Tag: India (page 1 of 11)

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.

http://WarMachines.com

Stockman Slams “The Awesome Recovery” Narrative

Authored by David Stockman via Contra Corner blog,

One of the great philosophers of recent times was surely Sgt. Easterhaus of "Hill Street Blues". As he assigned his men to their daily rounds in the crime infested streets of the Big Apple he always ended the precinct's morning call with his signature admonition:

"Let's be carful out there."

That wisdom has been long lost on both ends of the Acela Corridor. In the face of blatant dangers and even existential threats, their denizens whistle past the graveyard with alacrity. So doing, they turn a blind eye on virtually all that contradicts the awesome recovery narrative, the indispensable nation conceit and the Washington can Make America Great Again (MAGA) delusion, among countless other fantasies.

For example, the GOP should be literally petrified by an horrid fiscal scenario for the coming decade that entails Social Security going bust, another $12 trillion of current policy deficits and a prospective $33 trillion public debt by 2027. And even that presupposes a macro-economic miracle in the interim: Namely, a 207 month stretch from 2009 to 2027 without a recession—–a feat which is twice the longest expansion in recorded history

Image result for images of three monkeys of see no evil, hear no evil, speak no evil

Instead, they have passed a FY 2018 budget resolution which implicitly embraces all of the above fiscal mayhem, and then adds upwards of $2 trillion (so far and counting interest) of incremental deficits to fund an ill-designed tax cut that is inherently an economic dud and political time bomb.

As to the former, the GOP is lost in ritual incantation and foggy Reagan-era nostalgia. Unlike the giant Reagan tax cut of 1981, the pending bills do not cut marginal tax rates measurably—or even the individual income tax burden in any meaningful sense.

In fact, if you set aside the so-called pass-thru rate for unincorporated businesses (see below), the entire 10-year tax cut on the individual side amounts to just $480 billion. In the scheme of things, that's a tiny number; it represents only 2.2% of the $22 trillion CBO baseline for individual income tax collections over the next decade; and it also is equal to just 0.2% of the projected nominal GDP over the period.

By way of comparison, the Reagan tax cut amounted to 6.2% of GDP when fully effective; and the net cut for individuals taxpayers alone averaged 2.7% of GDP over a decade. In today's economy, that would amount to a tax cut of $6.5 trillion during 2018-2027 or 14X more than the $450 billion net figure estimated by the Joint Committee on Taxation.

To be sure, the abused citizens of America are more than entitled to even this tiny tax cut and much more. That is, if their elected representatives were willing to cut spending by an equal amount or even raise alternative, more benign sources of revenue (i.e. a VAT on consumers vs. the current levy on producer and worker incomes). But unless a rapidly aging society wishes to bury itself in unsupportable public debt, it simply can't afford deficit-financed tax cuts for either the principle or the politics of the thing.

Moreover, to pretend that the tax concoction fashioned by Congressman Brady—- with a pack of Gucci Gulch jackals nipping at his heels— will actually generate enough growth and jobs to largely pay for itself is to make a mockery of Sgt. Easterhaus' admonition. Rather than an exercise in fiscal carefulness, it is the height of recklessness to assume that much enhanced domestic growth, employment and Treasury receipts will result from any part of the $2.8 trillion cut for the rich and corporations that is at the heart of the GOP tax bill.

Actually, it's the heart and then some. With recent modifications (including dropping of the $150 billion corporate excise tax intended to prevent companies from hiding domestic profits via over-invoicing of imports from their own affiliates), the net revenue loss of the Brady bill is calculated at about $1.7 trillion.

That means, of course, that fully 165% of the net tax cut goes to: (1) 5,500 dead rich people's heirs per year ($172 billion for estate tax repeal); (2) 4.3 million very wealthy loophole users ($700 billion for the minimum tax repeal); and (3) the top 1% and 10% of households who own 60% and 85% of business equities, respectively, who will get most of the $1.95 trillion of business rate cuts.

In this context, we cannot stress more insistently that Art Laffer's famous napkin does not apply to business tax cuts in today's world of globalized trade and labor rates and artificially cheap central bank enabled debt and capital.

That's because the business income taxes are born by owners, not workers. The wage rates and incomes of the latter are determined in a saturated global labor market where the China Price for Goods and the India Price for internet based services sets wages on the margin.

At the same time, owners are not deterred from making investments by the proverbial "high after-tax cost of capital". That's because it isn't.

Even at the current statutory 35% tax rate (which few pay), the absolute cost of equity and debt capital is cheaper than ever before in modern history.

In fact, the after-tax cost of equity to scorched earth investment juggernauts like Amazon is virtually zero, while the cheap debt-fueled boom in conventional plant, equipment, mining, shipping and distribution assets over the last two decades has stocked the planet with sufficient capacity for decades to come.

In short, if you lower the business tax rates to 20% and 25% for corporations and pass-thrus, respectively, you will get more dividends, more stock buybacks and other returns to shareholders. Those distributions, in turn, will go to the very wealthy and to pension funds/non-profits. The latter will pay no taxes on these distributions while the former will pay 15%-20% at current law rates of o%, 15% and 20% on capital gains and dividends, which the Brady bill does not change.

In short, maybe the $2.8 trillion of tax cuts for business and the wealthy will generate a few hundred billion of reflows over the decade. And even that will not be attributable to the "incentive effect" of the Laffer Curve at all; it's just tax collection mechanics at work as between the personal and business taxing systems.

By the same token, the Sgt. Easterhaus principle is also being ash-canned by the GOP on the politics side of the tax bill, as well. In fact, Republicans have been chanting the "tax cut" incantation for so many decades that they apparently can't see the obvious. Namely, that among the middle quintile of households (about 30 million filers between $55,000 and $93,000 of AGI) the ballyhooed "tax cut" will actually be a crap shoot.

When fully effective, roughly two-thirds of filers (20 million units) would realize a $1,070 per year tax cut, while another 31% (roughly 9.5 million filers) would experience a $1,150 tax increase!

That's a whole lot of rolling dice—-depending upon family size, sources of income and previous use of itemized deductions. Yet for the heart of the middle class as a whole—-30 million filers in the aforementioned income brackets—the statistical average tax cut would amount to $6.15 per week.

That's right. Two Starbucks cappuccinos and a banana!

So we'd call the GOP's noisy advertising of a big tax cut for the middle class reckless, not careful. Indeed, the Dems will spend hundreds of millions during the 2018 election season on testimonials and tax tables which prove the GOP's claim is a pure con job.

They will also prove the opposite— that the overwhelming share of this unaffordable tax cut is going to the top of the economic ladder. After all, the income tax has morphed into a Rich Man's Levy over the last three decades. So if you cut income taxes—-the benefits inherently and mechanically go to the few who actually pay.

Thus, in the most recent year (2015), 150.5 million Americans filed for income taxes, but just 6.8 million filers (4.5% of the total) accounted for 35% of all AGI ($3.6 trillion) and 59% of taxes paid ($858 billion).

By contrast, the bottom 64 million filers reported only $928 billion of AGI, and paid just 2.2%  ($20 billion) in taxes. That is, owing to the standard deduction, personal exemptions and various credits the bottom 44% of taxpayers accounted for only 1.4% of personal income tax collections.

Even when you widen the bracket to the bottom 123 million tax filers (82%), you get $4.3 trillion of AGI and just $284 billion of taxes paid. In other words, the bottom four-fifths of filers pay only 6.6% of their AGI in tribute to Uncle Sam. They may not be getting their money's worth from the Washington puzzle palaces, but you can't get blood from a turnip, either.

In short, Flyover America desperately needs tax relief for the 160 million workers who actually do pay up to 15.5% of their wages in employer/employee payroll tax deductions. Yet by ignoring the $1.1 trillion per year payroll tax entirely and recklessly and risibly claiming that its income and corporate tax cut bill materially aids the middle class, the GOP is only setting itself up for a thundering political backlash.

Nothing makes this clearer than some recent (accurate) calculations by a left-wing outfit called the Institute for Policy Studies that boil down to the proposition that "It Takes A Baseball Team".

That is, the top 25 US persons (like the full MLB roster) on the Forbes 400 list now report about $1 trillion in collective net worth. That happens to match the net worth of the bottom 180 million (56%) Americans.

Needless to say, that egregious disproportion does not represent free market capitalism at work; it's the deformed fruit of Bubble Finance and the vast inflation of financial assets that the Fed and other central banks have enabled over the past three decades.

In terms of the Sgt. Easterhaus metaphor, monetary central planning has planted some exceedingly dangerous political time bombs in the precincts, neighborhoods, towns and cities of Flyover America. Accordingly, if the GOP succeeds in passing some version of its current tax bill, it may be what finally brings the Dems back into power on an out-and-out platform of socialist healthcare (single payor) and tax redistributionism with malice aforethought.

Even as the GOP recklessly plunges forward with gag rules and its sight unseen legislative steamroller (echoes of ObamaCare in 2010), it will never be able to hide what is buried in the bill's tax tables. Namely, an average tax cut for the top 1%—even after accounting for elimination of upwards of $1.3 trillion of itemized deductions—-that would amount to $1,000 per week.

Moreover, for the top o.1% (150,000 filers), the Dem campaign ads will show a cut of $5,300 per week; and for a subset of 100,000 of the top 0.1% filers, the GOP's tax cut would amount to $11,300 per week .

That's right. Each and every one of the very ultra rich would get a tax break equivalent to that which would accrue to every 2,000 middle bracket filers under the Brady bill.

As Sgt. Easterhaus might have said: They have been warned!

