# General Macro Observations



## DeepState (31 May 2014)

Starting a thread in which general macroeconomic observations can be made and discussed.


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## DeepState (31 May 2014)

Japanese 5yr CDS Spreads.  The developed world's most financially ridiculous nation is seeing a sharp decline in the perceived risk of default despite there being no material reforms being made to the fiscal situation which, if left unchecked, is on the path to ... something not very nice.


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## burglar (31 May 2014)

DeepState said:


> ... , if left unchecked, is on the path to ... something not very nice ...




As the Chinese professor would say,
"What can I do with this information?"


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## DeepState (31 May 2014)

burglar said:


> As the Chinese professor would say,
> "What can I do with this information?"




Dunno.  I just came across it and found it against the grain of my expectations and am puzzled.  If you can figure it out, you'll know how to trade USDJPY for a start.

Great to hear from you.

The standard belief with Japan is that it is going to implode.  "...bug in search of a windshield.." (Mauldin). Of Abe's three arrows, only one has been fired, and it looks like a miss.  The fiscal side has been stimulatory, but completely unsustainable.  If QE is not working, all you have left in fiscal and supply side reforms.  Fiscal is nuts, in terms of debt to GDP.  If interest rates were ever to revert to whatever is normal, the place would implode as the debt is rolled at higher rates.  And that debt load is increasing rapidly despite a recent sales tax hike.

There are two things that I can think of which are driving the CDS figures lower.  One is increased profitability of domestic firms as a result of the weaker JPY (which seems a weird reason given the current account keeps deteriorating and there is no pop in sales, personal income or industrial production although Nikkei as risen a bit and Tankan is quite strong) and the fact that the BoJ is just an extension of the Treasury which will just keep QE going to destruction.  In that kind of event, it is imaginable that default risk declines because you can always be paid in confetti...but that belief should have been there all along...or has been reassessed given recent developments. 

One is bullish JPY, the other is bearish. I think that the hypothesis of BoJ printing to oblivion is nuts and not factored into currency or equity markets.  It would have also shown up in gold.  BoJ prints pretty much what the Fed does now.  USDJPY has been trading in a range all year.  Both have near-term effectively zero interest rates making carry fairly neutral if judged by short rates only (it favours the US on long rates).  JPY has weakened vs EUR and GBP in the last year.  EUR has a Draghi ceiling on it.

Looks like JPY upside.  But, I dunno.  Anyone got a perspective?


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## burglar (31 May 2014)

DeepState said:


> ... Great to hear from you ...




I love to banter!



DeepState said:


> ...  Anyone got a perspective?




Like Warren Buffett, I have no interest in Japan.
But a Chinese recovery would be of enormous interest to me.


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## sydboy007 (31 May 2014)

Is there any successful large economy not built on an unsustainable mountain of debt to invest in?

Seems like the entire G20 is just floating on a sea of debt, only the inflatable bed seems to be getting more and more leaks.


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## DeepState (1 June 2014)

sydboy007 said:


> Is there any successful large economy not built on an unsustainable mountain of debt to invest in?
> 
> Seems like the entire G20 is just floating on a sea of debt, only the inflatable bed seems to be getting more and more leaks.




Check this out:


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## sydboy007 (1 June 2014)

DeepState said:


> Check this out:




Sums up my perceptions.

Even the successful looking CAS countries have massive levels of debt.  Look at Singapore and it's scary the way their housing boom has taken off.  HK has the highest cost housing in the world.

Is it "safer" to invest in a CAS country?  Can their CAS turn to a CAD quickly during the next global downswing in growth?

I have a feeling mercantlist trade policies will be less effective in a slow growth environment.

I think the saying about currency markets is it's more like a reverse beauty contest with not much talent, so it's kind of like picking the least "ugliest" to invest in.  Seems to be similar to stock markets as well.

http://www.nationmaster.com/country-info/stats/Economy/Debt/External#2012

Not Australia has put on another $300B to the credit card till the end of 2013.  Not sure if that means our external debt rose by 20% in a year??  if so that's a scary rate.


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## DeepState (1 June 2014)

sydboy007 said:


> 1. Even the successful looking CAS countries have massive levels of debt.  Look at Singapore...
> 
> 2. Is it "safer" to invest in a CAS country?  Can their CAS turn to a CAD quickly during the next global downswing in growth?
> 
> ...




1. Actually, in Singapore's case, that debt accumulation is funneled straight into the CPIF in the form of non-tradable securities.  I guess it's like pumping money in their Future Fund.  The Federal government (at least), has not run a deficit for around 30 years.

2. I think we cannot say based on that division.  In addition to the size, I think it also depends on the gross flows and what they do with it.  In terms of whether things switch, clearly it can.  This would depend on what their trade basket is and their sensitivities to external and internal developments (micro reform etc.).  Each case would need to be considered on its merits.  It's not necessarily a bad thing to be a CAD country.  It just may be in that time of their development.  Being an permanently increasing CAD/GDP obviously can't be sustained though.  And then you have the Fragile 5 examples, Tequila Crisis....

3. Don't know.  There is a greater norm nowadays to reject mercantilist policies.  Further, there are an increasing number of regional trade pacts being formed which makes it harder to launch one without irritating your neighbours.  Having said that, the world was 'happy' to tolerate a depreciation of the JPY.

4. Need to look into that one...

For your viewing pleasure, from Mauldin, the composition of Chinese debt.  Zombies, and government debt squeeze out the private investors and householders.  Given fixed asset investment is now what is keeping the economy afloat...with net exports not making that much of a contribution anymore...this is pretty bearish...


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## sydboy007 (1 June 2014)

DeepState said:


> For your viewing pleasure, from Mauldin, the composition of Chinese debt.  Zombies, and government debt squeeze out the private investors and householders.  Given fixed asset investment is now what is keeping the economy afloat...with net exports not making that much of a contribution anymore...this is pretty bearish...




Just another reminder to how much debt is out there.  I find it hard to get my head around just how much debt there is, most against assets that have been pumped up in value due to ZIRP.

Surely it can't all end particularly well?  Sometimes I feel like I should be following the Romans and burying gold coins in my backyard.  I just don't see as anywhere is particularly safe these days.  Pretty much every country has some issue bubbling away underneath just waiting to explode.  Even the Swiss are sitting on debt time bombs.  Maybe Norway, though the weather suxs


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## craft (1 June 2014)

DeepState said:


> The standard belief with Japan is that it is going to implode.  "...bug in search of a windshield.."




Being a Macro simpleton, I can't see too many concerns about Japanese default. Most of their Government debt is owned by their own private citizens and the country has a very health NIIP.

To me it just seem like worrying about a husbands debt when most of the debt is owned by the wife and the family has heaps of assets.  Mostly the whole issue is just a domestic dance, but there is no way the husband is going to ultimately default to those outside the family - its not in his or the wife's interest to jeopardise the family assets.

They don't so much need currency devaluation because the majority of the debt is internal - they want  price inflation to reduce the debt in real terms because that's more palatable then raising taxes to pay it down. But default? Given their NIIP/GDP is about the same as Australia's but with a POSATIVE sign in front of it, I don't think so - worry about Aus first.


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## DeepState (1 June 2014)

sydboy007 said:


> 1. I find it hard to get my head around just how much debt there is, most against assets that have been pumped up in value due to ZIRP.
> 
> 2. Sometimes I feel like I should be following the Romans and burying gold coins in my backyard.  I just don't see as anywhere is particularly safe these days.
> 
> 3. Not Australia has put on another $300B to the credit card till the end of 2013. Not sure if that means our external debt rose by 20% in a year?? if so that's a scary rate




1. I can't make sense of valuations.  They suggest that there will be an ongoing move of share of GDP towards capital and away from labour.  With participation rates dropping mostly due to demographic reasons and unemployment dropping, that doesn't seem reasonable.

Bonds provide a poor after tax return too and credit margins are very low.  Cash may indeed be the best long term asset.





2. Not such a bad idea actually.  Maybe not such a good idea to broadcast it on ASF.... you might have a 'council request' to dig up your backyard en route.





3. Rate of growth of offshore net finance is slowing.  Interesting composition mix.  Banks are getting redeemed (partly as a result of change in funding mix towards deposits) and direct investment to non-financials is increasing.  That's a good sign that international credibility for Australian firms is good...or maybe it's because our interest rates are just higher and this is search for yield in play as well.


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## sydboy007 (1 June 2014)

DeepState said:


> 1. I can't make sense of valuations.  They suggest that there will be an ongoing move of share of GDP towards capital and away from labour.  With participation rates dropping mostly due to demographic reasons and unemployment dropping, that doesn't seem reasonable.
> 
> Bonds provide a poor after tax return too and credit margins are very low.  Cash may indeed be the best long term asset.
> 
> View attachment 58188




Not sure I agree bonds are such a bad deal.  Maybe euro and US Govt bonds, and japanese govt bonds too are not worth bothering with, though PIMCO tried that a couple of years ago and got badly burned.

But I'm quite happy with my envestra inflation linked bond providing me a 3.4% yield above CPI - up around 10% so far this year with incom + capital growth.  Plenty of corporate bonds from relatively safe companies (compared to most Governments) offering 6-8% yields depending on your risk level.  Seems a better bet than casino HFT via the ASX.

Any inflation linked bond at the moment is doing well in Australia in that it's at least increased the payment level due to the spike in inflation recently  CPI came in at 2.9% last qtr.  I'm not expecting it to fall too much over the next year because every drop in the AUD is going to see tradeables inflation spike again.

Are macro observations even important these days?  From a macro perspective shouldn't most of the countries with the lowest interest rates actually be facing increasing rates?  When half the worlds central banks are spiking the punch is there any macro fundamentals left, or should we be playing to the tune of the banks and forget about the underlying reality?

I can't help but feel we've been convinced the nearly falling down house of debt is now a new macmansion simply due to a sort of fresh coat of paint and some photoshopped photos of the interior.


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## qldfrog (1 June 2014)

sydboy007 said:


> Are macro observations even important these days?  From a macro perspective shouldn't most of the countries with the lowest interest rates actually be facing increasing rates?  When half the worlds central banks are spiking the punch is there any macro fundamentals left, or should we be playing to the tune of the banks and forget about the underlying reality?



I have exactly the same puzzle:
should we even bother: USD should be just worth the value of the paper it is printed on when considering the amount created monthly,
yet Gold in USD goes down, and commodities/food/aka real valuable assets do not change much or fall;
RE in Australia keeps going on as if nothing happens yet there is hardly any job and a lot of at home dads in my circles: project manager/business analyst in Brisbane;
daily rate have fallen 20% in the last 4 years for the lucky few with work while inflation has taken an extra 10% or so;
wher does the money come from now? what do we sell?
yet the AUD is still at 93c;
And US first quarter are a disaster yet, all is good, it was winter..
As if this was the first harsh winter in the US


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## sydboy007 (1 June 2014)

qldfrog said:


> I have exactly the same puzzle:
> should we even bother: USD should be just worth the value of the paper it is printed on when considering the amount created monthly,
> yet Gold in USD goes down, and commodities/food/aka real valuable assets do not change much or fall;
> RE in Australia keeps going on as if nothing happens yet there is hardly any job and a lot of at home dads in my circles: project manager/business analyst in Brisbane;
> ...




I think it's all about perception.  For a long time after teh GFC pretty much everything was viewed as bad, now it seems like we can just ignore all the bad stats coming out.

We have a wimpy RBA not taking action to get the AUD down to a more real worth level, so the hollowing out of manufacturing and other sectors will continue until there's nothing really left.

I keep thinking maybe it's best to invest in the truly global companies that do well because they can eek out growth somewhere, or do like a Heinz and move production from Australia to NZ over 5c a bottle of sauce cost reduction.


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## DeepState (1 June 2014)

craft said:


> Being a Macro simpleton, I can't see too many concerns about Japanese default. Most of their Government debt is owned by their own private citizens and the country has a very health NIIP.
> 
> To me it just seem like worrying about a husbands debt when most of the debt is owned by the wife and the family has heaps of assets.  Mostly the whole issue is just a domestic dance, but there is no way the husband is going to ultimately default to those outside the family - its not in his or the wife's interest to jeopardise the family assets.
> 
> They don't so much need currency devaluation because the majority of the debt is internal - they want  price inflation to reduce the debt in real terms because that's more palatable then raising taxes to pay it down. But default? Given their NIIP/GDP is about the same as Australia's but with a POSATIVE sign in front of it, I don't think so - worry about Aus first.




Totally awesome.

Japan vies with China for the biggest owner of US Treasury debt.  It does so to finance the surplus it has with the US.  Geopolitically, it is evident that Japan is the US extension in the Pacific sphere, so the whole thing ties in to a wider picture which is not seen with China.

Japan is a bit like China in that it manages its foreign reserves to ensure that exports are competitive.  Japan has more or less the same US treasury holdings as China.  Virtually its entire FX reserves are held in that way.  China's are not.  Although having this type of situation might seem advantageous, it actually comes with a lot of risk.

It means that the US needs to tolerate a country which has a seemingly permanent trade surplus financed fairly significantly with accumulation of foreign reserves.  This has been in place since the Plaza Accord and remains something of an understanding...probably for stuffing up the Japanese Banking system and bringing in the Lost Decade (or two...maybe three).  The Japanese trade surplus was an issue in 1985.  It remains one now.

Additionally, it is a way of supporting industry over the compliant laborer.

Interestingly, reserve accumulation has slowed dramatically in since about late 2011.  This reflects a deterioration of Japan's trade position and current account.

Because China's reserves are so large, it can effectively absorb a stack of JPY in circulation that arises through sale of Japanese bonds abroad.  If China were to hold a stack of JPY, it is possible to force regional trade to take place in JPY.  China has already negotiated a deal to trade oil with Russia in Yuan.  Oil was central to making the USD the key currency in a post Bretton Woods world.  There are a stack of JPY gov't bonds in circulation.  So any discussion of net IIP needs to be considered along with Gross.

I love the husband/wife analogy.  It is this which has kept this whole thing going for a lot longer than almost anyone had imagined would be possible. But at some stage, self interest takes over from the interests of the nation.  The longer this goes, the more intense any crack will be felt.  

Let me borrow from this fantastic analogy.

Husband: Fetch me my dinner woman!

Wife: Here sweetheart, your favorite bento box.  Now, do I get a hug?

Husband:  Not now woman, here's an IOU instead.

....a year passes.  365 IOUs are issued.

....a decade passes. 3,650 IOUs are issued.  Leap days had hugs.

The wife realizes that she will never get the hugs back and realizes that this is a scam played by the recalcitrant husband.  She withholds 'services'.  The man tries to hug, but the hugs are now severely deflated due to the surfeit of IOUs and decay in the quality of hugs as a result of not being subject to the rigors of the capitalist system.  Now it goes (even more) nuts.  The husband has a mate.  When the husband calls for his dinner and the pissed off wife delivers it, the IOU goes to the mate who promises never to cash it in in the form of requiring a man hug.  This is QE.  Together, they are trying to inflate the value of the outstanding IOUs whilst getting the wife to keep doing all the work.  As in Japan, every chore is now unpaid in the hope that the IOU base decreases relative to production (creating inflation).  Every dinner she brings is now supposedly worth less hugs.  The harder she works, the less hugs she will get per dinner served.  Interesting incentive.

One day the wife gets up, looks at herself in the mirror and starts buying AUD bonds instead.  The husband starves and the IOUs cannot be repaid.  The mate is left holding confetti that is not going to go very far.

It's like money.  It only works if each of us believes that another will value it.  The moment doubt arises...it's not nice.  Until that time, all looks fine.  Japan looks fine in the way a tightrope walker at 50 storeys looks fine....until it doesn't.


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## DeepState (1 June 2014)

sydboy007 said:


> 1. Not sure I agree bonds are such a bad deal.  Maybe euro and US Govt bonds, and japanese govt bonds too are not worth bothering with, though PIMCO tried that a couple of years ago and got badly burned.
> 
> 2. But I'm quite happy with my envestra inflation linked bond providing me a 3.4% yield above CPI - up around 10% so far this year with incom + capital growth.  Plenty of corporate bonds from relatively safe companies (compared to most Governments) offering 6-8% yields depending on your risk level.  Seems a better bet than casino HFT via the ASX.
> 
> ...




1. I guess you mean that Aust corporate debt looks alright, and possibly so does Aust Gov't.  Just FYI only, yield spread on BBB (as an example) has now compressed to levels not seen since the start of the GFC.  I think it is clear to most that risk was underpriced prior to the GFC, so maybe this is as good as it gets for corporate credit?





2. Yeah, good stuff.  Part of the reason you've done so well is that nominal bonds came in and affected the discount rate applied to the expected real coupon/capital stream and probably also a compression in the credit spread.  Just watch out for extending that expectation.

With nominal Aust gov't yield and credit yield now very low against inflation expectations (at least, RBA mid band), real yields just weren't what they used to be. Treasury 1.25% Feb 2022 offers only 1% real.  What the heck is that?   Aust Gov't is credit sound, but I hear you about other countries and it wouldn't be the first time that corporate yields have been preferred to sovereign.

Having said that, linkers definitely have a role to play.  You mentioned FIIG in an earlier post about how much you need to live on $30k or something....I opened an account. 


3. In relation to rising rates, you'd think so.  But then why do they keep falling? Liability matching, less supply of US bonds meeting with increased demand from people leaving equities??  Lower equilibrium rate assessment? PbOC reserve management and FFX management?

All of this affects macro variables which then affect the stuff we invest in.  

If you are saying this is severely rigged...yep.  But somehow, sometime, gravity takes hold.  I want to know where the most egregious gaps are between a rigged situation and what it should be in reality.  The markets are bigger than the banks ultimately.  The banks are also reacting to macro developments.

As to McMansions...no doubt about it that they need to act calm whilst the house is on fire. Ahhhhhhhhh!!!


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## craft (1 June 2014)

DeepState said:


> One day the wife gets up, looks at herself in the mirror and starts buying AUD bonds instead.




It’s an arranged marriage with no way out. It’s truly until death do we part. 
If the Japanese citizens don’t continue to fund the government’s debt then they will be face increased taxation. (Don’t think I’ll translate that into the analogy)

Only if those tax increase impacts the economy and national psychology to such an extent that the Japanese turns from net saver to net spender and spend all their accumulated foreign assets would the circumstances be in place for default. 

Japan’s Net International Investment position is around positive 60% of GDP
Australia’s NIIP/GDP is around negative 60% and our earnings are cyclical.

Japanese Government debt is way down my list of things to worry about.  But in my case maybe it’s just a case of ignorance is bliss.


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## DeepState (1 June 2014)

craft said:


> Only if those tax increase impacts the economy and national psychology to such an extent that the Japanese turns from net saver to net spender and spend all their accumulated foreign assets would the circumstances be in place for default.




Here is how it ends on the tax and net saver/spender front. Japan is a demographic train wreck in slow-motion:





The NIIP includes private and public debt and equity investment of a portfolio and direct nature.  The official reserves component is quite a bit smaller.  When you have a debt load of 220% of GDP, net official reserves won't mean a lot.  Also, if they are deployed, it would raise the value of the JPY due to FFX pressures and hurt GDP more...requiring more stimulus, more tax... 

From Debelle (RBA) 2014:





Yet, Japan has always been idiosyncratic.  The JPY rises vs other smaller currencies in stress. So it is something of a safe haven...just like you say.


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## sydboy007 (2 June 2014)

DeepState said:


> It means that the US needs to tolerate a country which has a seemingly permanent trade surplus financed fairly significantly with accumulation of foreign reserves.  This has been in place since the Plaza Accord and remains something of an understanding...probably for stuffing up the Japanese Banking system and bringing in the Lost Decade (or two...maybe three).  The Japanese trade surplus was an issue in 1985.  It remains one now.




I think any talk of Japan's lost decade(s) need to be viewed slightly differently.  I'd argue they've done amazingly well for at first a rapidly aging population, and probably the last decade or so, for a falling population.  When you view per capita GDP for the country things don't look too bad.  

