flagging resources sector.

China’s contribution to the global credit impulse (market GDP weighted). Source: PIMCO

The “economic miracle” of GDP growth is also certainly not from manufacturing, which has collapsed in the last decade from 10.8% to 6.6% of Gross Value Add, and has grown by… negative 275,000 jobs since the 1990s.

Industry share of Gross Value Add 2005–6 versus 2015–6. Source: Australian Bureau of Statistics

This is even before the exit of Australia’s last two remaining car manufacturers, Toyota and Holden, who both shut up shop in 2017. Ford closed last year.

Australian Manufacturing Employment and Hours Worked. Source: AI Group

In the 1970s, Australia was ranked 10th in the world for motor vehicle manufacturing. No other industry has replaced it. Today, the entire output of manufacturing as a share of GDP in Australia is half of the levels where they called it “hollowed out” in the U.S. and U.K.

In Australia in 2017, manufacturing as a share of GDP is on par with a financial haven like Luxembourg. Australia doesn’t make anything anymore.

Manufacturing value add (% of GDP) for Australia. Source: World Bank & OECD

With an economy that is 68% services, as I believe John Hewson put it, the entire country is basically sitting around serving each other cups of coffee or, as the Chief Scientist of Australia would prefer, smashed avocado.

David Llewellyn-Smith recently wrote that this is unsurprising as “the Australian economy is now structurally uncompetitive as capital inflows persistently keep its currency too high, usually chasing land prices that ensure input costs are amazingly inflated as well.

Wider tradables sectors have been hit hard as well and Australian exports are now a lousy 20% of GDP despite the largest mining boom in history.

The other major economic casualty has been multifactor productivity (the measure of economic performance that compares the amount of goods and services produced to the amount of combined inputs used to produce those goods and services). It has been virtually zero for fifteen years as capital has been consistently and massively mis-allocated into unproductive assets. To grow at all today, the nation now runs chronic twin deficits with the current account (value of imports to exports) at -2.7% and a budget deficit of -2.4% of GDP.”

The Reserve Bank of Australia has cut interest rates by 325 basis points since the end of 2011, in order to stimulate the economy, but I can’t for the life of me see how that will affect the fundamental problem of gyrating commodity prices where we are a price taker, not a price maker, into an oversupplied market in China.

This leads me to my next question- where has this growth come from?

Successive Australian governments have achieved economic growth by blowing a property bubble on a scale like no other.

A bubble that has lasted for 55 years and seen prices increase 6556% since 1961, making this the longest running property bubble in the world (on average, “upswings” last 13 years).

In 2016, 67% of Australia’s GDP growth came from the cities of Sydney and Melbourne where both State and Federal governments have done everything they can to fuel a runaway housing market. The small area from the Sydney CBD to Macquarie Park is in the middle of an apartment building frenzy, alone contributing 24% of the country’s entire GDP growth for 2016, according to SGS Economics & Planning.

According to the Rider Levett Bucknall Crane Index, in Q4 2017 between Sydney, Melbourne and Brisbane, there are now 586 cranes in operation, with a total of 685 across all capital cities, 80% of which are focused on building apartments. There are 350 cranes in Sydney alone.

Crane Activity?—?Australia by Key Cities & Sector. Source: RLB

By comparison, there are currently 28 cranes in New York, 24 in San Francisco and 40 in Los Angeles. There are more cranes in Sydney than Los Angeles (40), Washington DC (29), New York (28), Chicago (26), San Francisco (24), Portland (22), Denver (21), Boston (14) and Honolulu (13) combined. Rider Levett Bucknall counts less than 175 cranes working on residential buildings across the 14 major North American markets that it tracked in 3Q17, which is half of the number of cranes in Sydney alone.

According to UBS, around one third of these cranes in Australian cities are in postcodes with ‘restricted lending’, because the inhabitants have bad credit ratings.

This can only be described as completely “insane”.

That was the exact word used by Jonathan Tepper, one of the world’s top experts in housing bubbles, to describe “one of the biggest housing bubbles in history”. “Australia”, he added, “is the only country we know of where middle-class houses are auctioned like paintings”.

An Auctioneer yells out bids in the middle class suburb of Cammeray. Source: Reuters

Our Federal government has worked really hard to get us to this point.

Many other parts of the world can thank the Global Financial Crisis for popping their real estate bubbles. From 2000 to 2008, driven in part by the First Home Buyer Grant, Australian house prices had already doubled. Rather than let the GFC take the heat out of the market, the Australian Government doubled the bonus. Treasury notes recorded at the time say that it wasn’t launched to make housing more affordable, but to prevent the collapse of the housing market.

Treasury Executive Minutes. Source: Treasury, The First Home Owner’s Boost

Already at the time of the GFC, Australian households were at 190% debt to net disposable income, 50% more indebted than American households, but then things really went crazy.

The government decided to further fuel the fire by “streamlining” the administrative requirements for the Foreign Investment Review Board so that temporary residents could purchase real estate in Australia without having to report or gain approval.

It may be a stretch, but one could possibly argue that this move was cunningly calculated, as what could possibly be wrong in selling overpriced Australian houses to the Chinese?

I am not sure who is getting the last laugh here, because as we subsequently found out, many of those Chinese borrowed the money to buy these houses from Australian banks, using fake statements of foreign income. Indeed, according to the AFR, this was not sophisticated documentation?—?Australian banks were being tricked with photoshopped bank statements that can be bought online for as little as $20.

UBS estimates that $500 billion worth of “not completely factually accurate” mortgages now sit on major bank balance sheets. How much of that will go sour is anyone’s guess.

Llewellyn-Smith writes, “Five prime ministers in [seven] years have come and gone as standards of living fall in part owing to massive immigration inappropriate to economic circumstances and other property-friendly policies. The most recent national election boiled down to a virtual referendum on real estate taxation subsidies. The victor, the conservative Coalition party, betrayed every market principle it possesses by mounting an extreme fear campaign against the Labor party’s proposal to remove negative gearing. This tax policy allows more than one million Australians to engage in a negative carry into property in the hope of capital gains. In a nation of just 24 million, 1.3 million Australians lose an average of $9,000 per annum on this strategy thanks to the tax break.”

The astronomical rise in house prices certainly isn’t supported by employment data. Wage growth is at a record low of just 1.9% year on year in 2Q17, the lowest figure since 1988. The average Australian weekly income has gone up $27 to $1,009 since 2008, that’s about $3 a year.

Private sector wage price index (annual percentage). Source: SMH, Australian Bureau of Statistics

Household income growth has collapsed since 2008 from over 11% to just 3% in 2015, 2016 and 2017. This is one sixth the rate that houses went up in Sydney in the last year.

Employment growth is at an anaemic 1% year on year in 4Q16, and the unemployment rate has been trending up over the last decade to 5.6%.

Unemployment rate and Employment growth. Source: ABS, RBA, UBS

Foreign buying driving up housing prices has been a major factor in Australian housing affordability, or rather unaffordability.

Urban planners say that a median house price to household income ratio of 3.0 or under is “affordable”, 3.1 to 4.0 is “moderately unaffordable”, 4.1 to 5.0 is “seriously unaffordable” and 5.1 or over “severely unaffordable”.

Demographia International Housing Affordability Survey. Source: Demographia

At the end of July 2017, according to Domain Group, the median house price in Sydney was $1,178,417 and the Australian Bureau of Statistics has the latest average pre-tax wage at $80,277.60 and average household income of $91,000 for this city. This makes the median house price to household income ratio for Sydney 13x, or over 2.6 times the threshold of “severely unaffordable”. Melbourne is 9.6x.

Sydney House values by Suburb. Source: Core Logic

This is before tax, and before any basic expenses. The average person takes home $61,034.60 per annum, and so to buy the average house they would have to save for 19.3 years- but only if they decided to forgo the basics such as, eating. This is neglecting any interest costs if one were to borrow the money, which at current rates would approximately double the total purchase cost and blow out the time to repay to around 40 years.

Ex-deputy Prime Minister Barnaby Joyce recently said to ABC Radio, “Houses will always be incredibly expensive if you can see the Opera House and the Sydney Harbour Bridge, just accept that. What people have got to realise is that houses are much cheaper in Tamworth, houses are much cheaper in Armidale, houses are much cheaper in Toowoomba”. Fairfax, the owner of Domain, or more accurately, Domain, the owner of Fairfax, also agrees that “There is no housing bubble, unless you are in Sydney or Melbourne”.

Now probably unbeknownst to Barnaby, who might be more familiar with the New Zealand housing market, in the Demographia International Housing Affordability survey for 2017 Tamworth ranked as the 78th most unaffordable housing marketing in the world. No, you’re not mistaken, this is Tamworth, New South Wales, a regional centre of 42,000 best known as the “Country Music Capital of Australia” and for the ‘Big Golden Guitar’.

According the Australian Bureau of Statistics, the average income in Tamworth is $42,900, the average household income $61,204 but the average house price is $375,000, giving a price to household income ratio of 6.1x, making housing in Tamworth less affordable than Tokyo, Singapore, Dublin or Chicago.

If you used the current Homesales.com.au data, which has the average house price at $394,212, or 6.6x, Tamworth would be in the top 40 most unaffordable housing markets in the world. Yes, Tamworth. Yes, in the world. Unfortunately for Barnaby, Armidale and Toowoomba don’t fare much better.

Tamworth, which at current prices would be in the top 40 most unaffordable housing markets tracked by Demographia in the world. Really? Source: GP Synergy

Out of a total of 406 housing markets tracked globally by Demographia, eight (or 40%) of the twenty least affordable housing markets in the world were in Australia, including in addition to Sydney and Melbourne such exotic places as Wingcaribbee, Tweed Heads, the Sunshine Coast, Port Macquarie, the Gold Coast, and Wollongong. Looking at all regional Australian housing markets, they found 33 of 54 markets “severely unaffordable”.

The 20 most unaffordable housing markets in the world. Source: Demographia, 13th Annual Demographic International Housing Affordability Survey:2017

If you borrowed the whole amount to buy a house in Sydney, with a Commonwealth Bank Standard Variable Rate Home Loan currently showing a 5.36% comparison rate (as of 7th October 2017), your repayments would be $6,486 a month, every month, for 30 years. The monthly post tax income for the average wage in Sydney ($80,277.60) is only $5,081.80 a month.

Commonwealth Bank Standard Variable Rate Home Loan for the average house. Source: CBA as of 7th October 2017

In fact, on this average Sydney salary of $80,277.60, the Commonwealth Bank’s “How much can I borrow?” calculator will only lend you $463,000, and this amount has been dropping in the last year I have been looking at it. So good luck to the average person buying anything anywhere near Sydney.

Federal MP Michael Sukkar, Assistant Minister to the Treasurer, says surprisingly that getting a “highly paid job” is the “first step” to owning a home. Perhaps Mr Sukkar is talking about his job, which pays a base salary of $199,040 a year. On this salary, the Commonwealth Bank would allow you to just borrow enough- $1,282,000 to be precise– to buy the average home, but only provided that you have no expenses on a regular basis, such as food. So the Assistant Minister to the Treasurer can’t really afford to buy the average house, unless he tells a porky on his loan application form.

The average Australian is much more likely to be employed as a tradesperson, school teacher, postman or policeman. According to the NSW Police Force’s recruitment website, the average starting salary for a Probationary Constable is $65,000 which rises to $73,651 over five years. On these salaries the Commonwealth Bank will lend you between $375,200 and $419,200 (again provided you don’t eat), which won’t let you buy a house really anywhere.

Unsurprisingly, the CEOs of the Big Four banks in Australia think that these prices are “justified by the fundamentals”. More likely because the Big Four, who issue over 80% of residential mortgages in the country, are more exposed as a percentage of loans than any other banks in the world, over double that of the U.S. and triple that of the U.K., and remarkably quadruple that of Hong Kong, which is the least affordable place in the world for real estate. Today, over 60% of the Australian banks’ loan books are residential mortgages. Houston, we have a problem.

Residential Mortgages as a percentage of total loans. Source: IMF (2015)

It’s actually worse in regional areas where Bendigo Bank and the Bank of Queensland are holding huge portfolios of mortgages between 700 to 900% of their market capitalisation, because there’s no other meaningful businesses to lend to.

Australian banks’ mortgage exposure as a percentage of market capitalisation. Source: Roger Montgomery, Company data

I’m not sure how the fundamentals can possibly be justified when the average person in Sydney can’t actually afford to buy the average house in Sydney, no matter how many decades they try to push the loan out.

Mortgage Stress Trends to Oct 2017. Source: Digital Finance Analytics

Indeed Digital Finance Analytics estimated in a October 2017 report that 910,000 households are now estimated to be in mortgage stress where net income does not covering ongoing costs. This has skyrocketed up 50% in less than a year and now represents 29.2% of all households in Australia. Things are about to get real.

Probability of default in 30, 90 days across Australian demographics in October 2017. Source: Digital Finance Analytics

It’s well known that high levels of household debt are negative for economic growth, in fact economists have found a strong link between high levels of household debt and economic crises.

This is not good debt, this is bad debt. It’s not debt being used by businesses to fund capital purchases and increase productivity. This is not debt that is being used to produce, it is debt being used to consume. If debt is being used to produce, there is a means to repay the loan. If a business borrows money to buy some equipment that increases the productivity of their workers, then the increased productivity leads to increased profits, which can be used to service the debt, and the borrower is better off. The lender is also better off, because they also get interest on their loan. This is a smart use of debt. Consumer debt generates very little income for the consumer themselves. If consumers borrow to buy a new TV or go on a holiday, that doesn’t create any cash flow. To repay the debt, the consumer generally has to consume less in the future. Further, it is well known that consumption is correlated to demographics, young people buy things to grow their families and old people consolidate, downsize and consume less over time. As the aging demographic wave unfolds across the next decade there will be significantly less consumers and significantly more savers. This is worsened as the new generations will carry the debt burden of student loans, further reducing consumption.

Parody of Sydney real estate, or is it?

So why are governments so keen to inflate housing prices?

The government loves Australians buying up houses, particularly new apartments, because in the short term it stimulates growth?—?in fact it’s the only thing really stimulating GDP growth.

Australia has around $2 trillion in unconsolidated household debt relative to $1.6 trillion in GDP, making this country in recent quarters the most indebted on this ratio in the world. According to Treasurer Scott Morrison 80% of all household debt is residential mortgage debt. This is up from 47% in 1990.

Australia Household Debt to GDP. Source: Bank for International Settlements, Macro Business

Australia’s household debt servicing ratio (DSR) ties with Norway as the second worst in the world. Despite record low interest rates, Australians are forking out more of their income to pay off interest than when we had record mortgage rates back in 1989–90 which are over double what they are now.