Meanwhile, at the other end of the Acela Corridor, the good precinct sergeant gets no respect, either. Indeed, gambling in today's hideously over-valued and unstable casino is exactly the opposite of being careful; it's certain to lead to severe—even fatal—financial injuries on the beat.

In this context, we have been saying right along that the essential evil of monetary central planning is that it systematically falsifies asset prices and corrupts all financial information. That includes what passes for analysis by the Cool Aid drinkers in the casino.

But when we ran across this gem from one Steve Chiavarone yesterday we had to double check because we thought perhaps we were inadvertently reading The Onion.

But, no, he's actually a paid in full (and then some) portfolio manager at the $360 billion Federated Investors group who appeared on CNBC, and then got reported by Dow-Jones' MarketWatch just in case you had the sound turned off during his appearance on bubblevision.

So here's how the bull market will remain "alive for another decade." According to Chiavarone, millenials who don't have two nickels to rub together will make it happen. No sweat.

“Millennials are entering the workforce, but their wages are going to be under pressure their whole career,” he explained to CNBC’s “Trading Nation” on Friday. “They won’t make enough money to pay down their debt, fund their life and fund retirement where there is no pension. So, they’re going to need equities.”

Then again, aspiration and capability are not exactly the same thing. In fact, the frequent yawning difference between the two puts us in mind of the Donald's characterization of his primary opponent as Little Marco Rubio. The latter never stops talking about himself as the very embodiment of the American Dream come true—-so for all we know perhaps Marco did aspire to be an NBA star.

But when he famously couldn't reach his water bottle from atop a stool during his nationwide TV rebuttal of an Obama SOTU speech a few years back, it was evident that NBA stardom wasn't ever meant to be.

Nor during the coming decade of stagnant wages and rising interest rates is it any more obvious how millennials will beg, borrow or steal their way to massive purchases of equities. That is, how they will finance what will actually be an avalanche of stock sales by 80 million fading baby boomers who will need the proceeds to pay their nursing home bills.

But never mind. MarketWatch caught the full measure of  what shines on the inside of Mr. Chiavarone's financial beer goggles:

 The risk is not being in this market,” says Chiavarone, who helps run the Federated Global Allocation Fund. The firm’s current price target is for 2,750 on the S&P by the end of next year and 3,000 for 2019.

 

“We are probably frankly low on both of them,” he said. “Tax reform could push up the markets.” That’s not to say there won’t be some pain along the way, specifically the potential for a recession in 2020 and 2021, according to Chiavarone.

 

What’s an investor to do in that case? “Buy the recession,” he said.

Indeed, it doesn't come any stupider than the market blather that is constantly published on MarketWatch. Today it also informs us that not only have US earnings been galloping forward in recent quarters, but its actually a global trend:

However, this is hardly a U.S.-only story. Corporate earnings have been improving globally, and some of the fastest growth has come from international companies, as seen in the following chart from BlackRock, which looks at U.S. growth against the globe, excluding the U.S.

The chart below is supposed to be the evidence, but we are still scratching our heads looking for the point. It seems that global corporate earnings ex-US based companies have surged…..all the way back to where they were in 2011!

You can't make this stuff up. Did these geniuses notice that China just went full retard in credit expansion to insure that the coronation of Mr. Xi was the greatest since, apparently, the Ming Dynasty invited the civilized world (not Europe) to the coronation of its fourth emperor in 1424?

In fact, the 19th Party Congress is now over, and the Red Suzerains of Beijing are back to the impossible task of reining in the massive malinvestment, housing, debt and construction bubbles which have turned China's economy into a $40 trillion powder keg. So right on cue it reported a sharp cooling of its red hot pre-coronation economy last night.

Thus, value-added industrial output, a rough proxy for GDP, expanded by just 6.2% in October compared to double digit increases a few months back.

Likewise, fixed-asset investment climbed 7.3% in the January-October period from a year earlier. Notably, that's way down from high double digit rates during most of the century, and, in fact, is the slowest pace since December 1999.

Needless to say, the latter data point amounts to a clanging clarion. At the end of the day, the ballyhooed Chinese growth miracle is really a story of construction and debt-fueled asset investment gone wild. And that party is now over.

So whatever Sgt. Easterhaus actually meant during the seven seasons of "Hill Street Blues" which always started with his famous admonition, we are quite sure that today it would not have meant buying the dips in a casino that is rife with unprecedented danger.

Finally, when it comes to real danger we think the most precarious spot along the Acela Corridor is about one mile from Union Station. We are speaking, of course, of the Oval Office and the Donald's questionable tenure therein.

Even as he meandered around Asia double-talking about trade and basking in the royal reception put on by his duplicitous hosts in Tokyo, Seoul and most especially Beijing, the Donald did manage to hit a fantastic bull-eye stateside.

Indeed, his takedown of the three stooges—Brennan, Clapper and Comey—–of the Deep State's spy apparatus will be one for the ages. Not since Jimmy Carter has a president even vaguely admonished the intelligence agencies, but as it his wont, the Donald held nothing back—naming names and drop-kicking backsides good and hard:

“And then you hear it’s 17 agencies. Well, it’s three. And one is Brennan and one is whatever. I mean, give me a break. They’re political hacks. So you look at it — I mean, you have Brennan, you have Clapper, and you have Comey. Comey is proven now to be a liar and he’s proven to be a leaker,” Trump told the reporters on Air Force One…..   

Yes, the next day he backed away in what appeared to be a pro forma nod to be his own courage-challenged appointees.

We don't think so, however.

Image result for picture of brennan, comey and clapper in prison uniforms

The truth is, the Deep State is already in the precinct house. And Sgt. Easterhaus is talking to the wall.

 

http://WarMachines.com

Moody’s Boosts Modi: India Gets First Sovereign Credit Upgrade Since 2004

Moody’s upgrade to India’s credit rating comes as a much-needed boost for India’s Prime Minister, Narendra Modi, who has been criticised for the fallout from the goods and services tax (GST) and demonetisation reforms. Indeed, Moody’s argued that Modi’s reforms will help to stabilize India’s rising debt levels. According to Reuters.

Moody's Investors Service upgraded its ratings on India's sovereign bonds for the first time in nearly 14 years on Friday, saying continued progress on economic and institutional reform will boost the country's growth potential. The agency said it was lifting India's rating to Baa2 from Baa3 and changed its rating outlook to stable from positive as risks to India's credit profile were broadly balanced. Moody's upgrade, its first since January 2004, moves India's rating to the second lowest level of investment grade. The upgrade is a shot in the arm for Prime Minister Narendra Modi's government and the reforms it has pushed through, and it comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings.

Moody's believes that Modi’s reforms have reduced the risk of a sharp increase in India’s debt, even in potential negative scenarios. On the GST reform, which converted India's 29 states into a single customs union, the rating agency expects it to boost productivity by removing barriers to inter-state trade. In addition, the recent $32 billion recapitalisation of state banks and the reform of the bankruptcy code are beginning to address India’s sovereign credit profile.

"While the capital injection will modestly increase the government's debt burden in the near term, it should enable banks to move forward with the resolution of NPLs."

Following the upgrade, India’s S&P BSE Sensex Index rose 1.1%, with metals, property and banks the strongest performers. The Sensex has risen 25% so far in 2017, while the banks sector is 42% higher. Retail investors have piled into financial assets and the banking system has been awash with funds since Modi unexpectedly banned high denomination bank notes last November.

As Reuters notes, the Indian government had been unsuccessful at persuading Moody’s to upgrade the rating in 2016.

Last year, India lobbied hard with Moody's for an upgrade, but failed. The agency raised doubts about the country's debt levels and fragile banks, and declined to budge despite the government's criticism of their rating methodology. The government cheered the upgrade on Friday with Economic Affairs Secretary S. Garg telling reporters the rating upgrade was a recognition of economic reforms undertaken over three years.

The Rupee and Indian bonds also rallied on the Moody’s announcement – although some debt traders expressed scepticism that the rally was sustainable.

"It seems like Santa Claus has already opened his bag of goodies," said Lakshmi Iyer, head of fixed income at Kotak Mutual Fund said. "The move is overall positive for bonds which were caught in a negative spiral. This is a structural positive which would lead to easing in yields across tenors," she said. 

 

The benchmark 10-year bond yield was down 10 basis points at 6.96 percent, the rupee was trading stronger at 64.76 per dollar versus the previous close of 65.3250. "We have been expecting it for a long time and this was long overdue and is very positive for the market. Looks like sentiments are going to become positive," said Sunil Sharma, chief investment officer with Sanctum Wealth Management. However, debt traders said the rally was unlikely to last beyond a few days as the coming heavy bond supply and hawkish inflation outlook were unlikely to change soon.

 

"Who has the guts to continue buying in this market?" said a bond trader at a private bank.

India has basked in its status as the world’s fastest growing major economy and Moody’s forecasts suggests that it will continue to outpace China’s roughly 6.5% growth, but only marginally. In the fiscal year to March 2018, Moody’s expects the Indian economy to grow at 6.7% versus last year’s 7.1%. From Reuters.

Moody's noted that while a number of key reforms remain at the design phase, it believes those already implemented will advance the government's objective of improving the business climate, enhancing productivity and stimulating investment. “Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns," said Moody's.

Bloomberg published some initial reactions from portfolio managers and analysts.