Conversely you look at Australia and it seems we've got good GDP growth so things should be sweet, but once you look at the per capita figures you start to notice the paint falling off and what's probably termite damage hollowing out much of the structure.

I do think Japan is borked unless they can get enough nuclear power stations back on line that they can significantly reduce their LNG imports.  Since the fukushima shutdown it's decimated their trade surplus.  The only reason their massive govt debt hasn't been an issue is the trade surplus.  Too many CADs and maybe Soros will decide to take them on :viking:


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## sydboy007 (2 June 2014)

DeepState said:


> 1. I guess you mean that Aust corporate debt looks alright, and possibly so does Aust Gov't.  Just FYI only, yield spread on BBB (as an example) has now compressed to levels not seen since the start of the GFC.  I think it is clear to most that risk was underpriced prior to the GFC, so maybe this is as good as it gets for corporate credit?




I think risk is still being under priced for a lot of debt.  Just have to look at the genworth IPO to see how close to the GFC level of risk ignorance things have gotten, or as you mention the way BBB debt yields have plummeted.  But that's the plan by the central bank cartel.  pump up assets, make people feel wealthy so they'll spend, then hope when you normalise rates the economy doesn't collapse and the FIRE sector doesn't have too big a hissy fit along the way.



DeepState said:


> 2. Yeah, good stuff.  Part of the reason you've done so well is that nominal bonds came in and affected the discount rate applied to the expected real coupon/capital stream and probably also a compression in the credit spread.  Just watch out for extending that expectation.
> 
> Having said that, linkers definitely have a role to play.  You mentioned FIIG in an earlier post about how much you need to live on $30k or something....I opened an account.




I don't expect another 10% gain next year, but I will get a real 3.4% over CPI which is not too bad in a financially repressed world.  I'd much rather be in a floating rate style bond now than fixed rate.  Considering inflation has taken off recently I'm in a better position than someone in cash or a TD.

Glad you signed up with FIIG.  I find them one of the few decent financial organisations out there.  At least they're not all about the sale, or that's my perception of them.  I just wish they'd create their own listed bond fund.  There's so many decent higher yielding corporate bonds I can't access, especially in foreign currency which I think is a good hedge for the eventual return of the pacific peso.  I will really miss AKY when they finally sell down all the bond holdings by the end of 2015.  It's been a nice yield play of around 6.5%.  If your risk profile is a bit higher you might like AYF and the diverse range of hybrids it's invested in.  7% yield is not bad.



DeepState said:


> 3. In relation to rising rates, you'd think so.  But then why do they keep falling? Liability matching, less supply of US bonds meeting with increased demand from people leaving equities??  Lower equilibrium rate assessment? PbOC reserve management and FFX management?
> 
> All of this affects macro variables which then affect the stuff we invest in.
> 
> ...




I suppose I'm most worried aboout when reality and gravity take hold again.  Just about nothing is actually priced on the fundamentals.  It's all about the relativities against artificially constrained government bonds prices.  The fact is pretty much every Government can't afford to have rates normalise or they'll be bankrupted, they have to blind the bond holders to rises in inflation in the hopes they can slowly steal back the value of the debt, and hope they don't piss off the voters too much and head down the path to viva les resistance :behead:


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## DeepState (2 June 2014)

sydboy007 said:


> I think any talk of Japan's lost decade(s) need to be viewed slightly differently.  I'd argue they've done amazingly well for at first a rapidly aging population, and probably the last decade or so, for a falling population.  When you view per capita GDP for the country things don't look too bad.
> 
> Conversely you look at Australia and it seems we've got good GDP growth so things should be sweet, but once you look at the per capita figures you start to notice the paint falling off and what's probably termite damage hollowing out much of the structure.
> 
> ...




1. Japan's GDP per capita is flat line relative to Australia's for the last 20 years.  More concerning is their growth has largely been financed by government budget deficits which have ballooned whereas private sector debt has been static.  That's a nasty combination, particularly when it is so sustained and ultimately has to be repaid with a smaller and less productive population.  Maintaining a trade surplus does not assist with increasing demand for JGB in of itself. Particularly given the trade surplus is at least partly financed by official reserve accumulation.  Australia's growth has been financed in a more sustainable manner - not necessarily saying it was a great thing and could not be improved.





2. The Soros thing, I think, is quite a real scenario.  If BoJ is printing beyond the level of government debt issuance, this usually leads to abandonment of a currency.  Even if Japanese nationals are super sticky with the purchases of JGB via their own personal savings or via large investment pools, there is a point when this becomes ridiculous.  All it needs is a catalyst and the sharks circle and attack with force and a self-fulfilling prophesy comes into being.  LTCM, BoE, Fragile 5, Asian Financial Crisis etc.. JPY is not beyond reach.  But this is a weird one because you are trying to force the currency to appreciate in order to break the economy.


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## sydboy007 (2 June 2014)

Quite an interesting article

http://www.macrobusiness.com.au/2014/06/economic-implications-of-the-iron-ore-crash/

The chart for just how far the mining capex cliff falls is scary.

The chart of investor financed mortgages is mind blowing.  NSW is just like mentos in a sealed coke bottle that suddenly shot up 

iron ore seems to be heading in the one direction now, and not a good one for our incomes.  Have no idea why FMG and RIO are doing so well when their lifeline is slowing been bled out.

How we resolve the anoying high AUD I'm not sure.  being a deficit nation leaves us with little options than to be a more desirable destination to park money, so we have to continue with our (relatively) high interest rates.

Maybe Soros will target the AUD soon.  Certainly on a fundamentals basis it's at least 10% over valued, and I'd say going into late 2015 it probably should have a leading 7 than the current 9.  Then again, predicting forex more than a few minutes is a mugs game, but the probabilities seem to be on my side.


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## burglar (2 June 2014)

sydboy007 said:


> ... iron ore seems to be heading in the one direction now, ...




Can anyone send me a telex when it bottoms?!!


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## qldfrog (2 June 2014)

sydboy007 said:


> Quite an interesting article
> 
> iron ore seems to be heading in the one direction now, and not a good one for our incomes.  Have no idea why FMG and RIO are doing so well when their lifeline is slowing been bled out..



one of the stories around is : 
while IO collapses, RIO and FMG with very low production cost still make a profit, so they carry on flooding the market at no loss and killi all the competitors.
not so sure it makes sense but think about it:
a ton of coal is cheaper today than a ton of Iron ore (basically ton of dirt)
So even at 90$ a ton, IO is still a great business
Not so good for the AUD and the budget...

Considering iron abondance on earth  you will quickly find that the real price of iron ore should be in the 20$ per ton range not $100 if coal is only worth 75$ a ton. anyway I diverge.


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## DeepState (2 June 2014)

burglar said:


> Can anyone send me a telex when it bottoms?!!




Let's say that demand for iron ore (imported and domestic) remains unchanged from 2013 levels, recalling that China 'only' consumes 70% of the seaborne market.  That equates to something like 1,300 mtpa:





There are grounds to believe consumption should grow:





...but let's just say annual demand remains static.


This results in a rational iron ore price of around $80USD per ton.  This corresponds to Treasury estimates as per the budget, which I think allows for constant currency from the looks of things:





As additional supply comes on stream, the cost curve should flatten and further displace high cost Chinese mines.  When looking at the steel intensity of GDP, the uplift of steel demand at early industrialization falls away and demand cannot be expected to grow anywhere near as rapidly, so prices will fall.  But it seems hard to imagine mines more efficient than, say, Vale's will come along in volume.  Hence Treasury's estimates look very reasonable...at least to me, on constant currency.


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## sydboy007 (2 June 2014)

DeepState said:


> This results in a rational iron ore price of around $80USD per ton.  This corresponds to Treasury estimates as per the budget, which I think allows for constant currency from the looks of things:
> 
> As additional supply comes on stream, the cost curve should flatten and further displace high cost Chinese mines.  When looking at the steel intensity of GDP, the uplift of steel demand at early industrialization falls away and demand cannot be expected to grow anywhere near as rapidly, so prices will fall.  But it seems hard to imagine mines more efficient than, say, Vale's will come along in volume.  Hence Treasury's estimates look very reasonable...at least to me, on constant currency.




Prob is a lot mines will hold on past the point of rationality.  Or it makes financial sense to run at a loss if you are like some of the QLD / NSW coal mines that find it cheaper to sell at a small loss than to break their contracts.

There's also the problem of India coming back onto the export market next year, and from the looks of it they are scaling up pretty fast.

Then you also have to get the inefficient suppliers in China to close down, which is 50 50 depending on how slow their economy is going and how fast they want to try improve the air there.

I wont be surprised if spot prices go below $80 for awhile.  There is going to be a massive oversupply by the second half of 2015.  Will be interesting to see if Atlas Iron and FMG can survive the coming storm.  I'm expecting them to fall into Chinese ownership or at least control.

Hopefully the falling iron ore and coal prices will tank the AUD down to a more liveable level.


----------



## DJG (2 June 2014)

Here's another cost curve chart.

It's expected that chinese miners stop production at and under the $90 mark as they have low costs (of shutting down)/quick to shut down production.

It's meant to be a natural support level. 

Time will tell.


----------



## Ken Oath (2 June 2014)

burglar said:


> Can anyone send me a telex when it bottoms?!!




X 2 

Love the thread guys but I'm as confused as an octopus with a set of bag pipes by these charts.


----------



## Julia (2 June 2014)

Telex?


----------



## DeepState (2 June 2014)

sydboy007 said:


> 1. Prob is a lot mines will hold on past the point of rationality.  Or it makes financial sense to run at a loss if you are like some of the QLD / NSW coal mines that find it cheaper to sell at a small loss than to break their contracts.
> 
> 2. There's also the problem of India coming back onto the export market next year, and from the looks of it they are scaling up pretty fast.
> 
> 3. Hopefully the falling iron ore and coal prices will tank the AUD down to a more liveable level.




1. Yep, but irrationality in this market clearly cannot last indefinitely. In all likelihood, markets will look through unsustainable price levels to some degree.  Those rational costs were at levels where the marginal producer is not making economic profit.

2. India is a very small player in the scheme of things.  There is talk of 11.5mt of ore sitting in Goa which might be released (although it might be retained given India's own needs).  But this needs to be considered against 1300mt of annual production/supply. Additional production is marginal relative to the existing curve and I don't think it should be thought of as a game changer.




3. It is interesting that these fair value models focus on two sides of the current account ledger.  The Terms of Trade component sits on one side and the interest differentials component sits on the other.  The models suggest that the AUD is overvalued when both components are taken together.  Yet the AUD continues to defy.  Why?

The Terms of Trade are the Terms of Trade.  I accept they are doing what they are.  But the interest rate differential component is understating the current value of the Australian yield relative to RoW.  In a world where we are awash with money such that interest rates on the short end are as close to zero as the monetary mechanisms allow, interest differentials matter a whole lot more than they did before.  

Check this out.  Carry trade (AUDJPY) vs S&P 500.  The world is a carry trade.  There is a hunt for yield and there is a hunt for risk bearing.  Same same.




The demand for Australian yield can be seen in the compression of AUD 10 yr vs US Treasury 10 yr:




...This obviously flows on to corporate credit which has grown enormously as a recipient of international funds (at the expense of our banks).  We have discussed corporate yield compression against gov't earlier in the thread and this is another supporting factor for this viewpoint.

Until the world's monetary circumstances normalize, we may not see as weak an AUD as might have been imagined from historical relationships of a different era.

Isn't it ironic that by keeping our house in order, in the way that it has been done, the price of our goods and services becomes less competitive?  But that's the function of markets.


----------



## DeepState (2 June 2014)

Ken Oath said:


> X 2
> 
> Love the thread guys but I'm as confused as an octopus with a set of bag pipes by these charts.




Gold! I mean, 62% Fe Iron Ore!

Which charts are confusing you most? Happy to assist if I can.


----------



## sydboy007 (3 June 2014)

DJG said:


> Here's another cost curve chart.
> 
> It's expected that chinese miners stop production at and under the $90 mark as they have low costs (of shutting down)/quick to shut down production.
> 
> ...




I really question that FMG is down below $60.  I wonder what costs have been left out of that figure, or maybe it ignores their massive interest bill?

My understanding is RIO has the best at around $43, BHP at $45 , FMG up around $70 with over $8B in debt still on the books, AGO around $80, BCI around $70 - though admittedly that was early in the year so maybe some cost cutting is coming through.

My understanding is a falling AUD helps those costs curve down, but slowly since a lot of fuel / equipment contracts are in USD.

Prob the best thing to happen at BHP is the fact they haven't made any Rio stoopid purchases during the boom.  I'd expect they're biding their time for the eventual shakeout of the market and can pick up some decent assets on the cheap, unless the Chinese outbid them.


----------



## sydboy007 (3 June 2014)

Between the continued falling in construction (large employer) and the continued run down in inventories things don't look good for next financial year.

http://www.thebull.com.au/articles/a/46427-figures-even-gloomier-than-they-look.html

The number of residential building approvals fell by six per cent in April.

That fall was bad enough, but it followed two consecutive falls of about the same size.

And the less-noticed estimate of the value of approvals for non-residential buildings - hotels, hospitals, offices and so on - recorded a serious slump of 27 per cent.

That also followed a run of three increasingly steep falls.

As a result, the April value of approvals, residential and non-residential combined, came in at $5.88 billion, *$2.31 billion below the average for the final quarter of last year.*

Most economists look first at company gross operating profits, which looked strong in the March quarter with a rise of 3.1 per cent.

But half of that gain came from inventory revaluations which aren't included in GDP because they represent windfall gains rather than actual production.

And the other major chunk of income comes from wages which, the ABS said, rose by a tiny 0.2 per cent in the March quarter.

Unincorporated business profits increased strongly, but is a small part of the total of all three measures, which rose by just 0.9 per cent.

And that's before allowing for inflation, and GDP is typically measured in "real" or inflation-adjusted terms.

After falling by 0.6 per cent in the previous three months, inventories fell by 1.7 per cent in the March quarter.

That means less production for any given level of spending, to the tune of about 0.5 per cent of GDP.

Ahead of the figures, economists' forecasts for GDP growth in the quarter were centred on 0.8 per cent - in line with the long-run average.


----------



## sydboy007 (3 June 2014)

http://www.bloomberg.com/news/2014-...llion-bond-market-renders-models-useless.html

Just last month, researchers at the Federal Reserve Bank of New York retooled a gauge of relative yields on Treasuries, casting aside three decades of data that incorporated estimates for market rates from professional forecasters. Priya Misra, the head of U.S. rates strategy at Bank of America Corp., says a risk metric she’s relied on hasn’t worked since March.

After unprecedented stimulus by the Fed and other central banks made many traditional models useless, investors and analysts alike are having to reshape their understanding of cheap and expensive as the global market for bonds balloons to $100 trillion. With the world’s biggest economies struggling to grow and inflation nowhere in sight, catchphrases such as “new neutral” and “no normal” are gaining currency to describe a reality where bonds are rallying the most in a decade.

Globally, bonds have returned an average 3.89 percent this year for the biggest year-to-date gain since 2003, index data compiled by Bank of America Merrill Lynch show. *The advance decreased yields on 10-year Treasuries by more than a half percentage point to 2.48 percent, the fastest pace over the same span since 1995, while borrowing costs for the riskiest U.S. companies tumbled to a record 5.94 percent last week.*

*“The biggest mistake for people is they think interest rates are merely a projection of where the economy is supposed to go,”* Bianco said. “It’s the Fed and the way they have changed the markeplace.”


----------



## kid hustlr (3 June 2014)

I really enjoy reading these threads and listening to you guys speak, but the more I read them the more I'm convinced I will never be a fundamental/macro based type investor. This discussion in the main goes way over my head yet quite often I'm left asking myself  'This is all well and good, but how can I make money from this?'

---

I find the rising bond values over the past months to be interesting (as well as confusing). In this new world of buy everything I feel something has to give, yet I'm not sure how or what.

 I feel when I sit back in my chair as an Australian investor I see:

- Low Aussie bond yields
- Middle of the road p/e valuations in the ASX200, by no means appealing valuations. 
- Expensive property prices (one could argue on both a long term fundamental level and even short term given the recent increase)

So again I'm left asking myself - Where do I put my money??


----------



## DeepState (3 June 2014)

kid hustlr said:


> I'm left asking myself  'This is all well and good, but how can I make money from this?'
> 
> ---
> 
> So again I'm left asking myself - Where do I put my money??




Maybe your aim might be to understand the shape of risk in your portfolio.  Even if you cannot predict this stuff directionally, you can gain a sense of which way the risk will break or whether there is a lot more/less risk in the system than might be priced. The medium term stuff moves in big, slow, cycles. With prices moving more extremely as they move like extrapolations of the tide. Whilst never perfect, it can help to determine where you might be on this cycle and just be a little more sensible with your choices. 

As you would know, risk management is crucial to successful portfolio management.  If you hold a single stock, what happens to that stock's performance is  - for the most part - largely determined by its own actions.  Once you group that up into a portfolio, that influence washes out and the dominance of macro factors comes to the fore.  Since you are exposed to it one way or another, being an investor might require at least some background knowledge of where the pressure points are.  No-one is saying you need to be Soros plotting to crack the JPY.  Just aware to the risks.

It's the short term timing stuff that is super hard (not worth pursuing?) but your horizon might be longer.  Once you move into the multi-decade horizons, I guess macro matters less again as it washes out and quality shines through as long term returns become all that mattered and short/medium term risk concepts are less important for you.  Whilst Buffett is quoted liberally in this Forum, not many of us can really hack his kind of horizon (although his actual actions suggest a shorter horizon is how he invests in reality).

I am deploying assets too.  I can't find much which offers a decent reward for risk borne and it's been this way for a while and just gets worse.  There are pockets which are alright though. Fair is the new cheap.  I can't stand the thought of adding duration risk.  Whilst AEQ is much more reasonably priced than the US equivalent, it'll get dragged down if the S&P deflates as I think it will/should although not by the margins predicted by the CAPE models.  US equities are expensive even with the lowered yield and earnings growth is still not really coming through and much of the earnings growth is coming from financial engineering or unsustainable-growth boosting initiatives.

If you can't stand to take outright directional positions, the best ideas seem to me to be in spread trades. This is just a different style of investing that applies the same skills but repackages them.  Pair trading is an example.  So SKC is in the zone.  One thing I feel though is that 7% per annum is the new 10% per annum and reaching for the old hurdle would be like doing high jump with the bar set at 1.80m (which you did in high school) at aged 70.  Not a good idea.  We just have to make do with what we get presented with today and not pretend that it is otherwise.  A fortune saved is as valuable as a fortune made.


----------



## burglar (3 June 2014)

DeepState said:


> ... A fortune saved is as valuable as a fortune made.




A Train Controller once said "Sometimes an empty wagon is more valuable than a loaded wagon!"


----------



## DeepState (3 June 2014)

burglar said:


> A Train Controller once said "Sometimes an empty wagon is more valuable than a loaded wagon!"




A Train Controller once said "Sometimes an empty wagon is more valuable than a loaded wagon...*of telexes*"


----------



## burglar (3 June 2014)

DeepState said:


> ...*of telexes*"




Sorry folks, I did mean "Facebook"!

From the urban dictionary:


> facebook
> a stalkers dream come true
> facebook addict #1: dude you know that hot girl who lives upstairs, i totally got her screen name and cell phone number off of facebook
> facebook addict #2: awesome, now you can totally stalk her


----------



## qldfrog (3 June 2014)

an article I like:
http://www.brisbanetimes.com.au/business/markets/alarm-over-return-of-pregfc-conditions-20140603-39fcl.html
about the absence of risk premium and a comment I share on the equities/bond trends...how can they go in tandem...
anyway, hope it helps


----------



## sydboy007 (3 June 2014)

qldfrog said:


> an article I like:
> http://www.brisbanetimes.com.au/business/markets/alarm-over-return-of-pregfc-conditions-20140603-39fcl.html
> about the absence of risk premium and a comment I share on the equities/bond trends...how can they go in tandem...
> anyway, hope it helps




Desperation for income.  With negative real rates in a large chunk of the world, it's either starve or take on more risk that you should for a lot of savers.