Everyone’s too busy watching Netflix and cash strapped paying off their mortgage to have much in the way of any discretionary spending. No wonder retail is collapsing in Australia.

Governments fan the flame of this rising unsustainable debt fuelled growth as both a source of tax revenue and as false proof to voters of their policies resulting in economic success. Rather than modernising the economy, they have us on a debt fuelled housing binge, a binge we can’t afford.

We are well past overtime, we are into injury time. We’re about to have our Minsky moment: “a sudden major collapse of asset values which is part of the credit cycle.”

Such moments occur because long periods of prosperity and rising valuations of investments lead to increasing speculation using borrowed money. The spiraling debt incurred in financing speculative investments leads to cash flow problems for investors. The cash generated by their assets is no longer sufficient to pay off the debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. This is likely to lead to a collapse of asset values. Meanwhile, the over-indebted investors are forced to sell even their less-speculative positions to make good on their loans. However, at this point no counterparty can be found to bid at the high asking prices previously quoted. This starts a major sell-off, leading to a sudden and precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity, and a severe demand for cash.

The Minsky Cycle. Source: Economic Sociology and Political Economy

The Governor of the People’s Bank of China recently warned that extreme credit creation, asset speculation and property bubbles could pose a “systemic financial risk” in China. Zhou Xiaochuan said “If there is too much pro-cyclical stimulus in an economy, fluctuations will be hugely amplified. Too much exuberance when things are going well causes tensions to build up. That could lead to a sharp correction, and eventually lead to a so-called Minsky Moment. That’s what we must really guard against”. A Minsky moment in China would be an extreme event for the parasite on the vein of Chinese credit stimulus- the Australian economy.

Today 42% of all mortgages in Australia are interest only, because since the average person can’t afford to actually pay for the average house- they only pay off the interest. They’re hoping that value of their house will continue to rise and the only way they can profit is if they find some other mug to buy it at a higher price. In the case of Westpac, 50% of their entire residential mortgage book is interest only loans.

Percentage of interest only loans by bank. Source: JCP Investment Partners, AFR

And a staggering 64% of all investor loans are interest only.

Share of new loan approvals for Australian banks. Source: APRA, RBA, UBS

This is rapidly approaching ponzi financing.

This is the final stage of an asset bubble before it pops.

Today residential property as an asset class is four times larger than the sharemarket. It’s illiquid, and the $1.5 trillion of leverage is roughly equivalent in size to the entire market capitalisation of the ASX 200. Any time there is illiquidity and leverage, there is a recipe for disaster- when prices move south, equity is rapidly wiped out precipitating panic selling into a freefall market with no bids to hit.

The risks of illiquidity and leverage in the residential property market flow through the entire financial system because they are directly linked; today in Australia the Big Four banks plus Macquarie are roughly 30% of the ASX200 index weighting. Every month, 9.5% of the entire Australian wage bill goes into superannuation, where 14% directly goes into property and 23% into Australian equities– of which 30% of the main equity benchmark is the banks.

ASX200 by market capitalisation, Big 4 banks top and Macquarie on the left (arrows). Source: IRESS

You don’t read objective reporting on property in the Australian media, which Llewelyn-Smith from Macro Business calls “a duopoly between a conservative Murdoch press and liberal Fairfax press. But both are loss-making old media empires whose only major growth profit centres are the nation’s two largest real estate portals, realestate.com.au and Domain. Neither report real estate with any objective other than the further inflation of prices. In the event that the Australian bubble were to pop then Australians will certainly be the last to know and the propaganda is so thick that they may never find out until they actually try to sell.”

Take, for example, this recent headline from the Fairfax owned Sydney Morning Herald on March 1st 2017, “Meet Daniel Walsh, the 26-year-old train driver with $3 million worth of property”. It appeared in the property section, which for Fairfax today sits on the homepage of their masthead publications, such as the Sydney Morning Herald, immediately below the top headlines for the day and above State News, Global Politics, Business, Entertainment, Technology and the Arts. The article holds up 26 year old Daniel, who services five million dollars worth of property with a train driver’s salary and $2,000 a week of positive cash flow.

This is what the Australian press more commonly holds up as a role model to young people. Not a young engineer who has developed a revolutionary new product or breakthrough, but an over leveraged train driver with a property portfolio on mostly borrowed money where a 1% move in interest rates will wipe out the entirety of this cash flow.

Yet this young train driver isn’t an isolated case, there are literally hoards of these young folk parlaying one property debt onto another in the mistaken belief that property prices only ever go up. Jennifer Duke, an “audience-driven reporter, with a background in real estate and finance” from Domain, also promotes Robert, a 20 year old, who had managed to accumulate three properties in two years using an initial $60,000 gift from his mum. Jeremy, a 24 year old accountant, has 8 properties with a loan to value ratio of 70%, Edward, a 24 year old customer service representative, has 6 properties despite a debt level of 69% and a salary under $50,000, and Taku, the Uber driver, has 8 properties, with plans for 10 covered by a net equity position of only $1 million by November 2017.

How a train driver can service five million dollars of property on $2,000 a week of positive cash flow comes through the magic of cross-collateralised residential mortgages, where Australian banks allow the unrealised capital gain of one property to secure financing to purchase another property. This unrealised capital gain substitutes for what normally would be a cash deposit. This house of cards is described by LF Economics as a “classic mortgage ponzi finance model”. When the housing market moves south, this unrealised capital gain will rapidly become a loss, and the whole portfolio will become undone. The similarities to underestimation of the probability of default correlation in Collateralised Debt Obligations (CDOs), which led to the Global Financial Crisis, are striking.

Fairfax’s pre-IPO real estate website Domain runs these stories every week across the capital city main mastheads enticing young people into property flipping as a get rich quick scheme. All of them are young, with low incomes, leveraging one property purchase on to another.

At Fairfax?—?whose latest half year 2017 financial results had Domain Group EBITDA at $57.3 million and the entire Australian Metro Media which includes Australia’s premier mastheads Australian Financial Review, Sydney Morning Herald, the Age, Digital Ventures, Life and Events EBITDA at $27.7 million?—?property is clearly the most important section of all.

In between holding up this 26 year old train driving property tycoon as something to aspire to, Jennifer has penned other noteworthy articles, such as “No surprise the young support lock-out laws” which parroted incredulous propaganda claiming that young people supported laws designed to shut down places where young people go?—?Sydney’s major entertainment districts.

As if the Australian economy needed further headwinds, the developer-enamoured evangelical right have crucified NSW’s night time economy. Reactionary puritans and opportunists alike seized on some unfortunate incidents involving violence to simply close the economy at night. NSW State Government, City of Sydney, Casinos, NSW Police, public health nannies, property-crazy media and, of course, property developers had the collective interest to manufacture and blow up a fake health & safety issue to create lockout laws?—?and then instituted broad night time economic terraforming policies designed to herd patrons to large casinos so they could become permanent monopoly owners of the night time economy in Sydney and Brisbane, while conveniently damaging the balance sheets of small businesses located in competing entertainment areas, so the property could be demolished and turned into apartment blocks.

Property watching at Fairfax has become a fetish. Almost on a daily basis Lucy Macken, Domain’s Prestige Property Reporter, publishes a gossip column of who bought what house, complete with the full address and photos of the exterior and interior and any financial information she can glean about them. I know of one person whose house was robbed?—?completely cleaned out?—?shortly after Macken published their full address. Perhaps that was a coincidence, but I am utterly amazed that Fairfax senior management allows this column to exist given the risks it poses to the people whose houses and private details are splashed across its pages.

Fairfax, to be fair, is not without its fair share of great journalists, albeit a species rapidly becoming extinct, who are very well aware of what is really going on. Elizabeth Farrelly writes, “Just when you thought the government couldn’t get any madder or badder in its overarching Mission Destroy Sydney?—?when it seemed to have flogged every floggable asset, breached every democratic principle, whittled every beloved park, disempowered every significant municipality and betrayed every promise of decency, implicit or explicit?—?it now wants to remove council planning powers. The excuse, naturally, is ‘probity’. Somehow we’re meant to believe that locally elected people are inherently more corrupt than those elected at state level, and that this puts local decision-making into the greedy mitts of Big Developers”.

However, despite the picture Domain would like to paint, young people with jobs aren’t responsible for driving house prices up, in fact their ownership is at an all time low.

In 2015–16 there were 40,149 residential real estate applications from foreigners valued at over $72 billion in the latest data by FIRB. This is up 244% by count and 320% by value from just three years before.

To put this 40,149 in comparison, in the latest 12 months to the end of April 2017, according to the Australian Bureau of Statistics, a total of 57,446 new residential dwellings were approved in Greater Sydney, and 56,576 in Greater Melbourne.

Even more shocking, in the month of January 2017, the number of first home buyers in the whole of New South Wales was 1,029?—?the lowest level since mortgage rates peaked in the 1990s. Half of those first home buyers rely upon their parents for equity.

The 114,022 new residential dwellings in Sydney and Melbourne in 2015–16 should also be put in comparison to a net annual gain of 182,165 overseas immigrants to Australia of which around 75% go to New South Wales or Victoria.

This brings me onto Australia’s third largest export which is $22 billion in “education-related travel services”. Ask the average person in the street, and they would have no idea what that is and, at least in some part, it is an $18.8 billion dollar immigration industry dressed up as “education”. You now know what all these tinpot “english”, “IT” and “business colleges” that have popped up downtown are about. They’re not about providing quality education, they are about gaming the immigration system.

In 2014, 163,542 international students commenced English language programmes in Australia, almost doubling in the last 10 years. This is through the booming ELICOS (English Language Intensive Courses for Overseas Students) sector, the first step for further education and permanent residency.

This whole process doesn’t seem too hard when you take a look at what is on offer. While the federal government recently removed around 200 occupations from the Skilled Occupations List, including such gems as Amusement Centre Manager (149111), Betting Agency Manager (142113), Goat Farmer (121315), Dog or Horse Racing Official (452318), Pottery or Ceramic Artist (211412) and Parole Officer (411714)?—?you can still immigrate to Australia as a Naturopath (252213), Baker (351111), Cook (351411), Librarian (224611) or Dietician (251111).

Believe it or not, up until recently we were also importing Migration Agents (224913). You can’t make this up. I simply do not understand why we are importing people to work in relatively unskilled jobs such as kitchen hands in pubs or cooks in suburban curry houses.

At its peak in October 2016, before the summer holidays, there were 486,780 student visa holders in the country, or 1 in 50 people in the country held a student visa. The grant rate in 4Q16 for such student visa applications was 92.3%. The number one country for student visa applications by far was, you guessed it, China.

Number of Student Visa Applications by Country 2015–16. Source: Department of Immigration and Border Protection

While some of these students are studying technical degrees that are vitally needed to power the future of the economy, a cynic would say that the majority of this program is designed as a crutch to prop up housing prices and government revenue from taxation in a flagging economy. After all, it doesn’t look that hard to borrow 90% of a property’s value from Australian lenders on a 457 visa. Quoting directly from one mortgage lender, “you’re likely to be approved if you have at least a year on your visa, most of your savings already in Australia and you have a stable job in sought after profession”?—?presumably as sought after as an Amusement Centre Manager. How much the banks will be left to carry when the market turns and these students flee the burden of negative equity is anyone’s guess.

In a submission to a senate economics committee by Lindsay David from LF Economics, “We found 21 Australian lending institutions where there is evidence of people’s loan application forms being fudged”.

The ultimate cost to the Australian taxpayer is yet to be known. However the situation got so bad that the RBA had to tell the Big Four banks to cease and desist from all foreign mortgage lending without identified Australian sources of income.

Ken Sayer, Chief Executive of non-bank Mortgage House said “It is much bigger than everyone is making it out to be. The numbers could be astronomical”.

So we are building all these dwellings, but they are not for new Australian home owners. The Westpac-Melbourne Institute has overall consumer sentiment for housing at a 40 year low of 10.5%.

Instead we are building these dwellings to be the new Swiss Bank account for foreign investors.

Share of consumers saying ‘wisest place for saving’ is real estate. Source: ABS, RBA, Westpac, Melbourne Institute, UBS

Foreign investment can be great as long as it flows into the right sectors. Around $32 billion invested in real estate was from Chinese investors in 2015–16, making it the largest investment in an industry sector by a country by far. By comparison in the same year, China invested only $1.6 billion in our mining industry. Last year, twenty times more more money flowed into real estate from China than into our entire mineral exploration and development industry. Almost none of it flows into our technology sector.

Approvals by country of investor by industry sector in 2015–6. Source: FIRB

The total number of FIRB approvals from China was 30,611. By comparison. The United States had 481 approvals.

Foreign investment across all countries into real estate as a whole was the largest sector for foreign investment approval at $112 billion, accounting for around 50% of all FIRB approvals by value and 97% by count across all sectors?—?agriculture, forestry, manufacturing, tourism?—?you name it in 2015–16.

In fact it doesn’t seem that hard to get FIRB approval in Australia, for really anything at all. Of the 41,450 applications by foreigners to buy something in 2015–16, five were rejected. In the year before, out of 37,953 applications zero were rejected. Out of the 116,234 applications from 2012 to 2016, a total of eight were rejected.

Applications for FIRB consideration, approved versus rejected 2012–13 to 2015–6. Source: FIRB

According to Credit Suisse, foreigners are acquiring 25 percent of newly completed housing supply in NSW, worth a total of $39 billion.

Demand for Property from Foreign Buyers in NSW (% of total, unstacked). Source: NAB, SBS

In some circumstances, the numbers however could be much higher. Lend Lease, the Australian construction goliath with over $15 billion in revenue in 2016, stated in that year’s annual report that over 40% of Lend Lease’s apartment sales were to foreigners.

I wouldn’t have a problem with this if it weren’t for the fact that this is all a byproduct of central bank madness, not true supply and demand, and people vital for running the economy can’t afford to live here any more.

What is also remarkable about all of this is that technically, the Chinese are not allowed to send large sums of money overseas. Citizens of China can normally only convert US$50,000 a year in foreign currency and have long been barred from buying property overseas, but those rules have not been enforced. They’ve only started cracking down on this now.

Despite this, up until now, Australian property developers and the Australian Government have been more than happy to accommodate Chinese money laundering.

After the crackdown in capital controls, Lend Lease says there has been a big upswing with between 30 to 40% of foreign purchases now being cash settled. Other developers are reporting that some Chinese buyers are paying 100% cash. The laundering of Chinese cash into property isn’t unique to Australia, it’s just that Transparency International names Australia, in their March 2017 report as the worst money laundering property market in the world.

Australia is not alone, Chinese “hot money” is blowing gigantic property bubbles in many other safe havens around the world.