Luke Spajic (head of portfolio management for emerging Asia at Pacific Asset Management Co. in Singapore)

  • “The upgrade came sooner than expected. India has undertaken some tough but necessary reforms like demonetization and the GST, the benefits of which are yet to be fully calculated”
  • “India is on the right long-term path with capital markets — in both debt and equity — pricing in potential improvements in investment quality”

Lin Jing Leong (investment manager, Asia fixed income, at Aberdeen Standard Investments in Singapore)

  • “The upgrade has been long time coming” given Modi’s reform ambitions. “This is not a surprise — we do believe all the rating agencies have been behind the curve somewhat”
  • Initial Indian market reaction is likely to be knee-jerk, but we still expect dollar-India credit spreads, onshore India bonds and the rupee to continue outperforming the broader Asia and emerging-market bloc.

Navneet Munot (chief investment officer at SBI Funds Management Pvt. in Mumbai)

  • This will boost global investors’ confidence in India, but factors like world monetary policy shifts and company earnings will also be key to foreign inflows.
  • Investors like us who have long positions on India always expected an upgrade.
  • The firm has been boosting equity holdings in Indian corporate lenders, industrial and telecommunications companies.

Nischal Maheshwari (head of institutional equities at Edelweiss Securities Ltd. in Mumbai)

  • Equity markets have already given a thumbs up to the news”.
  • It will lead to a reduction in borrowing costs, which is a major improvement.
  • “For foreign investors in equity, it doesn’t change much as their concerns around high stock valuations remain. However, their commitment to the country is in place and the upgrade will only help reiterate their position”.

Shameek Ray (head of debt capital markets at ICICI Securities Primary Dealership in Mumbai)

  • Foreign investors won’t be able to take full advantage of the positive sentiment from the upgrade as quotas for them to buy into rupee-denominated government and corporate debt are full, Ray says.
  • “Whenever these quotas open up there will be keen interest to take India exposure,” but in the meantime Indian companies will get more access to offshore markets.
  • “We could see them pricing dollar or Masala bonds at tighter levels”.

Ken Hu (chief investment officer for Asia-Pacific fixed income at Invesco Hong Kong Ltd.)

  • The upgrade confirms Invesco’s positive view on India’s structural economic reforms.
  • “With more political capital, Modi and his party are able to launch more difficult but more impactful structural reforms. The positive feedback loop will continue to lead to more credit rating upgrades of India in future”.

Chakri Lokapriya (managing director at TCG Asset Management in Mumbai)

  • The upgrade is “very positive for banks, infrastructure and cyclical sectors”.
  • “Banks will benefit strongly as their credit costs come down leading to a reduction in interest costs for infrastructure and manufacturing companies”.

Ashley Perrott (head of pan-Asian fixed income at UBS Asset Management in Singapore)

  • The upgrade is a bit of a surprise, so the market is likely to see some initial bond-spread tightening.
  • “But raising one notch does not make much difference from a fundamental perspective”.

Avinash Thakur (managing director of debt capital markets at Barclays Plc in Hong Kong)

  • “The upgrade should help issuers from India as they are no longer on the cusp of investment grade”.
  • “It makes a big difference to investors and we will see more dollar bond supply from India”.

http://WarMachines.com

Financial Times: Sell Bitcoin Because The Market Is About To Become “Civilized”

On 31 October 2017, we discussed the announcement that the CME Group was responding to client interest and launching a Bitcoin Futures contract before the end of this year. CME stated that the contract would be cash settled based on the CME CF Bitcoin Reference rate, a once-a-day reference rate of the US dollar Bitcoin price at 4.00pm London time. In the run-up to the launch of the futures contract, the Financial Times has written a piece on the likely impact of futures trading on the Bitcoin price.

The title of the piece makes the FT’s view clear, “Prepare to bet against bitcoin as it becomes civilised”. We disagree with using the word “civilised” in this context (see below), but here is the FT’s take. 

In recent years, bitcoin has been the wild west of the financial world. Now, however, it is being civilised — a touch. In the coming weeks, the Chicago Mercantile Exchange plans to start listing bitcoin futures, with a centralised clearing mechanism. Cboe Global Markets may follow suit. That will enable investors to bet on the coin’s future value without actually holding it — just as investors can use the Chicago exchange to bet on hog prices, say, without ever handling a pig.

To its credit, the FT reflects the concerns from some CME participants that there is insufficient regulatory oversight and Bitcoin’s stratospheric vol could lead to significant losses for some traders.

Is this a good idea? Some of the CME’s members do not think so. This week Interactive Brokers, an important clearing firm in the exchange, took the extraordinary step of using a newspaper advertisement to ask for more regulatory oversight. It fears that bitcoin is potentially so volatile that these futures will create huge losses for traders, which might then undermine the health of the CME and hurt other brokers, given its part-mutualised structure. The CME — unsurprisingly — dismisses this as poppycock: it argues that any risks will be contained by rules that allow traders to charge more so as to generate fat margins (of about 30 per cent) and thus absorb losses, and by circuit breakers that would stop a trade in the event of wild price swings.

Our suspicion is that CME Group has seen the volume of Bitcoin trading and is determined to get its “cut”, whether or not some of its members take some big hits or not. It can deal with those issues if or when they occur. Anyway, the FT moves on to the more interesting subject of the impact on Bitcoin’s price. We should note that when the futures contract was announced the price surged more than $100 to a then all-time high of $645.

But while the regulatory debate bubbles on, there is a more immediate question facing investors: bitcoin prices. Until now, it has been an article of faith among bitcoin evangelists that if — or when — the currency became more “civilised”, this will boost the price. After all, the argument goes, assimilating bitcoin into the mainstream investment world should boost its appeal and demand, making it more valuable.

As the FT alludes to in the articles title, it expects the Bitcoin price to fall.

It is highly likely there will be an opposite effect. Until now, investors have not had an easy way to bet against bitcoin — the only “short” was to sell coins. But the CME futures contract will let investors place those negative bets. You do not need to be a conspiracy theorist to imagine that some bitcoin cynics will be doing just that.

To support its case, the FT cites the example of Japan launching equity derivatives in 1989, just before the bubble burst.

Think, for example, about Japan. Before the mid-1980s, its stock market seemed to exist on a planet of its own, subject to its own valuation rules. But when Japanese equity derivative contracts were launched, and then integrated within the wider global market system as a result of financial reform, that sense of “otherness” broke down. The change in how Japan was seen through a comparative investment lens was not the only reason for the 1990 Nikkei crash, but it contributed.

We have a slight problem with using this as an analogy for Bitcoin. Firstly, an ultra-hawkish BOJ-governor was nominated in mid-1989 who announced his intention to crackdown on house price inflation and the shadow banking system which was facilitating much of the leverage. Secondly, all bubbles burst and Japan’s was extreme. For example, depending on whether you use the highest per square metre property deal in the Ginza district, or one in the Chiyoda district, the land underneath the Imperial Palace was valued between $852 billion and $5.1 trillion at the time. Futures trading, we would suggest, played a tiny role.

The FT cites the launch of trading in the ABX Index prior to the sub-prime crisis, as another example.

So too with US mortgages. Until 2005 or so, outsiders could not easily assess or price the risks of America’s subprime mortgages: mortgage-backed bond prices were opaque, and the only way to short the market was to sell bonds. But when mortgage derivatives, such as the ABX index, were launched, it suddenly became easy to make negative bets. Then, the ABX index was published in newspapers, such as the Financial Times, in 2007, creating a visible barometer of sentiment. That helped a sense of panic to feed on itself after 2008.

Once again, we would suggest the FT is confusing the impact of derivatives with an inevitable reversion of market price of an asset in a bubble as expectations regarding the outlook changed. In the case of sub-prime, housing prices in the US had never fallen, then they did, the AAA-ratings of the bonds were manifestly incorrect and the dramatically overpriced sub-prime bonds were pledged as collateral in all manner of other risky, leveraged trades.

From our perspective, the impact of the futures launch is difficult to gauge as it depends on the interaction of two opposing forces.

Firstly, as cryptocurrencies gradually become accepted as an asset class, more institutional money is likely to enter the sector and holding long futures positions is one way to do it.

 

Secondly, as the article notes, Bitcoin futures will be settled in cash, which means there is potential for the volume of futures trading to vastly outweigh the buying and selling of “actual” Bitcoins. If this occurs, then the “tail can wag the dog” as price discovery is dominated by futures trading. This permits all manner of market abuse via naked short selling by investors, major banks and any “official” players who deem it necessary to manipulate the Bitcoin price.

For this reason, we don’t agree that adding a futures contract will necessarily “civilise” Bitcoin, indeed, it might have the opposite effect.

The second scenario precisely describes the state of the “gold” market today. According to the Reserve Bank of India’s estimate, the ratio of “paper gold” trading to physical gold trading is 92:1, meaning that the price of gold on the screens has almost nothing to do with the buying and selling of physical gold. This makes the gold market and, therefore, the gold price something of a mockery. As Zero Hedge has highlighted time after time, the gold price has frequently been subject to waterfall declines, as huge volumes of gold futures are dumped on the market with no regard for price. See "Gold Slammed After Someone Pukes $4bn Notional In Gold Futures" on 10 November 2017. Perhaps the FT journalist, Gillian Tett, could write an article on gold, instead of Bitcoin, explaining how the price of the former – a widely viewed indicator of financial risk – is being suppressed by derivative trading. Indeed, Tett was present at a private dinner in Scott’s of Mayfair several years ago when the Gold Anti-Trust Action Committee gave a presentation on exactly the same process which she expects to lower the Bitcoin price.

http://WarMachines.com

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?

http://WarMachines.com

India’s Continued War on Gold Causes a Monstrous Increase in Silver Imports

 

India’s Continued War on Gold Causes a Monstrous Increase in Silver Imports

Written by Nathan McDonald, Sprott Money News

 

India's Continued War on Gold Causes a Montrous Increase in Silver Imports - Nathan McDonald

 

For anyone that has followed my writing for some period of time, you will remember the series that I wrote, which broke down India’s war on gold and how it was going to fail in its goal – and fail spectacularly it did.

