Crude downward slide continues

Long-term June 2017 Nymex Light Crude futures (CLM2017) is approaching its medium-term target of $54/barrel*, maintaining a premium of about $10/barrel over current delivery. Expect support at $54, but the long-term target could be as low as $36**.

Nymex WTI Light Crude June 2017 Futures

* Target calculation: 60 – ( 66 – 60 ) = 54

** Target calculation: 66 – ( 90 – 60 ) = 36

Ana Vidovic: Asturias

Asturias by Isaac Albeniz

Classical guitarist Ana Vidovic was born (1980) near Zagreb in Croatia.

China: Deja vu all over again

The Shanghai Composite today found support at 3500 today after plunging more than 8% on Monday. The large divergence on 13-week Twiggs Money Flow continues to warn of selling pressure.

Shanghai Composite Index

* Target calculation: 4000 – ( 5000 – 4000 ) = 3000

Japan’s Lost Decade

From Wikipedia:

The Japanese asset price bubble….. was an economic bubble in Japan from 1986 to 1991 in which real estate and stock market prices were greatly inflated. The bubble was characterized by rapid acceleration of asset prices and overheated economic activity, as well as an uncontrolled money supply and credit expansion. More specifically, over-confidence and speculation regarding asset and stock prices had been closely associated with excessive monetary easing policy at the time.

By August 1990, the Nikkei stock index had plummeted to half its peak by the time of the fifth monetary tightening by the Bank of Japan (BOJ)…..the economy’s decline continued for more than a decade. This decline resulted in a huge accumulation of non-performing assets loans (NPL), causing difficulties for many financial institutions. The bursting of the Japanese asset price bubble contributed to what many call the Lost Decade.

“…uncontrolled money supply and credit expansion….overheated stock market and real estate bubble.” Sound familiar? It should. We are witnessing a re-run but this time in China. Wait, there’s more…..

…..At the end of August 1987, the BOJ signaled the possibility of tightening the monetary policy, but decided to delay the decision in view of economic uncertainty related to Black Monday (October 19, 1987) in the US.

…..BOJ reluctance to tighten the monetary policy was in spite of the fact that the economy went into expansion in the second half of 1987. The Japanese economy had just recovered from the “endaka recession” ….. closely linked to the Plaza Accord of September 1985, which led to the strong appreciation of the Japanese yen.

… order to overcome the “endaka” recession and stimulate the local economy, an aggressive fiscal policy was adopted, mainly through expansion of public investment. Simultaneously, the BOJ declared that curbing the yen’s appreciation was a “national priority”……

Global stock market crash leads to prolonged monetary easing…… aggressive expansion of public investment to stimulate the domestic economy…..central bank efforts to curb appreciation of the currency. We all know how this ends. We’ve seen the movie before.

It’s like deja-vu, all over again. ~ Yogi Berra

The prevailing wisdom is that markets are always right. I take the opposition position. I assume that markets are always wrong. Even if my assumption is occasionally wrong, I use it as a working hypothesis. It does not follow that one should always go against the prevailing trend. On the contrary, most of the time the trend prevails; only occasionally are the errors corrected. It is only on those occasions that one should go against the trend. This line of reasoning leads me to look for the flaw in every investment thesis…. I watch out for telltale signs that a trend may be exhausted. Then I disengage from the herd and look for a different investment thesis. Or, if I think the trend has been carried to excess, I may probe going against it. Most of the time we are punished if we go against the trend. Only at an inflection point are we rewarded.

~ George Soros

George Soros: Assume that markets are always wrong…

Does a Dead Kazakh KGB Chief Own Sherlock’s House? – The Daily Beast

From Michael Weiss:

…..“These wealthy oligarchs all come to London because it’s a really good place to put your money,” Simon Farrell QC, a British attorney who specializes in corporate crime and money laundering, told The Daily Beast. “It’s a fantastic place to hold property because it’s a secure democracy where the rule of law is taken seriously, where the judiciary is not corrupt and where you can trust the legal profession. In many parts of the world the super-rich can’t be sure that their assets will be safe.”

Indeed, London has now earned the unflattering designation of the world’s No. 1 money-laundering capital, with an estimated $1 billion pouring in each month…..A stunning £122 billion in real estate in England and Wales is held be companies registered outside England and Wales, according to Global Witness….

Read more at Does a Dead Kazakh KGB Chief Own Sherlock’s House? – The Daily Beast.

Chinese Manufacturing Activity Falls in July – The New York Times

From Reuters:

BEIJING — China’s factory sector contracted by the most in 15 months in July as shrinking orders depressed output, a preliminary private survey showed on Friday, a worse-than-expected result that should reinforce bets the struggling Chinese economy will get more stimulus.