But combined with our lack of future proof industries and exports, our economy is complete stuffed. And it’s only going to get worse unless we make a major transformation of the Australian economy.

We can’t rely on property to provide for our future. In 1880, Melbourne was the richest city in the world, until it had a property crash in 1891 where house prices halved causing Australia’s real GDP to crash by 10 per cent in 1892 and 7 per cent the year after. The depression of the 1890s caused by this crash was substantially deeper and more prolonged than the great depression of the 1930s. Macro Business points out that if you bought a house at the top of the market in 1890s, it took seventy years for you to break even again.

Australia CQ Real Housing Price Index 1890–2016. Source: LF Economics, Macro Business

Instead of relying on a property bubble as pretense that our economy is strong, we need serious structural change to the composition of GDP that’s substantially more sophisticated in terms of the industries that contribute to it.

Australia’s GDP of $1.6 trillion is 69% services. Our “economic miracle” of GDP growth comes from digging rocks out of the ground, shipping the by-products of dead fossils, and stuff we grow. Mining, which used to be 19%, is now 7% and falling. Combined, the three industries now contribute just 12% of GDP thanks to the global collapse in commodities prices.

If you look at businesses as a whole, Company tax hasn’t moved from $68 billion in the last three years?—?our companies are not making more profits. This country is sick.

Indeed if you look at the budget, about the only thing going up in terms of revenue for the federal government are taxes on you having a good time- taxes on beer, wine, spirits, luxury cars, cigarettes and the like. It would probably shock the average person on the street to discover that the government collects more tax from cigarettes ($9.8 billion) than it collects from tax on superannuation ($6.8 billion), over double what it collects from Fringe Benefits Tax ($4.4 billion) and over thirteen times more tax than it does from our oil fields ($741 million).

Turnbull is increasing the tax on cigarettes by 12.5% a year for the next four years. In the latest federal budget, the government forecasts that by 2020 that it will collect $15.2 billion from taxes on tobacco per annum. This is four times the amount that the government collects from the entire coal industry per annum.

Just compare these numbers: $15 billion is over double what the government projects it will collect from petrol excise in that year ($7.15b), 21 times what it will collect from luxury car tax ($720m), 27 times what it will collect from taxes on imported cars ($560m) and 89 times what it will collect from customs duty on textile and footwear imports ($170m).

As a sign of how addicted to taxing you the government has become, look at the myriad of taxes on cars?—?high import duties, stamp duty and a luxury car tax?—?these were designed to protect a car manufacturing industry which doesn’t exist anymore. Yet the government is still increasing them. We closed the last factory this year. These taxes are not only blatant cash grabs but serve to stifle the deployment of electric cars, which have hit a dead end in Australia. Likewise, the taxes on textile and footwear imports were originally designed to protect our textiles, an industry that has now collapsed and that lost 30% of its manufacturing workers this year.

If you look through federal budget forecasts, taxes on cigarettes is the only thing practically floating the federal government’s finances other than wishful thinking in forward projections. Which is, of course, some other future administration’s problem.

How they think they can raise $15 billion in taxes per year on cigarettes?—?a product that costs a cent per stick to make and will retail for almost $2 a stick in 2020?—?without creating a thriving black market, another Pablo Escobar and throwing hundreds, perhaps thousands of people in jail, who will decide unwisely to participate in that black market, astounds me. But that’s how the government decides to plug the hole in its accounts instead of cutting spending.

Of course like so many things this all gets sold to you, the general population, under the banner of “health and safety”- and it’s easy to sell because all you need to do is parade out a few patronising doctors. The truth is that it’s really just for the health and safety of the government budget, because the economy is really, really sick.

If the government wants to fix the budget, I would have thought the most practical way to do it would be to find ways to grow the economy. You’ll never wean the government off wasteful spending no matter who is in power. The politicians, after all, need to keep that up in order to buy votes through profligate policies such as welfare for the middle class.

But instead of thinking of intelligent ways to grow the economy, the focus is purely on finding more ways to tax you. Just think of all the times over the last couple of years, all the random thought bubbles, that various politicians have proposed raising taxes on superannuation, high earners, banks, property, tripling fines for cyclists, tripling fines for companies, the GST to 15% or 20%, the GST on low value imports, the GST on digital goods, stamp duty, alcohol, sugar, red meat, it’s endless.

They are even proposing banning the $100 note, so that when the RBA drives interest rates negative, you won’t be able to withdraw your hard earned funds in cash so easily. You’ll either have to spend it or have the rude shock of the bank taking money out of your account each month rather than earning interest.

Here’s a crazy idea: the dominant government revenue line is income tax. Income tax is generated from wages. Education has always been the lubricant of upward mobility, so perhaps if we find ways to encourage our citizens to study in the right areas?—?for example science & engineering?—?then maybe they might get better jobs or create better jobs and ultimately earn higher wages and pay more tax.

Instead the government proposed the biggest cuts to university funding in 20 years with a new “efficiency dividend” cutting funding by $1.2 billion, increasing student fees by 7.5 percent and slashing the HECS repayment threshold from $55,874 to $42,000. These changes would make one year of postgraduate study in Electrical Engineering at the University of New South Wales cost about $34,000.

We should be encouraging more people into engineering, not discouraging them by making their degrees ridiculously expensive. In my books, the expected net present value of future income tax receipts alone from that person pursuing a career in technology would far outweigh the short sighted sugar hit from making such a degree more costly?—?let alone the expected net present value of wealth creation if that person decides to start a company. The technology industry is inherently entrepreneurial, because technology companies create new products and services.

Speaking of companies, how about as a country we start having a good think about what sorts of industries we want to have a meaningful contribution to GDP in the coming decades?

For a start, we need to elaborately transform the commodities we produce into higher end, higher margin products. Manufacturing contributes 5% to GDP. In the last ten years, we have lost 100,000 jobs in manufacturing. Part of the problem is that the manufacturing we do has largely become commoditised while our labour force remains one of the most expensive in the world. This cost is further exacerbated by our trade unions?—?in the case of the car industry, the government had to subsidise the cost of union work practices, which ultimately failed to keep the industry alive. So if our people are going to cost a lot, we better be manufacturing high end products or using advanced manufacturing techniques otherwise other countries will do it cheaper and naturally it’s all going to leave.

Last year, for example, 30.3% of all manufacturing jobs in the textile, leather, clothing & footwear industries were lost in this country. Yes, a third. People still need clothes, but you don’t need expensive Australians to make them, you can make them anywhere.

That’s why we need to seriously talk about technology, because technology is the great wealth and productivity multiplier.

However the thinking at the top of government is all wrong.

I recently heard a speech by the Chief Scientist of Australia where he held up a smashed avocado on toast as a prime example of Australian innovation. Yes, smashed avocado on toast. I am not sure which Australian company has the patent on smashed avocados on toast?—?it’s too surreal to even think about.

Australian Innovation according to the Chief Scientist of Australia. Source: ChiefScientist.gov.au

In the same speech, he said that an Australian iron ore mine is every bit as innovative as a semiconductor fabrication plant. My mind was seriously blown.

You can throw as much automation, AI and robotics at an iron ore mine as technologically possible, but it doesn’t change the fact that mines are, and always will be wasting assets that output a commodity for which we are a price taker, not a price maker, into what is currently an oversupplied global market. An iron ore mine, not matter how advanced, is not a long term scalable productivity multiplier; it is a resource to be extracted with finite supply. Once it’s gone, the robots will be dormant.

A semiconductor fabrication plant on the other hand, makes automation of the mine possible. It powers the robotics, the AI and the software?—?not just for the iron ore mine, but factories and businesses all over the world. It’s the real productivity and wealth multiplier. It’s a long term sustainable, competitive advantage. Smart and efficient resource extraction is just an application of this technology.

That’s why we shouldn’t get confused about what is a technology company, because there is no other industry that can create such immense wealth, with such capital efficiency and long term benefit to the world, as the technology industry.

Today, the largest public company in the world, Apple, is a technology company. Apple’s market capitalisation of $810 billion is bigger than the entire US retail market sector. Its revenue of over $215 billion generates over US$2 million dollars per employee per year. And that’s just the company directly. Think of all the business, jobs, wealth creation and benefits to society that have come indirectly from using the company’s computers, mobile devices, software, services and products.

The largest four companies by market capitalisation globally as of the end of Q2 2017 globally were Apple, Alphabet, Microsoft and Amazon. Facebook is eight. Together, these five companies generate over half a trillion dollars in revenue per annum. That’s equivalent to about half of Australia’s entire GDP. And many of these companies are still growing revenue at rates of 30% or more per annum.

These are exactly the sorts of companies that we need to be building.

With our population of 24 million and labour force of 12 million, there’s no other industry that can deliver long term productivity and wealth multipliers like technology. Today Australia’s economy is in the stone age. Literally.

By comparison, Australia’s top 10 companies are a bank, a bank, a bank, a mine, a bank, a biotechnology company (yay!), a conglomerate of mines and supermarkets, a monopoly telephone company, a supermarket and a bank.

We live in a monumental time in history where technology is remapping and reshaping industry after industry?—?as Marc Andreessen said “Software is eating the world!”?—?many people would be well aware we are in a technology gold rush.

And they would be also well aware that Australia is completely missing out.

Most worrying to me, the number of students studying information technology in Australia has fallen by between 40 and 60% in the last decade depending on whose numbers you look at. Likewise, enrollments in other hard sciences and STEM subjects such as maths, physics and chemistry are falling too. Enrolments in engineering have been rising, but way too slowly.

This is all while we have had a 40% increase in new undergraduate students as a whole.

Women once made up 25 percent of students commencing a technology degree, they are now closer to 10 percent.

All this in the middle of a historic boom in technology. This situation is an absolute crisis. If there is one thing, and one thing only that you do to fix this industry, it’s get more people into it. To me, the most important thing Australia absolutely has to do is build a world class science & technology curriculum in our K-12 system so that more kids go on to do engineering.

In terms of maths & science, the secondary school system has declined so far now that the top 10% of 15-year olds are on par with the 40–50% band of of students in Singapore, South Korea and Taiwan.

For technology, we lump a couple of horrendous subjects about technology in with woodwork and home economics. In 2017, I am not sure why teaching kids to make a wooden photo frame or bake a cake are considered by the department of education as being on par with software engineering. Yes there is a little bit of change coming, but it’s mostly lip service.

Meanwhile, in Estonia, 100% of publicly educated students will learn how to code starting at age 7 or 8 in first grade, and continue all the way to age 16 in their final year of school.

At my company, Freelancer.com, we’ll hire as many good software developers as we can get. We’re lucky to get one good applicant per day. On the contrary, when I put up a job for an Office Manager, I received 350 applicants in 2 days.

But unfortunately the curriculum in high school continues to slide, and it pays lip service to technology and while kids would love to design mobile apps, build self-driving cars or design the next Facebook, they come out of high school not knowing that you can actually do this as a career.

I’ve come to the conclusion that it’s actually all too hard to fix?—?and I came to this conclusion a while ago as I was writing some suggestions for the incoming Prime Minister on technology policy. I had a good think about why we are fundamentally held back in Australia from major structural change to our economy to drive innovation.

I kept coming back to the same points.

The problems we face in terraforming Australia to be innovative are systemic, and there is something seriously wrong with how we govern this country.

There are problems throughout the system, from how we choose the Prime Minister, how we govern ourselves, how we make decisions, all the way through.

For a start, we are chronically over governed in this country. This country has 24 million people. It is not a lot. By comparison my website has about 26 million registered users. However this country of 24 million people is governed at the State and Federal level by 17 parliaments with 840 members of parliament. My company has a board of three and a management team of a dozen.

Half of those parliaments are supposed to be representatives directly elected by the people. Frankly, you could probably replace them all with an iPhone app. If you really wanted to know what the people thought about an issue, technology allows you to poll everyone, everywhere, instantly. You’d also get the results basically for free. I’ve always said that if Mark Zuckerberg put a vote button inside Facebook, he’d win a Nobel Peace Prize. Instead we waste a colossal $122 million on a non-binding plebiscite to ask a yes/no question on same sex marriage that shouldn’t need to be asked in the first place, because those that it affects would almost certainly want it, and those that it doesn’t affect should really butt out and let others live their lives as they want to.

Instead these 840 MPs spend all day jeering at each other and thinking up new legislation to churn out.

In 1991, the late and great Kerry Packer said “I mean since I grew up as a boy, I would imagine, that through the parliaments of Australia since I was 18 or 19 years of age till now, there must be 10,000 new laws been passed, and I don’t really think it’s that much better place, and I would like to make a suggestion to you which I think would be far more useful. If you want to pass a new law, why don’t you only do it when you’ve repealed an old one. I mean this idea of just passing legislation, legislation, every time someone blinks is a nonsense. Nobody knows it, nobody understands it, you’ve got to be a lawyer, they’ve got books up to here. Purely and simply just to do the things we used to do. And every time you pass a law, you take somebody’s privileges away from them.”

Last year the Commonwealth parliament alone spewed out 6,482 pages of legislation, adding to over 100,000 pages already enacted. That’s not even looking at State Governments.

In Australia, the average person in the street might think that the way that you get into the Prime Minister’s office is by being elected by the people. Since 1966, this has only been true about 40% of the time.

In fact, of the 15 Prime Ministers since Menzies, only six have come into the office via being elected by the people. Yes, only six since 1966. They were Gough Whitlam in 1972, Bob Hawke in 1983, John Howard in 1996, Kevin Rudd in 2007 and Tony Abbott in 2013 and Malcolm Turnbull in 2016.

The typical way to get into the Prime Minister’s office in Australia is not by being voted in, but by stabbing the incumbent in your own party in the back. Or in the case of Malcolm Fraser, getting the Governor General to do your dirty work for you. That’s how 60% of our Prime Ministers have gotten into office since we stopped using pounds Sterling as currency. It’s crazy.

In the technology industry we had high hopes for number fifteen but it looks like we might be onto our sixteenth very shortly.

I say it looks like we might be onto number 16 shortly as the Australian government is currently in the grips of a major political crisis. A crisis for the absurd reason that a large number of our politicians do not know they were a dual citizen of another country (or worse, they tried to hide it)! In Australia this is not allowed under section 44 of the Constitution. On almost a daily basis, members of parliament across the political spectrum have been found to be dual citizens of other countries. This has happened to such an extent that the coalition government has now lost its majority and is teetering at the brink of collapse.

The level of incompetence from these politicians that spend all day dreaming up rules about how we all should live our lives and standards to that our businesses must submit to is astounding, not to mention their parties. I would have thought that the first page of the “So you want to be a politician?” checklist that each party handed out to bright young recruits would have said “Have you stolen any money? Are you a drug addict? Have you fiddled with any kids? Are you a citizen of another nation? Then the career of a politician probably isn’t for you!”.