 

 

This series went on and through time, my initial estimations were proven correct – the officially reported number of gold imports did indeed crash, but this was simply because the black market exploded. Smuggling of gold into India increased dramatically and all kinds of innovative ways of getting the metal into the country at reduced costs were created. The free market exerted its will and as always, won the day.

 

 

Undoubtedly, there was some reduction in imports, but not as much as the government of India was hoping for. Yet, there was one other prediction that was made during this time period, of which has also been proven correct through time. The demand for silver was going to explode.

 

 

India in the past has had a history of being the largest importer of the yellow metal, which it has only recently been dethroned from. Their appetite for gold is insatiable and therefore it was only logical to assume that a large percentage of the funds intended to flow into gold, were going to go to the next best thing: silver.

 

 

This has and continues to prove to be the case. As reported, imports of silver in September exploded higher, increasing by a whopping 152% year over year! This is coming on the back of an already significant surge seen in the month of August.

 

 

566.778 tons of silver were imported throughout the month of September, up from 225 tons in September 2016. This is a massive and huge increase, indicating that India’s appetite for precious metals not only remains strong, but is increasing, despite the government’s best efforts to clamp down on it. In fact, this was the highest level seen since 2009.

 

Meanwhile, in the West, precious metals continue to be scorned and ridiculed, cast aside and forgotten as the latest and greatest thing continues to siphon funds out of this market. Cryptocurrencies, led by Bitcoin, continue to drain funds that would otherwise have gone into the precious metals space.

 

This is not entirely a bad thing, unless you are fully committed to the precious metals space. As many of you know, I have been a long time supporter of Bitcoin, writing about its value from its infancy. But, still, as I have always stated, it is no replacement for gold and silver, which have stood the test of time for over 10,000 years and will continue to do so for the foreseeable future. They are two different assets and
play two different roles in the protection of your portfolio.

 

I expect 2018 to be the year of gold and silver’s resurgence after the monumental explosion seen throughout this year in the price of Bitcoin. This will be a price increase that has made many feel like they have “missed the boat”, which will cause them to search for other opportunities.

 

I expect the West to once again wake from its slumber and take cues from countries such as Russia, China and India, who continue to take prudent steps and diversify into hard assets.

 

Questions or comments about this article? Leave your thoughts HERE.

 

 

 

 

India’s Continued War on Gold Causes a Monstrous Increase in Silver Imports

Written by Nathan McDonald, Sprott Money News

 

http://WarMachines.com

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.

http://WarMachines.com

Goldman Reveals Its Top Trade Recommendations For 2018

It’s that time of the year again when with just a few weeks left in the year, Goldman unveils its top trade recommendations for the year ahead. And while Goldman’s Top trades for 2016 was an abysmal disaster, with the bank getting stopped out with a loss on virtually all trade recos within weeks after the infamous China crash in early 2016, its 2017 “top trade” recos did far better. Which brings us to Thursday morning, when Goldman just unveiled the first seven of its recommended Top Trades for 2018 which “represent some of the highest conviction market expressions of our economic outlook.”

Without further ado, here are the initial 7 trades (on which Goldman :

  • Top Trade #1: Position for more Fed hikes and a rebuild of term premium by shorting 10-year US Treasuries.
  • Top Trade #2: Go long EUR/JPY for continued rotation around a flat Dollar.
  • Top Trade #3: Go long the EM growth cycle via the MSCI EM stock market index.
  • Top Trade #4: Go long inflation risk premium in the Euro area via EUR 5-year 5-year forward inflation.
  • Top Trade #5: Position for ‘early vs. late’ cycle in EM vs the US by going long the EMBI Global Index against short the US High Yield iBoxx Index.
  • Top Trade #6: Own diversifed Asian growth, and the hedge interest rate risk via FX relative value (Long INR, IDR, KRW vs. short SGD and JPY).
  • Top Trade #7: Go long the global growth and non-oil commodity beta through long BRL, CLP, PEN vs. short USD.

As Goldman’s Francesco Garzarelli writes, “these trades represent some of the highest conviction market expressions of the economic outlook we laid out in the latest Global Economics Analyst, as well as in our Top 10 Market Themes for 2018. Some of the key market themes reflected in our trade recommendations include:

  • Strong and synchronous global expansion. We forecast global n GDP growth of around 4% in both 2017 and 2018, suggesting that next year’s global economy will likely surprise on the upside of consensus expectations.
  • Relatively low recession risk. Given the low inflation and well-anchored inflation expectations across DM economies, we think central banks have little reason to risk ‘murdering’ this expansion with the kind of aggressive rate hikes that would have historically been warranted to fight the risk of inflation becoming entrenched.
  • But relatively high drawdown risk. Even if growth remains strong in the coming year, markets are still susceptible to temporary drawdowns, especially given the high level of valuations. We think the two most prominent risks to markets in 2018 are (1) pressures on US corporate margins from rising wages and 2) a swing in market psychology around the withdrawal of QE, which could lead to a faster re-pricing of interest rate markets than we assume.
  • More room to grow in EM.While most developed economies are currently growing well above potential, most emerging market economies still have room for growth to accelerate in 2018.

More from Goldman:

Our Top Trade recommendations reflect our Top Ten Market Themes for the year ahead. To capture the gradual normalization of the bond term premium and position for a more hawkish path of the Fed funds rate than the market currently expects, we recommend going short 10-year US Treasuries. Given our expectations of a ‘soggy Dollar’ in 2018, we think investors should position for a rotation into Euro area assets and continued Yield Curve Control from the BoJ by going long EUR/JPY. We expect EM growth to accelerate further in the coming year and suggest going long the EM growth cycle via the MSCI EM stock market index. At the same time, the EM credit cycle appears ‘younger and friendlier’ than the ageing US credit cycle, so we recommend going long the EMBI Global against US High-Yield credit. The combination of solid global growth and supportive domestic factors should help the Indonesian Rupiah, the Indian Rupee and Korean Won rally in 2018, while we expect the low-yielding Singaporean Dollar and Japanese Yen to underperform. Since the strong global demand environment should also help the commodity complex perform well but commodities as an investment carry poorly, we recommend going long BRL, CLP and PEN to gain diversified exposure to the commodities story.

And some more details on the individual trades:

Top Trade #1: Position for more Fed hikes and a rebuild of ‘term premium’ by shorting 10-year US Treasuries

Go short 10-year US Treasuries with a target of 3.0% and a stop at 2.0%.

We forecast that the yield on 10-year US Treasury Notes will head towards 3% next year, levels last seen before the decline in oil prices in 2014. By contrast, the market discounts that 10-year yields will be at 2.5% at the end of 2018, a meagre 20bp above spot levels. Our view builds on two main assumptions. First, QE and negative rate policies conducted by central banks in Europe and Japan have amplified the fall in  the term premium on bonds globally and have contributed to flatten the US yield curve this year – a central ingredient in our macro rates strategy for 2017. As a result of this, we think that US monetary conditions are too accommodative for the Fed’s comfort in light of the little spare capacity left in the jobs market. This will likely lead the FOMC to deliver policy rate hikes in excess of those discounted by the market (Exhibit 1). On our US Economists’ baseline projections, Dec 2018 Eurodollar futures, trading at an implied yield of 2.0%, will settle at 2.5%.

Second, we expect a normalization in the US bond term premium from the current exceptionally low levels over the coming quarters (Exhibit 2). This will reflect the compounding of two forces. One is an increase  in inflation uncertainty as the economic cycle continues to mature. The other reflects the interplay of the lower amount of Treasury bonds that the Fed will roll over (quantitative tightening, QT) and higher Treasury issuance. We expect these dynamics to come to the fore particularly in the second half of the year.

* * *

Top Trade #2: Go long EUR/JPY for continued rotation around a flat Dollar

Go long EUR/JPY with a target of 140 and a stop at 130.

Although most economies are sharing in the upturn in global activity, there remains scope for divergence in capital flows and therefore FX performance. Among the major developed markets, we think this is particularly true for the Euro and Yen. We expect both currencies to head back to one twenty—1.20 for EUR and 120 for JPY—over the coming months. We therefore recommend that investors go long the cross, with a target of 140 and stop of 130 (Exhibit 3).

We interpreted the run-up in the Euro in 2017 as a kind of ‘short-covering’ rally. Euro area growth picked up, national politics trended in a favourable direction, and the ECB began to turn its attention away from monetary easing and towards the eventual normalisation in policy by tapering bond purchases. Against this backdrop, many investors seem to have decided that Euro shorts were no longer appropriate—especially given estimates of long-run ‘fair value’ for EUR/USD of around 1.30. Direct measures of investor positioning bear this out. For instance, net speculative Euro length in futures swung from a short of $9bn at the start of the year to a long of $12bn as of last week. These portfolio shifts seem to have more room to run: bond funds remain long USD in aggregate, and FX reserve managers have not started to  cover their substantial EUR underweight. Continued inflows into Euro area assets should support the EUR currency, even as interest rates remain low.

The opposite holds true for the Japanese Yen. Because of the Bank of Japan’s Yield Curve Control (YCC) policy, USD/JPY has remained highly correlated with yields on long-maturity US Treasuries (Exhibit 4). As a result of the recent general election—in which the LDP won another supermajority—a continuation of YCC appears very likely for the time being. Although the policy is beginning to bear fruit—in terms of improving price and wage trends—we suspect that Governor Kuroda (or his possible replacement) will judge these favourable signs as well short of what is needed to consider reversing course. Therefore, with global yields pushing higher on the back of solid growth, we think USD/JPY can again approach its cyclical highs.