The flash Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) dropped to 48.2, the lowest reading since April last year and a fifth straight month below 50, the level which separates contraction from expansion.

Read more at Chinese Manufacturing Activity Falls in July – The New York Times.

Japan Escalates Its Standoff With China in the South China Sea | VICE News

By Jennifer Peters
July 22, 2015 | 8:45 am

Japan has put its foot down — at least in writing — over China’s attempts to assert greater control of the South China Sea.

….Japan isn’t the only one pushing back against China’s expansion in the region. The Philippines is taking China to court over territorial claims to the South China Sea, with top Filipino officials appearing at The Hague to argue their case before a United Nations arbitral tribunal. China has called it a “political provocation.”

“The Chinese take kind of a Leninist approach to these things,” [Kelley Currie, a senior fellow with the Project 2049 Institute] said. “They probe with the bayonet until they hit steel, and then they’ll stop. When they start to see that people are serious about pushing back, then they will back off a bit.”

Read more at With a Few Words, Japan Escalates Its Standoff With China in the South China Sea | VICE News.

Cold wind blows for crude oil producers

Long-term June 2017 Nymex Light Crude futures (CLM2017) broke support at $60/barrel, offering a target of $54/barrel*.

Nymex WTI Light Crude June 2017 Futures

* Target calculation: 60 – ( 66 – 60 ) = 54

In the short-term, September 2015 futures (CLU15) are testing support at their March low of $50/barrel. Breach is likely, given the long-term down-trend, and would offer a target of $40/barrel*.

Nymex Light Crude September 2015 Futures CLU15

* Target calculation: 50 – ( 60 – 50 ) = 40

Declining prices will hurt the Energy sector in the short/medium-term, but the benefit to the broader economy will outweigh this in the longer term. Lower fuel prices will especially benefit the Transport sector. Highly industrialized exporters like Germany, Japan, China and the broader EU, will also benefit. While oil exporters like Russia, Iran, the Middle East, Nigeria, Angola, Venezuela, and to a lesser extent Norway, face hard times ahead.

War is politics by other means…Putin’s goals are political

From Brian Whitmore at RFERL:

….War is politics by other means and the Kremlin’s goals in Donbas are ultimately political.

Vladimir Putin may have once dreamed of seizing all of what his propagandists call Novorossia — the strip of land from Kharkiv to Odesa — and establishing a land bridge to Crimea.

But that’s off the table now and he is clearly not interested in annexing the war-ravaged and economically devastated enclaves his separatists currently hold.

“The Kremlin, for its part, is losing interest in the armed conflict it helped create: It wants to move on from military interference in Ukraine to quieter political destabilization,” political commentator Leonid Bershidsky wrote in Bloomberg View.

….If you want to see Ukraine’s future under this scenario, just look at Bosnia.

Read more at How Do You Solve A Problem Like The Donbas?.

“We should be ashamed”…Isis could have been ‘nipped in the bud’ four years ago

The rise of extremist terror group Islamic State (Isis) could have been avoided if the UK began attacks on Syrian President Bashar al-Assad in 2013, according to two former defence chiefs.

“It’s a great shame, something that we should be ashamed of, that we could have nipped this problem in the bud four years ago, but failed to do so,” said Lord David Richards, a former general and the UK’s chief of defence staff from 2011 to 2013 under Prime Minister David Cameron.

“….if anything encouraged Isis at that point, it was that decision,” said Lord George Robertson, Nato secretary general from 1999 to 2004, and UK defence secretary from 1997 to 1999. “It was that fact of a failure of will on the part of the Western powers,” he added, that also encouraged Russian President Vladimir Putin to invade Crimea in 2013.

….”We are our own worst enemy. We simply ignore problems,” said Robertson, who urged the UK’s politicians to do more to convince the public why the government needs to take military action. “Unless people are convinced there are things worth fighting for, then we’ll be in trouble….”

Reminds me of:

“All that is necessary for evil to triumph is for good men to do nothing.” ~ from the film adaptation of Tolstoy’s War and Peace.

Often misattributed to Edmund Burke who wrote: “When bad men combine, the good must associate; else they will fall one by one, an unpitied sacrifice in a contemptible struggle.”

Read more at Isis could have been 'nipped in the bud' with attack on Assad in 2013 say ex UK defence chiefs.

Mick Fanning’s close-encounter with a shark

I am sure most of you have seen footage of Australian triple surf champion Mick Fanning’s close-encounter with a shark during the final of a surfing competition at Jeffrey’s Bay in South Africa.