Possibly the best one can hope for is the not fall and get crushed in the rush for the exits when it eventually occurs??

problem with the macro view is when the fundamentals take a back seat to central bank manipulation, we're best off not betting against the FED / BOJ / ECB / BOE.

Now if only I could put my hand up for some from QE to appear in my bank account.  5 to 6 zeros is all I'm after.  Barely a merchant bankers bonus, so not terribly greedy at all


----------



## DeepState (3 June 2014)

sydboy007 said:


> With negative real rates in a large chunk of the world, it's either starve or take on more risk that you should for a lot of savers.
> 
> Possibly the best one can hope for is the not fall and get crushed in the rush for the exits when it eventually occurs??
> 
> problem with the macro view is when the fundamentals take a back seat to central bank manipulation, we're best off not betting against the FED / BOJ / ECB / BOE.




"Volatility in many financial prices is unusually low."  
- Glen Stevens (RBA) in today's Statement.

VIX vs three month volatility in SP500:




With Central Banks either committed to normalizing (BoE, Fed) or at max stimulus (Japan), or heading into more crap (ECB)...does it seem reasonable for risk to be saying:

"Don't worry, about a thing..because every little thing is gonna be alright" 
- Bob Marley



And yet equity markets march upward virtually unbroken as yields continue to fall.  This is a violation of historical relationships.  It is a symptom of risk bearing and excess liquidity.  The usual relationship broke down at the end of the recession. 

"One of these things is not like the other."
- Sesame Street





Let's decompose the march of the S&P into multiple expansion and earnings.  EPS is actually lower than where it was in 2007.  Yet the multiple attached is about 30% higher.  The EPS growth heading into 2007 was also much higher than can reasonably be expected from this point.  In other words, the PE premium in 2007 was already rich.




With the decline in long bond yields, it is possible to conclude that the valuation now is sort of similar to the one at the peak of 2007.  But, it's a stretch because EPS growth cannot be sustainably produced by financial engineering and the GDP outlook is modest at 3% per annum (real) and expected to decline.  Credit growth is not like the post tech-wreck/Iraq 2 period and bargaining power of labor should increase as unemployment lowers, although much spare capacity exists. EPS growth is typically high after an acute crisis.  We are not in that phase any more. Basically, you'd want to be doing well and for bonds to stay at really low rates just to justify current super rich premiums at current bond yields.




...and long bond yields are incredibly tight in real terms.




"How low can you go"
- Ludacris


The other thing that CBs now know is that inflation targeting needs to consider asset price inflation as well.  As per QldFrog's link, the BoE is taking steps to cool the housing market.  Further, the Fed has moved to a checklist approach as opposed to strict targeting. Systemic risk is now more of an issue given the lessons of the GFC.  

"There was a flaw in my ideology."
- Alan Greenspan


----------



## DeepState (4 June 2014)

This just in from Europe:

Every item of inflation except for energy is down for the annual period ended May 2014 compared to the same figure in May 2013. 




ECB Meeting tomorrow...

- Negative rate on excess reserves is thought to be largely baked in
- LTRO in exchange for commitment to lend is possible
- Limited QE is currently an outside chance

More hanging on this than usual.  Watch out if you are in Euro Zone related positions.


----------



## sydboy007 (5 June 2014)

DeepState said:


> ECB Meeting tomorrow...
> 
> - Negative rate on excess reserves is thought to be largely baked in
> - LTRO in exchange for commitment to lend is possible
> ...




I'm trying to work out how it will impact AUD / EUR.  Heading over in a few months and it's killing me whether to buy now or wait till I get there.


----------



## sydboy007 (5 June 2014)

http://www.macrobusiness.com.au/2014/06/gdp-euphoria-needs-a-reality-check/

From the below it's not boding well for the retail sector.  Hate to think what the next qtr figures will look like after the no surprise budget tanked consumer sentiment.

_While headline “real” GDP recorded quarterly seasonally-adjusted growth of 1.1% and annual growth of 3.5% – the best outcome since March 2012 – actual spending in the economy fell.

That’s right, real gross national expenditure (GNE), defined as the sum of all expenditure within the economy, both public and private (including on imports), fell by 0.3% in seasonally-adjusted terms in March and was up by only 0.9% over the year – the fifth consecutive quarter where annual growth in GNE was below 1%.

In trend terms, GNE was flat over the March quarter, and up by only 0.7% over the year – also the fifth consecutive quarter where annual growth in GNE was below 1%._


----------



## sydboy007 (5 June 2014)

not looking too good for the resource states.

State final demand is a better representation of the actual economic activity within a state.

Can't bode well for house prices, unless NSW VIC investors decide the gras in greener over there


----------



## DeepState (5 June 2014)

sydboy007 said:


> I'm trying to work out how it will impact AUD / EUR.  Heading over in a few months and it's killing me whether to buy now or wait till I get there.




With inflation so low, there are real concerns that appreciation will be even more detrimental.  But the EUR rose from 1.28 to 1.39 during the year to April which obviously drains HICP.  Since then the Draghi USD call scenario seems to be priced in with the EUZ GDP contribution from net exports declining as well (From the Q1 2nd release).  This should all help with keeping a lid on the exchange rate.

July 2014 EURUSD Options are pricing a bias to *EUR weakening* vs USD.

July 2014 AUDUSD Options are pricing a bias to *AUD strength* vs USD, although there are wide wings of expectations on each side of the forward curve.

All in all, the options market is saying hang on to your AUD for now and convert later.  The risk of regret is somewhat limited by the implicit Draghi EURUSD call which he has sold to the market.  Your risk of regret could be reduced further by converting some now and a larger slice later.  Currency is currency.  Who the heck knows? I'm just the messenger for the data and market pricing.

Hope you have a blast.


----------



## sydboy007 (5 June 2014)

DeepState said:


> All in all, the options market is saying hang on to your AUD for now and convert later.  The risk of regret is somewhat limited by the implicit Draghi EURUSD call which he has sold to the market.  Your risk of regret could be reduced further by converting some now and a larger slice later.  Currency is currency.  Who the heck knows? I'm just the messenger for the data and market pricing.
> 
> Hope you have a blast.




Considering I've pretty much prepaid fro everything I'm only looking at converting spending money, so yeah I might as well hold on for a bit longer as the cost of regret, and being right, is not really that much in the grand scheme of things.


----------



## sydboy007 (5 June 2014)

http://www.zerohedge.com/news/2014-06-03/welcome-new-yield-hunger-games


The sale of complex debt products popular in the pre-crisis boom years has soared in 2014 as investors have embraced riskier assets in exchange for higher returns.

Issuance of US-marketed payment-in-kind notes - which give a company the option to pay lenders with more debt rather than cash in times of crisis - has almost doubled so far this year to reach $4.2bn, according to Dealogic. That is the highest amount since the same period of 2007, when a record $5.6bn in PIK notes were sold.

...

“We call it the yield-hunger games,” said Matt Toms, head of US public fixed income for Voya Investment Management. “In this environment of very low yields and very low volatility, any extra yield that products such as these may offer already helps.”

On average, PIK notes yield 50 basis points more than comparable high-yield bonds. Average yields on junk-rated bonds stood at 4.99 per cent on Tuesday, according to Barclays indices.

“I’m glad regulators are trying to instil some discipline in the market,” said Michael Collins, a senior investment officer at Prudential Fixed Income.

“I have no doubt that the resurgence of PIKs and other risky debt deals is a sign that we are setting the stage for the next down cycle. It is still a couple of years away, but some of these deals will be very high on the list of defaults.”


----------



## DeepState (5 June 2014)

sydboy007 said:


> The sale of complex debt products popular in the pre-crisis boom years has soared in 2014...
> 
> Issuance of US-marketed payment-in-kind notes - which give a company the option to pay lenders with more debt rather than cash in times of crisis - has almost doubled so far this year to reach $4.2bn...
> 
> “I have no doubt that the resurgence of PIKs and other risky debt deals is a sign that we are setting the stage for the next down cycle. It is still a couple of years away, but some of these deals will be very high on the list of defaults.”




Whilst I think this development increases risk to financial stability, particularly if still held on bank balance sheets and unhedged by a sound counterparty, I found the following interesting:


----------



## sydboy007 (5 June 2014)

DeepState said:


> Whilst I think this development increases risk to financial stability, particularly if still held on bank balance sheets and unhedged by a sound counterparty, I found the following interesting:




WOW.  Amazing if true.  Maybe some massaging of the figures?  Not sure if covenant lite loans are junk or get an investment grade rating???

This from a couple of years ago:

Default rates have been quite low in the corporate bond market over time, averaging 1.47% of all outstanding issues in the 32-year period measured. Investment grade bonds defaulted at a rate of just 0.10% per year, while *the default rate for below-investment grade (high yield) bonds was 4.22%.*

The vast majority of defaults have occurred among the lowest-rated issuers. The 31-year average for securities rated AAA (the highest rating) and AA were 0.0% and 0.2%, respectively. Comparatively, the default rate among *B-rated issuers (the second lowest) was 4.28%*, *but for the lowest tier, CCC/C, the default rate was 26.85%*.

By a wide margin, the majority of defaults are preceded by downgrades to the issuer’s credit rating. As a result, most defaults are likely to be preceded by a warning.


----------



## DeepState (5 June 2014)

sydboy007 said:


> WOW.  Amazing if true.  Maybe some massaging of the figures?  Not sure if covenant lite loans are junk or get an investment grade rating???
> 
> This from a couple of years ago:
> 
> ...




Cov-Lite are usually sub-investment grade.  Here's something interesting as well.  Cov-Lite default rates are lower than cov-heavy.  Why?  Apparently you only give cov-lite loans to the more credit worthy borrowers (yet they are sub-investment grade?)  That sort of makes sense, I guess.  It seems that the rating agencies do not make allowance for this which is why a cov-lite B credit does better than a cov-heavy B credit etc.


----------



## sptrawler (5 June 2014)

sydboy007 said:


> I'm trying to work out how it will impact AUD / EUR.  Heading over in a few months and it's killing me whether to buy now or wait till I get there.




Try to find out the local exchange rates, I found in Italy the exchange rates were day light robbery. In U.K they were fine.


----------



## DeepState (5 June 2014)

Meanwhile, over on the Continent....we have NIRP on the deposit facility at -0.1% and the Main Refi has been brought to 0.15%.  This is about the weakest end of expectations in terms of stimulus from economist surveys.  The weakest was, of course, no change.  Yet, the STOXX is having a modest up day, popping on announcement,  and the EUR is marginally down.  In addition the long end curves are steady with periphery tightening to core, albeit by bips. Gold is steady.

The size of the moves suggest a very very mild positive surprise net. Nothing to see here. Move along. If anything, there might have been a little doubt that the ECB would move.  The debt and currency markets are acting as if this result was in line with expectations.  Given rates have compressed so much, they (to personalize a bond) might be thinking that NIRP is just the prelude to something more energetic.  

In any case, get ready for a flood of stuff about negative interest rates...however, it's not a big deal for Europe.


----------



## burglar (5 June 2014)

sptrawler said:


> Try to find out the local exchange rates, I found in Italy the exchange rates were day light robbery. In U.K they were fine.




Stay out of Milan and Capri, if you want your spending money to last!!


----------



## sydboy007 (6 June 2014)

http://www.metal.com/newscontent/61...eel-production-was-sold-in-export-market-meps

The first coupe of paragraphs.  Doesn't bode well for the Iron ore juniors in Australia.  I can feel some massive write downs coming from BHP and RIO next year,

_Chinese steel demand growth is slowing down. This is partly due to high inventories throughout the supply chain but also a decrease in government investment. Despite this, output in the first four months of 2014 increased by 2.7 percent compared with the same period last year. By historic standards, this is a modest rate of growth, said MEPS International in a research note.

However, it is worth noting that *approximately 50 percent of China's increased, year-on-year, steel production in the first quarter of 2014 was exported*. Moreover, imports of steel into China in the first quarter of this year are little changed from the figure in 2013._


----------



## DeepState (8 June 2014)

So, like, this is kind of important from a few perspectives:


----------



## DeepState (12 June 2014)

From Niall Ferguson, The American Interest, 9 June 2014.  I thought this was an interesting and insightful observation about the growing similarities between the US and China:


----------



## DeepState (12 June 2014)

Another anecdote for clipping into the "this is nuts" file:


----------



## DeepState (12 June 2014)

Which of these central banks.....





Looks most like Varuca Salt?


----------



## DeepState (12 June 2014)

Chart of rolling 1yr forecast EPS for Australia, Europe and the US.  Notice Europe has not converged yet to Aust and US.  This may be somewhat alleviated when the full ECB package including TLTRO is introduced:





Meanwhile, the composition of EPS growth for the US in recent years, shows that it has arisen with very little revenue growth.  Although not shown (available if requested), corporate debt has declined materially and cash on balance sheet is strong which is helping to finance buy backs and dividend payments in the absence of sustainable growth:


----------



## sydboy007 (13 June 2014)

who'd a thought US 10Y T bills are high interest plays

Puts into perspective why the money is still flowing to aussie debt markets.


----------



## DeepState (24 June 2014)

sydboy007 said:


> Puts into perspective why the money is still flowing to aussie debt markets.




....keeping the AUD elevated despite deteriorating ToT.


----------



## DeepState (24 June 2014)

From the FOMC Press Conference following the release of the Minutes:




Source: FT


----------



## DeepState (24 June 2014)

Thought this was interesting.  Very different to what one could be led to believe from general 'sky is falling' reports.


----------



## DeepState (2 July 2014)

So Goldman Sachs finds that its Sigma-X dark pool was not actually delivering the best prices to pool participants. FINRA finds that Goldman did not have the proper processes in place from Dec 2008 to Aug 2011.  There were 395k transactions between 29 July 2008 to 9 August 2008 alone which contravened the law.

US regulators are filing a suit for $800,000.  No, there are no missing zeros at the end of that figure. In addition, Goldman will pay $1.67m (again, that's an 'm' as opposed to 'bn') in restitutions to clients.

This week, BNP Paribas has been fined $9bn for violating sanctions.

Which of these is just? Is the other unjust?  Or are they both screwed up?


----------



## skyQuake (2 July 2014)

DeepState said:


> So Goldman Sachs finds that its Sigma-X dark pool was not actually delivering the best prices to pool participants. FINRA finds that Goldman did not have the proper processes in place from Dec 2008 to Aug 2011.  There were 395k transactions between 29 July 2008 to 9 August 2008 alone which contravened the law.
> 
> US regulators are filing a suit for $800,000.  No, there are no missing zeros at the end of that figure. In addition, Goldman will pay $1.67m (again, that's an 'm' as opposed to 'bn') in restitutions to clients.
> 
> ...




A whopping 800k. Fantastic. Meanwhile Barclays is being sued by NY state and even its non-dark pool customers are leaving by the shipload.

Long GS short BNP/Barclays


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## sydboy007 (3 July 2014)

Not looking good for employment growth 

http://www.aigroup.com.au/portal/si...x.portlet.endCacheTok=com.vignette.cachetoken

The deterioration in the Australian PSI was evident across all the activity sub-indexes, which were all below 50 points this month. The sales, new orders, supplier deliveries and stocks sub-indexes moved below 50 points after indicating a mild expansion last month.

Three of the nine sub-sectors in the Australian PSI expanded in June. Growth remains concentrated in health and community services (62.0 points) and finance and insurance (64.7 points, three month moving averages). Accommodation, cafes and restaurants (54.3 points) expanded in June, for the first time since April 2013. The sub-indexes for retail trade (46.5 points) and the closely related wholesale trade sub-sector (46.6 points) stayed below 50 points in June, indicating ongoing contraction in these industries (three month moving average).

Ai Group Chief Executive, Innes Willox, said: “Conditions in the services sector slipped again in June with respondents to the latest Australian PSI survey suggesting that ongoing weakness across much of the domestic economy and the public reception of the Federal Budget are dampening consumer and business confidence. With both the sales and new orders sub-indexes pointing to contraction, it appears likely that it will take several months at least to recapture the momentum that was building earlier in the year in the services sector.

“Several respondents indicated that the further deterioration in manufacturing conditions in recent months is reducing demand for business-to-business services such as accounting, IT and personnel services while poor results for the retail, wholesale and transport & storage sub-sectors pointed to further weakness in household spending,” Mr Willox said.


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## sydboy007 (7 July 2014)

http://www.zerohedge.com/news/2014-...er-revealing-40-surge-bad-debt-provisions-rec

_Unfortunately for some banks, especially those which operate in Europe's supposedly highest-rated country, Austria, sometimes just being able to kick the can is not enough as on occasion a law will change, having the unintended consequence of forcing the bank to admit just how ugly its balance sheet truly is. That's what happened overnight when Erste Group, Austria's largest bank by assets, and the third biggest bank in Eastern Europe after UniCredit and Raiffeisen, announced that, oops, its earlier forecast about the amount of bad loans on its books is wrong, and will have to rise by a massive 40%, leading to what will be a record $2.2 billion loss, and triggering writedowns._

Tick tock for the debt clock.  Japan or Europe first to go???


----------



## sydboy007 (7 July 2014)

http://www.thebull.com.au/premium/a...-the-world-economy-as-energy-prices-rise.html

I found the below quite an interesting concept.  Only thing I'd argue with is that rising temperatures heating requirements may be reduced in colder countries, and cooling costs will likely rise in warm countries as it will just too hot without it for a lot of manufacturing to occur.

_One part of our problem is that with globalization, we are competing against warm countries – countries that receive more free energy from the sun than we do, so are warmer than the US and Europe. Because of this free energy from the sun, homes do not need to be built as sturdily and less heat is needed in winter. Without these costs, wages do not need to be as high. These countries also tend to have less expensive healthcare systems and lower pensions for the elderly.

Governments can try to fix our non-competitive cost structure compared to these countries by reducing interest rates  as much as possible, but the fact remains–it is very difficult for countries in cold parts of the world to compete with countries in warm parts of the world in making goods. This cost competition problem becomes worse, as the price of energy products rises because we are competing with a cost of $0 for heating requirements. If cold countries add carbon taxes, but do not surcharge goods imported from warm countries, the disparity with warm countries becomes even worse.

In the early years of civilization, warm countries dominated the world economy. As energy prices rise, this situation is likely to again occur._


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## DeepState (7 July 2014)

Another push to remove the USD from the position of enjoying Exorbitant Privilege...from France, no less. Follows from the agreement between Russia and China to trade energy in Renminbi.  This strikes right to the heart of the scaffold of USD centrality since coming off gold.  If the hub breaks/splinters, QE could be back in a hurry.


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## sptrawler (7 July 2014)

I read that associated press is going to use computers to generate financial reports from 'raw data' this will result in a loss of 400 financial journalist jobs apparently.

Well at last, a bit of pressure on the journo's, welcome to our world.

http://www.theaustralian.com.au/med...alism/story-e6frg996-1226979748460#mm-premium

Here is a link to some common sense.

http://www.smh.com.au/business/mark...eteran-investor-han-k-lee-20140707-zsyj6.html


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## sydboy007 (14 July 2014)

Definitely the finite world is signalling cheap oil is consigned to the history books.

http://www.telegraph.co.uk/finance/...try-is-the-subprime-danger-of-this-cycle.html

Data from Bank of America show that oil and gas investment in the US has soared to $200bn a year. It has reached 20pc of total US private fixed investment, the same share as home building. This has never happened before in US history, even during the Second World War when oil production was a strategic imperative.