* * *

Top Trade #3: Go long the EM growth cycle via the MSCI EM stock market index

Go long EM equities through the MSCI EM Index with a target at 1300 (+15%) and a stop at 1040 (-8%).

As we outline in our Top Themes for 2018, we expect strong and synchronous global growth to continue into 2018. We prefer to own growth exposure in emerging economies, which we think have more room to grow. When EM growth is above-trend and rising, equities typically outperform on a volatility-adjusted basis.

From an earnings perspective, we see much more scope for EM corporates to surprise to the upside, driving equity performance in 2018 (Exhibit 6). MSCI EM EPS have rebounded quite quickly from a six-year stagnation and, in local currency terms, EM earnings per share (EPS) has repaired the ‘damage’ of the 2010-2016 period. We expect MSCI EM EPS to rise another 10% in 2018, which should drive the bulk of the upside in this trade.

From a valuation perspective, EM equities are not cheap relative to their own history (they are currently trading in the 86th percentile of the historical P/E range), but they are cheap relative to US equities (38th percentile of historical relative P/E range), which should hopefully offer some cushion in a global risk-off event. We find that the relative valuation of EM to DM equity is largely influenced by the growth  differential between the two regions; and we forecast this differential to widen another 60bp next year, which in turn should drive EM valuations to expand relative to DM by around 3%. To be sure, a long-only EM equity trade carries significant ‘pullback risk’, especially given the current entry point. Accordingly, we have set a stop on the recommended trade at -8%, which provides enough buffer to accommodate for a shock similar to the EM equity sell-off around the US election. Although EM equities have had a good run in 2017, we do not view the asset class as over-owned. Indeed, the cumulative foreign flow into major EM equity markets is still tracking below historical averages.

* * *

Top Trade #4: Go long the inflation risk premium in the Euro area via EUR 5-year 5-year forward inflation swaps

Go long EUR 5-year 5-year forward inflation with a target of 2.0% and a stop at 1.5%.

We recommend going long Euro area 5-year inflation 5-years forward (henceforth 5y-5y) through EUR inflation swaps, for an target of 2.0% – levels last seen in mid-2014 ahead of the fall in crude oil prices. The rationale for the trade is the following.

First, the risk premium on Euro area forward inflation is currently depressed, offering an attractive entry point. A low inflation risk premium can be inferred from the flat term structure of inflation swap yields. The difference between 5-year inflation, which is priced roughly in line with the expectations of our European Economists (Exhibit 7), and 5y-5y forward is near the lowest levels observed since the 2011 crisis.

Second, the inflation options market assigns high odds to Euro area headline inflation staying at or below 1% over the next 5 years. Against this backdrop, the ECB has reiterated its determination to keep monetary policy accommodative in order to encourage a rebuild of inflationary pressures. With the expansion in activity and job creation likely to continue, we expect the inflation risk premium to increase.

* * *

Top Trade #5: Position for ‘early vs. late’ cycle in EM vs. the US by going long the EMBI Global Index against short the US High Yield iBoxx Index

Go long EM USD credit through the EMBI Global against US High-Yield credit through the iBoxx USD Liquid High Yield Index, with a 1.5×1 notional ratio, indexed at inception to 100, with a total return target at 106 and a stop at 96.

The EM credit cycle is ‘younger and friendlier’ relative to an ageing US corporate credit cycle. With the improvement in macro fundamentals across EM, namely better current account balances, dis-inflation and FX reserve accumulation, we do not see a near-term risk of Dollar funding concerns. While EM credit spreads are not cheap per se, we see relative value against the US High-Yield market. In addition to the growing exposure of the latter to secularly challenged sectors, with the US cycle maturing and profit margins potentially eroding, we see more fundamental concerns in US High-Yield than in the EMBI (of which 70% of the constituents are sovereign bonds and the remainder in ‘quasi-sovereigns’).

Unlike most EM trades, long EM credit vs. US High-Yield has yet to fully recover from the sell-off following the US election. Since the ‘taper tantrum’, EM has generally outperformed with the exception of a few sharp risk-off events that had specific negative-EM implications (such as the sharp decline in oil prices and Russian recession in late 2014/early 2015, and the 2016 US presidential election). However, other risk- off periods, such as the Euro crisis in early 2011, saw EM credit outperform US high-yield.

The relative performance of EM vs. US High-Yield consistently tracks the EM-DM growth differential (Exhibit 10). We expect the general trend of EM outperformance to continue in a pro-risk environment and see the entry point as attractive, albeit admittedly slightly less so following the recent High-Yield sell-off. Finally, this trade is positive carry and should perform well if global spreads move sideways to tighter. We have set the stop at -4%, which coincides roughly with the bottom reached after the US election.

* * *

Top Trade #6: Own diversifed Asian growth, and the hedge the interest rate risk via FX relative value (long INR, IDR, KRW vs. short SGD and JPY)

Go long an equal-weighted basket of INR, IDR, KRW against an equal-weighted  basket of SGD and JPY, indexed at inception to 100, with a total-return target at 110 and stop at 95.

INR, IDR and KRW provide diversified exposure to the strong global growth we forecast in 2018 and specific idiosyncratic factors that should support their currencies in the year ahead. The combination of commodity exporting (IDR) and commodity importing (INR and KRW) currencies on the long leg of the recommended trade offers some protection against swings in commodity prices. By funding out of SGD and JPY, not only do we take advantage of their low yields, but JPY underperformance should also provide a hedge should the move higher in US yields lead to wobbles in the currencies where we recommend being long. The overall trade carries positively to the tune of about 4% over the year.

Country-specific factors in India, Indonesia and South Korea should boost their currencies, on top of the strong global growth environment we expect next year. Specifically:

India’s bank re-capitalization plan should impart a powerful positive impulse to investment in the coming year and should break the vicious cycle of higher non-performing loans, weaker bank balance sheets and slower credit growth. As the drags from GST implementation and de-monetization also fade, we expect growth to move from 6.2% in 2017 to 7.6% in calendar 2018. In addition to the three hikes we expect the Reserve Bank of India to deliver by Q2-2019, the high carry, FDI and equity inflows should also be supportive for the INR. We have moved our 12-month forecast for $/INR stronger to 62.

We continue to see Indonesia as a good carry market. As the drag on domestic consumption from the tax amnesty fades in 2018, we expect economic growth to move up to 5.8% in 2018 (from 5.2% in 2017), while the current account, inflation, and fiscal deficit should remain stable. We think Bank Indonesia is done easing and should move to hike rates by 50bp in H2-2018. We also expect Indonesia to be included in the Global Aggregate bond index, which could prompt one-off inflows worth US$5bn in Q1-2018 (vs. US$10bn bond inflows YTD in 2017). We have moved our 12-month forecast for $/IDR stronger to 13000. Finally, Indonesia, like India, has accumulated reserves over the past year that now stand at record high levels and should help mitigate volatility.

We expect the KRW to outperform other low-yielding Asian peers in 2018. The strong memory chip cycle should extend at least through H1-2018, while the government’s income-led growth policy provides a fiscal boost. Together with the boost from improving exports, this should allow the Bank of Korea to withdraw monetary accommodation in the face of rising financial stability concerns, with three policy rate hikes to 2.0% penciled in by the end of 2018. The thawing of China/South Korea relations and rebound in Chinese tourists should also help the travel balance. Overall, we expect the current account to remain stable at around 5% of GDP in 2018. Further deregulation in outbound capital flows could temper KRW strength over the medium term, but might not pass the National Assembly in the near future given  fragmentation in the legislative body. Our 12-month forecast for $/KRW is now stronger at 1060.

On the funding side, not only do SGD and JPY offer a low yield, we expect them to underperform in the year ahead. While we expect the Monetary Authority of Singapore to steepen its appreciation bias in October, we do not expect any significant SGD appreciation versus Asian peers given that the SGD is already trading on the strong side of the policy band. Meanwhile, we forecast USD/JPY at 120 in 12 months. With the BoJ controlling the yield curve as US rates move higher, JPY should continue to weaken, especially if US rates move higher than the forwards discount, as we expect.

* * *

Top Trade #7: Go long the global growth and non-oil commodity ‘beta’ through BRL, CLP, PEN vs. short USD

Go long a volatility-weighted basket of BRL, CLP and PEN (weights of 0.25, 0.25 and 0.5) against USD, indexed at inception to 100, with a total return target of 108 and a stop at 96.

The ongoing strength of global growth should continue to support a rally in most industrial metal prices. Our seventh Top Trade recommendation aims to capture this dynamic by going long the ‘growth and metals beta’. All three currencies on the long side have reliably responded to upswings in global trade and external demand over the past two decades. Moreover, each has performed particularly well in the pre-crisis decade, a period that also featured strong global growth and buoyant industrial metals prices. CLP offers direct exposure to a particularly encouraging story in copper, while BRL and PEN provide more varied metals exposures. The recommended trade has a positive carry of roughly 2.5% a year, and our 12-month forecasts are stronger than the forwards in all cases: we forecast USD/BRL at 3.10 in 12 months, USD/CLP at 605 in 12 months and USD/PEN at 3.15 in 12 months.

