General Macro Observations

[sydboy007]

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.

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]

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]

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]

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]

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

 

[sydboy007]

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]

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]

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]

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.

 

[qldfrog]

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)

 

[sydboy007]

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.

 

[sydboy007]

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:

Japanese drew down savings for the first time on record while wages adjusted for inflation dropped the most in almost five years, highlighting challenges for Prime Minister Shinzo Abe as he tries to revive the world’s third-largest economy.

The savings rate in the year through March was minus 1.3 percent, the first negative reading in data back to 1955, the Cabinet Office said.

 

[sydboy007]

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.

 

[sptrawler]

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

 

[sydboy007]

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.

 

[DeepState]

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?

 

[sydboy007]

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

 

[Smurf1976]

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.

 

[sydboy007]

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.

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?

 

[DeepState]

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?

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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.
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Yours?