The cumulative blitz on exploration and production over the past six years has been $5.4 trillion, yet little has come of it. Output from conventional fields peaked in 2005. *Not a single large project has come on stream at a break-even cost below $80 a barrel for almost three years.*

"*What is shocking is that upstream costs in the oil industry have risen threefold since 2000 but output is up just 14pc*," said Mark Lewis, from Kepler Cheuvreux. The damage has been masked so far as big oil companies draw down on their cheap legacy reserves.

"They are having too look for oil in the deepwater fields off Africa and Brazil, or in the Arctic, where it is much more difficult. *The marginal cost for many shale plays is now $85 to $90 a barrel*."

A report by Carbon Tracker says companies are committing $1.1 trillion over the next decade to projects that require prices above $95 to break even. *The Canadian tar sands mostly break even at $80-$100. Some of the Arctic and deepwater projects need $120. Several need $150*. Petrobras, Statoil, Total, BP, BG, Exxon, Shell, Chevron and Repsol are together gambling $340bn in these hostile seas.

Martijn Rats, from Morgan Stanley, says* the biggest European oil groups (BP, Shell, Total, Statoil and Eni) spent $161bn on operations and dividends last year, but generated $121bn in cash flow*. They faces a $40bn deficit even though Brent crude prices were buoyant near $100, due to disruptions in Libya, Iraq and parts of Africa. "Oil development is so expensive that many projects do not make sense," he said.

IHS Global Insight said *the average return on oil and gas exploration in North America has fallen to 8.6pc, lower than in 2001 when oil was trading at $27 a barrel*. What happens if oil falls back towards $80 as Libya ends force majeure at its oil hubs and Iran rejoins the world economy?

*"Under a global climate deal consistent with a two degrees centigrade world, we estimate that the fossil fuel industry would stand to lose $28 trillion of gross revenues over the next two decades, compared with business as usual," said Mr Lewis. The oil industry alone would face stranded assets of $19 trillion, concentrated on deepwater fields, tar sands and shale.*


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## Smurf1976 (14 July 2014)

sydboy007 said:


> Data from Bank of America show that oil and gas investment in the US has soared to $200bn a year. It has reached 20pc of total US private fixed investment, the same share as home building. This has never happened before in US history, even during the Second World War when oil production was a strategic imperative.




It can be said in two words - peak oil.

It never was about running out as such. As with any resource constraint, it follows the basic pattern that the "low hanging fruit" is picked first, after which it becomes a case of running faster and faster in order to achieve less and less.

At some point, we'll reach the stage where the economy simply can't afford to continue growing oil production at ever increasing costs. 20% of fixed investment now, give it a few years and that will be 25, 30, 35% and at some point something breaks economically as a result.

It's the same with any natural resource. There's still plenty of coal in the UK but it's too expensive to mine. Not "too expensive" as in it can't compete with other coal mines, but "too expensive" as in nobody could afford to use the coal unless the cost is socialised in some manner. Therefore it stays in the ground. Much the same has happened in Germany and Japan with coal.

We'll never extract all the oil, because we simply can't afford to. If it ends up costing $5 per litre then we just can't afford to use anywhere near as much as we do today, meaning that the marginal sources costing that much won't actually be developed to any significant extent. Once that tipping point is reached, where we can't afford to pay rapidly increasing costs, that's when we'll see a peak of physical oil extraction.

The key point to grasp, and which most seem to struggle with, is that the timing of peak physical extraction is not solely a function of geology and isn't actually that relevant in an overall context. What matters is when business as usual no longer works.

It's no good being able to supply 120 million barrels per day at a price of $300 if the world can't actually afford to spend $13 Trillion a year on oil. Just because it's in the ground and technically able to be extracted, doesn't mean we can afford to do so.

The real, unanswered question is at what price point the economy "breaks" sufficiently to preclude further growth in total expenditure on oil? That's the real question and a very relevant one on a stocks / investment forum. My guess personally is that the limit is somewhere in the $150 - $200 per barrel range.


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## sydboy007 (14 July 2014)

Smurf1976 said:


> The real, unanswered question is at what price point the economy "breaks" sufficiently to preclude further growth in total expenditure on oil? That's the real question and a very relevant one on a stocks / investment forum. My guess personally is that the limit is somewhere in the $150 - $200 per barrel range.




You only have to look at graphs showing US and China consumption.  Pretty much every barrel of consumption dropped in the USA has been taken by China.  It will boil down to who can extract the highest $$$ in GDP from each unit of oil.  In the west there's lots of recreational oil consumption that will disappear as prices continue to rise, and the developing world will use it.

The problem all the economic models have is they view oil consumption as a demand issue, not a supply issue.  I'd agree the demand limit is in the $150-200 range, and probably much closer to the $150 range - iirc $146 was what it go to pre GFC and things were already turning nasty in a lot of the developing world.

I'm starting to wonder if those doomsday preppers ain't so crazy afte rall.  Maybe as a country we need to start disconnecting from the global economy and see just how much we can make do with indigenous production.  At the moment we're screwed.


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## DeepState (15 July 2014)

1. So...after Barclays gets busted for acting in poor faith for its Dark Pool clients, volume dropped by ONLY 40%?  What?

2. RBA minutes released today.  Australian dollar still higher than historical levels....




Classic carry.


----------



## sydboy007 (16 July 2014)

Could be interesting for those who like their yield income.

am I wrong to think the hang seng is offering the  best yield / risk play?

http://www.bespokeinvest.com/thinkbig/2014/7/15/country-dividend-yields.html


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## DeepState (16 July 2014)

sydboy007 said:


> Could be interesting for those who like their yield income.
> 
> am I wrong to think the hang seng is offering the  best yield / risk play?
> 
> http://www.bespokeinvest.com/thinkbig/2014/7/15/country-dividend-yields.html




Not necessarily wrong.  Just something more to consider:

MSCI HK has around 70% in Financials, Telco and Utilities.  These tend to trade on higher yields and lower PE.  So perhaps the data you posted reflects this.  Naturally, the sector composition of each market and other similar considerations will, to a significant extent, impact the valuation parameters shown.  What we really need to make this comparison easier is to sector neutralize each country's stats. If we did that, I suspect the picture would be less clear cut.


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## sydboy007 (22 July 2014)

"We've got to make sure that every molecule of gas that can come out of the ground does so. Provided we've got the environmental approvals right, we should develop everything we can." Ian Macfarlane (resource minister)

I'm not sure how a lot of manufacturing and food processing is supposed to survive with export parity gas prices?  Curtis Island LNG export facilities were over built - should have been a clause they could only use CSG rather than siphon away a large chunk of cooper basin gas from local users.  Another calssic example of Governments of various stripes taking short term gains over the long term.


http://www.businessspectator.com.au...il&utm_content=831043&utm_campaign=pm&modapt=

_An alliance of industry associations – largely in the manufacturing sector – have released a report today by Deloitte Access Economics outlining that soaring gas prices will curtail output in manufacturing and mining sectors by levels which this industry alliance claim are “significantly larger than those associated with repeal of the carbon tax”.

The group – involving a coalition of the Australian Industry Group, the Aluminium Council, the Energy Users Association, Plastics and Chemicals, Food and Grocery Council and the Steel Institute – point out that the expected rise in gas prices as part of LNG exports will have the following impacts:

– Australia's manufacturing output will contract by $118 billion over the next seven years;

– The mining sector will contract by $34 billion and the agriculture sector by $4.5 billion; and

– 14,600 manufacturing jobs will be lost.

Contrary to Abbott’s assertions of an economic wrecking ball, the regulatory impact statement which accompanied his own carbon price repeal bill outlined that manufacturing and agricultural economic output would expand by more with the carbon price left in place rather than repealed. However, this would come at the expense of mining and, in particular, mining of coal, gas and non-ferrous ore._


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## CanOz (22 July 2014)

sydboy007 said:


> Could be interesting for those who like their yield income.
> 
> am I wrong to think the hang seng is offering the  best yield / risk play?
> 
> http://www.bespokeinvest.com/thinkbig/2014/7/15/country-dividend-yields.html




This is a great chart Syd, can you re-post in the International Markets thread? Also can you give the source and / post the update every a Qtr?


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## sydboy007 (23 July 2014)

http://blogs.telegraph.co.uk/financ...-debt-ratios-poised-to-breeze-past-us-levels/

The ratio has risen by 100 percentage points of GDP over the last five years. As Fitch has argued out in the past, this is more than double the rise seen in Japan over the five years before the Nikkei bubble burst in 1990, or in the US before subprime blew up in 2007, or in Korea before the Asian financial crisis.

It is the speed of the rise that worries credit rating agencies and regulators – including many at the Chinese central bank – as much as the volume itself. Though China is scary on both fronts. *It has pushed debt to $26 trillion,* more than the entire commercial banking systems of the US and Japan combined. The scale obviously has global ramifications.


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## DeepState (23 July 2014)

sydboy007 said:


> http://blogs.telegraph.co.uk/financ...-debt-ratios-poised-to-breeze-past-us-levels/
> 
> The ratio has risen by 100 percentage points of GDP over the last five years. As Fitch has argued out in the past, this is more than double the rise seen in Japan over the five years before the Nikkei bubble burst in 1990, or in the US before subprime blew up in 2007, or in Korea before the Asian financial crisis.
> 
> It is the speed of the rise that worries credit rating agencies and regulators – including many at the Chinese central bank – as much as the volume itself. Though China is scary on both fronts. *It has pushed debt to $26 trillion,* more than the entire commercial banking systems of the US and Japan combined. The scale obviously has global ramifications.




A view from FT on the above:


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## sydboy007 (23 July 2014)

DeepState said:


> A view from FT on the above:
> 
> View attachment 58789




Yeah, I don't see the crisis as being similar to the GFC, more it's just going to cause their rate of growth to stagnate for a very long time.  Zombie loans will eventually crowd out productive loans.  How fast that occurs depends on how much can kicking the Govt undertakes.  japan seems to paint a likely future for China unless they undertake fundamental reforms, and write off large licks of debt (unlikely).

The fact the central bank is continuing to loose a lot of money on it's FOREX reserves - assets mainly in USD and liabilities in CNY - that supposed strength is actually slowly turning into part of the problem.  If their CNY convertibility deals with other BRICS helps to see the USD lower then it's as much a boone as bust for them too.

We do live in interesting times.


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## sydboy007 (28 July 2014)

I find Gail Tverberg to be an interesting, though worrying, writer to read

http://ourfiniteworld.com/2014/07/23/world-oil-production-at-3312014-where-are-we-headed/

_Thus, we cannot expect decline to follow a bell curve. The real model of future energy consumption crosses many disciplines at once, making the situation difficult to model.  The Reserves / Current Production model gives a vastly too high indication of future production, for a variety of reasons–rising cost of extraction because of diminishing returns, need for high prices and taxes to support the operations of exporters, and failure to consider interest rates.

The Energy Return on Energy Invested model looks at a narrowly defined ratio–usable energy acquired at the “well-head,” compared to energy expended at the “well-head” disregarding many things–including taxes, labor costs, cost of borrowing money, and required dividends to stockholders to keep the system going. All of these other items also represent an allocation of available energy. A multiplier can theoretically adjust for all of these needs, but this multiplier tends to change over time, and it tends to differ from energy source to energy source._


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## sydboy007 (29 July 2014)

If the below is enacted by the Eu and USA it will have a major impact on the Russian economy.  I'd nearly call it economic war in terms of the potential impact.

http://blogs.telegraph.co.uk/financ...to-shut-russia-out-of-world-financial-system/

Here are a few extracts.

Russian companies and financial institutions are heavily dependent on EU capital markets:
Between 2004 and 2012 a total of USD 48.4bn was raised through lPOs in the EU by companies incorporated in Russia. Out of those, USD 15.4bn was issued by state-owned financial institutions.
ln 2013, 47% of the bonds issued by Russian public financial institutions were issued in the EU's financial markets (â‚¬7.5bn out of a total of â‚¬15.8bn).

Restricting access to capital markets for Russian state-owned financial institutions would increase their cost of raising funds and constrain their ability to finance the Russian economy, unless the Russian public authorities provide them with substitute financing. lt would also foster a climate of market uncertainty that is likely to affect the business environment in Russia and accelerate capital outflows.

With regard to the scope of the restriction, the measure would consist in prohibiting any EU persons from investing in debt, equity and similar financial instruments with a maturity higher than 90 days, issued by state-owned Russian financial institutions after the entry into force of the restrictive measure anywhere in the world. lt would also be prohibited to provide investment services and any service in relation to the admission to trading on a regulated market or trading on a multilateral trading facility with regard to the same financial instruments.
With regard to the entities targeted, the measure would target Russian state-owned credit institutions (banks with over 50% public ownership), as well as development finance institutions.

The prohibition would extend both to primary markets (first issue) and secondary (subsequent trading) market of the newly issued Russian securities. Existing shares and bonds would not be covered. Transactions other than those mentioned before with the targeted entities would remain possible, Russian companies and financial institutions are heavily dependent on EU capital markets:

lmpact on Russian investors would consist in sharply increased costs of issuance, even if eventually alternative financing sources in third markets could be found.

Substitution would not be easy in the short term. Even if not caught by EU sanctions, third-country investors will likely be unwilling to participate in new issuances by targeted entities or demand significantly higher yields. This would push companies to seek State financing as a stopgap, further straining the government's budget.

The efficiency of the measure strongly depends on co-ordination with the US. EU and US investors constitute the major portion of market participants investing or assisting the investment in these financial instruments and their venues are the major hubs for issuance.

Other jurisdictions such as Switzerland, Singapore, Hong Kong or Tokyo would only provide significant substitution capacity over time, but they could not fully compensate for the loss of EU and US investors.


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## DeepState (29 July 2014)

sydboy007 said:


> Other jurisdictions such as Switzerland, Singapore, Hong Kong or Tokyo would only provide significant substitution capacity over time, but they could not fully compensate for the loss of EU and US investors.




This has tones of the formation of the Eurodollar market.  Regulatory arbitrage is a specialty of markets and a cottage/city industry exists.  EU and US investors, possibly via hedge funds and other secretive intermediaries which are established outside of US and EU jurisdiction, would suddenly find the interest rates offered on wholesale deposits in third nations offers very nice opportunities for Euro and USD denominated investments.  What happens after that is plausibly denied.  If desired, the paperwork to achieve this kind of outcome can be drafted and signed in days.  The infrastructure already exists. I suspect that Russia will get its hands on plenty of hard currency.  The lawyers and bankers will already have met to discuss contingencies.  The volume involved is a drop in the world financial ocean.

For every measure there is a countermeasure. It is an interesting escalation nonetheless.


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## sydboy007 (4 August 2014)

Could be part of the reason why the department stores and harvey norman are having such a hard time.


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## sydboy007 (4 August 2014)

not sure if this is a repeat of pre GFC??

http://www.zerohedge.com/news/2014-08-01/suddenly-wall-street-bailing-housing

Among this week's most notable moves was the decompression of high-yield credit spreads to near 9 month wides (and continued outflows). What went notably-under-reported by the mainstream media, however, was an even bigger selloff in US mortgage bonds. While JPMorgan is unable to see "any fundamental reason" for the plunge in prices, the worrying indication from the magnitude of the drop relative to volumes is that liquidity has evaporated. As 

Bloomberg notes, with dealer inventories sold down (due to new regulations that make repo and agency securities unpalatable), they have no way to 'smooth' the selling when investors want to exit positions. Weakness of this magnitude when the 10Y gained only 2bps on the week is a big wake-up call that traders are looking for the exits from housing debt and the door is very narrow.


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## sydboy007 (5 August 2014)

how long can the household debt binge and bank profit chow down continue?


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## DeepState (5 August 2014)

sydboy007 said:


> how long can the household debt binge and bank profit chow down continue?




Bank share prices have more or less moved in line with EPS, with PE contributing little to the variation of the stock price over recent years.

The chart you have shown in relation to household debt to income is interesting.  The more recent divergence reflects more favourable wholesale funding availability and, maybe, growth in lending outside of that through households.  I'd need to check.  Yes.  Credit growth has increased for Non-Financial corps from shrinking in the period mid-2009-mid 2011 to slightly above the growth rate of households since early 2012.

It would appear that debt to income has hit a ceiling.  That's with debt interest burdens at low levels of interest.  Further, it is clear that banks are yield plays also.  As non-mining growth picks up, there will be a balance between who get the benefit - capital or labour.  If labour gets a big chunk, incomes will grow and as will borrowing capacity.  If successful, corporate lending should also expand.  Both of these are constrained by the interest rates actually payable.

It is likely that interest rates will stay subdued with forward curves not indicating anything revolutionary on that front.  I guess that means that this show still has a bit to run without requiring PE expansion to support the story.

Risk factors: 

+ inflation breaks to the upside due to inflexibility at key junctures and rates rise before growth in non-mining takes hold...downside
+ AUD falls, inflation rises but it washes through, not requiring a policy response...upside
+ ECB TLTRO outcome..impacting funding costs...depends.

plenty more...


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## sydboy007 (6 August 2014)

http://pensionpartners.com/blog/?p=602

_We are now over seven months into the year and while investors remain highly bullish the average U.S. stock is down on the year. You read that word correctly: down. The cap-weighted S&P 500 has been masking underlying weakness for the entire year. The median total return of stocks in the Russell 3000 is actually -1.7% in 2014.

In addition, in spite of the “rising rate environment” talk, we’ve actually seen a persistent decline in interest rates for the entire year, with the 30-year Treasury Bond yield moving from 3.9% to 3.2%.
_

The second graph shows the importance of rebalancing your portfolio.  Last years dogs can make a tasty new years breakfast /sic


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## sydboy007 (6 August 2014)

US centric, but I'm sure others are like myself with some exposure to the US market.

Quite a few interesting graphs 

http://www.businessinsider.com.au/stock-buybacks-and-stock-prices-2014-8

One big source of demand for stocks in recent years has come from companies buying back their own shares. These buybacks have not just provided extra demand ”” they have decreased the total supply of shares available. So the buybacks have shifted the supply-demand balance and helped drive stock prices higher.

All these buybacks, which have ranged between $US75 billion and $US159 billion a quarter for the past four years, have provided a steady flow of demand for shares. As the chart below shows, the buybacks have not been offset by new share issuance, so they have modestly reduced the total supply of shares available for S&P 500 companies. The number of shares outstanding is now lower than it was back in 2005, almost 10 years ago.

One important point in the charts above is that corporations usually make the same mistake in buying back their own stocks that many investors make: They buy most aggressively late in bull markets when stocks are about to fall. And then they stop buying when prices plunge and their shares are actually cheap. In so doing, in other words, they squander shareholder capital.

So now the question is… How long will corporations keep buying back stock at current or ever-increasing levels? Will this source of demand continue?

One way to begin to answer that question is note where the money to buy back stocks is coming from.

Some of it is coming from the companies’ operating cash flow. .., American companies have had high cash flows over the past several years. (It’s worth noting, though, that these cash flows have not increased for the past few years).

Another big source of cash for buybacks, however, has been debt. ..., *companies have been borrowing like mad in recent years. And they have been using lots of the cash they borrow to buy back their stock.*

In other words, corporations have borrowed so much money, in part to buy back their own stocks, that they are “levered” to the gills.

What is the maximum debt load that corporations can carry relative to the size of the economy?

No one knows. For all we know, we’ve already exceeded it.

What is clear is that debt capacity depends in large part on interest rates. When rates are very low, as they have been for the past 5 years, corporations (and people) can support much more debt than they can support when interest rates are high.


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## sydboy007 (7 August 2014)

http://gregormacdonald.tumblr.com/post/93965564740/global-oil-production-falters-once-again

Global oil production ex-US is actually lower now at 68.612 mbpd than it was more than six years ago, when it was tracking at 68.935 mbpd in 2008. US oil production now accounts for 10.6% of total global production. More poignant is that global oil production ex-US is also in short-term decline, compared to its high in 2012. Both annual data (shown here) and the monthly data support this trend: the rest of Non-OPEC and even OPEC remain quite stagnant, and unable to make any further supply response to today’s higher price of oil. | see: Global Oil Production mbpd- Ex-USA (white) | USA (red) 2008-2014.