Beyond these global factors, our recommended Top Trade allows for diversified exposure to an encouraging Latin American growth recovery. Not only should growth in Brazil pick up as it recovers from a deep recession (and a recent BRL sell-off, creating an attractive entry-point), but BRL screens as strongly undervalued on our GSFEER currency model due to a combination of contained inflation and current account rebalancing, making BRL an attractive high carry currency. Meanwhile, PEN – the low-vol ‘tortoise’ of Andean FX – offers exposure to one of the most attractive valuation stories in the EM low- to mid-yielder space. Last but not least, CLP – the ‘hare’ of Andean FX – has moved quickly in 2017, so sends a somewhat less attractive valuation signal, but provides direct exposure to our most encouraging metals view, copper, and what opinion polls suggest is likely to be a market-friendly outcome in the upcoming Chilean election.

Finally, although it is designed for our global base case of strong growth, our Top Trade #7 can perform well in other external environments, potentially including a global growth disappointment. In particular, while BRL is a high-yielding and ‘equity-like’ currency, CLP and PEN are each lower-yielding and more ‘debt-like’: they have historically shown relatively resilient performance vs. the USD during periods of both declining growth and falling core rates.

http://WarMachines.com

Corruption In China Risks A Soviet-Style Collapse – Party’s Graft Buster

Yang Xiadou is the Party’s number two man in Xi Jinping’s crackdown on corruption in the Chinese Communist Party – although some have seen this, in part, as a convenient way for Xi to bolster his power base.

During the 19th Party Congress last month, Yang was asked about the anti-corruption drive and how to achieve a balance between human rights and party discipline. Yang replied that, having worked in the Tibet Autonomous Region for many years, human rights was an “interesting question”. He recounted a conversation he had with a US assistant secretary of state where he likened Abraham Lincoln freeing slaves in America to China’s actions in Tibet.

“I said in the hearts of Chinese people, Lincoln is a hero, because he freed the slaves.

 

On this point the Chinese people and the American people have the same understanding – this is a human rights issue.

 

In turn, we freed the serfs in Tibet, how come American friends cannot understand this? From Lincoln’s perspective, he should have supported China’s overturning of the serfdom in Tibet.”

No matter that the Central Tibetan Administration, usually called the “Tibetan Government in Exile” has a starkly different view.

Yang’s ability to “paint broad canvases” was in evidence again when he stated that corruption in China could lead to a collapse similar to the Soviet Union. According to the Times of India.

China must step up its battle against corruption in order to safeguard against a Soviet-style collapse, the country's second most senior graft buster said in an editorial on Wednesday. Yang Xiaodu, the deputy secretary of the Central Commission for Discipline Inspection, who was promoted to the ruling Communist Party's 25-strong Politburo last month, said failure would risk the "red country changing colour".

In unusually direct and strongly worded criticism of previous administrations, Yang said "in a previous period", corruption had been allowed to fester to such an extent that the party's leadership had weakened, with supervision soft, and ideology apathetic.

 

"It had developed to the point where if not rectified, the country could change colour," Yang wrote in the official People's Daily.

 

"The future fate of the party and the country's people could follow the same old road to ruin as the Soviet Union and the Eastern Bloc."

It's well known that senior Party officials warn their underlings of the need to study the collapse of the Soviet Union and the importance of maintaining discipline and tight control. China analysts are viewing these comments by Yang and others as evidence that Xi’s crackdown is not letting up despite the former Secretary of the Central Commission for Discipline Inspection, Wang Qishan, stepping down at the Party Congress.

Writing in the People’s Daily last Saturday, Wang’s replacement and Politburo Standing Committee member, Zhao Leji, warned that if the Party lost the battle against corruption it risked “being erased by history”. Yang emphasised the need to press forward in the eliminating corruption, as the Times of India notes.

Yang said Xi's anti-corruption achievements had been revolutionary in "turning the blade of the knife inward".

 

But he said unhealthy pollutants within the party's political ecosystem had yet to be completely cleansed, and the anti-corruption fight remained "grave and complex”.

 

"There is no road for retreat, only forward in attack, and definitely no pause or relax," Yang wrote. China has plans for a national supervision law and a new commission next year to oversee the expansion of Xi's graft fight. Yang, who is also minister of supervision, had been Wang's deputy since 2014 and his promotion to the Politburo is seen as another display of the importance the central leadership attaches to fighting corruption.

In the wake of the Party Congress, we can deduce that Xi means business on deleveraging and cooling the property bubble, stepping up efforts to reduce pollution, in addition to attacking corruption. We continue to believe that China is entering a more risky phase than financial markets are discounting at this point.

http://WarMachines.com

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

Why We’re Buying Physical Gold with a $1700 Target

originally on marketslant.com

For What it is Worth: We are buying Gold in our small family fund. This is a trade, not an investment. Potentially a much longer term trade for us than normal, possibly a 12 month hold as opposed to our 3 day positions. We are buying physical in quantities that will not need to be sold if we are wrong, thus no leverage. We will also be swing trading gold with an upward bias as our indicators dictate below $1260 or above $1306.

Target  picking is risky in an asset whose value is largely based on sentiment and prone to being “jawboned” into its proper place. But we believe for various reasons that if Gold does not pierce $1260 spot, its chances of a rally topping between $1450 and $1700 are strong over the next 12-18 months. The wide target range reflects the emotional factor in Gold’s behavior far outweighing supply, production costs, and its lack of fundamentals to measure using tools like EBITDA, PE, and cash flows. And our own analysis is corroborated from several different disciplines from whom we did not seek out to rationalize. It’s a trade, that’s all. But it’s a very good and very rare risk reward trade. it has set up right now. Further, it will either be violently and decisively confirmed (or negated) above $1306 or below $1260.

Why are we sharing this? That same question should be asked of Ray Dalio, Jeff Gundlach and others who announce they are bullish on Gold after they have  bought. Our own position is not relevant to the market overall and we do not need to market our tiny positions to create an exit strategy a la George Soros.  The premise for the trade happens so rarely its worth writing about, if for no other reason as an exercise in outsourcing our self-discipline on the trade. 

Vince Lanci for SKG

vlanci@echobay.com 

Here is how  we came to be this way.

Step 1: Volatility is Coiling

When trading short term periods, intraday and intraweek, we use a volatility system for alerts to incipient movement. We risk 1 to make 2 and move  on when wrong. It works about 50% of the time. it is net profitable. And best of all, positions that are in limbo are closed expeditiously. This is after all a volatility system. No vol, no position. It’s been cited here many times in the past. When it is right, it is very right. when it is wrong, you are out. Past posts and a 25 year track record of use bear this out from our active days.  The bottom of this post goes into more detail on its use.

What we never did at Echobay or its predecessor fund CIS Energy, was use it on long term charts. We certainly looked at them, but only for bias in shorter term trades.  Last month we took a serious look at our VBS algorithm on a monthly chart. Here is what we found:

Updated from : Gold Macro Analysis: A November to Remember

Gold has a  tremendous risk reward setting up above $1306 or below $1260….. which way from there is not known but can be handicapped once either number is breached

for a nexplanation of VBS see bottom Appendix

Step 2: How Equity Funds Play Gold

Portfolio managers at large equity funds who have contributed here anonymously use systems that advise them when being in cash as opposed to long stocks is prudent. What is also known is that funds like these  punt gold positions with their discretionary in-house money for fun.

They use similar systems for entry and exit, and never risk much in their positions. Gold is a hobby to these guys. As a result, they like to buy and walk away with long term trade orientations and firm stops. This means using long  term moving averages to avoid noise. We know this is true.  And here is an example of how that type of positions is implemented:

 In a recent interview a vocal critic of the Gold industry explained why he was buying Gold

…Gold is poised to close above its 12-month moving average for the second straight month. Going back to 1970, the average monthly return for gold following a close above the 12-month moving average is 1.47%. The average monthly return following a close below the 12-month moving average is -0.15%.

If you used the simplest of trend-following methods, investing in gold when it was above its 12-month moving average, and going to cash when it is below, the results would have been far better than just buying and holding gold. He continues:

The chart below shows when you would have been invested in gold and when you would have been out. Granted, prior to GLD, this could only have been done with futures contracts, or gold bullion, with the former adding a degree of leverage that I would not have been comfortable with, and the latter adding a degree of paranoia that also would have made me uncomfortable.

Full post : Vocal Critic Explains Why He is Buying Gold

About Physical vs. ETF: While we agree with the rationale behind GLD vs futures if you are trading and not investing, we feel for multiple reasons the physical gold market is going to open up and become a serious competitor to ETF allocations within 12 months. Specifically, blockchain products are coming,  and if properly implemented as a pipeline, owning physical gold not held in trust by a GLD custodian will be as easy as clicking a mouse. You will buy and sell physical Gold that will be yours and verified via the blockchain system.

So for us, physical gold now has the benefit of increased  liquidity on the horizon, which means increased transactions and exposure. Which ultimately means decentralization of the Gold market from a few large firms to grass roots stackers, owners, and value preservers. We view emerging technologies as putting physical assets in a position to  have their true value unlocked. Whether that be the tea farmer in India who can’t currently get a loan on his land due to government rules, to Silver whose value is somewhat disconnected from its  price. The effect will not be unlike when a private company goes public. Accessibility and liquidity creates safety and increases demand. Owning physical metals is like owning a beneficiary of technology down the road.

Monthly Chart Through July 2017 using the 12 Month MA described above

 

Step 3: Optimizing the Simple 12 month MA Tool

by optimizing the MA with one factor we back tested greater successes when in trades. Conversely, we were also in less trades. On balance it was a wash. But right now the employed filter says the 12 Month MA has bigger upside than the average if profitable at all. A rare chance to buy close to the level the fund punters did with a statistical chance of greater profits than the  1.47% monthly average  generated by the original backtest.

Updated and Optimized by the Author

 

The chart below shows the hypothetical results from each of the 30 exits following an entry (going back to 1970). Using these rules would have resulted in a loss two-thirds of the time. But as you can see, the losses have been relatively shallow, not exceeding 10%, while the gains have been good to extraordinary.