It’s not like this hasn’t happened before, either.

Now how the sixteenth Prime Minister will pick their team is completely crazy. The problem is section 64 of the Constitution. This is the part that says that federal Ministers?—?members of the executive?—?must sit in Parliament. This is nuts.

Not so long ago the former Minister of Trade for Indonesia, Tom Lembong, visited my company. Tom’s entire career has been in private equity and banking. He’d never been in politics before- Jokowi simply asked him to be Minister of Trade. Similarly the Minister for Communications, Rudiantara, spent his entire career running telecommunications companies. In Indonesia they vote for the President & Vice President, and then separately for the legislature. The President can pick his own team for the executive. This is how you get good people in government, because you can pick people with real world domain expertise to run a portfolio. In Australia we end up with lawyers, evangelicals or career politicians. People who don’t have a clue about their portfolio. Imagine trying to run a company, but instead of of being able to pick the best engineer to be Vice President of Engineering, you have to pick it from a pool of lawyers, crazy people or card carrying political hacks. How can we have a science, technology and engineering focused agenda, which the country critically needs, when this is how cabinet gets chosen?

Then we have the problems that are a result of regulatory duplication, confusion and duplication of responsibilities or the mindless populism of absurd policies of the State Governments. Here I think we have some of the biggest problems.

I ended up doing Electrical Engineering completely by accident. I went to one of the best private schools in the country. When I graduated, at careers day, nobody talked about engineering. In fact, nobody even mentioned the word engineering throughout my entire schooling. I honestly thought it had something to do with driving a train.

I was disheartened to go back to that same school, Sydney Grammar, to talk at careers day. The students still thought that engineering had something to do with driving a train.

This is completely nuts, when I told the students that by working in engineering you get to design satellites, self driving cars, virtual reality helmets, design rockets like those SpaceX will one day send to Mars or build the next Facebook, many in the room got excited. Just they didn’t have a clue how to head towards a career in engineering because it wasn’t mentioned once to them in thirteen years of schooling. It’s not just my old school, almost all the schools are like this.

So how do you fix K-12 education in this country so that we can drive innovation in the future? It’s the remit of the bureaucracy of the State Governments.

Trying to get them to all agree to modernise the economy is an exercise in futility. Since taking power, the NSW Government has sold 384 Department of Education properties. That is despite leaked Department of Education documents that report NSW is facing an influx of 15,000 school students a year, and will require $10.8 billion in funding for 7,500 new classrooms and buildings over just 15 years.

If you look at their profit & loss statements you’ll see the bizarre way in which State Governments think.

The biggest revenue generator for NSW is payroll tax. In NSW companies pay $8.4 billion dollars as a result of this idiotic tax which is basically a penalty imposed on you for hiring a lot of people. $8.4 billion that could be better used employing more people. If I hire a lot of people, I should get a discount, not a penalty.

The second is stamp duty & land tax. NSW collects $7.8 billion of stamp duty. This is a tax that simply makes it expensive to transact. The stamp duty on an average house in Sydney is $42,000, or about 70% of the average NSW citizens’ post tax annual income. The average person has to work for most of year just to be able to transact in the housing market. The illiquidity this tax causes will be one of the biggest pain points behind a housing crash.

The State Government then tries to build a road between all these apartments, and because property and construction costs are too high, Westconnex, a 33 kilometer road, will cost between $20 and $40 billion. Trump’s wall, which is 1600 km long is costed at around $15 billion.

When the NSW government proposes to build a 14 kilometer tunnel to Manly, it’s costed at $14 billion dollars. That’s $1 million dollars per metre just to build. At $14 billion, that’s about the same price Gotthard tunnel cost, which is the deepest and longest tunnel in the world which goes for 57 kilometers under the Swiss Alps, 2.3 km below the surface of the mountains above and through 73 different kinds of rock at temperatures of up to 46 degrees. Yet a tunnel to Manly costs New South Wales the same price.

This is the absurdity of how State Governments think and operate.

Something is clearly very wrong.

New South Wales also collects $2.4 billion in fees for access to roads, and fines for actually using them. Fines which are erratically enforced through the strategic placement of cameras in areas of maximal revenue, random busts on jaywalkers, through to the ridiculous 350% increase in fines on cyclists for not wearing a helmet, when all the public health policy globally says it’s better to have your citizens ride bikes and get healthy.

It’s so absurd that in NSW a kid riding home on his bike without a helmet now gets fined more ($319) than the speeding driver doing almost 80kms/hr in a 60 zone that ran over him ($269).

Of course, this gets sold to you again under the banner of “health and safety”. But that’s all a load of crap. The only health and safety it’s ensuring is the health and safety of government finances.

This is why I wouldn’t hold your breath for the deployment of electric cars in Australia. State governments will get a rude shock when all of a sudden car ownership collapses and there are no more fines from speeding, red light cameras or poor driving, let alone a crash in fees from parking meters and parking levies. State governments simply won’t let it happen. They’ll also find an excuse to still stop and search your car even though driving under the influence won’t be an adequate excuse anymore.

Why is this important? Well if you are trying to attract young smart people to come back to Australia to join the technology industry, it’s a bit hard when the hashtag #nannystate is trending on Twitter.

After that, all you are left with of any size are gambling and betting taxes. In NSW this is $2.1 billion. The NSW Government is so addicted to gambling revenue that it has shut down most of Sydney’s nightlife in order to boost this line item by funneling people into the casino or pokies rooms, which has the added benefit that they can turn those entertainment areas into apartment blocks for more stamp duty & land tax.

Again, of course, the general public has all been taken for fools because once more it has been sold to you under the guise of “health and safety”. It’s a bit hard to enact structural change in the economy by building a technology industry when every second twenty year old wants to leave because you’ve turned the place into a derelict bumpkin country town.

A little while ago I was sent an essay by Paul Graham of YCombinator, the greatest technology incubator in the world entitled “How to make Pittsburgh into a Startup Hub”. The main thesis of this essay was to make it somewhere that 25–29 year olds want to live?—?build restaurants, cafes, bars and clubs- places that young people want to be.

About young people he said:

I’ve seen how powerful it is for a city to have those people. Five years ago they shifted the center of gravity of Silicon Valley from the peninsula to San Francisco. Google and Facebook are on the peninsula, but the next generation of big winners are all in SF. The reason the center of gravity shifted was the talent war, for programmers especially. Most 25 to 29 year olds want to live in the city, not down in the boring suburbs. So whether they like it or not, founders know they have to be in the city. I know multiple founders who would have preferred to live down in the Valley proper, but who made themselves move to SF because they knew otherwise they’d lose the talent war.

He then went on to say:

It seems like a city has to be very socially liberal to be a startup hub, and it’s pretty clear why. A city has to tolerate strangeness to be a home for startups, because startups are so strange. And you can’t choose to allow just the forms of strangeness that will turn into big startups, because they’re all intermingled. You have to tolerate all strangeness.

Sydney will never be a technology hub if all the young people want to flee overseas.

You’re kidding yourself if you think they are going to come back one day. In the last 18 years that I have been running technology companies in Australia, out of the scores that have left I’d estimate that less than 10 percent come back. They are at the time of their lives where when they go overseas they usually meet a boy or a girl and eventually settle down.

Not so long ago the topic of Innovation was discussed on ABC’s Q&A.

Stephen Merity asked: “I’m an Australian programmer working on machine learning and artificial intelligence in San Francisco after studying at Harvard. I want to return to Australia but I fear it won’t ever be the right choice. Research and educational funding has been slashed, the FTTP NBN has been abolished, and my most competent engineer friends have been left with the choice of leaving home for opportunities or stunting themselves by staying in Australia. Even if all that was fixed, it’s not enough to just prevent brain drain, we need to attract the world’s best talent to Australia. Does the Liberal government truly believe their lacklustre policies can start fixing this divide?”

 

The response from Labor’s Ed Husic was “Okay. So on the issue of the brain drain, you can take it two ways. Obviously you can, as Stephen was saying, there is some negative factors that drove him away and I’ve had a father email me of a son who said “I had to leave because I didn’t have opportunities, I had to go elsewhere to pursue”, in terms of his science career, you know, pursue opportunity elsewhere. I actually also see the positive in that, you know, a lot of the start-ups, a lot of people that are moving overseas are pursuing opportunity to grow and they’re going to gain experience and potentially come back and replenish our pool. The key for us is if people are leaving, what’s being done to backfill the places? What’s being done to replenish the talent pool?”

This is like a business saying well we have no customer retention because our product is crap, so let’s go find some new customers.

I taught Stephen Merity here at the University of Sydney. He also worked for me at Freelancer. He’s one of the top graduates in computer science that this University and country has ever produced. He’s never coming back.

What about trying to attract more senior people to Sydney?

I’ll tell you what my experience was like trying to attract senior technology talent from Silicon Valley.

I called the top recruiter for engineering in Silicon Valley not so long ago for Vice President role. We are talking a top role, very highly paid. The recruiter that placed the role would earn a hefty six figure commission. This recruiter had placed VPs at Twitter, Uber, Pinterest.

The call with their principal lasted less than a minute “Look, as much as I would like to help you, the answer is no. We just turned down [another billion dollar Australian technology company] for a similar role. We tried placing a split role, half time in Australia and half time in the US. Nobody wanted that. We’ve tried in the past looking, nobody from Silicon Valley wants to come to Australia for any role. We used to think maybe someone would move for a lifestyle thing, but they don’t want to do that anymore.

“It’s not just that they are being paid well, it’s that it’s a backwater and they consider it as two moves?—?they have to move once to get over there but more importantly when they finish they have to move back and it’s hard from them to break back in being out of the action.

 

“I’m really sorry but we won’t even look at taking a placement for Australia”.

We have serious problems in this country. And I think they are about to become very serious. We are on the wrong trajectory.

I’ll leave you now with one final thought.

Harvard University created something called the Economic Complexity Index. This measure ranks countries based upon their economic diversity- how many different products a country can produce- and economic ubiquity- how many countries are able to make those products.

Where does Australia rank on the global scale?

Worse than Mauritius, Macedonia, Oman, Moldova, Vietnam, Egypt and Botswana.

Worse than Georgia, Kuwait, Colombia, Saudi Arabia, Lebanon and El Salvador.

Sitting embarrassingly and awkwardly between Kazakhstan and Jamaica, and worse than the Dominican Republic at 74 and Guatemala at 75,

Australia ranks off the deep end of the scale at 77th place.

Australia’s ranking in the Harvard Economic Complexity Index 1995–2015. Source: Harvard

77th and falling. After Tajikistan, Australia had the fourth highest loss in Economic Complexity over the last decade, falling 18 places.

Australia keeps good company in the Harvard Economic Complexity Index at position #77. Source: Harvard

Thirty years ago, a time when our Economic Complexity ranked substantially higher, these words rocked the nation:

“We took the view in the 1970s?—?it’s the old cargo cult mentality of Australia that she’ll be right. This is the lucky country, we can dig up another mound of rock and someone will buy it from us, or we can sell a bit of wheat and bit of wool and we will just sort of muddle through … In the 1970s … we became a third world economy selling raw materials and food and we let the sophisticated industrial side fall apart … If in the final analysis Australia is so undisciplined, so disinterested in its salvation and its economic well being, that it doesn’t deal with these fundamental problems … Then you are gone. You are a banana republic.”

Looks like Paul Keating was right.

The national conversation needs to change, now.

http://WarMachines.com

Global Stocks Tumble, Asia Plunges On Chinese Commodity Carnage

The euphoria of the past month has ended with a thud and BTFDers are strangely missing as the commodity chill out of China (which overnight became full blown carnage), has unleashed a global risk-off phase ahead of today’s critical CPI data, resulting in broad and sharp selling across global markets, as European stocks followed declines in Asia while bonds and gold advanced. The equity retreat, which spread to U.S. stock futures, started with last night’s sharp puke in Chinese commodities.

As a result, S&P 500 futures dropped 0.5% after U.S. stocks fell for a third time in four days, while Japan’s recent euphoria – which attracted a record influx of foreign investors – is now a distant memory with the Topix falling for the fifth day, its longest losing streak this year, as it declined 2%, while European stocks tumbled for a seventh consecutive day, the worst losing streak since November 2016, to a two month low with the Stoxx 600 down 1%.

“The decline by U.S. equities led by energy shares is having a knock-on effect, dampening sentiment in sectors related to energy and industry,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management in Tokyo. “Broadly speaking equities had enjoyed an almost uninterrupted run for the past few months, so we are seeing a bit of a correction finally emerging.”

“So far we don’t see that much disruption in sentiment, so I think we are just taking a bit of froth off the top of the market at the moment,” Michael Metcalfe, global head of macro strategy at State Street Global Markets, said on Bloomberg TV. “It would be dangerous to say this is the unwinding of a bubble – the fact that it’s being led by Japan actually tells you that, because there isn’t a valuation case to sell Japanese stocks.”

The cautious tone has settled into markets in recent days as new obstacles emerged to the U.S. overhauling taxes and after many stock gauges approached record highs. Attention now turns to data coming on U.S. consumer prices and retail sales for further clues on US economic strength after the flattest American yield curve in a decade raised concern that growth will slow. Amusingoy, amid the equity pullback, Morgan Stanley advised staying overweight stocks and avoiding the temptation to sell even as valuations appear stretched. Current indicators used by the New York-based bank’s cross-asset strategy team are showing strong macro-economic data favoring a tilt to shares, with low allocation to high-yield credit.

Asian equities fell, with the regional benchmark poised for its steepest four-day decline this year, as a slump in commodity prices weighed on materials and energy producers shares. The MSCI Asia Pacific Index dropped 1% percent to 167.97 with material and energy sub-gauges each down at least 1.7 percent. Japan’s Topix capped its longest declining streak since September 2016, while Hong Kong’s Hang Seng Index lost 1 percent. Moderation in China’s growth and rising odds of U.S. rate hikes are putting the brakes on Asia’s world-leading rally this year. A Bloomberg gauge of commodity prices extended Tuesday’s steepest slump in six months after Chinese data pointed to slowing industrial output, fixed-asset investment and retail sales. The MSCI Emerging Market Index fell 0.4%, hitting the lowest in almost three weeks with its fifth consecutive decline.

“Commodity prices are sinking on rate-hike expectations as well as China data that missed some analyst forecasts,” said Hao Hong, Hong Kong-based chief strategist at Bocom International Holdings Co. “Investors are taking profits after rallies.” Mitsubishi Gas Chemical Co. slumped 4.3 percent in Tokyo for its biggest drop in more than seven months, while PetroChina Co. lost 3.1 percent in Hong Kong.