As previously discussed in TerraJoule.us, the oil and gas industry as a whole has had a very difficult time achieving profit-growth, even in a time of repriced oil. EIA Washington spoke to this issue just recently, in their Today in Energy: As Cash Flow Flattens, Major Oil Companies Increase Debt, Sell Assets.

Although US oil production has started to hit 8.5 mbpd on a monthly basis recently, TerraJoule.us in this month’s issue, The New Dependency on US Oil, is forecasting that total US production is not likely to rise past 9.5 mbpd on an annual basis. With better global growth slated for 2015 as the Non-OECD economies start to strengthen, the lower pace of US oil production growth will form a major piece to the next oil repricing cycle. 2015 will bring, therefore, the first phase of this repricing, as oil makes a strong, initial move off the $100 level. Oil should respond to a slowdown in US production late in 2014, and could hit a high of $115 to $120 next year.


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## McLovin (7 August 2014)

Big jump in unemployment from 6% to 6.4%. Victoria has hit 7%.


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## sydboy007 (7 August 2014)

http://www.businessinsider.com.au/mergers-and-tax-inversion-trend-fall-apart-2014-8

On Tuesday, more than $US100 billion worth of proposed mergers was withdrawn as Fox pulled its bid for Time Warner and reports said Sprint won’t make an offer for T-Mobile.

Additionally, Walgreen announced that it would acquire the remaining stake in European pharmacy chain Alliance Boots it doesn’t already own, but as part of the deal the company won’t move its tax base overseas in a tax inversion deal.

On Monday, we highlighted commentary from Jonathan Krinsky of MKM Partners who wrote that for the last year and a half, the market has been effectively “crying wolf” at every small decline by quickly recovering any losses and again moving higher.

Krinsky said that now, the wolf may finally be coming.

In an environment where investors seem to be looking for an excuse to sell stocks, the breakdown of two powerful corporate trends might be enough to really spook the market.


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## qldfrog (7 August 2014)

McLovin said:


> Big jump in unemployment from 6% to 6.4%. Victoria has hit 7%.




is anyone surprised?
And who will now agree that rates will actually fall here?


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## McLovin (7 August 2014)

There's been a change in the definition of looking for work, which probably explains the rise.

Pp 6-8.

http://www.ausstats.abs.gov.au/ausstats/meisubs.nsf/0/E90D34FDE03092E5CA257D2C001244E7/$File/62020_jul%202014.pdf


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## CanOz (7 August 2014)

A little technical stuff for the macro thread, timing seems right...

How you’ll know if it’s time for a market crash



> By L.A. Little
> 
> Last week, U.S. equities dropped 2% to 3%, depending on what index you monitor. That had the financial columns full of crash warnings about the coming plunge. Now to be fair, we have seen these headlines for a while now, so it's not like they just suddenly began to appear, but the fact that there actually was some selling added a little credence to the crash worries. Sure there were a few voices of reason, but for the most part, the coming declines were all but set in stone as far as most commentators were concerned. But is that really the case? Is it finally time for a crash?
> 
> ...


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## DeepState (7 August 2014)

1.Agree that the rise in unemployment was partly due to the change in participation rate, but I cannot tell if this would have happened anyway or was driven by change in definition.  ABS does not think it had much impact on the participation rate figure, but small variations there impact unemployment.  The market reacted adversely to this on the headline, but I am puzzled. Hours worked was up 0.9% sa. and there was a healthy move from part-time to full time employment.  So the underlying is alright but it doesn't show through to the employment figure quite yet.

2.The market was somewhat surprised.  The 1 year yield didn't move much because the RBA is expected to hold rates steady for a year.  The two and three year bond yields each declined by 7bps.  That's a move of some note and more or less implies that the chances of a rate rise in 2 years time has moved from near certainty to unlikely. Looking out three years, rates have moved from implying an additional 25bps rise and the further ~25% of a second tightening to less than a 50% chance of a single rate rise of 25bps.  In other words, we are looking at a flat RBA official rate for at least the next three years.


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## qldfrog (8 August 2014)

http://www.brisbanetimes.com.au/business/property/brisbane-office-vacancies-reach-new-high-20140807-101k8e.html
Worse than during the GFC, back to the level of the recession we had to have
This matches what I see on a day to day: empty offices and retail in the CBD;
I have a tweaked vision obviously focussed on IT/Mining/Engineering projects so  BA, PM and associated roles but for now years (ie end of mining boom 2 or so years ago) it has been a downhill slide in term of available positions as no new work arrive and existing projects get completed.
None of these type of jobs ever being recorded in tge jobless rate, yet having a very high economic impact.
IMHO, what we see now is the after effect of what happenned when these roles were lost months ago
This will explain my gloomy forecast for the next couple of years; hoping I am wrong.


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## sydboy007 (8 August 2014)

DeepState said:


> 1.Agree that the rise in unemployment was partly due to the change in participation rate, but I cannot tell if this would have happened anyway or was driven by change in definition.  ABS does not think it had much impact on the participation rate figure, but small variations there impact unemployment.  The market reacted adversely to this on the headline, but I am puzzled. Hours worked was up 0.9% sa. and there was a healthy move from part-time to full time employment.  So the underlying is alright but it doesn't show through to the employment figure quite yet.
> 
> 2.The market was somewhat surprised.  The 1 year yield didn't move much because the RBA is expected to hold rates steady for a year.  The two and three year bond yields each declined by 7bps.  That's a move of some note and more or less implies that the chances of a rate rise in 2 years time has moved from near certainty to unlikely. Looking out three years, rates have moved from implying an additional 25bps rise and the further ~25% of a second tightening to less than a 50% chance of a single rate rise of 25bps.  In other words, we are looking at a flat RBA official rate for at least the next three years.




1. My understanding of the employment figures was that total employment decreased by a seasonally adjusted 300 to 11,576,600 in July. The decrease in jobs was driven by a 14,800 decrease in part-time jobs, partly offset by a 14,500 increase in full-time jobs. *Aggregate monthly hours worked decreased by 14.8 million hours (0.9%) to 1 ,610.7 million hours.*  That's a significant fall in hours worked - maybe a usual fall this time of year, but still a significant income drop for the economy.  

The participation rate also increased by 0.1% to 64.8%, which is part of the reason why the unemployment rate rose, and softens the blow of the poor headline result, but since the GFC we've had roughly a 1.5% fall in the participation rate.  How much of that is the pensioner boom and how much is discouraged workers?  Anecdotally my friends in the retail industry are finding it hard to get enough work, so the level of underemployment is likely to be high as well, and reflects the large fall off in hours worked.

2. Fits with the fall in bank 3 year mortgage rates.


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## DeepState (8 August 2014)

sydboy007 said:


> *Aggregate monthly hours worked decreased by 14.8 million hours (0.9%) to 1 ,610.7 million hours.*  That's a significant fall in hours worked - maybe a usual fall this time of year, but still a significant income drop for the economy.




You must have gotten the final version.  I was reading off a pre-release which obviously still had a few typos in it.


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## sydboy007 (9 August 2014)

another step or 3 down the road to human obsolescence 

http://www.tomsitpro.com/articles/ibm-cornell-neuron-neurosynaptic-supercomputer,1-2103.html

BM, in collaboration with Cornell Tech and iniLabs, has announced the first neurosynaptic computer chip with one million programmable neurons, and 256 million programmable synapses, capable of 46 billion synaptic operations per second. The chip is about the size of a postage stamp and, IBM claims, is one of the largest complimentary metal-oxide-semiconductor (CMOS) chips ever made.

... Because of the neurosynaptic chip's communication and integration capabilities, multiple chips can scale out easily, much like a human cortex.

The new neurosynaptic chip, in addition to its impressive computing power claims, is highly energy efficient. The chip holds 5.4 billion transistors, thanks to the CMOS architecture, and, according to the IBM press release, “while running at biological real time, it consumes a miniscule 70mW – orders of magnitude less power than a modern microprocessor.” This is about the equivalent of a hearing-aid battery.

Additionally, unlike traditional computer chips that run and consume power all the time, the neurosynaptic chip is 'event-driven' and functions only when it is needed.


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## Smurf1976 (9 August 2014)

sydboy007 said:


> Anecdotally my friends in the retail industry are finding it hard to get enough work, so the level of underemployment is likely to be high as well, and reflects the large fall off in hours worked.




I know quite a few people who were doing lots of overtime in the past but these days it's virtually zero Meanwhile they're not overly busy during normal working hours either. 

Further, there seems to be a general "when someone leaves, don't replace them" policy among quite a few employers as well, they're basically avoiding putting off staff as such, by hoping that natural attrition does it. 

This situation is basically underemployment in a physical work sense, whilst being lucky enough to still be being paid a full time wage at least for the time being. One resulting issue is that workload would need to pick up quite a lot before they'd need to look at hiring anyone new, if it was just a modest increase then current staff would simply work harder. The term "jobless recovery" comes to mind there.


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## sydboy007 (9 August 2014)

Smurf1976 said:


> I know quite a few people who were doing lots of overtime in the past but these days it's virtually zero Meanwhile they're not overly busy during normal working hours either.
> 
> Further, there seems to be a general "when someone leaves, don't replace them" policy among quite a few employers as well, they're basically avoiding putting off staff as such, by hoping that natural attrition does it.
> 
> This situation is basically underemployment in a physical work sense, whilst being lucky enough to still be being paid a full time wage at least for the time being. One resulting issue is that workload would need to pick up quite a lot before they'd need to look at hiring anyone new, if it was just a modest increase then current staff would simply work harder. The term "jobless recovery" comes to mind there.




My company has off shored 500+ jobs this year.

They moved a few to Tassie but now decided to stop them being 24 hours.

Starting to wonder when they'll decide my team is too expensive.


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## Garpal Gumnut (9 August 2014)

sydboy007 said:


> My company has off shored 500+ jobs this year.
> 
> They moved a few to Tassie but now decided to stop them being 24 hours.
> 
> Starting to wonder when they'll decide my team is too expensive.




That does concentrate one's mind. Look to your own health and wellbeing.

gg


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## sydboy007 (10 August 2014)

Garpal Gumnut said:


> That does concentrate one's mind. Look to your own health and wellbeing.
> 
> gg




It surely does.  I look at some of the staff in my office and think to myself why would you upgrade to a new house and much bigger mortgage when you know the new management has moved from being customer focused to bean counters.

Being debt free is a safety net I'm enjoying, but I have to admit I'd like to job to last a couple more years so my savings is sufficient to seriously look at selling up and moving overseas.


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## sydboy007 (11 August 2014)

doesn't bode well for the retail sector, especially since the $ hasn't really fallen yet.


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## sydboy007 (13 August 2014)

http://blog.alliancebernstein.com/index.php/2014/08/12/trouble-on-the-margin/

Profitability at a Peak
As a result, profit margins have soared. Net profit margins more than doubled from 4.6% in March 2009 to 9.8% at the end of the first quarter. And based on our estimates, margins could come in just shy of 10% when all the second-quarter results are in (Display).

Sounds great, so what’s the rub? The problem is that, historically, margins like these have marked a peak rather than a normal level of profitability. And the factors that have driven margin expansion to date are unlikely to persist.
Margins gains have benefited from three key drivers: labor efficiencies, lower depreciation and amortization, and reduced interest expense. Although we are not forecasting a drop in margins, we think that it has become incrementally more difficult to make further progress on these fronts for several reasons.


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## sydboy007 (13 August 2014)

Looks like China is getting serious about reducing the use of coal.  Certainly not a good scenario for coal and iron ore.  Will be interesting to see if Adani can get the Carmichael Coal Mine and Rail Project to fly with investors.

http://www.reuters.com/article/2014...-29605821&mc_cid=742a2e77a8&mc_eid=73f8e9ca55

China's capital Beijing cut total coal consumption by 7 percent in the first half of 2014 as part of its efforts to tackle smog, the official Xinhua news agency reported, citing data from its environmental protection bureau.

Under new plans to integrate Beijing with Hebei and the port city of Tianjin, the region will be treated as a "single entity" with unified industrial and emission standards.

Hebei said last week that it had cut total coal consumption by 7.53 million tonnes in the first half of 2014, amounting to just over half of its target of 15 million tonnes for the year.

The province agreed last year to cut total coal use by 40 million tonnes by 2017, and it is also planning to shed at least 60 million tonnes of excess steel capacity over the same period.


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## sydboy007 (13 August 2014)

China looks to be getting ugly in terms of finance - doesn't bode well for Aussie iron ore and coal

July Credit stats out.  New yuan loans were 385.2bn versus 780.0bn expected and and prior was 1080.

Aggregate social financing was 273bn yuan versus 1500.0bn expected and prior was 1970bn implying that shadow banking credit contracted 112bn in the month - a contraction of some 40%+

M2 decelerated sharply to 13.5% versus expected 14.4% and prior of 14.7.


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## DeepState (13 August 2014)

sydboy007 said:


> China looks to be getting ugly in terms of finance - doesn't bode well for Aussie iron ore and coal
> 
> July Credit stats out.  New yuan loans were 385.2bn versus 780.0bn expected and and prior was 1080.
> 
> ...




This is important. 

Do you regard this as a sudden stop or a seasonally driven anomaly that will correct itself? Or is it something different which is less alarming like representing reduced debt financed cross border financial activity to some degree. PBOC site is useless...

Lowest print since Feb 2010. 

ASX Materials sold off a bit and AUD fell before more than recovering vs USD.  Nothing too telling either way.

No material developments on the status of China Gov credit, Standard Chartered or Bank of China leading into this.  Does not seem to represent concerns about financial stability.  The Chinese Gov curve has been steepening and, despite no change in stance of the short end, could be contributing to reduced demand for credit. Activity indicators (YoY) did not show anything particularly special.

Credit intensity of growth recently has been increasingly high....does the inverse occur?  That is, reduced extent of credit expansion will have limited impact of the rate of growth?

For Australia, China will be shuttering a stack of steel mills which are uncompetitive.  I do not know if the reduction of demand for coal and iron ore will come from retirement of domestic sources - preserving Australian demand.  Depending on which way this occurs, the most recent developments could swing from negative to positive.  That is, a reduced reliance on wasteful credit and unproductive resource sets up a better functioning economy whose demand for Australian bulk products remains pretty much intact and more sustainable.  Or not. 

Which way does this break?


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## sydboy007 (13 August 2014)

DeepState said:


> This is important.
> 
> Do you regard this as a sudden stop or a seasonally driven anomaly that will correct itself? Or is it something different which is less alarming like representing reduced debt financed cross border financial activity to some degree. PBOC site is useless...
> 
> ...




If the Chinese Govt is serious about rebalancing then this has to continue not just for a few months but for years.

http://www.businessspectator.com.au/article/2014/8/13/china/middle-income-trap-will-haunt-china

_China has done things differently. Even when it was a very poor country, with GDP per capita levels one-tenth that of the US, it embarked on a huge fixed investment splurge. In the 1980s, fixed investment as a proportion of GDP was already around 33 per cent of GDP, rising to just under 40 per cent of GDP by the late 1990s, and about 45 per cent of GDP during the middle of the last decade.

As mentioned, China had already reached those levels by the late 1980s at a time when it was still immensely poor. But in case readers still thought China's fixed-investment model can continue for some time yet, fixed investment as a proportion of GDP has now reached around 50 per cent -- unprecedented for any significant length of time for any economy in history.

*Take the last decade during which China's official GDP increased by around 162 per cent. Of this 162 per cent increase, additional labour inputs have contributed about 6 per cent. But an enormous 135 per cent can be attributed to fixed investment,* according to World Bank figures, with total factor productivity (using labour and/or capital more productively) contributing to only 20 per cent of the 162 per cent growth. *This means that fixed investment has been behind more than 80 per cent of China's GDP growth over the past decade.*

But the more likely reality is that economic gravity is already having its effect. After all, the amount of capital input needed to produce *one additional dollar of output (the capital-output ratio) increased from 2:1 in the 1980s, to about 4:1 in the 1990s, and was well over 5:1 in 2011, according to OECD figures. At the end of 2012, the ratio was 5.5:1.*_

The above makes me think that a very bumping landing is heading China's way, and towards Australia as well.  Our main exports will definitely overshoot on the way down.  Our hollowed out tradeables sector wont be able to make up for the shortfall.

I would also think that the increasing issues China will face with their investment lead model starting to fail because of the enormous debts that are building up will make the Govt less likely to allow the private sector to expand and generate higher returns on investment, as well as see that investment is allocated far more efficiently.  I'm not confident that China will escape the middle income trap without significant political and market based reforms, but the vested interests will fight doggedly to keep change to a minimum.


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## DeepState (13 August 2014)

sydboy007 said:


> If the Chinese Govt is serious about rebalancing then this has to continue not just for a few months but for years.
> 
> http://www.businessspectator.com.au/article/2014/8/13/china/middle-income-trap-will-haunt-china




Thanks for the article.  An interesting read. I'll come back with questions because you are seriously tapped in with info sources and this is a really important and definitive issue for China and Australia.

In relation to the article, the author makes some interesting observations about the capital intensive nature of Chinese growth.  These have been widely observed, including the reducing marginal returns from such.  What I found interesting was his drawing upon Singapore, Taiwan, South Korea and Japan as examples of how Asian countries managed to escape the middle-income trap and as an example of how China's political economy has much to do in order to emulate this:

_ For the other East Asian economies that broke past the middle-income barrier, they had already entrenched many liberal civil and economic institutions by the time they reached middle-income status and did not require radical changes to their political and economic systems. This partly explains why they enjoyed a relatively smooth and non-violent transition to political pluralism and eventually democracy._


Singapore is not a democracy in anything but name.  Its economy is heavily managed.


Taiwan's political system: 




Korea's economy is strongly influenced by a oligopoly of Chaebols which prevent full price discovery and transparency.  Its political system:




Japan is mired in economic malaise and has been for decades.  In part, this is due to the manner in which the Keiretsu clusters prevent full price discovery from taking place and, hence, capital flows.  In terms of a functioning democracy, here is a list of their prime ministers with tenure.  Apart from Koizumi, the shelf life of the average Prime Minister since the Crisis is probably shorter than that for a packet of chips:





Whilst China's arrangements may not compare favourably to Western Democratic ideals, I'm not too sure that the effectiveness of the regime is as bad as the author might be implying when comparing it to the East Asian break-through economies.


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## sydboy007 (13 August 2014)

DeepState said:


> Thanks for the article.  An interesting read. I'll come back with questions because you are seriously tapped in with info sources and this is a really important and definitive issue for China and Australia.




Yes, most of the Asian economies are nothing like western democracy, but I'd say China is still more towards the command and control side than letting the market decide.  The rest of Asian is a bit closer to the private sector dominating the economy, but still with a lot of Govt direction.

In some ways the Chinese can make the tough choices easier because the Govt doesn't have to worry so much about being voted out.  They still have to worry that if they do stuff up badly that the population takes to the streets.  That's the advantage with democracy.  We use the ballot box to show our displeasure rather than rising up to overthrow our leaders.

I think the take away point is that either the Chinese take their medicine now and suffer slower growth and let the economy move towards consumption as the growth engine, or they can kick the can a few more times like they have since the GFC, but each time gets more expensive, and the next round of medicine is just that bitter and takes longer to work.

Whatever happens the gravity defying iron ore miners share prices are going to have to take a serious pounding, and I'd not be surprised to see iron ore fall towards $50.  I don't believe the Chinese will allow as much of their production to close down as being forecast, especially when they'd be reliant on a strong ally to the USA.

I'd say anyone above vale on the cost curve is facing extinction over the next 18 months.