Step 4: Using VBS for Confirmation of Direction

Simply put: If we get a VBS signal trigger when $1306 trades, a decision must be made to add, sell, or hold based on the data that comes with the signal. If we get one on a $1260 print, the same must be assessed. 

 

Step 5: Actions

  1. We are buying Gold now based on the “Fund Finder” signal with a monthly stop out below the yellow line in that chart above.
  2. $1306- we will consider adding a shorter term amount in a rally if the monthly VBS is triggered higher
  3. $1260-  we will consider either adding physical, or selling paper Gold for swing trading purposes if the VBS is triggered lower.
  4. Per #1- we will close or hedge the first physical purchased on a monthly settlement below $1244 – the wide berth on monthly exits necessitates no leverage 

 

Bonus: Moor Analytics comes to a similar conclusion from a different perspective.

Moor Analytics: Gold Downside May Finally be Exhausted

Within the overall bearishness I noted that a possible area of exhaustion for this move down from 13624 comes in at 12732-644.  We basically held this, but with a $1.6 violation, and rallied to 13084 before rolling over and rejecting from it again (although this time down the 12628 was simply support, not exhaustion)

And Michael’s most recent weekly report of Nov. 10th

Via Moor Analytics:

I would note that we broke above a well-formed macro line in the week of 8/7 that came in at 12629. The
break above here projects this upward $183 minimum, $501 (+) maximum—the maximum to be attained likely within 9-12
months. This line comes in at 12357 today. I am late to the game on this, but we were only $18 from the original breakout
when I mentioned this, and have a lot of room to go in the projection.

 

Appendix

 

What is VBS?

  • Volatility Based Risk Reward Generator

+ Originally developed as an alert to when the risk of being short implied volatility is larger than being long it, and vice-versa
+ It is a probability model that handicaps risk reward
+ As a by-product of its original purpose, it gives risk/reward scenarios in market direction. 
+ Due to its accuracy in predicting volatility expansion, directional applications are right or wrong quickly and is very useful in efficient use of capital

 

How VBS Works

  • Time is precious, Price is noisy, Volatility is less so.

+Volatility is less noisy than price, therefore more reliable as an indicator. 
+Volatility cycles more cleanly and  can be seen to “inhale and exhale” when viewed graphically with Bollinger Bands
+VBS is based on several relationships between historical and implied volatility  across different time frames
+ It can  be applied by traders on any time frame

 

VBS and Direction

  • It doesn’t predict price, only speed of movement

+It gives non-directional alerts and was initially developed for optimizing option portfolio risk.
+While not predictive directionally, VBS gives as a by-product excellent risk-reward setups for directional plays

 

VBS Process

  • Radar, Alert, Trigger, Entry, Exit
  1. Radar- VBS generates 2 prices, one above and one below current prices for a “breakout” in market volatility 
  2. Alert- One of the prices is breached and closes its bar/ candle beyond that price level.
  3. Trigger- Real volatility will expand
    • Market direction does not have to continue in the direction the price in #1 was broken
    • volatility based risk- reward prices are generated for directional use. I.E. Risk 1 to make 2
  4. Entry- using the  VBS risk/ reward generated levels, a decision is made to either go with the directional trend, against it, or do nothing
    • The trigger gives 2 bites at the apple if the trader so desires.
    • In “first way, wrong way” scenarios reversal levels are generated (N.B.- our preference is to not play the reversal and have left money on the table in favor of the trauma of being “chopped up”. if compelling, we have used options to remain in the game on reversals)
  5. Exit- is either from a stop-out, a profit capture, or a time limit
    •  Stop-Loss- are generated by VBS and adhered to religiously. Profitable trades trail stops higher based on expanding volatility
    • Profits- exits can be subjective, we prefer taking 90% of position at target and leaving a tail if the VBS is not signalling Vol is overbought
    • Time Exit- trades  that are neither profitable  nor stopped out are exited  in 3 bars/ candles. The signal is designed for quick confirmation / rejection of the trigger

Good Luck

http://WarMachines.com

India’s Sovereign Bond Market In Trouble As Inflation Rebound Surprises

Another day and another Indian inflation reading comes in “hotter” than markets expected. Yesterday, India’s CPI printed at 3.58% for October 2017 – its highest level in seven months – versus the consensus expectation of 3.43%. The September 2017 reading was 3.28%, itself marking a strong rebound from the recent low of 1.46% in June 2017. Market chatter was that the prospect for a rate cut by the Reserve Bank of India (RBI) when it meets on 5-6 December 2017 was fading.

That prospect faded further today with the release of the wholesale price data for October 2017. The 3.59% year-on-year increase was well above the consensus estimate of 3.01%. As with the CPI, the rebound in energy prices was a major factor in the surge in wholesale prices. Fuel, power and lighting prices rose by 10.52% year-on-year, food prices rose by 4.30% and manufactured products by a more modest 2.62%. The latest CPI and wholesale price data should, however, provide the RBI’s monetary policy committee with the clarity it’s wanted on the inflation path, even if the growth outlook remains more opaque. According to Bloomberg.

This will be the last price print for the Reserve Bank of India before its Dec. 6 decision. Minutes of the previous meeting showed cracks within the monetary policy committee are widening as members disagreed sharply over the path for growth and inflation, resulting in five of the six voting to hold the benchmark repurchase rate at 6 percent until there’s more clarity. The RBI had also raised its inflation forecast and lowered the growth prediction for the year through March, as the lingering effects of last year’s shock cash ban combined with the disruptive roll out of a new nationwide sales tax and climbing global oil costs. Focus now shifts to India’s gross domestic product data for July to September, due Nov. 30. "Inflation has sequentially hardened more than what we had expected," said Rupa Rege Nitsure, Mumbai-based chief economist at L&T Finance Holdings Ltd. said by phone. "The rise in food prices in tandem with hardening fuel prices and a revival in the US markets will keep the RBI’s hands tied — any chance of a rate cut is now remote."

The inflation data had a negative impact on what has been a surging Indian equity market in 2017, as Bloomberg notes.

India’s stock benchmark was poised to fall for a second straight day after accelerating inflation tempered expectations of a rate cut by the central bank. The S&P BSE Sensex dropped 0.3 percent to 32,945.11 as of 12:25 p.m. in Mumbai, with Larsen & Toubro Ltd. leading losses after lowering a forecast for future orders. The index has climbed 24 percent this year, repeatedly setting records, and sparking concern the rally has gone too far too fast. Data released late Monday showed consumer prices in October rose at the fastest pace in seven months, and may accelerate further amid rebounding oil prices. The Reserve Bank of India meets next month to rule on rates.

 

A “higher inflation trajectory may reduce room for RBI to cut rates,” said Soumen Chatterjee, head of research at Guiness Securities Ltd. “Investors are booking profits as the earnings season is drawing to a close and valuations look uncomfortable.”

 

The NSE Nifty 50 fell 0.4 percent. Forty seven of its constituents have reported quarterly results and of those 28 have met or exceeded analyst expectations, according to data compiled by Bloomberg. That’s helped push the Nifty up 24 percent this year and its valuation to the highest since 2010.

However, the inflation concerns in the Indian economy have been driving a sell-off in the Indian government bond market since the Summer – a sell-off which has accelerated in the last few weeks.

With the 10-year Indian yield testing the 7.0% threshold, Bloomberg notes.

Sovereign bond traders’ worries about inflation are intensifying…

 

Not surprisingly, the yield on the benchmark 10-year notes climbed above 7 percent Tuesday for the first time since last September. The yield could reach as high as 7.10 percent, according to IDFC Bank Ltd. Nomura Holdings Inc. is predicting CPI to rise above 4 percent this month, and to stay above the Reserve Bank of India’s 4 percent target through 2018. Sovereign bonds have been under pressure on concerns rebounding oil prices would widen the government’s budget deficit, forcing it to boost the size of debt sales just when state administrations are borrowing heavily and the central bank is selling debt to suck out excess liquidity from the system.

India is far from alone in the recent emerging market debt sell-off, the question now is when equities follow suit – maybe India's Sensex will show the way.

 

http://WarMachines.com

Why Credit Suisse Thinks Millennials Are The “Unluckiest” Generation

As part of the annual Credit Suisse Global Wealth Report, which as discussed earlier found that for the first time ever, the “Top 1%” owns a majority, or 50.1%, of the world’s wealth…

… the millionaire bankers behind the firm’s (Ultra) High Net Worth client division decided to also shed some tears for the world’s Millennials, whom they dubbed with one word: “unlucky”… a term which members of said generation will likely wear as a badge of honor (if only to justify their plight in life), while other generations will be eager to promptly mock.

While both sides have valid justifications for their perspective, here is why the Swiss bank has almost given up on an entire generation as a potential client:

The “Millennials” – people who came of age after the turn of the century – have had a run of bad luck, most clearly in developed markets. Capital losses in the global financial crisis of 2008-2009 and high subsequent  unemployment have dealt serious blows to young workers and savers. Add rising student debt in several developed countries, tighter mortgage rules after 2008, higher house prices, increased income inequality, less access to pensions and lower income mobility and you have a “perfect storm” holding back wealth accumulation by the Millennials in many countries.”

In a contrast that is sure to generate controversy, Credit Suisse compares the plight of the “unlucky” Millennials to the “good fortune experienced by the baby boomers, born in large numbers between 1945 and 1964, whose wealth was boosted by a range of factors including large windfalls due to property and share price increases.” Additionally, CS notes that the millennial cohort is smaller as a percentage of the total adult population than the baby boomers were at the same age, and notes that while “normally it is good to belong to a smaller cohort” this time that appears not to be the case, and nowhere more so than in the United States.