European stocks followed in Asia’s example, falling in brisk volumes, with basic resources and energy stocks falling the most on the back of weaker commodity prices, as investors assess the global equity pull-back. The Stoxx Europe 600 Index retreated 0.6% to a near two-month low, breaking below its 200-day moving average for the first time since early September. All but one sector are in the red, with banks among the worst performers as bond yields weaken. The Stoxx 600 is heading for its longest losing streak since November 2016. The U.K.’s FTSE 100 Index decreased 0.6% , hitting the lowest in almost seven weeks with its fifth consecutive decline. Germany’s DAX Index dipped 1.3%, reaching the lowest in almost seven weeks on its fifth consecutive decline.

European stocks fall in brisk volumes, with basic resources and energy stocks falling the most on the back of weaker commodity prices, as investors assess the global equity pull-back. The Stoxx Europe 600 Index retreats 0.6% to a near two-month low, breaking below its 200-day moving average for the first time since early September. All but one sector are in the red, with banks among the worst performers as bond yields weaken. The Stoxx 600 is heading for its longest losing streak since November 2016. Mining and oil-related stocks set the tone, as the Bloomberg Commodities Index continued its longest slide since June.

Benchmark WTI crude fell through $55 a barrel after industry data showed U.S. stockpiles unexpectedly rose last week and as Russia was said to waver on extending output cuts. The dollar traded near a three-week low and Treasuries led bond gains. S&P 500 futures dropped 0.6 percent.

The euro climbed to its highest level in more than three weeks, the EURUSD rising above 1.1800 as increased confidence in the currency bloc was underpinned with concerns that U.S. inflation data due Wednesday may further pressure the dollar. The common currency rose a sixth day, set for its longest winning run since May 2016, as demand for upside exposure intensified in both spot and options markets. Real-money names returned from the sidelines and added fresh longs, while macro accounts also bid the euro, traders in Europe and London told Bloomberg.

Pressured by the euro’s surge, the dollar index against a basket of six major currencies lost about 0.7 percent overnight. It last stood flat at 93.870. The greenback was 0.2 percent lower at 113.230 yen after pulling back from a high of 113.910 the previous day.  The yen as well as Japan’s equity and bond markets showed little reaction to Wednesday’s GDP data. Japan’s economy grew for the seventh straight quarter during the July-September period, although this was tempered somewhat as private consumption declined for the first time since the last quarter of 2015.

The immediate focus for the dollar, and a potential catalyst, was data on U.S. consumer prices due later in the global day.

Ahead of today’s closely watched CPI update out of the US, overnight the Fed’s Evans said that the Fed should acknowledge a much greater chance of 2.5% inflation, further stating that he sees solid US economic growth in 2018 and sees a big risk in not getting inflation to 2% before the next recession hits.

Elsewhere, the US Senate Finance Committee Chair Hatch unveiled the modified Chairman’s mark of Senate’s tax overhaul plan, which:

  • Repeals Affordable Care Act’s individual mandate tax, according to release from committee
  • Increases child tax credit from the current $1,000 to $2,000
  • Reduces middle income tax rates from 22.5% to 22%; 25% to 24%; and 32.5% to 32%

The White House is said to strongly support the House tax bill.

Crude oil prices stretched losses, weighed by forecasts for rising U.S. crude output and a gloomier outlook for global demand growth in a report from the International Energy Agency. U.S. crude futures were down 1.1 percent at $55.07 per barrel and on track for their fourth day of losses. Brent lost 1.3 percent to $61.42 per barrel. With oil prices having slid steadily from 28-month highs scaled last week, commodity currencies came under pressure.

On today’s calendar, investors will be looking for consumer prices, retail sales, MBA mortgage applications, Empire State manufacturing, business inventories, and Treasury net capital flows.  Tax overhaul update: revisions bring the plan in line with Senate’s tight fiscal constraints, but may create complications for President Donald Trump who have pitched the plan as benefiting the middle class. Several ECB officials speak with Executive Board member Peter Praet chairing the closing policy panel at an ECB conference in Frankfurt.

Market Snapshot

  • S&P 500 futures down 0.5% to 2,566.25
  • STOXX Europe 600 down 1.0% to 380.00
  • MSCI Asia down 0.9% to 168.14
  • MSCI Asia ex Japan down 0.6% to 552.69
  • Nikkei down 1.6% to 22,028.32
  • Topix down 2% to 1,744.01
  • Hang Seng Index down 1% to 28,851.69
  • Shanghai Composite down 0.8% to 3,402.52
  • Sensex down 0.6% to 32,750.40
  • Australia S&P/ASX 200 down 0.6% to 5,934.24
  • Kospi down 0.3% to 2,518.25
  • German 10Y yield fell 2.8 bps to 0.369%
  • Euro up 0.4% to $1.1845
  • Italian 10Y yield fell 0.5 bps to 1.563%
  • Spanish 10Y yield fell 0.9 bps to 1.525%
  • Brent Futures down 1.1% to $61.51/bbl
  • Gold spot up 0.4% to $1,285.26
  • U.S. Dollar Index down 0.4% to 93.47

Top Overnight News

  • Chicago Fed President Charles Evans says policy makers should take a more aggressive public stance toward boosting price gains; “harder for me to feel comfortable with the idea that weak
    inflation is simply transitory”; concerned something more persistent is
    holding down inflation today
  • While U.K. unemployment rate stayed near a 42-year low, there were signs that the labor market may be slowing as the number of people in work fell for the first time in almost a year
  • Britain’s PM May is heading for a showdown with her own Tory party over what one member of Parliament called her “mad” plan to write the date of Brexit into British law
  • The armed forces seized power in Zimbabwe after a week of confrontation with President Robert Mugabe’s government and said the action was needed to stave off violent conflict in the southern African nation that he’s ruled since 1980
  • U.K. Sept. Average Weekly Earnings: 2.2% vs 2.1% est; Unemployment Rate 4.3% vs 4.3% est.
  • ECB’s Hansson: we feel more and more confident that inflation will eventually reach the levels consistent with our aim; short-term economic risks are to the upside
  • Australia 3Q wage prices 0.5% vs 0.7% est; y/y 2.0% vs 2.2% est
  • API inventories according to people familiar w/data: Crude +6.5m; Cushing -1.8m; Gasoline +2.4m; Distillates -2.5m
  • North American Free Trade Agreement (Nafta) negotiators from the U.S., Canada, and Mexico meet in Mexico City for round five of discussions through Nov. 21.
  • The armed forces seized power in Zimbabwe after a week of confrontation with President Robert Mugabe’s government
  • House leaders cleared the way for a Thursday vote on their tax-overhaul bill as Senate tax writers released a late-night draft that would make many individual breaks temporary and repeal a key part of the Obamacare law
  • Airbus SE announced the biggest commercial-plane transaction in its history, securing an order for single-aisle aircraft valued at nearly $50 billion at the Dubai Air Show, outdoing Boeing Co.’s own $20 billion mega-deal
  • Amid the worst sell-off in months for junk-rated corporate bonds, money manager Loomis Sayles & Co. has been selectively buying the debt
  • Warren Buffett continued to trim a once-major investment in International Business Machines Corp. while adding to newer holding Apple Inc. in the third quarter
  • OPEC has yet to convince Russia that it’s necessary to reach an agreement to extend oil-output cuts at a meeting in Vienna later this month, as officials and oil bosses in Moscow still haven’t decided how long the production deal should last
  • Deutsche Bank AG has attracted a new top investor whose identity will probably be revealed within days
  • SandRidge Energy is nearing agreement to buy Bonanza Creek Energy for about $750 million in cash-and-stock deal, Wall Street Journal reports citing unidentified people familiar

Asian stocks slumped sharply, following the lead of their US counterparts, as negative risk sentiment and the stronger domestic currency weighed on Japan’s Nikkei 225 which finished 1.6% lower, although this was off of worst levels. In Australia, the ASX 200 fell 0.6%, with energy stocks and resource names leading the way on the back of softer oil prices and yesterday’s Chinese data respectively. Chinese and Hong Kong markets also fell afoul of risk off sentiment (Shanghai Comp -0.6%, Hang Seng -0.7%), with the tumble in Shanghai metals heaping further weight on industrial names. Bonds edged higher in the US, Japan & Australia, with Australian 3-year bond futures experiencing notable buy side flow in the wake of the soft wage data. Japanese GDP QQ (Q3) 0.3% vs. Exp. 0.3% (Prev. 0.6%); Australian Wage Price Index QQ (Q3) 0.5% vs. Exp. 0.7% (Prev. 0.5%); New Zealand Finance Minister Robertson reiterates that it is the government’s intention to reduce net debt to 20% of GDP within 5 years. The RBNZ has increased the capital requirements for Westpac’s NZ division as the firm did not comply with regulations.

Top Asian News

  • China Throws Lifeline to Builders Facing Record Wall of Debt
  • China Seen Supporting Bonds as PBOC Steps Up Liquidity Injection
  • Tencent Delivers a Blowout Quarter as Honour of Kings Shines
  • India Advances BS-VI Fuel Norm in Delhi to Combat Pollution
  • Korea Factories Operating Normally After Big Quake
  • China Is Said to Allow Panda Bond Issuers to Use U.S. GAAP Rules
  • Investors Lose Faith in Asia’s Top Stock as Downgrades Mount
  • Freeport Indonesia Shuts Main Road to Grasberg After Shooting
  • Aluminum Supply Cuts in China Set to Disappoint This Winter

European indices lower this morning, with almost every sector in negative territory. A typical risk-off session thus far, with financials and commodity-related names taking the most points off EU bourses. Not all doom and gloom however, as Airbus shares have been flying high after they confirm the largest aircraft deal in its history, valued at over USD 40bln. Gilts initially firmer in wake of the latest jobs and wages update, and indeed inched a bit closer to 125.00 before easing back again, while the Short Sterling strip has held relatively modest gains of 1-2 ticks. The inference is that unemployment and pay did not top estimates by enough to prompt a reaction or change the near term outlook for the BoE, albeit encouraging. Moreover, Bunds and USTs are inching further ahead (former just up to a fresh 162.86 Eurex high) amidst a broader safety flight, which has now seen the 10 year UK benchmark break through 125.00 to 125.09. Germany supply up next, but in the context of risk aversion this should cause any major digestion issues.

Top European News

  • EU Is Said to Be Looking to 2018 Summits for Brexit Breakthrough
  • Weimer Is Said to Be Lead Candidate for Deutsche Boerse CEO Post
  • U.K. Labor Market Shows Signs of Slowing as Employment Falls
  • VW Raided by German Prosecutors Over Labor Chief’s Pay
  • TalkTalk Plunges as Earnings Outlook Dims on Customer Costs
  • Atlantia CEO Says Room to Make Abertis Offer Competitive: FT
  • AstraZeneca’s Fasenra Gets FDA OK for Severe Eosinophilic Asthma
  • Israel Plans to Issue Tax Bills to Google, Facebook: Haaretz

In FX, cable Retreated from session highs, consolidating back inside the day’s range. In DXY trading, d Dovish comments from Fed’s Evans hardly helped to ease the Greenback’s pain as he bemoans the fact that US inflation remains below target and warns that it may not hit mandate before the next recession. The Index has duly declined further from the 94.000 level and is threatening 93.500 on the downside. It’s onwards and upwards for the Euro with 1.1800 now surpassed and techs turning outright bullish given the break of a negative channel. The early morning upside target of 1.1837 has been breached with the October peak of 1.1880 in sight. EURGBP making a firm breach of 0.90 has weighed on GBP. GBP briefly above 1.32 above post UK jobs data, however wages still continue to lag inflation, while some investors may be looking at the retail sales release tomorrow which has some growing pessimism given how weak the retail sector has been over the recent months. In JPY moves, benefiting from its flight to quality status (along with the Chf) and breaking below the recent 113.00-114.00 range vs the Greenback to around 112.80 and closer to downside option expiries at 112.50 (460 mn). The AUD was a marked and sole underperformer vs the US Dollar among majors, largely due to weaker than forecast Australian wage data, hot on the heels of comments alluding to that fact from RBA deputy Governor Debelle. Aud/Usd has now slipped through 0.7600 where macro offers were evidently seen, and bears are looking at 0.7571 chart support next. Note, a 0.7650 option expiry today (470 mn).

In commodities, oil prices off around 1% following last night’s API report which showed a rather large build of 6.5mln in US crude inventories, while analysts had expected a drawdown of 2.2mln.

Looking at the day ahead, the big focus will be the October CPI print while October retail sales, November empire manufacturing and September business inventories are also due. There is plenty more central bank speak scheduled with the ECB’s Lane, Praet and Hanson all due along with the Fed’s Evans and the BoE’s Haldane. NAFTA negotiators from the US, Canada and Mexico are also scheduled to meet for round 5 of discussions.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior 0.0%
  • 8:30am: US CPI MoM, est. 0.1%, prior 0.5%; CPI Ex Food and Energy MoM, est. 0.2%, prior 0.1%
    • US CPI YoY, est. 2.0%, prior 2.2%; Ex Food and Energy YoY, est. 1.7%, prior 1.7%
    • Real Avg Weekly Earnings YoY, prior 0.63%; Real Avg Hourly Earning YoY, prior 0.7%
  • 8:30am: Empire Manufacturing, est. 25.1, prior 30.2
  • 8:30am: Retail Sales Advance MoM, est. 0.0%, prior 1.6%; Retail Sales Ex Auto MoM, est. 0.2%, prior 1.0%
    • Retail Sales Ex Auto and Gas, est. 0.3%, prior 0.5%; Retail Sales Control Group, est. 0.3%, prior 0.4%
  • 10am: Business Inventories, est. 0.0%, prior 0.7%
  • 4pm: Total Net TIC Flows, prior $125.0b; Net Long-term TIC Flows, prior $67.2b

DB’s Jim Reid concludes the overnight wrap

So will today’s US inflation numbers give markets an early Xmas present after a ‘bah humbug’ last four trading days which has carried on overnight in the Asian session. At the moment US CPI is probably the most important data release of the month so the stakes are high. The central bank put can continue to be withdrawn slowly and possibly be put back in place if needed whilst inflation remains well behaved. By well behaved the sweet spot for risk markets is a bias for slightly missing expectations more often than it beats but without ever threatening deflation. This describes 2017 perfectly so far. US CPI has missed expectations for 6 out of the last 7 months, with the other month being in-line. Today we expect Core CPI (+0.2% mom vs. +0.1% previous) to firm in line with consensus but the year-over-year growth rate should remain at 1.7%, down from 2.3% at the beginning of the year (headline 2.0% yoy expected). While our economists anticipate core inflation to remain tame near-term, there are signs that we are reaching an inflection point though. Over the last 20 years US inflation has lagged GDP by around five to six quarters, so we think that a lot of the misses this year can be attributed to the weak growth seen at the back end of 2015/ early 2016. The stronger growth seen in the US and globally post H2 2016 should start to impact inflation soon. Today’s print might be too early and our strategists’ models point to a weak 0.2% core reading (0.16% unrounded) so the risks might be on the downside near term but we think to the upside in 2018.