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## DeepState (13 August 2014)

sydboy007 said:


> 1. Yes, most of the Asian economies are nothing like western democracy, but I'd say China is still more towards the command and control side than letting the market decide.  The rest of Asian is a bit closer to the private sector dominating the economy, but still with a lot of Govt direction.
> 
> In some ways the Chinese can make the tough choices easier because the Govt doesn't have to worry so much about being voted out.  They still have to worry that if they do stuff up badly that the population takes to the streets.  That's the advantage with democracy.  We use the ballot box to show our displeasure rather than rising up to overthrow our leaders.
> 
> ...




1. I found the following two charts interesting in their contrast (had posted it previously in End of the China Bull).  Although economic growth is generally slightly hindered by lack of political freedom, it is a somewhat flat relationship (flatter than I would have thought).  The difference to the Asian experience in isolation is stark.







2. Agreed.  It will be interesting how consumption and services are going to take up the slack from government led investment over time.  Will there be a flare up in the banking system?  Does the reduction of support from credit growth cause a sudden shift in demand or asset prices? and so much more.

3. Going to have to leave this for tomorrow or so.

Thanks


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## CanOz (14 August 2014)

the recent econo numbers out of EU and the US are getting quite soft....anyone expect the world bank to lower growth forecasts again?


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## sydboy007 (14 August 2014)

CanOz said:


> the recent econo numbers out of EU and the US are getting quite soft....anyone expect the world bank to lower growth forecasts again?





Russia heading to recession - will curb their ability to invest inthe oil sector - will be noticable in a few years as their production keeps falling.
Iraq - could see 2-3MB/d of oil impacted depnding on how things go with ISIL.
Ebola in West Africa - if it continues to spread I can see this being a big negative to growth as well since a lot of western companies are bringing back workers so resource projects are slowing down.  Potential black swan event if something dramatic happens.
Debt levels in most countries aren't improving - still getting worse in plenty

I've not seen anything to make me think we're on a sustainable growth path as yet.  With most of the world able to access near free money, yet growth isn't much above inflation in a lot of countries, it doesn't make me confident.


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## DeepState (14 August 2014)

So back to China for a tick,

Substantive drop in issuance of bank bills explains a lot of the decline.  Possible wash out from higher June figures might be responsible for some of the gap too.

What is going on with issuance of bank bills and associated drop of shadow banking?  Short term financing has to be rolled unless the economy suddenly stopped. If the economy did not suddenly stop, it could be the result of disintermediation of the shadows which doesn't do much to the economy. Would not take much to get this type of result given the size of the outstanding.

Some mention that longer term loans did alright.

So, is this demand destruction, supply reduction, washout from prior period, accounting chicanery via disintermediation....?

Market doesn't seem to care.  Music plays on.


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## DeepState (14 August 2014)

CanOz said:


> the recent econo numbers out of EU.....soft....anyone expect the world bank to lower growth forecasts again?




The bond market.


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## CanOz (14 August 2014)

DeepState said:


> The bond market.




lol...thats a pretty good, if not at times twisted opinion!


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## sydboy007 (14 August 2014)

plenty of info int he below - have just put a few of the big picture stuff down below.  Lots of good graphs.

http://www.zerohedge.com/news/2014-...hopes-more-pboc-easing-conventional-wisdom-ag

The breakdown of actual TSF components is as follows, per BofA:


New loans fell sharply to RMB385bn in July from RMB1,079bn in June, driven by a decline in new corporate short-term loans. The hefty RMB345bn in new corporate short-term loans in June was perhaps due to a response by banks to the government’s call for supporting growth as well as the need to meet mid-year regulatory requirements on deposits.
Both entrusted and trust loans declined in July, perhaps due to tighter regulation on interbank business. New entrusted loans decreased to RMB122bn from RMB272bn, while new trust loans contracted by RMB16bn from a net increase of RMB120bn in June.
New corporate bonds declined to RMB143bn in July from RMB261bn in June, in part reflecting a temporary shortage of liquidity on resumed IPOs. However, we notice the issuance of LGFV bonds decreased to RMB77bn from a monthly average of RMB237bn in 2Q. The trend of slower issuance of LGFV bonds echoed our long-held view that the central government should leverage up (via PSL for instance) rather than build up local government indebtedness. We expect local governments will get a large amount of funding from the China Development Bank which in turn will get funding from the PBoC’s PSL scheme in the second half of this year.
Non-discounted bankers acceptance (BA) decreased by RMB416bn in July, after increasing by RMB144bn in June. However, BA is notoriously volatile and the data are of low quality.
FX loans contracted by RMB17bn in July after rising by RMB36bn in June, although sentiment of stronger CNY/USD returned last month.

As for the new loan components:


New medium-to-long-term (MLT) corporate loans moderated to RMB208bn in July, compared to RMB269bn in June, suggesting some moderation in loan demand for fixed asset investment projects.
New short-term corporate loans declined by RMB236bn in July, sharply down from the RMB354bn increase in June, mainly driven by seasonal factors as new short-term corporate loans surged in June. Meanwhile, new discounted bills jumped to RMB173bn in July from to RMB78bn.
New MLT loans to households (mainly mortgage loans) moderated to RMB180bn in July from RMB199bn in June. This number is still relatively robust compared to the monthly average of RMB188bn in 2013. There have been some local news reports of banks reintroducing discounts to the benchmark lending rate in bigger cities and shortening of mortgage release time. Meanwhile, new short-term loans to households dropped to RMB26bn in July from RMB158bn in June.

The PBOC provided its own explanation:

The PBoC believes credit and aggregate financing growth is still in a reasonable range after adjusting for seasonal factors, irregular issues and base  effects. The PBoC said in its statement that China’s daily new RMB loans were RMB30-50bn in early August, suggesting robust (normalized) credit growth in August. The jump in deposits in June and subsequent decline in July resulted from seasonal factors, which in turn led to the rise and fall of loans (note the CBRC does a serious mid-year assessment with a focus on loan to deposit ratio, forcing banks to ramp up deposits at the end of June). The fluctuation was widened by the rapid growth in bank wealth management (WMPs) and internet-based money market funds. IPOs in July also diluted some deposits, which in turn constrained growth in bank loans and other types of credit such as entrusted loans and bonds. In addition, growth of non-standard financing was curbed by new regulations introduced and financial institutions strengthening their risk control. The PBoC did see some impact from the demand side. With the economy facing downward pressure and corrections in the property market, effective loan demand is not as strong as before. Banks are more cautious in granting loans to some high risk regions and sectors.


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## sydboy007 (14 August 2014)

An interesting read and quite relevant witht eh current escalating tensions between China and the rest of Asia.

http://twq.elliott.gwu.edu/japan-muddle-model


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## DeepState (14 August 2014)

sydboy007 said:


> plenty of info int he below..




Thanks.  Have reviewed a few other things which corroborate.

Seasonal factors and some technicalities have affected this result.  Notable for decline in shadow activity implied by entrusted (in particular) and trust loans. The market is probably right to look through it overall.  If another weak result comes along, a lot of the arguments relating to seasonality will have to be scrubbed and this decline takes a different hue. But movements for Aug thus far don't point to it.  Activity indicators and surveys do not support any thesis of credit induced reduction in activity over this period.  PBoC statements are broadly in alignment.

Interesting about the PSLs. Hadn't heard about that previously.   It is changing the source of financing for LGFV. This moves the source of implicit support for LGSVs to a more explicit footing and controls their borrowing more directly.  Quite a nice move in terms of centralising command and preventing excess spending. Whether the source of funding for the PSLs results in sterilised or non-sterilised finance will be interesting.  QE for China?  Conceivable given the contribution from trade becomes more important as fixed asset investment fades, and likely in the event of a banking crisis.


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## sydboy007 (16 August 2014)

a quick browse it seems interesting.  hopefully nothing breaks at work this afternoon and I can have a read

http://www.voxeu.org/content/secular-stagnation-facts-causes-and-cures


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## sydboy007 (16 August 2014)

so this is how CDS work when a country is in legal default.  Just don't lose those bonds

http://www.bloombergview.com/articles/2014-08-14/argentina-defaulted-on-bonds-no-one-can-even-find


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## sydboy007 (16 August 2014)

http://pragcap.com/todays-not-so-pretty-picture-the-europe-vs-us-divergence


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## sydboy007 (16 August 2014)

what happens when someone decides half that paper was taken from the bathroom?

http://soberlook.com/2014/08/eurozone-banks-hold-record-amounts-if.html

This has two major consequences:

1. Government bonds crowd out private sector credit, limiting loan growth in a number of countries.

2. Banks are becoming more intertwined with their central governments - something that was part of the cause of the debt crisis. Governments depend on banks for cheap funding and banks depend on their governments for support (bailout) in case of a liquidity crunch.


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## sydboy007 (16 August 2014)

numerology and the IMF.  Seriously???


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## sydboy007 (18 August 2014)

For those interested in credit risks.  some good graphs and tips

http://www.pimco.com.au/EN/Insights...-Trade-Implications-For-Credit-Investors.aspx


Australia is contending with a multi-year decline in the terms of trade and a rebalancing toward the non-mining sectors of the economy.
For companies, the macroeconomic consequences of a downswing in the terms of trade provide both challenges and benefits.
For investors, it is important to find companies that have a clear, demonstrated understanding of the macro environment and can navigate the headwinds through operational efficiencies, cost control, market positioning and balance sheet management.


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## sydboy007 (20 August 2014)

a good read to see just how dark the coming storm clouds really are.


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## sydboy007 (21 August 2014)

I'm starting to wonder when ebola becomes a black swan event??  These graphs are getting towards the hockey stick scenario.


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## DeepState (21 August 2014)

sydboy007 said:


> I'm starting to wonder when ebola becomes a black swan event??  These graphs are getting towards the hockey stick scenario.




The shape is proceeding as would be predicted by disease transmission models.  As a % of population infected, the sigmoid shape is the standard model.....but what is the population?  It depends on how effective containment of the disease is:


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## sydboy007 (21 August 2014)

yet our iron ore minnows still defy gravity


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## sydboy007 (21 August 2014)

DeepState said:


> The shape is proceeding as would be predicted by disease transmission models.  As a % of population infected, the sigmoid shape is the standard model.....but what is the population?  It depends on how effective containment of the disease is:




I'm assuming after the clinic patients were liberated along with a large amount of contaminated items, containment is not working out so well.  Pretty sure that event alone is going to ensure another large spike in new cases in a week or 2


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## sydboy007 (21 August 2014)

not looking good for LNG in Australia.  On the bright side it might help to contain the pending price increase for east coast natural gas.

http://www.lngworldnews.com/platts-asia-spot-lng-prices-for-september-delivery-plummet-33-1-pct/

Prices of spot liquefied natural gas for September delivery to Asia plummeted 33.1% year over year to an average $10.702 per million British thermal units (/MMBtu), the latest Platts Japan/Korea Marker (Platts JKM) for month-ahead delivery showed.

The drop came as increased supply in the region continued to outweigh lackluster demand.

On a month-over-month basis, the September JKM was down 5.8% from August. The data reflects the daily Platts JKM for September assessed between July 16 and August 15, and expressed as a monthly average.

“The results of Australia’s North West Shelf LNG tender for cargoes loading in September, October and November showed a steep contango building into the traditionally high-demand winter season,” said Stephanie Wilson, managing editor of Asia LNG at Platts. “This prompted some buyers in Japan to purchase cargoes for October at prices significantly above those seen in September.”

At $10.702/MMBtu, the average Platts JKM for September was the lowest monthly average on record since April 2011, and reflected the largest year-over-year decrease in 2014.

Despite the year-over-year plunge for average September-delivery prices, the month-over-month decline was the narrowest since March, when prices began their rapid descent.

After beginning the assessment period at $10.775/MMBtu July 16, spot prices bottomed at $10.525/MMBtu August 1 as a slew of supply tenders in the Asia-Pacific basin hit the market. It was the lowest daily spot price seen since Friday, March 11, 2011, when the JKM was $9.90/MMBtu. The spot JKM had spiked to $10.95/MMBtu on March 15, 2011, in the wake of the Great Eastern Earthquake and resulting Fukushima crisis in Japan.

The Platts JKM began its rebound on August 8, gaining a total of 40 cents before ending the assessment period at $11.025/MMBtu August 15. This brought a close to five consecutive months of declines and reversed the downtrend in spot prices.

“The removal of deferment clauses on cargoes loading from train 1 of the new ExxonMobil-led Papua New Guinea integrated LNG project also fuelled the more bullish sentiment, as traders and sellers can now compete for these cargoes too,”Wilson explained. “On the other hand, end-user inventories remained high despite higher temperatures in Japan and South Korea in recent weeks, giving buyers flexibility in their delivery schedules. Numerous projects in Asia also continued to offer additional supply to the spot market, which could suggest a cap to potential price increases.”


----------



## DeepState (21 August 2014)

WES-AU commentary includes a supportive retail environment and an improving one since report date.  Westpac Redbook shows consumer confidence recovering and lagging business confidence.  Stevens (RBA) reports expectations that consumer spending will exceed income growth, albeit not by the margin prior to GFC.  A floor under domestic consumer spend, it seems.


----------



## sydboy007 (22 August 2014)

http://blogs.reuters.com/james-saft...ds-cash-individuals-holdings-hit-14-year-low/

Individual investors have been cutting back on cash in portfolios, the exact reverse of what Warren Buffett has been doing at Berkshire Hathaway.

Who do you think has got it right?

Cash at Berkshire Hathaway stood at just over $55 billion as of June 30, an all-time high and two and a half times
the level he’s in the past said he likes to keep on tap to meet extraordinary claims at his insurance businesses. That’s also up more than 50 percent from a year ago.

Buffett’s green pile is in sharp contrast to individual investors, who’ve cut cash in portfolios to 15.8 percent, a
14-year low, according to the July asset allocation survey from the American Association of Individual Investors.


----------



## sydboy007 (22 August 2014)

http://money.cnn.com/2014/08/21/news/economy/aging-countries-moodys/index.html

The world is graying at a break-neck pace and that's bad news for the global economy.  By 2020, 13 countries will be "super-aged" -- with more than 20% of the population over 65 -- according to a report by Moody's Investor Service.

That number will rise to 34 nations by 2030. Only three qualify now: Germany, Italy and Japan.

"Demographic transition ... is now upon us," warn Elena Duggar and Madhavi Bokil, the authors of the Moody's report.  "The unprecedented pace of aging will have a significant negative effect on economic growth over the next two decades across all regions."

According to Moody's, Greece and Finland will turn "super-aged" next year. Eight countries, including France and Sweden, will have joined them by 2020.  Canada, Spain and the U.K. will be "super-aged" by 2025, and the U.S. will follow by 2030.

The problem isn't confined to Europe and North America. Singapore and Korea will be in that category by 2030, while China will also face "severe aging pressures."


----------



## McLovin (22 August 2014)

sydboy007 said:


> http://blogs.reuters.com/james-saft...ds-cash-individuals-holdings-hit-14-year-low/
> 
> Individual investors have been cutting back on cash in portfolios, the exact reverse of what Warren Buffett has been doing at Berkshire Hathaway.
> 
> ...




I saw that. I think you need to read it in context. BH is huge these days, so their investment universe is pretty small. Couple that with the fact that BH doesn't pay dividends and there isn't many options but to hoard cash.

Buffett has said for decades that the average investor should be 100% invested all the time. And as for his own estate...



> My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s. (VFINX)) I believe the trust’s long-term results from this policy will be superior to those attained by most investors ”” whether pension funds, institutions, or individuals ”” who employ high-fee managers.


----------



## DeepState (10 September 2014)

DeepState said:


> Thanks.  Have reviewed a few other things which corroborate.
> 
> Seasonal factors and some technicalities have affected this result.  Notable for decline in shadow activity implied by entrusted (in particular) and trust loans. The market is probably right to look through it overall.  If another weak result comes along, a lot of the arguments relating to seasonality will have to be scrubbed and this decline takes a different hue. But movements for Aug thus far don't point to it.  Activity indicators and surveys do not support any thesis of credit induced reduction in activity over this period.  PBoC statements are broadly in alignment.
> 
> Interesting about the PSLs. Hadn't heard about that previously.   It is changing the source of financing for LGFV. This moves the source of implicit support for LGSVs to a more explicit footing and controls their borrowing more directly.  Quite a nice move in terms of centralising command and preventing excess spending. Whether the source of funding for the PSLs results in sterilised or non-sterilised finance will be interesting.  QE for China?  Conceivable given the contribution from trade becomes more important as fixed asset investment fades, and likely in the event of a banking crisis.




....another weak result is in the consensus for announcement this evening.


----------



## DeepState (16 September 2014)

Some observations from RBA about why vol in Australian equities has been trending lower:




Similar analysis has been undertaken by BIS for overseas markets.


----------



## DeepState (16 September 2014)

OECD released the interim economic assessment overnight. Some thoughts/observations:

1. GDP revisions were downwards for major DMs.  These would reflect the Q1 final GDP figure in the US, which was a total shocker, not being available in time for the May release.  Further, the Japanese figures following the tax hike were much worse than generally anticipated.  The EZ is the EZ...fizzle.  Interesting that China outlook has not been altered.





2. When the ECB moves to print (it has already shown its willingness to move the Bundesbank opinion/super-vote to one side), the world is likely to have more liquidity flushing over it than at any time up to this point.  The US tightening does not involve taking liquidity out of the monetary system, for example.





3. The below shows the bargaining power of capital vs labour.  Although there is widespread unemployment in many jurisdictions, skilled labour shortages are showing up.  Further, as unemployment generally declines, wage inflation is inevitable.  Company profits have been boosted by the weak bargaining position of labour which may be a symptom of the hollowing out of middle class jobs in some cases.  This has been a feature in Australia as well.  The major CBs including the RBA are watching wage increases as a key measure for the sustainability and level of ongoing inflation.  It is arguable that this indicator will be more influential than the headline CPI/PCE in determining monetary policy on a head to head basis at this time.  Belief in this suggests that interest rates will likely remain lower for a longer period than might be the case under a repeat of historical relationships.


----------



## sydboy007 (23 September 2014)

http://www.zerohedge.com/news/2014-...eaks-30-coal-miners-unable-pay-employees-time



> About 30 per cent of the industry’s miners had not been able to pay their employees on time and a further 20 per cent had cut salaries by more than 10 per cent, the Economic Information Daily, a Xinhua-affiliated newspaper, reported on Monday.




The chart is scary when considering the Chinese debt (non) problem

When is an asset not an asset


----------



## Macro Polo (20 October 2014)

Hey RY,

Have you got any thoughts on the Fed meeting at the end of this month?

I've been fairly convinced up until now of QE ending on a set course, less convinced by interest rate forecasts (especially from FOMC members), however I'm wondering if falling inflation expectations trumps improving employment conditions for now.

The Fed has a dual mandate and can't really be seen to allow inflation to fall so far below 2%, and if they do it seems to make any talk of rate hikes a little premature. 

Are UBS etc crazy to say that the Fed might call off the final taper until the end of December? I would have thought so a month ago, less sure now.

I wonder if the market hasn't gotten ahead of itself a little bit on EUR/USD, given a lot of the ECB's balance sheet expansion is dubious given the opposition from within the Euro and the assets available for purchase outside of sovereign debt. It certainly would be an interesting short squeeze to end the year if the Fed gotcold feet.

Anyway, penny for your thoughts.


----------



## DeepState (28 October 2014)

Macro Polo said:


> Hey RY,
> 
> Have you got any thoughts on the Fed meeting at the end of this month?
> 
> ...




Hi MP, sorry for the delay in this response.  I missed your question.