So why aren’t Millennials a lucky cohort? Did the financial crisis and its fallout just swamp the advantage of being in a small cohort? Or is there more to it? Here are several key reasons cited by Credit Suisse to make its high net worth clients feel some compassion for America’s young adults.

Assets and debts of the Millennials

Table 1 provides a breakdown by age for various wealth characteristics in key developed markets.  The table shows that income and wealth both generally increase with age – certainly for the average individual, but also usually in cross-section data.

The share of financial assets also rises once young millennial adults have left the parental nest. Non-financial assets – of which owner-occupied homes are the most important – decline in importance with age. For many people, the first priority is to buy a house, with financial assets being built up later. This pattern helps to explain why the high and rising house prices seen in many countries since the year 2000 have been a special problem for the Millennials. According to the IMF, state pensions in advanced economies are expected to replace just 20% of per capita income by 2060, compared with 35% today. Also, fewer workers are now covered by employer-based pensions than in the past, and defined benefit pensions are declining fast. For example, only 10% of UK workers in the private sector born in the 1980s have a defined benefit pension plan, compared to 40% of those born in the 1960s at the same age. So it is increasingly important for people to save for retirement on their own account. The share of financial assets in total assets will need to rise in most countries in the future compared to what is seen in Table 1. This is especially true for the Millennials, who will likely face the added challenge of higher contributions and taxes required to fund state pensions and other benefits for the baby boom cohort in their retirement.

Student loans have been an increasingly important component of debt in a number of countries. The trend is particularly striking in the United States and is also evident in Germany (see Figures 2a and 2b, which use the same data sources and age groups as Table 1). In the United States, 37% of those aged 20–29 in 2013 had some student debt, which accounted for 18% of the total debt of that age group. In Germany, 12% of those in the same age group had student debt and it accounted for about 6% of total debt.

The rise in student debt is partly due to higher fees. But it also reflects the fact that the Millennials are more educated than preceding cohorts. For instance, the percentage of 25–34 year olds with tertiary education in OECD (Organisation for Economic Cooperation and Development) countries rose from about 15% in 1970 to 26% in 2000 and 43% in 2016. This greater educational attainment may help to ease the Millennials labor market diffuclties. However, although average rates of return to college and university have held up fairly well, this is largely because lower wages for less-educated workers have reduced the opportunity cost of tertiary education. But for the most university-educated Millennials the outcome may be job opportunities and wages no better than those of their parents, achieved by a dint of more costly education.

Entrepreneurship

It is sometimes claimed that Millennials are starting more businesses than earlier generations, and doing it at younger ages. But the official statistics suggest otherwise: only 2% of Millennials in the United States are self- employed, versus 8% of Generation Xers (those born between 1965 and 1980) and baby boomers. And entrepreneurship, as measured by the fraction of self-employed workers, has been declining in most OECD countries since the turn of the century. The OECD self-employment rate fell from 17.6% in 2001 to 15.8% in 2011; in the United States it dropped from 7.4% in 2001 to 6.5% in 2015. Sagging entrepreneurship in most countries is consistent with relatively few Millennials starting a business in this period.

The apparent decline in entrepreneurship among Millennials relative to their predecessors seen in the official statistics may reflect the fact that the cohorts being compared are observed at the same point in time, not at the same age. More Millennials will start businesses as they age. Another explanation is that those Millennials who have become entrepreneurs have each created more businesses than their counterparts in earlier cohorts. This may reflect their ”tech savvy” and the greater ease of starting multiple businesses these days with the help of the internet. A third factor is that although many Millennials would like to start a business, for a time they were restrained by  tough economic conditions. This suggests a surge in millennial entrepreneurship may occur soon or may already be taking place, as has been seen in some emerging markets, such as China and India.

Comparing cohorts

Figure 4 shows wealth components for US adults aged 20–29 and 30–39 in 1992, 1998, 2007 and 2013. Total assets increased markedly for the 20– 29 year-old group between 1998 and 2007, due mostly to an increase in real assets caused by rising house prices. Real assets for 30–39 year olds also increased rapidly at that time, but mean financial assets fell in this age range, perhaps reflecting re-allocation of portfolios in response to the changing returns from real and financial assets. Things went into reverse between 2007 and 2013: real assets declined substantially for both groups and financial assets increased a little. Debt rose strongly for both groups between 1998 and 2007, but has since returned to its 1992 level. These comparisons tell us about the experience of Generation X and the Millennials in their early adulthood. Generation X was still in its late 20s and 30s when house prices rocketed in the United States prior to the global financial crisis, and during the crisis itself. So it, as well as the first wave of Millennials, had a wild roller coaster ride. They experienced not only the effects of the general rise and fall of economic activity, but also the impacts of wild swings in asset prices. Both aspects are reflects in the wealth changes seen in Figure 4, which simply shows that young Americans aren’t getting wealthier any more.

General Indebtedness

Figure 6 shows US age-debt ratio profiles. For each cohort aged 40 or more in 2017, the debt to income ratio was higher than that of previous cohorts at all ages. The “crossing over”observed for wealth in Figure 5 is not seen reflecting the fact that debts do not fall in value when houses and shares crash, as they did during the financial crisis. But, perhaps most interestingly, the pattern is interrupted for the Millennials. The debt to income ratio started out higher than earlier cohorts for those aged 35-39 in 2017 and also rose (briefly, in 2010) above earlier cohorts for those aged 30–34 in 2017. But then there was a crossing-over in 2013 for both of these cohorts, with their debt to income ratios declining below previous cohorts. This hints that the Millennials became more cautious about debt than their predecessors due to the shock of the housing bust in the United States and the global crisis.

Student Debt

Student debt has leapt up for the most recent cohorts in the United States (Figure 7). The biggest increase came for the cohort aged 35–39 in 2017 – i.e. the “leading edge” of the Millennials – but those aged 30–34 in 2017 saw a further increase. As noted earlier, as a consequence, student debt now forms a substantial portion of total debt for young people in the United States.

Living in their parents’ basement

The percentage of adults living in owner-occupied housing shows much more stability over cohorts (Figure 8). The oldest cohorts follow almost exactly the same path, but for those aged 40–49 or 35–39 in 2017, there was a higher initial fraction of home owners in successive cohorts. The financial crisis resulted in crossing-over once again, and by 2013 these cohorts slipped below previous cohorts with regard to the fraction of homeowners

Inequality and mobility

Millennials have been affected by the general rise in income inequality in advanced economies over recent decades. In a world with constant mean income, constant inequality and no mobility, parents and children would be equally well off. If – more likely – mean income is rising, and there is some mobility, but inequality is constant, then most children will be better off than their parents. But income inequality has been rising in the United States since the mid-1970s, and while mean income has also risen considerably, median income has not increased much. Mobility has also gone down. Similar trends have been seen in other “anglo” countries (with some notable differences, of course). The net result is that past expectations no longer apply. For example, 90% of children in the United States born in 1940 had earnings greater than their parents’, but this ratio had fallen to 50% for children born in the 1980s. About 70% of this decline was due to the rise in inequality.

Interest Rates and Rates of Return

The financial prospects of a cohort are affected by the rates of return they receive on investments and by the interest rates they face. Throughout the world, equity returns were high in both nominal and real terms during the 1980s and 1990s, providing favorable investment opportunities to baby boomers in the first half of their working lives, and also to young members of Generation X. In the first dedcade of the new century, however, both real and nominal returns collapsed, creating quite a different investment environment for the Millennials. After 2010, returns rebounded, but not to the level seen in the 1980s and 1990s. The interest rate story is similar to that for  equity returns, but the decline in real rates began earlier, in the 1990s. Although they rebounded slightly in Europe after 2000, the decline was steady in the United States. This is significant because workers trying to acquire assets increasingly have to switch to riskier investments to get a reasonable rate of return. Real lending rates, which are also important for young people, via mortgages for example, have declined over time as well, but more slowly than deposit rates. In the United States, lending rates reached quite a low level after 2010, but in Europe they remained at 3.8%, far above the real deposit rate of 0.4%. Hence safe saving opportunities have deteriorated for young people, while borrowing has not become correspondingly cheaper.

* * *

Finally, Credit Suisse’s conclusion:

The Millennials have not been a lucky cohort so far. They faced the rigors of the financial crisis and the high unemployment that followed in many countries, and have also been widely hammered by high and rising house prices, rising student debt and increasing inequality. Their pension outlook is also worse than that of preceding cohorts. Some of the Millennials have prospered in spite of these difficulties, as reflected in the more positive picture we see in China and a range of other emerging markets, and the recent upsurge in the number of Forbes billionaires below the age of 40. Some have had substantial family help in paying for education and buying homes, and some stand to inherit from wealthy boomer parents in the future. But there are many Millennials who have not been so fortunate. As a result, the Millennials are not only likely to experience greater challenges in  building their wealth over time, but also greater wealth inequality than previous generations.

And some parting words of comfort: Millennials’ may or may not be unlucky, but all they have to do is lat a few years, and slowly but surely their wealth should start to grow….

… Unless, of course, the entire social-economic matrix has been corrupted by a decade of central planning and there truly is no hope for America’s young adults. In which case, if you need directions to the Marriner Eccles building to protest your fate to the appropriate authorities, we are glad to provide.

Oh, and for those Millennials who hoped to become the next ultra wealthy clients of Credit Suisse’ high net worth group… our condolences, but we hear HSBC will take anyone these days.

http://WarMachines.com

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

http://WarMachines.com

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

http://WarMachines.com