Ahead of this, the US PPI was strong but European inflation data weak. In the US, the headline October PPI was 2.8% yoy – the highest since February 2012. Core PPI was also above expectations at 0.4% mom (vs. 0.2%) and 2.4% yoy (vs. 2.2% expected). In the details, the healthcare services component of the PPI (a direct input into the core PCE deflator) was up 0.18% mom on a seasonally adjusted basis. Across Europe, the UK’s October CPI was slightly below expectations at 0.1% mom (vs. 0.2%), while core annual inflation was steady for the third consecutive month at 2.7% yoy (vs. 2.8% expected).

Elsewhere, the final readings on inflation for Germany (1.5% yoy), Spain (1.7% yoy) and Italy (1.1% yoy) were unrevised.

This morning in Asia, markets have followed the negative lead from yesterday and are trading lower again. The Nikkei (-1.51%), Kospi (-0.29%), Hang Seng (-0.79%) and ASX 200 (-0.42%) are all down with losses led by energy and mining stocks. In Japan, 3Q GDP was a tad softer than expected (0.3% qoq vs. 0.4% expected), but is still an expansion for the 7th consecutive quarter – longest since 2001, and adjusting for prior data revisions, the annual growth was more in line at 1.4% yoy.

Prior to this it was another weak day yesterday for markets. US bourses all weakened, with the S&P 500 (-0.23%), Dow (-0.13%) and Nasdaq (-0.29%) all down modestly. Within the S&P, only the utilities and consumer sectors were in the green, while losses were led by energy (-1.53%) and telco stocks. GE dropped a further 5.9% (-12.6% in two days) after announcing its turnaround plans. European markets were all lower, with the Stoxx 600 down for the 6th consecutive day (-0.59%, cumulative loss of -3.2%) – the longest losing streak since October 2016, with losses led by energy and mining stocks, partly in response to lower oil price and softer than expected Chinese macro data on IP and property sales. Across the region, the FTSE was the relative outperformer (-0.01%) following weaker inflation data, while the DAX (-0.31%), CAC (-0.49%) and FTSE MIB (-0.63%) all fell modestly. Bond markets were slightly firmer, with core 10y bond yields 1-3bp lower (UST: -3.3bp; Bunds -1.9bp; Gilts -0.8bp) while peripheral yields marginally underperformed, ranging from flat to 1bp lower.

Turning to currencies, the US dollar index fell 0.70% – the biggest fall since late June, while Sterling and the Euro gained 0.37% and 1.12% respectively, with the latter likely supported by a solid beat in Germany’s 3Q GDP (0.8% qoq vs. 0.6% expected). In commodities, WTI oil dropped 1.87% – the biggest fall since early October, following the IEA lowering its 2018 demand outlook and cautioning that the global market is likely to remain over supplied in 2Q. This morning, it’s fallen c1% more, after API data showed an unexpected rise in US crude inventory. Elsewhere, precious metal were little changed (Gold +0.15%; Silver -0.20%) but other base metals all weakened following  softer Chinese macro data (Copper -1.74%; Zinc -2.25%; Aluminium -0.90%). As a reminder, in China yesterday, both the October IP (6.2% yoy vs. 6.3% expected) and retail sales (10% yoy vs. 10.5% expected) were lower than consensus and monthly property sales turned negative for the first time since March 2015, dropping to -1.7% yoy from 1.6%.

Moving onto Brexit, yesterday we noted that Bloomberg reported that Brexit Secretary Davis told a group of business leaders that the chance for a breakthrough for Brexit talks by December was “a 50/50 chance”. Later on, a spokesman on behalf of Davis said “this is categorically untrue. Davis did not say this”. Elsewhere, Davis noted that he wanted banking employees to retain their ability to transfer between offices in the UK and EU after Brexit and he predicted he will achieve an agreement on a post 2019 transition period “very early next year”. Finally, the House of Commons has voted 318 to 68 to agree to Clause 1 of the EU withdrawal bill which will repeal the 1972 law that is the basis of UK’s EU membership. Notably, the vote is the second in a series of upcoming votes on PM May’s Brexit bill.

As we get closer to 2018 the outlooks will start to come thick and fast. Hot off the presses this morning our European equity strategy team led by Sebastian Raedler have published their 2018 outlook. They expect the Stoxx 600 to end 2018 at 395, 3% above current levels, based on projected 2018 EPS growth of 2% and an end-2018 12-month forward P/E of 15.1x (slightly above the current 14.8x). They remain tactically neutral near-term, but expect a pull-back for the Stoxx 600 to 375 in Q1 as Euro area macro momentum softens from its current elevated levels. They are underweight European cyclicals versus defensives – and expect European equities to continue underperforming US equities over the coming months. Email Sebastian.Raedler@db.com for a copy.

Now wrapping up with a busy day of central bank speak before we recap yesterday’s data and preview today’s. Firstly the Fed’s Bullard reiterated his dovish view, noting the current interest rate “is likely to remain appropriate over the near term” and that even if US unemployment rate declines substantially further, “the effect on inflation are likely to be small”. Further, if the Fed is going to hit its inflation target, “it will likely to occur in 2018 or 19”.  Conversely, the Fed’s Kaplan said he is “actively considering appropriate next steps” in terms of a potential December rate hike. Further, he is watching core inflation closely and noted there is a mounting case for moving ahead of signs of price increases.

Following on, the Fed’s Bostic noted that based on anecdotal feedback and monitored indicators, they convince him that the foreseeable future is “more of the same”, with GDP growth at a bit above 2%, unemployment rate in low 4% and modest increase in real wage growth. Hence he believes “it will be appropriate for interest rates to rise gradually over the next couple of years”. Elsewhere, he seemed to attribute the current yield curve flattening in the US to the flow associated with the demand for US securities, rather than as a sign of the economy’s softness. After the PPI data, softer markets and central bankers speak, the odds of a December rate hike fell 5ppt to a still high level of 92% (per Bloomberg).

Staying with the Fed, the WSJ has reported that former Pimco CEO Mohamed El-Erian is among several candidates that are currently being considered for the role of Fed Vice Chairman. Moving onto US tax plans, Senator John Thune noted that Senate Majority Whip Mr Cornyn is confident the chamber can get the votes to pass the bill, “we wouldn’t have proceeded if Cornyn wasn’t confident he could get to 50”.

Back to central bankers and the ‘Fab Four’ panel discussion at the ECB’s conference yesterday. Overall, there was minimal material information for markets. In the details, Mrs Yellen sounded a bit critical of some FOMC members who gave the impression of having made their policy decisions ahead of hearing the views of fellow colleagues. Elsewhere, she noted “all (rates) guidance should be conditional on the outlook for the economy” and the appropriate policy path depends “on expectations about where the medium term outlook is”. Finally, one of the lessons for the Fed from the taper-tantrum was to lay the ground work in a long set of communications to enable the taper process to be orderly, gradual and avoid market disruption.

The BOE’s Carney reiterated his caution on Brexit, noting that the UK is in “exceptional circumstances”, in part as Brexit will “very much depend on the final arrangements with the EU-27 and what the transition path is from here”. However, he noted the potential impact on rates may be evolving. On the one hand, it could be inflationary as there are not much spare capacity in the economy, on the other, there could be an expansive relationship with Europe, a reasonable transition period and demand holds up. For now, “you could paint either picture”. The ECB’s Draghi expressed some disappointment in the continued media

criticism of his Bank’s policies that was evident in some countries and noted that “forward guidance has now become a full-fledged monetary policy instrument”. Elsewhere, the BOE’s deputy governor Cunliffe was one of the two policy makers who oppose the recent rate hike in the UK. He reiterated his dovish view, noting “the low level of domestic pressure on inflation now, the absence of second round effects from the depreciation of sterling…..make it possible to wait before tightening policy until there is clear evidence that pay growth is responding to the level of unemployment”.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the NFIB small business optimism index was broadly in line at 103.8 (vs. 104 expected). In Germany, 3Q GDP beat  expectations at 0.8% qoq (vs. 0.6% expected) and 2.8% yoy (vs. 2.3% expected) – the highest in 6 years, mainly due to positive contributions from net exports and capital investment. The November ZEW survey on current situations for November slightly beat at 88.8 (vs. 88 expected).

In the Eurozone, the second reading of the 3Q GDP was unrevised at 0.6% qoq and 2.5% yoy along with the September IP at -0.6% mom and 3.3% yoy. The November ZEW survey on expectations was higher than last month’s reading at 30.9 (vs. 26.7 previous). Over in Italy, 3Q GDP was in line at 0.5% qoq and 1.8% yoy – the most since 1Q 2011.

Looking at the day ahead, in Europe we’ll receive the final October CPI report in France and the September/October employment stats in the UK. In the US the big focus will be the October CPI print while October retail sales, November empire manufacturing and September business inventories are also due. There is plenty more central bank speak scheduled with the ECB’s Lane, Praet and Hanson all due along with the Fed’s Evans and the BoE’s Haldane. NAFTA negotiators from the US, Canada and Mexico are also scheduled to meet for round 5 of discussions.

http://WarMachines.com

China 10Y Bond Yield Breaks Above 4% “Mental Line Of Defense”

Following last night's dismal economic data, China's 10Y bond yield pushed above 4.00% for the first time since October 2014…

As China's intentional credit slowdown strikes.,,

 

Additionally, China's yield curve has been inverted for a record 22 days and analysts are warning it is likely to get worse – at least until Chinese authorities are forced to step back in.

 

Bloomberg provides a breakdown of analysts' comments:

David Qu, market economist at Australia & New Zealand Banking Group Ltd. in Shanghai

  • “The breaking of 4 percent will have significant negative impact on sentiment. There’s a chance that we will see an extensive and quick slump in bonds in the near term.”
  • The selloff will spread to corporate bonds if sentiment worsens.
  • Worse-than-expected monetary and real economic data didn’t help bonds, which shows the market is losing confidence.
  • Investors should expect tougher financial regulations and tighter monetary policy next year, so bond yields will keep climbing.

Li Qilin, chief macroeconomic researcher at Lianxun Securities Co.

  • The breach of 4 percent may trigger a new round of stop-loss trades and drive the 10-year yield up, though it’s hard to predict how high.
  • The peak depends on whether authorities announce some supportive policies to calm the market and whether banks start buying bonds.
  • Banks don’t currently have money to allocate to sovereign bonds because they are under pressure to buy local government debt and deposit growth has been slow due to the popularity of investment alternatives such as Yue Bao.

Chris Leung, senior economist at DBS Bank Hong Kong Ltd.

  • “If deleveraging continues as Xi stated in the party congress, then bond yields will climb further.”
  • “With financial firms’ liabilities shrinking, and outstanding WMPs (wealth-management products) falling, the allocation or the demand to allocate to government bonds will shrink, weighing on prices.”

Liu Dongliang, senior analyst at China Merchants Bank Co. in Shenzhen.

  • China bonds will remain weak but there may not be an acceleration of declines after the break of 4 percent, as a “mental line of defense” was broken when the yield hit 3.9 percent.
  • Investors were expecting it to rise to 4 percent.
  • “The market is still worried about tougher financial regulation and tighter year-end liquidity.”

Zhang Guoyu, analyst at Tebon Securities Co. in Shanghai

  • The 10-year yield should be capped at 4.1%.
  • Authorities aren’t likely to let the rate climb fast as that would increase corporate funding costs and put pressure on the real economy, which is against the aim for stable growth.
  • If there’s another round of panic selling, the central bank will likely add liquidity to the market to stabilize it and prevent a rapid pickup in yields.

Not exactly positive, but it seems everyone is banking on Chinese authorities losing the market's game of chicken.

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Two-Thirds Of The Top Primary Silver Miners Suffered Production Declines In 2017

SRSrocco

By the SRSrocco Report,

It has been a rough year for many primary silver miners as two-thirds have suffered declines in production.  Also, many high ranking silver producing countries are also experiencing a pronounced reduction in their domestic silver mine supply.  According to the data put out by World Metal Statistics, Chile’s silver production is down 20% in the first eight months of the year, while Australia is down 19%, Mexico declined 2% and Peru lower by 1%.

The Silver Institute will be releasing their 2017 Silver Interim Report shortly which will provide an update on current silver production and forecasts for the remainder of the year.  However, I believe global silver production will take a big hit this year due to several factors including, falling ore grades, mine closures, and strikes at various projects.

For example, Tahoe Resources was forced to shut down its Guatemalan Escobal Mine in July due to a temporary suspension of its operating license by the country’s Supreme Court.  However, even after the Guatemalan Supreme Court reinstated Tahoe Resources Escobal Mine’s license in early September, an ongoing road blockade has hampered the ability of the project to continue mining.  Regardless, Tahoe’s silver production declined a stunning 6.7 million oz Q1-Q3 2017 versus the same period last year.

Now, on the other hand, silver production at Fresnillo’s operations in Mexico jumped by nearly six million oz during the first three-quarters of 2017 primarily due to the start-up of its San Julian Mine phase II expansion and a ramp-up of its phase I:

While the gain in silver production at Fresnillo’s operations helped to offset the significant decline at Tahoe’s Escobal Mine, two-thirds of the top primary silver companies in the group experienced a reduction in mine supply this year.  Hecla’s silver production fell by 3.7 million oz in the first three-quarters this year due to an ongoing strike at its Lucky Friday Mine in Idaho.  Moreover, output at Silver Standard’s Puna operations in Argentina fell by 3.2 million oz due to a 36% decline in ore grade at is open-pit Pirquitas Mine.  Silver Standard’s Pirquitas Mine is one of the few open-pit silver operations in the world.  The overwhelming majority of primary silver mines in the world are underground operations.

Overall, production at these top primary silver miners fell 9 million oz in 2017 compared to the same period last year:

Now, if Tahoe Resources Escobal Mine was not forced to shut down or if Hecla’s Lucky Friday Mine’s strike was resolved, overall production at these top primary silver miners would have likely increased by approximately one million oz this year.  Unfortunately for Tahoe’s Escobal Mine and its investors, it may be quite some time before full production resumes.  As I have mentioned in previous articles about the troubles plaguing the Escobal Mine by the local and indigenous peoples living by the operation, there are two very different opinions on the underlying problems.