This is a meaty question.  Here goes.  I think Fed will end QE in October.  Reasons include:

+ maintaining consistency between prior statements and their actions (predictability is very important).  Further, they gave more guidance about how the balance sheet would be managed and updated their forecasts from the June figures.  No change to employment or PCE, but dropped GDP (how on earth the markets rallied on release is beyond me.  Took them a day to figure it out. Is Bullard quite that influential?);
+ The value of ABS being purchased is at a $5bn run rate and the value of Treasury is $10bn run rate.  The outstanding debt of the US Federal Government is $1.7tr.  Delaying QE ending for a month will do a essentially nothing to the yield curve of each.
+ A review of each of the major economic releases does not reveal a break to the comments made in the Sept 16/17 and expectations in there.  Employment continues to improve rapidly and inflation remains within a reasonable bound.  Qualitative comments from the Beige Book are also consistent with a solid growth picture emerging.
+ The Fed can keep the Fed Funds rate (not so relevant at this time given the zero bound has essentially been hit) and other relevant rates lower for longer if they need to.  They will reinvest coupons until lift-off.
+ Downside risks are strong USD holds inflation down.  The USD strength coincided with market-based inflation expectations for 5yrs dropping.  One-off shifts in currency have inflationary impacts but they wash out unless there is en-masse offshoring of domestic import substitutes that can continue to become more efficient.  Possible, but uncommon.  The market based inflation estimates remain above the Fed target over the next five years.  This implies as accelerating rate of inflation in the coming period to achieve these levels and a period of overshoot as per Fed statements.  It's OK. USD will not go to the moon.
+ The more concerning one is residential construction is not very strong.  However, this operates at a lag and can be expected to grow more strongly as unemployment decreases and confidence returns.  Underlying data suggests this is in place. Job openings have really boomed lately.  Wage tension must be around the corner although lack of wages growth has been a question mark and may suggest a few different things.  Overall, retail confidence will recover.
+ ISMs, transportation bottlenecks, Q2 GDP underlying all point to a moderate and accelerating recovery.

Interest rates all fell in recent weeks as drama unfolded in EZ and continued to unfold in Japan.  Capital flowed from these into a major carry trade into the US.  The liquidity additions envisaged in the ECB and BoJ will actually accelerate print into the market place even as the Fed ceases.  Accelerate.  As a result, the curve will be held down in the US as other central banks are essentially maintaining QE in the US.

There are minor financial stability concerns in the US, so they can tolerate a rising yield curve arising from end of QE.  Further, search for yield is obviously leading to credit allocation distortions.  This is what happens in QE and is intended, but cannot be allowed to go on indefinitely.

BoJ will have no possibility of easing up on their incredible print.  The swing factor is ECB.  The world is hanging on to whether it will move to print and all the herding of feral cats that needs to happen to achieve balance sheet growth and restore or exceed the size it had previously reached.  QE is possible indirectly via programs of the type that have already been put in place previously.  Nonetheless, the detail of this stuff does highlight desperation from the ECB.  With a poor uptake from tranche one of TLTRO, we'll have to see what's next. However, LTRO, TLTRO, CBPP3, ABSPP were all done without the need to gain unanimous agreement.  Further, any recalcitrant voters get periodically rotated off the Council so impasses have a chance.  Europe acts when the walls are falling upon it.  With the release of the AQR results recently, credit growth might also kick off, some of which will leak offshore to add to the carry trade, holding down USD yields a bit and adding some pressure to USD to the upside.

So, overall, whilst anything is possible, I think the Fed will end QE in a few days.


----------



## DeepState (28 October 2014)

Anyone out there have a take on the AQR results published on the weekend?


----------



## burglar (28 October 2014)

DeepState said:


> Anyone out there have a take on the AQR results published on the weekend?




Change of Registered Office, announced 19/09/2014, has had a stupendous effect on AQR Share Price.

My experience would suggest that "something bad" (odifferous) has been published in one of those boutique (buttock) magazines.


----------



## DeepState (28 October 2014)

burglar said:


> Change of Registered Office, announced 19/09/2014, has had a stupendous effect on AQR Share Price.
> 
> My experience would suggest that "something bad" (odifferous) has been published in one of those boutique (buttock) magazines.




Hi Burgs

Thanks.  I should have been clearer.  AQR: Asset Quality Review.  Results just published by the ECB on the weekend.  Interested in:

- Will this catalyze resumption of credit growth for mid-small companies?
- Will this result in easier and actual capital raising to facilitate additional lending?
- Will this help reduce and/or limit the extent of fragmentation in the EZ?
- Other stuff

Cheers

RY


----------



## burglar (28 October 2014)

DeepState said:


> ...  I should have been clearer ...




Whata mistaka I maka!
Did a 5 second assessment of AU:AQR.
Thought it was, perhaps, a heads up for a company severely oversold.

The company had announced "more stuff" at greater depth.
One would assume the Share Price Action would be positive!

Sorry to have interjected!!
You obviously have bigger fish to fry - given the thread title!


----------



## Macro Polo (29 October 2014)

DeepState said:


> Hi MP, sorry for the delay in this response.  I missed your question.
> 
> This is a meaty question.  Here goes.  I think Fed will end QE in October.  Reasons include...
> 
> So, overall, whilst anything is possible, I think the Fed will end QE in a few days.




Hey RY,

Thanks for the detailed reply. 

It looks like pretty much every research piece I've read seems to agree - QE ends, no major change to the statement until the meeting with a press conference in December. The data is definitely supportive of this, so I tend to agree - though I'm wondering how much more bullish people can get on USD before something shocks this in to a short squeeze such as a change in wording on rates. The Fed probably wants to be rid of QE and the stigma attached though.

Nothing to do but wait now - I'll definitely be waking up early to listen/trade.

Good luck to everyone else


----------



## DeepState (29 October 2014)

Macro Polo said:


> Hey RY,
> 
> Thanks for the detailed reply.




Any time.




Macro Polo said:


> I'm wondering how much more bullish people can get on USD before something shocks this into a short squeeze such as a change in wording on rates




The USD rise is partly an unwind of a massive carry trade.  That carry unwind...how big, when, if, where, does carry extend...is probably the defining macro issue of global markets right now.  The risks are strongly tilted towards USD strength (actually, I'll have to check what is priced, but the qualitative stuff suggests upside tail risk to the USD).  

Pls let me know if you have thoughts/insights on this.


----------



## Macro Polo (29 October 2014)

DeepState said:


> The USD rise is partly an unwind of a massive carry trade.  That carry unwind...how big, when, if, where, does carry extend...is probably the defining macro issue of global markets right now.  The risks are strongly tilted towards USD strength (actually, I'll have to check what is priced, but the qualitative stuff suggests upside tail risk to the USD).
> 
> Pls let me know if you have thoughts/insights on this.




Sure, I actually agree with this (USD strength) but I'm currently suffering from "Oh, is this really it?" at the end of QE. It suddenly feels like - after all that build up and anticipation - a bit of a fizzle as it's winding down gradually and I'm trying to see where the surprise comes from - causing me to look at everything very sceptically.

But, aside from these thoughts it's hard to see any other country with such good prospects/trajectory as the US; they went through a painful restructuring quite efficiently which Europe is still struggling through, and for which China et. al have yet to really pay the piper; policy has been quite easy and is likely to trend tighter over time; Treasuries and US Dollars will remain the reserve assets of choice because where else is there ample liquidity, stability and well defined property rights (let alone without zero/negative yields)?

If I was to try and quantify the carry trade unwind I would be looking at about 10 years’ worth/back to the early 2000's - but that is a purely 'discretionary' guess, based on nothing but gut feeling. I'll leave the quant work to you clever ones.

I think the SP500 will correct back to 1400-1500 in the next year or two (if QE ends) but after that it really comes down to whether an inflationary shock arrives or not and forces sustained tightening. I don't neccessarily think a recession accompanies a correction here. My best guess is this might be associated with the peaking of US light tight oil, which is forecast for somewhere between 2016-2020. 

Or, more intangibly, the removal of the trade imbalances could end the oversupply/under consumption paradigm in place - by this I mean countries like China overproduce because it is a side product of their economic model, while western developed nations are currently not consuming like they used to due to over indebtedness/trauma from the previous consumption boom. When I go to the shops I am amazed at how cheap I can buy manufactured goods - it's crazy - and with the internet it’s hard not to be entertained all day for free (legally or through pirating).

I feel the same way about long bond yields as equities (directionally) - they have further to run (falling yields/rising prices) in the next year or two, but after that wage pressures might finally start to evoke something resembling inflation - especially if combined with some form of oil supply shift (US LTO Boom shifting into decline).

Anyway, that's how I'm feeling right now but lets see what the Fed brings!


----------



## DeepState (30 October 2014)

Should continue to explore that issue MP.

Reaction to FOMC outcome was in line.  Change to wording in relation to employment is also in-line although any change is worthy of printing something out, it seems. Kocherlakota dissents.  Ultra dove.  Ultimately the crazy bit was to sustain asset purchases at current levels.  The other bits about inflation outlook over coming one to two years is reasonable and likely to be the effect of what the Fed does anyway, although their current wording and approach allows broader considerations.  It could go either way in terms of argument but the current approach by Yellen is less preferred in terms of providing clarity to the market and is generally seen to be less successful for monetary policy. I think he has a point there. These are unusual times, though.

Greenspan says buy gold.

Been looking into the AQR.  It is credible.  This is a step up on the other junk from before.  I am amazed that the banks have fared so well.  They still need to raise a lot of capital to meet the capital adequacy requriements in the years ahead, but solvency looks well dealt with.  The shock test is truly a shock test.

The key question then moves to whether there is demand for lending not being supplied, or excess supply because there is no demand, whether the banks start to trust each other to cross-collateralize again and also undertake cross-border lending.  If this works, a lot of pressure comes off.  The banking system is revived.  Need to check out what happened in the US in 2009 (success) and why the Japanese experience a decade earlier failed.  I have never actually looked into it.  Anyone?  

The initial read on the ECB Bank Lending Survey suggests that demand is not being satisfied.  The brakes are also being lifted with the result that very tight standards are being relaxed resulting in lending for the purposes of working capital and inventory...where you'd expect it to start.  If it flows to fixed capital investment...the clouds begin to part.

One thing to watch is how much money is just flowing offshore.

Haven't looked at USD risk shape yet.  Need to figure out some stuff I used to do a few years ago.  I can't remember the method I used.  If I come up with anything, I'll pass it along.


----------



## Trembling Hand (30 October 2014)

DeepState said:


> Need to check out what happened in the US in 2009 (success) and why the Japanese experience a decade earlier failed.  I have never actually looked into it.  Anyone?




The Japanese economy is structurally very very different. What they didn't do, where the US is the leader, is promote good fast entrepreneurship and give up on protecting big slow inefficient companies and ease of employment and immigration (they never will!!) and ease employment law, move away from top down industrial policy and fix their demographics and and and.


----------



## DeepState (30 October 2014)

Trembling Hand said:


> The Japanese economy is structurally very very different. What they didn't do, where the US is the leader, is promote good fast entrepreneurship and give up on protecting big slow inefficient companies and ease of employment and immigration (they never will!!) and ease employment law, move away from top down industrial policy and fix their demographics and and and.




Thanks.  Taking a deeper look now.  

Shall dig in on a few of the things you mentioned.  The demographics side and work practices were always an issue, yet credit expansion occurred (albeit spent badly).  Why did they prevent a resumption of credit and decent growth in the domestic economy (exporters were different)?  Now, a lot of the workforce is flexible, with some being uber-flexible. Keitretsu is uniquely Japanese, unless you translate it to Chaebol where Sth Korea is doing alright.... pls let me know if you have the answers to hand, or even a strong suspicion.  Perhaps the balance sheets of the borrowers were totally trashed as well and still haven't recovered? Except they don't receive direct bail-outs...although they are being provided very cheap long term finance now and still aren't really biting?




I'm curious to understand what stopped the flow of finance to productive uses or what permitted it.  Europe is unique and we won't be able to template it directly from historical precedents.  Still...


----------



## Trembling Hand (30 October 2014)

DeepState said:


> Perhaps the balance sheets of the borrowers were totally trashed as well and still haven't recovered?



http://qz.com/198458/zombies-once-destroyed-japans-economy-now-theyre-infecting-chinas/


----------



## DeepState (1 November 2014)

Trembling Hand said:


> http://qz.com/198458/zombies-once-destroyed-japans-economy-now-theyre-infecting-chinas/




What goes on in Roppongi stays in Roppongi. Oh my !!...

Thanks for the article.  Have done more work.  Very interesting indeed. What a mess. They are pushing on a string.  If they generate inflation, it's probably not going to be of the type that generates sustained demand. 

Two major themes.  The Americans stuffed the Japanese economy in the 1980s after setting the scene for the post war recovery and seeing Japan emerge as an economic force.  Japan does not help itself by denying reality over amd over again.  Now included. The issue is not bank solvency directly.


----------



## DeepState (18 November 2014)

RBA Minutes lament the fact that AUD remains high on an historical basis and also relative to fair value on most models.  Many of these models include terms of trade.  This keeps getting mentioned.  Yet value of trade is what matters.  Despite a very substantive fall in the price of Iron Ore, Australia's export performance has held up well due to capacity expansions in producers.  This concept gets tricky if capacity closures take out some of the domestic producers as their breakeven points are passed.


----------



## sydboy007 (24 November 2014)

seems it'll be rinse and repeat in the USA shortly

http://davidstockmanscontracorner.c...-feds-zirp-is-fueling-the-next-subprime-bust/

This $120 billion subprime auto paper machine is now driving millions of transactions which are recorded as auto “sales”, but, in fact, are more in the nature of short-term “loaners” destined for the repo man. So here’s the thing: In an honest free market none of these born again pawnshops would even exist; nor would there be a market for out-of-this-world junk paper backed by 115% LTV/75-month/20% rate loans to consumers who cannot afford them.



> Indeed, from the low point in early 2010, the subprime market has increased by more than 100% or double the rate of growth in prime auto loans, which have also expanded at a heady pace (40%) relative to the tepid growth of consumer incomes (12%) during the period. Stated differently, the auto sector is being pushed back into an unsustainable boom based on the very same bubble finance distortions that sent the entire industry””led by GM, Chrysler, Delphi””into the calamitous bankruptcies of 2008-2009.




*



			In short, there is a reason why capitalism requires honest price discovery in financial markets. Without it, false signals quickly flow through the real economy, causing booms and busts that are not an inherent result of the free market but the artificial and destructive consequence of central bank intervention and manipulation.
		
Click to expand...


*


> Half the issuers tracked by Standard & Poor’s hadn’t sold bonds before 2010, and concern is mounting that growth in the market for securities backed by car loans to people with poor credit poses a risk to the whole auto industry. Wall Street banks have arranged $20.6 billion of the deals this year, up from $8.6 billion in 2010, according to Barclays Plc.


----------



## Smurf1976 (24 November 2014)

Lending money to people who can't afford to repay it, in order for them to buy something that rapidly depreciates and which incurs ongoing costs to operate and maintain.

What could possibly go wrong.....


----------



## sptrawler (25 November 2014)

BHP squeezing contractors on prices for goods and services, they will be the first of many.

https://au.news.yahoo.com/thewest/a/25603497/bhp-suppliers-caught-in-us4b-savings-squeeze/

This will filter through the W.A economy.
Hopefully commodity prices recover soon.


----------



## sydboy007 (30 November 2014)

a very interesting piece

http://janelanaweb.com/trends/we-al...he-next-person-interview-with-daniel-stelter/



> _Financial bubbles since the 1980s are one of the pillars of an artificial growth? Present capitalism needs always a “good bubble,” as someone once said ironically?_
> 
> I would not say capitalism needs it, I would say politicians wanted it and central banks tried to deliver it. Whenever we had an economic problem – crash 1987, Asia Crisis, LTCM Crisis, Russia Crisis, Dot-com Bubble, 9/11, Housing Bubble – central banks helped with more easy credit and lower interest rates. But this was a one way bet, leading to ever more speculation and debt. The problem is that we never allow a small fire to burn and therefore create ever bigger fires like in California where the main reason for the big forest fires is the fact that they not allow small ones to happen. This is not what capitalism needs. Capitalism needs failures of companies and banks for wrong decisions. If we do not let this happen it is not very “capitalistic” but destroys capitalism in the long run. Walter Bagehot the founder of the Economist magazine and big thinker on central bank policy said a central bank should only give credit to institutions, which are solvent against first class collateral and at punishing interest rates. *Today central banks give money to institutions, which are not solvent, against doubtful collateral for zero interest. This is not capitalism.*


----------



## DeepState (9 December 2014)

Anyone got something simple and quickly digestible on the issues with micro-economic reform in Italy and France?  Thanks.


----------



## sydboy007 (14 December 2014)

well worth a read.  The rebalancing of China certainly doesn't bode well for Australia in the medium term.

http://blog.mpettis.com/2014/12/how-might-a-china-slowdown-affect-the-world/



> Two years ago it was hard to find analysts who expected average GDP growth over the rest of this decade to be less than 8%. The current consensus seems to have dropped to between 6% and 7% on average.
> 
> I don’t think Beijing disagrees. After assuring us Tuesday that China’s economy – which is growing a little slower than the 7.5% target and, is expected to slow further over the rest of the year – was nonetheless “operating within a reasonable range”, in his Tianjin speech on Wednesday Premier Li suggested again that the China’s 7.5% growth target is not a hard target, and that there may be “variations” in China’s growth relative to the target.


----------



## sydboy007 (19 December 2014)

quite an interesting read

http://fivethirtyeight.com/features/the-conventional-wisdom-on-oil-is-always-wrong/



> Even when drilling does slow, production won’t necessarily follow. Wells keep producing for decades after they’ve been drilled, although at ever-declining rates. Companies prioritize their most promising projects, so the wells that do get drilled will be the best ones. And technology keeps improving, so companies can coax more oil out of each well. Natural gas provides an instructive example: *The U.S. is drilling half as many gas wells today as it was five years ago and producing a third more gas.*


----------



## qldfrog (19 December 2014)

sydboy007 said:


> quite an interesting read
> 
> http://fivethirtyeight.com/features/the-conventional-wisdom-on-oil-is-always-wrong/



I do not see the in bold  issue: you do not produce when you drill, but after:
drill, setup christmas tree or whatever is required if lucky, production start;
what the bold sentence means is that production will decline (and drastically within 3 years for fracking), in itself an interesting point,
then there is drilling and drilling
drilling for exploration: looking for gas/coal/oil
and drilling for exploitation/extraction
fracking for gas/ blasting for open cut coal;
The raw number of drills being used (aka activity of drill company) can have a different meaning based on what type of drilling is actually done
if it helps,,,


----------



## Smurf1976 (19 December 2014)

qldfrog said:


> I do not see the in bold  issue: you do not produce when you drill, but after:




It's a bit like saying that engineers don't design things for real world use when they're studying at uni, they do it once they've completed their degrees. Same with any other profession.

If you stop allowing new engineers, doctors or whatever to commence their studies then in due course you have nobody completing degrees once those currently in training are qualified. And if you stop the flow of people coming into the profession, then due to natural attrition the workforce starts to drop and would eventually reach zero.

Same concept with oil. Cutting back on drilling doesn't stop currently producing wells but it does mean fewer new ones coming online in the future. And since oil wells naturally decline in due course, that means production starts to drop or at least grows more slowly than it otherwise would have.

Same basic concept in any industry. Stop developing land and in due course we stop building houses and that is followed by a housing shortage. It takes time for the full effects to work through the system, but it happens eventually. 

Whilst it may be difficult to know exactly what effect a drop in drilling is having, that is what isn't being drilled that otherwise would have been, it's a reasonably safe bet to assume that any major change involves oil or gas to a considerable extent. Regardless of whether that's exploration or production related, at some future time less activity = less production.


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## qldfrog (19 December 2014)

Smurf1976 said:


> Regardless of whether that's exploration or production related, at some future time less activity = less production.



fully agree with you and that is what I was trying to convey
 the article seemed to imply that there will be a forever glut of oil (well I am pushing but..)
proof being that even with less drilling the US produces more

and my own interpretation is : if there is less drilling we will probably end up with LESS available oil soon (3years for fracking)


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## sydboy007 (20 December 2014)

well worth a read

http://www.bne.eu/content/story/russia-doomed-recession



> Uralsib said in its 2015 outlook that if the ruble continues to tumble, then "Russia would experience economic deterioration on the scale seen in the early 1990s." But this has to be balanced by Russia macro fundamentals, which remain fairly solid, whereas in the 1990s the country was bankrupt.
> 
> There is one glimmer of hope for the economy in 2015, largely championed by Evgeny Gavrilenkov, chief economist at Sberbank and an economist of formidable power, who cannot be written off lightly. He is arguing that the problem is the lack of stability in the ruble/oil prices, rather than the level they fall to. If both stabalise quickly, then the devaluation of the ruble will lead to a surge in import substitution investment and give the Russian economy a shot of vitality that will keep growth positive in 2015.


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## sydboy007 (27 December 2014)

http://www.zerohedge.com/news/2014-...most-21st-century-savings-rate-turns-negative



> And the reason why any poll that shows a recently "re-elected" Abe has even a 1% approval rating has clearly been Diebolded beyond recognition, is that real wages cratered 4.3% compared to a year ago. This was the largest decline since the 4.8% recorded in December 1998. In other words, Abenomics has now resulted in the worst economy, if only for consumers, in the 21st century.
> 
> But that's not all: as Bloomberg reported, for the first time ever since records were collected in 1955, Japan's savings rate turned negative. To wit:
> 
> ...


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## sydboy007 (28 December 2014)

quite an interesting read

http://www.economist.com/blogs/free...?fsrc=scn/tw_ec/when_did_globalisation_start_



> Early economists would certainly have been familiar with the general concept that markets and people around the world were becoming more integrated over time. Although Adam Smith himself never used the word, globalisation is a key theme in the Wealth of Nations. His description of economic development has as its underlying principle the integration of markets over time. As the division of labour enables output to expand, the search for specialisation expands trade, and gradually, brings communities from disparate parts of the world together. The trend is nearly as old as civilisation. Primitive divisions of labour, between “hunters” and “shepherds”, grew as villages and trading networks expanded to include wider specialisations. Eventually armourers to craft bows and arrows, carpenters to build houses, and seamstress to make clothing all appeared as specialist artisans, trading their wares for food produced by the hunters and shepherds. As villages, towns, countries and continents started trading goods that they were efficient at making for ones they were not, markets became more integrated, as specialisation and trade increased. This process that Smith describes starts to sound rather like “globalisation”, even if it was more limited in geographical area than what most people think of the term today.


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## sptrawler (30 December 2014)

So Syd, after your posts, what is the answer?
How do we maintain our first word lifestyle, with a third world economy?


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## sydboy007 (31 December 2014)

sptrawler said:


> So Syd, after your posts, what is the answer?
> How do we maintain our first word lifestyle, with a third world economy?




Major tax reform, especially on the tax expenditures.  A shift from taxing hard work and capital to taxing land / resources / consumption.  Without that our tax system will continue to act as a dead weight on progress.

We need to decide if we want to continue digging things up and shipping them off as our source of wealth, or do we start to use our brains to generate IP that brings in foreign income?  Can we continue to cut funding to Government research?  have we denuded the CSIRO to such an extent that the research they can undertake will limit the economy?  I think we're well beyond it.  Labor has cut funding, and the current Govt even more, and also doesn't have a science minister.

I'd like to see less focus on university, and more at the TAFE level.  The fact the current Govt has hacked $1B in funding for supporting apprentices doesn't bode well for this.  The states have cut funding for TAFE and fees are becoming a barrier for students from poor families.  How can we be a prosperous society if we limit the intellectual potential of the population?

There needs to be a less combative approach by the current Govt towards unions.  The German Govt has no issues in dealing with unions there, so why should the state and federal Govt act negatively towards unions when they are quite willing to cozy up to business lobby groups?

We need to move away from a simplistic debt is bad attitude.  Debt to pay day to day expenses is bad.  Debt to fund infrastructure that doesn't generate an economic return is bad.  Debt to fund infrastructure that is self liquidation is good, and with the current mining CAPEX cliff really starting to fall of next year, it would be a smart way to help provide productivity improving infrastructure and keep unemployment from increasing too much.  Infrastructure Australia has many projects vetted that could be built using debt that generate sufficient economic returns to pay themselves off.  It certainly works out cheaper for the public than the secretive PPPs that have been used.

Something needs to be done with land prices in the capital cities.  It's acting as a massive drain to the economy.  Business have to raise prices to cover the costs of inflated land values, consumers have less to spend due to high debt levels.  maybe we need to follow the germans and have federal funding based on population.  That acts as an incentive for the german states to get as many people to live there as they can, and cheap housing is one of the easiest ways they can do this.  We could look to Texas as well to see how they are able to have the same level of population growth as Australia, yet house prices didn't take off like a rocket, and they were able to achieve this in a state smaller than NSW, along with faster jobs and wages growth.

We're all going to have to accept we'll be poor for the immediate future, and possibly a lot poorer if we don't become a lot more competitive.  The falling AUD means the imports we like are going to cost us more.  we need honest politicians that are willing to lead via being truthful to us.  How can Hockey say he wont take actions that would hurt households?  He has to, but he has to do it in a way that the voters see as fair.  Without that the senate will block it, the Govt wastes what little political capital it has left, and the deficit just keeps on growing.  I'd argue that for the political pain the GP tax / fuel indexation and uni fees deregulation has cost, the Govt would have been better off quarantining capital gains to the income of the asset, removing the CGT reduction for assets held at least 12 months, and stopped the transition to retirement pension re-contribution tax minimisation abuse.  Within a few years you have an extra $4-5B in annual revenue.  There'd be howls of outrage, but most people would view these as fair, even if it is costing them.


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## DeepState (4 January 2015)

sydboy007 said:


> Major tax reform, especially on the tax expenditures.  A shift from taxing hard work and capital to taxing land / resources / consumption.  Without that our tax system will continue to act as a dead weight on progress.



Syd, would you care to expand on your thoughts on this matter?


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## sydboy007 (4 January 2015)

DeepState said:


> Syd, would you care to expand on your thoughts on this matter?




There's too much time wasted arguing about how much tax / how much spending is required, when the actual efficiency of generating the revenue is probably becoming far more important now that the participation rate is in structural decline.

I'm sure the marginal excess burden of current taxes are not exactly as the below chart shows, but unless someone can come up with better figures I'd say they're around the right levels.  

Pretty much treasury has been telling Govt for many years that we need to move away from taxing hard work ie income taxes and corporate taxes, and move towards more indirect taxation.

Income taxes discourage people from working, and encourages them to do what they can to minimise and avoid tax.  Same for corporates.  If you can get these taxes a lot lower than they currently are, then the rewards for minimising them become a lot lower, which probably makes the costs of setting up elaborate tax shelters around the world not really worth it.

So we tax land more.  It's immovable so you can't not pay tax for it.  We tax consumption more, and probably broadening the GST base rather than raising it's level would be the fairer and simpler way to go, especially as the areas current GST free are where wealthier people spend a higher proportion of their incomes, so it also passes the equity test too.

We should be taxing resources more than we currently do.  I note the mining companies love to put royalties into their tax paid calculations, yet royalties are a cost for accessing the resource they are depleting.  It would be like a farmer claiming the purchase of cattle is a tax.

So ideally what the Federal Govt needs to do is coral the states into agreeing to give up commonwealth grants in exchange for

* Land taxes - these can easily be set up on a progressive scale with safe guards for say pensioners to have them deducted from their estate so as to help wiith their current cash flow.

* Broadening the GST to cover pretty much all consumption

* Increasing taxes on resources - this could either be done by the states or the federal Govt.

In return the Federal Govt can reduce corporate and income taxes thereby making hard work work rewarding.

The states then have the income base to fund their areas of responsibility.

No more blame shifting.

I'd further argue that stamp duties would have to be fully removed.  They're an extremely bad tax.

I'd also like to see the GST carve up moved more towards the German model of funding where it's predominantly per capita based.  This introduces a competitive tension between the states because then they have to work harder to encourage people to live there.  In Germany this has encouraged the sates to keep housing far more affordable than it is in Australia.

I'd also like all federal and state infrastructure investment vetted by Infrastructure Australia, with their report automatically fully released to the Australian public.  This should then stop the white elephant infrastructure projects like the $1M / M Melbourne tunnel being funded.  IA should regularly update a table of proposed projects and their expected economic returns.  The public could then see where their money should be spent to generate the biggest bang for buck.  Why fund a project that provides a 45c in the $ return when other projects can provide $2 or even more for each $ invested?

The above is definitely not easy to achieve, especially with the bipartisan well poisoned as it has been, but the current Govt probablly needs to be the ones who make the first move since it's really up to them to offer the solutions to the problems Australia is facing.

I fully recommend reading the below as it spells out the the changes we need to make quite well

http://www.treasury.gov.au/Publicat...ortunities-for-Australia-over-the-next-decade


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## Smurf1976 (4 January 2015)

I can't imagine it being popular amongst members of a stock market forum, but why not a broad assets tax rather than only taxing land?

The issue I see is that of creating distortions in the economy. Eg land tax encourages those with a high level of assets to hold that wealth in anything other than land. It also potentially distorts the use of land itself, depending on how the tax is applied (ie does it apply to the land only, or does it include the value of buildings etc on that land?).

Also what about industries such as agriculture? If the rate of land tax is on a per area basis, then I can't imagine too many farmers staying in business. And what about situations where different means of producing the same thing require vastly different areas of land, but with the same value of actual production? Eg a solar farm takes up far more land than a nuclear reactor, and yet both have the same end product of electricity. 

I'm not arguing against it, just querying how it could be fairly applied in practice. It seems odd that I'd need to pay an annual tax to keep the land I own and yet I'd pay no tax to keep the same wealth in shares or cash. That said, it could be argued that we already have a wealth tax - inflation.


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## sydboy007 (4 January 2015)

Smurf1976 said:


> I can't imagine it being popular amongst members of a stock market forum, but why not a broad assets tax rather than only taxing land?
> 
> The issue I see is that of creating distortions in the economy. Eg land tax encourages those with a high level of assets to hold that wealth in anything other than land. It also potentially distorts the use of land itself, depending on how the tax is applied (ie does it apply to the land only, or does it include the value of buildings etc on that land?).
> 
> ...




We could definitely take a leaf out of the Swiss way of taxing wealth

http://www.expatica.com/ch/finance/tax/Taxes-in-Switzerland_101589.html

I just think wealth taxes would be a leap too far at the beginning, but could be an end goal.

As for taxing land, generally it's the unimproved value, as we currently do with council rates.  I don't believe we currently tax rural / agricultural land.  I think any land tax system would basically only tax land zoned for either residential or commercial activities.  This might be another way to tax resources if you were to tax the land used, but I still think a direct tax on resources would be the most efficient way.

Land taxes also encourage land to be used, which would in some ways make the current decades of land banking that is occurring less viable as there would be an addition annual cost to it.

If a land tax makes housing less attractive as an investment, and we move back to viewing housing as predominantly for shelter, then I don't see that as a negative.  Hopefully it would mean we invest n much more productive areas of the economy.

I'd like to see the halving of the capital gains tax and bring back indexation to inflation - to me income is income so why should a poor person pay full tax on their bank interest but a wealthier person gain at times substantial reductions in their tax due to converting income to capital gains?


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## DeepState (23 January 2015)

What is the single, most important, macro thing we need to know for investing on a long only basis in equities today?  Medium term horizon.

Even if it is the most important thing we need to know, can it be ascertained to any meaningful degree of accuracy?

----
My response: 

With Fed expectations for longer term interest rates so much higher than that of the street, who is more likely to be correct?  [embeds expected growth rates, inflation, QE...influences currency, equities...]

Probably won't get a good handle on rate levels in the longer term within a tighter band than +/- 2% but can get a handle on shape of risk or at least a better understanding of the divergence in beliefs.  
----

Yours?


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## sydboy007 (28 January 2015)

some interesting thoughts from bloomberg in the renewable energy space

http://www.businessspectator.com.au...l&utm_content=1111879&utm_campaign=pm&modapt=


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## sydboy007 (29 January 2015)

some inteesting info on how the currency wars are hurting China

http://ftalphaville.ft.com/2015/01/28/2102862/chinas-currency-war-problem-wont-just-go-away/?


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## DeepState (31 January 2015)

Key points from a speech by Mark Carney, governor of the Bank of England.
"Fortune favours the bold" 28 January 2015


	* The European area has 27% of the global banking assets. Low growth has deepened the burden of debt leading to a debt trap. This prompts the private sector to cut spending further.
	* Prior borrowing leading into the financial crisis was largely for consumption real estate investment rather than for business and projects that would generate earnings necessary to service those obligations. Underwriting standards slipped.
	* Real returns from bonds in the European area are negative as far as the eye can see, suggesting perpetually anaemic growth. Estimates of the equity risk premium have risen by over 100 basis points in the United Kingdom and the euro area back to levels last seen at the heart of the crisis. This all suggests that investors may be attaching some probability to very bad outcomes, possibly the tail risk of economies becoming stranded in a debt trap.
	* Despite low interest rates investment remain subdued and businesses continue to build cash in many advanced economies. This is one reason why the so-called equilibrium real interest rate is negative in many advanced economies. Also, the fear of stagnation is holding back spending and investment.
	* The ECB alone cannot eliminate the risks of prolonged stagnation. These exist primarily because of the destruction of the euro area, which is unfinished.
	* There is limited cross-border banking in the euro area and savings to float potential investments. Modest cross-border equity flows many inadequate risksharing. Moreover, cross-border fiscal flows virtually do not exist. As a result fiscal space is separated from fiscal needs.
	* Internal evaluations simply reallocate demand from within the currency union. A solution for some cannot be a solution for all.
	* Before the crisis the financial system appeared to be highly integrated with cross-border bank loans amounting to more than a third of total bank lending. It is now half that. This curtails the ability of the euro system to recycle the surplus savings of peripheral nations to other parts of the private sector.
	* The current fragmentation of the system in part comes from a collapse in confidence in financial institutions across national borders.
	* Various initiatives to increase the confidence in the banking system should help over time. In addition to this efforts to increase cross-border equity investment would also be welcome. Currently there is a significant home bias to this.
	* The European monetary union will not be complete until it builds mechanisms to share fiscal sovereignty.
	* Despite the current difficulties the euro area's fiscal deficit is half that of the UK. The structural deficit, according to the IMF, is less than one third is large. It is difficult to avoid the conclusion that, if the Eurozone were a country, fiscal policy would be substantively more supportive.


Items to watch:

	* cross-border CDS spreads;
	* cross-border lending;
	* corporate and personal cash balances;
	* intra-Eurozone cross-border balance of payments.


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## DeepState (31 January 2015)

An interesting point of view from...Bank for International Settlements:




....it's only money.  Ignorance is bliss by policy.


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## waterbottle (31 January 2015)

DeepState said:


> An interesting point of view from...Bank for International Settlements:
> 
> View attachment 61391
> 
> ...




Well I would think that brute force i.e. military might, would be some sort of guarantee...


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## DeepState (31 January 2015)

waterbottle said:


> Well I would think that brute force i.e. military might, would be some sort of guarantee...




I guess so, in the right circumstances and not as an absolute statement.

Paying for that military might has often caused default and is actually a leading cause of default/debasement when military campaigns take place.  Like the in the case of the Confederates or WWI Germany or...(very long list).  Each was pretty mighty in the context of its circumstances. I think Greece (awaiting default..again) has a military too as does Russia (junk) which has a fair number of nukes which have been used unsuccessfully as collateral....  How many credit notches might you think that is worth?

In comparison, Australia spends very little on military as a proportion of GDP by developed world standards.  This for a country with a surfeit of essential natural resources and a massive coast line which, in turn, is very far away from its main allies. AAA-rated. New Zealand hardly has anything except for a battalion of angry sheep on permanent stand-by.  AA-rated.


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## notting (31 January 2015)

How you manage your money is voted on by the democracy of the markets.
It's about as fair a value as can be put on it.
Democracies have a history of outperforming, they tend to be in sync with the game - naturally!


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## waterbottle (31 January 2015)

DeepState said:


> I guess so, in the right circumstances and not as an absolute statement.
> 
> Paying for that military might has often caused default and is actually a leading cause of default/debasement when military campaigns take place.  Like the in the case of the Confederates or WWI Germany or...(very long list).  Each was pretty mighty in the context of its circumstances. I think Greece (awaiting default..again) has a military too as does Russia (junk) which has a fair number of nukes which have been used unsuccessfully as collateral....  How many credit notches might you think that is worth?
> 
> In comparison, Australia spends very little on military as a proportion of GDP by developed world standards.  This for a country with a surfeit of essential natural resources and a massive coast line which, in turn, is very far away from its main allies. AAA-rated. New Zealand hardly has anything except for a battalion of angry sheep on permanent stand-by.  AA-rated.




Yes you are right, there isn't a clear correlation. I was thinking in context of the US (strongest) v. any other country.


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## sydboy007 (19 February 2015)

some may call it the lazy way to invest, but it's certainly been working for me

http://thereformedbroker.com/2015/02/17/why-active-management-fell-off-a-cliff-perhaps-permanently/

_As you are likely well aware by now, 2014 was the worst year for actively managed mutual fund performance in three decades. Less than 20% of stock-picking managers were able to exceed the returns of their benchmarks last year and, in some categories, the number was closer to 10%. How on earth could things have gotten so bad?_


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## DeepState (20 February 2015)

sydboy007 said:


> some may call it the lazy way to invest, but it's certainly been working for me







Entertainment comes at a price.


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## DeepState (20 February 2015)

ECB Governing Council does not view the, predominantly, supply side driven fall in oil price as an unambiguous positive to the economy (markets).  This aligns with my view and is a little at odds with the sentiments of other posts in this Forum and published views on the matter.  It's just not that straight forward in the current circumstances (particularly outside of the US). Just a 'Beware' if you are of the view that the oil price decline is just a monster tax cut which will stimulate demand for the developed/importing world.


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## sydboy007 (28 February 2015)

not sure if this is good or bad for manufacturing

http://www.upi.com/Business_News/20...-two-jet-engines/9271424981808/?spt=sec&or=bn

_A group of researchers at Melbourne's Monash University, in conjunction with Deakin University and Australia's Commonwealth Scientific and Industrial Research Organization (CSIRO), used a large 3-D printer to manufacture the two engines._

I can see things really moving fast in this area.


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## DeepState (5 March 2015)

Syd, did you have a read of the Intergenerational?  Your take-outs? TIA


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## sptrawler (12 March 2015)

Things are going somewhat pear shaped, over here in W.A, Rio has even removed the coffee machines from HO apparently.


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## rederob (5 May 2019)

The recent high in our allords was not supported by banks and miners.
In a fashion it might suggest our stock market is better balanced, with a range of other industry sectors coming into prominence.

Another explanation is that proposed franking credit changes are affecting super funds allocations.  Investors are moving into stocks which are less affected by grossed up yields; the likes of Dexus, Transurban or APA as examples.

If franking credits were their justification, then APA yielding 4.5% and Dexus at 4.3% versus CBA at 6.1% or BHP/RIO at 4.3% before franking credits, hardly seems a value proposition.

Banks may well be on the nose, and the Royal Commission has taken the win from their sales.  However, as they can fractionally increase their various rates and charges to recoup losses, the big banks still appear to be good places to keep your money.

Diversified miners are presently off their recent cyclical highs and a likely to run north again soon. Demand for their output remains strong, and prices remain firm albeit a long way from previous highs.
A difference now, however, is that they are producing at stronger margins and at greater quantities.
Another interesting point is that while China is a massive raw material consumer, the developing world as a whole is gathering speed and their small individual contributions are nowadays quite sizeable in aggregate.  We used to look to BRICs, but now it's the mortar that joins them that provides strength to our miners.

I am optimistic about our markets overall, but particularly like the value that appears locked in to our big players in the allords at present.


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