While I have stated that the negative issues put forth by the local and indigenous peoples about the Escobal Mine are likely more valid than the pro-western stance taken by the Tahoe Managment or the Mainstream financial media, time will tell how this is resolved.  However, the notion put forth by Tahoe Management that the problems are stemming from “non-locals” who are supposedly radicalizing the locals around the plant, is unfounded when we understand that it is a huge ground-roots movement led by a large percentage of the inhabitants surrounding the mine.

According to the article, Tahoe Resources’ Social Licence in Guatemala Non-Existent, as Uncertainty Plagues Escobal Permits:

Tahoe CEO Ron Clayton is also wrong when he states in a recent press release that community opposition comes from “non-locals”. Lack of social license has dogged Tahoe Resources since the beginning of its project. Since 2011, tens of thousands of residents in eight municipalities around the Escobal mine have voted in municipal plebiscites demonstrating their opposition to the project, or any mining in the area, out of concern for their water supplies, health, and local agriculture. Five municipalities refuse to receive any royalty payments from Tahoe’s mine operations and are now parties to the legal proceedings over discrimination of the Xinka Indigenous population and the Ministry of Energy and Mines’ failure to consult with them.

As the article states, five municipalities refuse to receive any royalty payments from Tahoe’s mine operations and are now supporting legal proceedings.  This does not sound like a small group of non-locals instigating trouble.  Rather, this has been an ongoing issue ever since the Escobal Mine was initially planned, during its construction phase and ever since it produced its first ounce of silver in 2014.

Lastly, it looks like global silver production will take a big hit this year.  We could see world silver mine supply fall by 40-50 million oz in 2017 if the trend continues for the remainder of the year.  One country that I did not report on about silver production was China.  According to the World Metals Statistics, they show Chinese silver production down by a stunning 25% in the first eight months of 2017.  However, I don’t believe the decline is that high.  Even though the World Gold Council stated that Chinese gold production was down 10% so far this year, I doubt their silver production fell 25% this year.

We will have to wait and see what production figures the Silver Insitute will release in their 2017 Silver Interim Report when it’s published in the next few weeks.  Regardless, the world’s economies are being propped up by a massive amount of debt, derivatives and money printing.  When the markets finally crack, global silver production will fall considerably as for demand for base metals will drop like a rock.  We must remember, 58% of world silver production is a by-product of copper, lead and zinc production.  So, when base metal demand falls, so will base metal production.

Thus, as the market and economy continue to disintegrate, global silver supply will fall right at the very same time investment demand surges.

Check back for new articles and updates at the SRSrocco Report.

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For The First Time Ever, The Richest 1% Own More Than Half Of The World’s Wealth

Today Credit Suisse released its latest annual global wealth report, which traditionally lays out what has become the single biggest reason for the recent "anti-establishment" revulsion: an unprecedented concentration of wealth among a handful of people, as shown in Swiss bank's infamous global wealth pyramid, an arrangement which as observed by the "shocking" political backlash of the past year, suggests that the lower 'levels' of the pyramid are increasingly unhappy about.

As Credit Suisse tantalizingly shows year after year (most recently one year ago), the number of people who control roughly half of the global net worth, or 45.9% of the roughly $280 trillion in household wealth, is declining progressively relative to the total population of the world, and in 2017 the number of people who were worth more than $1 million was just 36 million, roughly 0.7% of the world's population of adults. On the other end of the pyramid, some 3.5 billion adults had a net worth of less than $10,000, accounting for just about $7.6 trillion in household wealth. And inbetween is the so-called global middle class – those 1.4 billion people whose rising anger at the status quo made Brexit and Trump possible.

As the report authors write, there is just one group to have benefited from the Fed's post-crisis monetary policies: " Our calculations show that the top 1% of global wealth holders started the millennium with 45.5% of all household wealth. This share was about the same until 2006, then fell to 42.5% two years later. The downward trend reversed after 2008 and the share of the top one percent has been on an upward path ever since, passing the 2000 level in 2013 and achieving new peaks every year thereafter. According to our latest estimates, the top one percent own 50.1 percent of all household wealth in the world.”

As the bank then laconically adds, "Global wealth inequality has certainly been high and rising in the post-crisis period." And as the chart below shows, in 2017, for the first time ever, the richest 1% now controls just over half, or 50.1%, of global wealth.

Incidentally, we tracked down the first Credit Suisse report we found in the "wealth pyramid" series, from back in 2010, where the total wealth of the top "layer" in the pyramid was a modest $69.2 trillion for the world's millionaires. It has nearly doubled in the 7 years since then. Meanwhile, the world's poorest have gotten, you got it, poorer, as those adults who were worth less than $10,000 in 2010 had a combined net worth of $8.2 trillion, a number which has since declined to $7.6 trillion in 2016 despite a half a billion increase in the sample size. Meanwhile, the layer right above, also known as the "middle class", has gone exactly nowhere, with a net worth of just over $32 trillion.

How about the very top?

Things here are even more nuanced, with 31.4 million people whose net worth is between $1 and $5 million gradually tapering off  to just 148,200 Ultra High Net Worth individuals who control more than $50 million in assets each.  Of these, 54,800 are worth at least USD 100 million, and 5,700 have assets above USD 500 million. The total number of UHNW adults has risen by 13% (19,600 adults) during the past year, as a result of the widespread
gains in wealth, primarily via artificially inflated rising financial assets, and the increase has been relatively uniform across all regions.

* * *

Here are some of the key excerpts from Credit Suisse

Wealth differences within and between countries

Wealth differences between individuals occur for many reasons. Variation in average wealth across countries accounts for much of the observed inequality in global wealth, but there is also considerable disparity within countries. Those with low wealth are disproportionately found among the younger age groups who have had little chance to accumulate assets. Others may have suffered business losses or personal misfortune, or live in regions where prospects for wealth creation are more limited. Opportunities are also sometimes constrained for women or minorities. At the other end of the spectrum there are many individuals with large fortunes, acquired through a combination of talent, hard work and good luck.

The wealth pyramid in Figure 1 captures these differences. The large base of low wealth holders supports higher tiers occupied by progressively fewer adults. We estimate that 3.5 billion individuals – 70% of all adults in the world – have wealth below USD 10,000 in 2017. A further 1.1 billion adults (21% of the global total) fall in the USD 10,000–100,000 range. While average wealth is modest in the base and middle tiers of the pyramid, the total wealth of these segments amounts to USD 40 trillion, underlining the economic importance of this often overlooked group.

The base of the pyramid

The layers of the wealth pyramid are quite distinctive. The base tier has the most even distribution across regions and countries (Figure 2), but also the widest spread of personal circumstances. In developed countries, about 30% of adults fall within this category, and for the majority of these individuals, membership is either transient – due to business losses or unemployment, for example – or a lifecycle phase associated with youth or old age. In contrast, more than 90% of the adult population in India and Africa falls within this range. In some low-income countries in Africa, the percentage of the population in this wealth group is close to 100%. For many residents of low-income countries, life membership of the base tier is the norm rather than the exception.

Mid-range wealth

In terms of global wealth, USD 10,000–100,000 is the mid-range band, covering 1.1 billion adults and encompassing a high proportion of the middle class in many countries. The average wealth of this group is quite similar to global mean wealth, and its combined net worth of USD 33 trillion provides it with considerable economic clout. India and Africa are under-represented in this segment, whereas China’s share is disproportionately high, having  risen rapidly from 12.6% in 2000 to 35% in 2015, where it remains. This contrasts with India, which accounted for just 2.7% of the group in 2000, and only 5.7% now, less than half the share of China at the turn of the century before the rapid rise in its membership.

The high wealth bands

The top tiers of the wealth pyramid – covering individuals with net worth above USD 100,000 – comprised 6.1% of all adults in the year 2000. The proportion rose to 9.1% by the end of the financial crisis, before dropping back to the current level of 8.6%. Regional composition differs markedly from the strata below. Europe, North America and the Asia-Pacific region (omitting China and India) together account for 89% of the group, with Europe alone supplying 155 million members (36% of the total). This compares with just seven million members (1.7% of the global total) in India and Africa combined.

The pattern of membership changes once again for the US dollar millionaires at the top of the pyramid. The number of millionaires in any given country is determined by three factors: the size of the adult population, average wealth, and wealth inequality. The United States scores high on all three criteria, and has by far the greatest number of millionaires: 15.4 million, or 43% of the world total (Figure 3). For many years, Japan held second place in  the millionaire rankings by a comfortable margin – with 13% of the global total in 2011, for example, twice as many as the third placed country. However, the number of Japanese millionaires has fallen, alongside a rise in other countries. As a consequence, Japan’s share of global millionaires dropped to 10% in 2012, and has settled around 7%. This has been linked to a 16% decrease in its average wealth since 2011.

The United Kingdom retains third place with 6% of millionaires worldwide. Germany, China and France each account for 5% of the global total, followed by Italy with 4%, and Canada and Australia at 3%. Korea, Switzerland, Spain, and Taiwan are the remaining four countries hosting more than 360,000 millionaires, the minimum requirement for a one percent share of the global total.

Changing membership of the millionaire group

Year-on-year variations in the number of millionaires can often be traced to real wealth growth or exchange-rate movements. This year, widespread rises in wealth per adult have led to an additional 2.3 million dollar  millionaires, almost half of whom (1.1 million) reside in the United States. Another 620,000 new millionaires are located in the main Eurozone countries (Germany, France, Italy and Spain) partly due to a 3% rise in the euro  against the US dollar. Australia added 200,000 new members and about the same number appeared in China and India taken together. Millionaire numbers fell in very few countries, the main exceptions – all associated with depreciating currencies – being the United Kingdom, which lost 34,000, and Japan, which shed over 300,000.

High net worth individuals

The primary sources of information on wealth distribution – official household surveys – tends to become less reliable at higher wealth levels.To estimate the pattern of wealth holdings above USD 1 million, we therefore supplement the survey data with information gleaned from the Forbes annual tally of global billionaires. These data are pooled for all years since 2000, and wellknown statistical regularities are then used to estimate the intermediate numbers in the top tail. This produces plausible values for the global pattern of asset holdings in the high net worth (HNW) category from USD 1 million to USD 50 million, and in the ultra-high net worth (UHNW) range from USD 50 million upwards.

While the base of the wealth pyramid is characterized by a wide variety of people from all countries and all stages of the lifecycle, HNW and UHNW individuals are heavily concentrated in particular regions and countries, and tend to share similar lifestyles, for instance participating in the same global markets for luxury goods, even when they reside in different continents. The wealth portfolios of these individuals are also likely to be more similar, with a focus on financial assets and, in particular, equities, bonds and other securities traded in international markets.

For mid-2017, we estimate that there are 35.9 million HNW adults with wealth between USD 1 million and USD 50 million, of whom the vast majority (31.4 million) fall in the USD 1–5 million range (Figure 4). There are 3.0 million adults worth between USD 5 million and USD 10 million, and another 1.6 million have assets in the USD 10–50 million range. Europe and North America had similar numbers of HNW individuals from 2007 to 2009, but North America then opened up a gap that has widened significantly since 2013. North America now accounts for 16.4 million members (46% of the total), compared to 10.8 million (30%) in Europe. Asia-Pacific countries, excluding China and India, have 6.1 million members (17%), and a further 2.0 million are found in China (5% of the global total). The remaining 1.2 million HNW individuals (2% of the total) reside in India, Africa or Latin America.

Ultra-high net worth individuals

Our calculations suggest that 148,200 adults worldwide can be classed as UHNW individuals, with net worth above USD 50 million. Of these, 54,800 are worth at least USD 100 million, and 5,700 have assets above USD 500 million. The total number of UHNW adults has risen by 13% (19,600 adults) during the past year, as a result of the widespread gains in average wealth. All regions shared in this rise in the number of UHNW individuals.

North America dominates the regional rankings, with 75,000 UHNW residents (51%), while Europe has 31,900 (22%), and 17,500 (12%) live in Asia-Pacific countries, excluding China and India. Among individual countries, the United States leads by a huge margin with 72,000 UHNW adults, equivalent to 49% of the group total (Figure 5), a rise of 9,900 compared to mid-2016. China occupies second place with 18,100 UHNW individuals (up
3,000 on the year), followed by Germany (7,200, up 500). The United Kingdom (4,700, up 400) made up for some of the losses suffered a year ago after the Brexit vote and retained fourth place ahead of France, Australia and Canada (all 3,000). The remaining places in the top ten list of countries are occupied by Switzerland (2,800, up 400), Italy (2,600, up 100) and Korea (2,300, up 300).

The wealth spectrum

The wealth pyramid captures the contrasting circumstances between those with net wealth of a million US dollars or more in the top echelon, and those lower down the wealth hierarchy. Discussions of wealth holdings often focus exclusively on the top tail. We provide a more complete and balanced picture, believing that the middle and base sections are interesting in their own right. One reason is the sheer size of numbers and their political power. However, their combined wealth of USD 40 trillion also yields considerable economic opportunities, which are often overlooked. Addressing the needs of these asset owners can drive new trends in both the consumer and financial industries. China, Korea and Singapore are examples of countries where individuals have risen rapidly through this part of the wealth pyramid. India has shown less progress to date, but has the potential to grow rapidly in the future from its low starting point.

While the middle and lower levels of the pyramid are important, the top segment will likely continue to be the main driver of private asset flows and investment trends. Our figures for mis-2017 indicate that there are now nearly 36 million HNW individuals, including 2.0 million in China, and 6.3 million more in India and other Asia-Pacific countries. At the apex of the pyramid, 148,200 UHNW adults are each worth more than USD 50 million. This includes 18,100 UHNW individuals in China (12% of the global total), nearly 40 times the number at the turn of the century. A further 6,400 UNHW adults (4% of the total) can be found in Taiwan, India, Hong Kong and Singapore.

Source: Credit Suisse

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For The First Time Ever, The Richest 1% Own More Than Half Of The World’s Wealth, Or $140 Trillion

Today Credit Suisse released its latest annual global wealth report, which traditionally lays out what has become the single biggest reason for the recent "anti-establishment" revulsion: an unprecedented concentration of wealth among a handful of people, as shown in Swiss bank's infamous global wealth pyramid, an arrangement which as observed by the "shocking" political backlash of the past year, suggests that the lower 'levels' of the pyramid are increasingly unhappy about.

As Credit Suisse tantalizingly shows year after year (most recently one year ago), the number of people who control roughly half of the global net worth, or 45.9% of the roughly $280 trillion in household wealth, is declining progressively relative to the total population of the world, and in 2017 the number of people who were worth more than $1 million was just 36 million, roughly 0.7% of the world's population of adults. On the other end of the pyramid, some 3.5 billion adults had a net worth of less than $10,000, accounting for just about $7.6 trillion in household wealth. And inbetween is the so-called global middle class – those 1.4 billion people whose rising anger at the status quo made Brexit and Trump possible.

As the report authors write, there is just one group to have benefited from the Fed's post-crisis monetary policies: " Our calculations show that the top 1% of global wealth holders started the millennium with 45.5% of all household wealth. This share was about the same until 2006, then fell to 42.5% two years later. The downward trend reversed after 2008 and the share of the top one percent has been on an upward path ever since, passing the 2000 level in 2013 and achieving new peaks every year thereafter. According to our latest estimates, the top one percent own 50.1 percent of all household wealth in the world.”

As the bank then laconically adds, "Global wealth inequality has certainly been high and rising in the post-crisis period." And as the chart below shows, in 2017, for the first time ever, the richest 1% now controls just over half, or 50.1%, of global wealth.

To be sure, 2017 was a good year for the rich: it saw 2.3 million people becoming new dollar millionaires, with the total number of millionaires increasing  to 36 million. “The number of millionaires, which fell in 2008, recovered fast after the financial crisis, and is now nearly three times the 2000 figure,” Credit Suisse said. The poorest 3.5 billion people, who account for 70 percent of the working age population, each earn less than $10,000 and account for just 2.7 percent of global wealth.

It's only getting better… for the rich that is: with global wealth now at $280 trillion, this figure is expected to grow to over $340 trillion in five years. 

For those asking, you need to own $76,754 to be a member of the top 10% of global wealthholders and $770,368 to belong to the top 1%.

The report said the poor are mostly found in developing countries, with more than 90% of adults in India and Africa having less than $10,000. “In some low-income countries in Africa, the percentage of the population in this wealth group is close to 100%,” the report said. “For many residents of low-income countries, life membership of the base tier is the norm rather than the exception.”

Meanwhile at the top of what Credit Suisse calls the “global wealth pyramid”, the 36 million people with at least $1m of wealth are collectively worth $128.7tn. More than two-fifths of the world’s millionaires live in the US, followed by Japan with 7% and the UK with 6%.

Incidentally, we tracked down the first Credit Suisse report we found in the "wealth pyramid" series, from back in 2010, where the total wealth of the top "layer" in the pyramid was a modest $69.2 trillion for the world's millionaires. It has nearly doubled in the 7 years since then. Meanwhile, the world's poorest have gotten, you got it, poorer, as those adults who were worth less than $10,000 in 2010 had a combined net worth of $8.2 trillion, a number which has since declined to $7.6 trillion in 2016 despite a half a billion increase in the sample size. Meanwhile, the layer right above, also known as the "middle class", has gone exactly nowhere, with a net worth of just over $32 trillion.

How about the very top?

Things here are even more nuanced, with 31.4 million people whose net worth is between $1 and $5 million gradually tapering off  to just 148,200 Ultra High Net Worth individuals who control more than $50 million in assets each.  Of these, 54,800 are worth at least USD 100 million, and 5,700 have assets above USD 500 million. The total number of UHNW adults has risen by 13% (19,600 adults) during the past year, as a result of the widespread gains in wealth, primarily via artificially inflated rising financial assets, and the increase has been relatively uniform across all regions.

* * *

Here are some of the key excerpts from Credit Suisse

Wealth differences within and between countries

Wealth differences between individuals occur for many reasons. Variation in average wealth across countries accounts for much of the observed inequality in global wealth, but there is also considerable disparity within countries. Those with low wealth are disproportionately found among the younger age groups who have had little chance to accumulate assets. Others may have suffered business losses or personal misfortune, or live in regions where prospects for wealth creation are more limited. Opportunities are also sometimes constrained for women or minorities. At the other end of the spectrum there are many individuals with large fortunes, acquired through a combination of talent, hard work and good luck.

The wealth pyramid in Figure 1 captures these differences. The large base of low wealth holders supports higher tiers occupied by progressively fewer adults. We estimate that 3.5 billion individuals – 70% of all adults in the world – have wealth below USD 10,000 in 2017. A further 1.1 billion adults (21% of the global total) fall in the USD 10,000–100,000 range. While average wealth is modest in the base and middle tiers of the pyramid, the total wealth of these segments amounts to USD 40 trillion, underlining the economic importance of this often overlooked group.

The base of the pyramid

The layers of the wealth pyramid are quite distinctive. The base tier has the most even distribution across regions and countries (Figure 2), but also the widest spread of personal circumstances. In developed countries, about 30% of adults fall within this category, and for the majority of these individuals, membership is either transient – due to business losses or unemployment, for example – or a lifecycle phase associated with youth or old age. In contrast, more than 90% of the adult population in India and Africa falls within this range. In some low-income countries in Africa, the percentage of the population in this wealth group is close to 100%. For many residents of low-income countries, life membership of the base tier is the norm rather than the exception.

Mid-range wealth

In terms of global wealth, USD 10,000–100,000 is the mid-range band, covering 1.1 billion adults and encompassing a high proportion of the middle class in many countries. The average wealth of this group is quite similar to global mean wealth, and its combined net worth of USD 33 trillion provides it with considerable economic clout. India and Africa are under-represented in this segment, whereas China’s share is disproportionately high, having  risen rapidly from 12.6% in 2000 to 35% in 2015, where it remains. This contrasts with India, which accounted for just 2.7% of the group in 2000, and only 5.7% now, less than half the share of China at the turn of the century before the rapid rise in its membership.

The high wealth bands

The top tiers of the wealth pyramid – covering individuals with net worth above USD 100,000 – comprised 6.1% of all adults in the year 2000. The proportion rose to 9.1% by the end of the financial crisis, before dropping back to the current level of 8.6%. Regional composition differs markedly from the strata below. Europe, North America and the Asia-Pacific region (omitting China and India) together account for 89% of the group, with Europe alone supplying 155 million members (36% of the total). This compares with just seven million members (1.7% of the global total) in India and Africa combined.

The pattern of membership changes once again for the US dollar millionaires at the top of the pyramid. The number of millionaires in any given country is determined by three factors: the size of the adult population, average wealth, and wealth inequality. The United States scores high on all three criteria, and has by far the greatest number of millionaires: 15.4 million, or 43% of the world total (Figure 3). For many years, Japan held second place in  the millionaire rankings by a comfortable margin – with 13% of the global total in 2011, for example, twice as many as the third placed country. However, the number of Japanese millionaires has fallen, alongside a rise in other countries. As a consequence, Japan’s share of global millionaires dropped to 10% in 2012, and has settled around 7%. This has been linked to a 16% decrease in its average wealth since 2011.

The United Kingdom retains third place with 6% of millionaires worldwide. Germany, China and France each account for 5% of the global total, followed by Italy with 4%, and Canada and Australia at 3%. Korea, Switzerland, Spain, and Taiwan are the remaining four countries hosting more than 360,000 millionaires, the minimum requirement for a one percent share of the global total.

Changing membership of the millionaire group

Year-on-year variations in the number of millionaires can often be traced to real wealth growth or exchange-rate movements. This year, widespread rises in wealth per adult have led to an additional 2.3 million dollar  millionaires, almost half of whom (1.1 million) reside in the United States. Another 620,000 new millionaires are located in the main Eurozone countries (Germany, France, Italy and Spain) partly due to a 3% rise in the euro  against the US dollar. Australia added 200,000 new members and about the same number appeared in China and India taken together. Millionaire numbers fell in very few countries, the main exceptions – all associated with depreciating currencies – being the United Kingdom, which lost 34,000, and Japan, which shed over 300,000.

High net worth individuals

The primary sources of information on wealth distribution – official household surveys – tends to become less reliable at higher wealth levels.To estimate the pattern of wealth holdings above USD 1 million, we therefore supplement the survey data with information gleaned from the Forbes annual tally of global billionaires. These data are pooled for all years since 2000, and wellknown statistical regularities are then used to estimate the intermediate numbers in the top tail. This produces plausible values for the global pattern of asset holdings in the high net worth (HNW) category from USD 1 million to USD 50 million, and in the ultra-high net worth (UHNW) range from USD 50 million upwards.

While the base of the wealth pyramid is characterized by a wide variety of people from all countries and all stages of the lifecycle, HNW and UHNW individuals are heavily concentrated in particular regions and countries, and tend to share similar lifestyles, for instance participating in the same global markets for luxury goods, even when they reside in different continents. The wealth portfolios of these individuals are also likely to be more similar, with a focus on financial assets and, in particular, equities, bonds and other securities traded in international markets.

For mid-2017, we estimate that there are 35.9 million HNW adults with wealth between USD 1 million and USD 50 million, of whom the vast majority (31.4 million) fall in the USD 1–5 million range (Figure 4). There are 3.0 million adults worth between USD 5 million and USD 10 million, and another 1.6 million have assets in the USD 10–50 million range. Europe and North America had similar numbers of HNW individuals from 2007 to 2009, but North America then opened up a gap that has widened significantly since 2013. North America now accounts for 16.4 million members (46% of the total), compared to 10.8 million (30%) in Europe. Asia-Pacific countries, excluding China and India, have 6.1 million members (17%), and a further 2.0 million are found in China (5% of the global total). The remaining 1.2 million HNW individuals (2% of the total) reside in India, Africa or Latin America.

Ultra-high net worth individuals

Our calculations suggest that 148,200 adults worldwide can be classed as UHNW individuals, with net worth above USD 50 million. Of these, 54,800 are worth at least USD 100 million, and 5,700 have assets above USD 500 million. The total number of UHNW adults has risen by 13% (19,600 adults) during the past year, as a result of the widespread gains in average wealth. All regions shared in this rise in the number of UHNW individuals.

North America dominates the regional rankings, with 75,000 UHNW residents (51%), while Europe has 31,900 (22%), and 17,500 (12%) live in Asia-Pacific countries, excluding China and India. Among individual countries, the United States leads by a huge margin with 72,000 UHNW adults, equivalent to 49% of the group total (Figure 5), a rise of 9,900 compared to mid-2016. China occupies second place with 18,100 UHNW individuals (up
3,000 on the year), followed by Germany (7,200, up 500). The United Kingdom (4,700, up 400) made up for some of the losses suffered a year ago after the Brexit vote and retained fourth place ahead of France, Australia and Canada (all 3,000). The remaining places in the top ten list of countries are occupied by Switzerland (2,800, up 400), Italy (2,600, up 100) and Korea (2,300, up 300).

The wealth spectrum

The wealth pyramid captures the contrasting circumstances between those with net wealth of a million US dollars or more in the top echelon, and those lower down the wealth hierarchy. Discussions of wealth holdings often focus exclusively on the top tail. We provide a more complete and balanced picture, believing that the middle and base sections are interesting in their own right. One reason is the sheer size of numbers and their political power. However, their combined wealth of USD 40 trillion also yields considerable economic opportunities, which are often overlooked. Addressing the needs of these asset owners can drive new trends in both the consumer and financial industries. China, Korea and Singapore are examples of countries where individuals have risen rapidly through this part of the wealth pyramid. India has shown less progress to date, but has the potential to grow rapidly in the future from its low starting point.

While the middle and lower levels of the pyramid are important, the top segment will likely continue to be the main driver of private asset flows and investment trends. Our figures for mis-2017 indicate that there are now nearly 36 million HNW individuals, including 2.0 million in China, and 6.3 million more in India and other Asia-Pacific countries. At the apex of the pyramid, 148,200 UHNW adults are each worth more than USD 50 million. This includes 18,100 UHNW individuals in China (12% of the global total), nearly 40 times the number at the turn of the century. A further 6,400 UNHW adults (4% of the total) can be found in Taiwan, India, Hong Kong and Singapore.

Source: Credit Suisse

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Are Electric Cars As Clean As They Seem?

Authored by Zainab Calcuttawala via OilPrice.com,

Tesla’s unveiling of its mass market Model 3 sparked a global interest in making electric vehicles the next big thing in automobile manufacturing. But can the category’s green agenda keep up with its metal and recycling needs?

The concept of bunking the traditional engine for a non-gas guzzling counterpart has been here for decades, but creating an ecosystem for battery charging and bringing vehicle costs down was a challenge for decades.

The sheer force of Elon Musk’s vision is building the infrastructure needed to sustain millions of electric cars in the United States, Europe, and elsewhere. Most major manufacturers have joined the enthusiasm to ditch old-school engines to construct the international fleet of tomorrow.

But this new step doesn’t solve all of the world’s environmental pollution issues related to transportation. The extraction of rare earth minerals, the disposal of lithium-ion batteries, and the sourcing of the energy that powers charging stations are all issues that plague the future of the green argument for electric vehicles.

As Wired notes in an article from last year, electric vehicles are most efficient when they’re light. That way, they need minimal energy to transport their valuable cargo. In search for a light material to carry and conduct batteries, scientists discovered the power of lithium – a highly conductive metal that adds little burden to the vehicle’s frame.

Discovered in 1817, this key ingredient is mostly extracted from deposits in the United States, Chile, and Australia. The most cost-effective method for lithium processing involves pumping salt-rich waters into special evaporation ponds that eventually produce lithium chloride. Then, a special plant adds sodium carbonate to turn the former lithium chloride into lithium carbonate, a white powder.

The whole process requires power, which more often than not is sourced from fossil fuels, not renewables or nuclear energy. This is similar to the issue electric-car charging stations face when evaluating the efficiency of their establishments in eliminating pollution from the environment. In most parts of the U.S., if the stations source their electricity from the grid, they’re just increasing demand for fossil fuels since coal, oil, and natural gas power the majority of the country anyway. Some states, like California, are obvious exceptions because of their heavy investments in green energy, but for the most part, the pattern holds.

Moreover, lithium batteries need proper facilities in order to be recycled once they reach the end of their lifespan. Tesla’s Gigafactory, which promises to produce the electric car manufacturer’s batteries in an environmentally conscious way, says it will lead a program to recycle the hardware responsibly.

“The challenge that we have with recycling these rare metals is enormous,” author David Abraham, from The Elements of Power, says, “because the products that we have now use metals in such a small quantity that it’s not economic to recycle.”

But larger batteries should make a more convincing argument to start responsive recycling programs. Reusing the metal resources in these devices will lower the emissions and mining of rare minerals from the planet, paving the way for a healthier environmental report for future electric vehicles.

“The more batteries that are out there, in various devices, the more interest there is in figuring out how to recycle them or to recapture rare earth metals [from them],” electric car advocate Chelsea Sexton told Wired.

It truly has become a demand issue. As electric cars become increasingly popular, more services will be needed to deal with their production and disposal, accelerating the development of the vehicle category’s branding as the technology of tomorrow’s green Earth.

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