“Paddling out to ride his first wave, a menacing grey fin appeared in the water behind him before knocking the 34-year-old off his board. The whole episode being caught live on camera for Sunday’s final of the World Surf League’s J-Bay Open.”

I was relieved to see Fanning escaped unscathed but admit to a chuckle at this post on a South African forum:

“These Australians are crazy. All I did was get caught in Mick Fanning’s leg-rope and he punched me. You hear stories about Australians….but you try not judge. But the way Fanning attacked me, I now see where the stories come from. I now know what the English go through in the Ashes, these guys are bloody animals…… Nobody deserves to be treated this way, someone needs to do something about this!”

Signed Hannes the Shark.

Gold headed for $600 or $700?

Gold broke long-term support at $1140/ounce, offering a medium-term target of $1000*. Peaks at zero on 13-week Twiggs Momentum indicate a strong primary down-trend.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

What is the long-term target?

Gold fell from a long-term high around $1800 before encountering strong support at $1200. Breakout below this lengthy, mid-point consolidation suggests that the precious metal is likely to experience another decline of similar magnitude to the first. These patterns are normally symmetrical, which would present an end target of $600 per ounce. That is $1200 – ($1800 – $1200) = $600.

$600 may seem outlandish, given the strength of recent support, but not when one adjusts the gold price by the consumer price index (CPI). Then it appears that yellow metal still has some way to fall.

Gold over CPI

Nothing is certain in this world (except death and taxes) and there are many fundamentals (like central banks) that may intervene. Also, there is a strong support level at the 2008 low of $700 per ounce.

Spot Gold

I would attach a 50% probability to gold reaching $700 in the next few years and a bit less, say 30%, to gold reaching $600.

APRA confirms further capital adequacy measures

From Robin Christie:

The Australian Prudential Regulation Authority (APRA) has confirmed that the country’s largest banks will face increased capital adequacy requirements for residential mortgage exposures – and hasn’t ruled out further rises.

The regulator made it clear yesterday that the new rules would be an interim measure based on the Financial System Inquiry’s (FSI) recommendations – and that it was keenly awaiting guidance from the Basel Committee on Banking Supervision before making any further changes.

The new measures, which come into effect on 1 July 2016, mandate that authorised deposit-taking institutions (ADIs) that are accredited to use the internal ratings-based (IRB) approach to credit risk must increase their average risk weight on Australian residential mortgage exposures to at least 25 per cent. According to APRA, the current average risk weight figure sits at around 16 per cent….

This is a welcome first step. Increases in bank capital will improve economic stability. Even at 25 percent, however, a capital ratio of 10% would mean that banks are holding 2.5 percent capital against residential mortgages. Further increases over time will be necessary.

Read more at APRA hints at further capital adequacy measures.

Why negative gearing is not a fair tax policy

Interesting view from Antony Ting, Associate Professor at University of Sydney:

Is negative gearing in accordance with well-established tax rules? A fundamental principle in the tax law is that a taxpayer should be able to deduct expenses only if the expenses have been incurred to generate assessable income.

This is why an employee can only deduct expenses that are sufficiently related to work. For example, a funeral director at tropical Queensland would be able to deduct the cost of his black jacket (but not his black trousers) because the ATO believes that no rational person – except a funeral director – would wear a black jacket in such a hot place.

Should mortgage interest on an investment property be deductible? Investment properties generate two kinds of income: rental income and capital gains (if any). As capital gains on investment property can enjoy a 50% tax discount if the property has been held for at least a year, strictly speaking only 50% of the interest expenses related to the capital gain should be deductible.

……Many countries resolve this issue by quarantining losses on investment properties. It means that losses generated from negative gearing cannot be used to offset against other sources of income, for example, salaries or business income. Instead, the losses can be carried forward to future years to offset against income from the investment properties.

Quarantining losses seems fairer than limiting deductibility of losses to the 50% discount normally available on capital gains. But the situation gets more complicated when the property is sold. Can accumulated losses never be deducted against gains on other assets or should they be offset against any capital gain made on disposal of the property? And if the result is a net capital loss should this be allowed to be offset against gains on other properties? We need a system that is fundamentally fair.

Read more at Why negative gearing is not a fair tax policy.

Gold crashes through primary support

Gold broke primary support at $1140/ounce, signaling a decline to the target of $1000*. 13-Week Twiggs Momentum peaks below zero have been warning of this for some time.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

Major producer Barrick Gold also broke primary support, at $10, strengthening the bear signal for gold. Similar peaks below zero on 13-week Twiggs Momentum warn of a primary down-trend. Breach of support offers a target of $6.50*.

Barrick Gold

* Target calculation: 10 – ( 13.50 – 10.00 ) = 6.50

China’s Debt-to-GDP Ratio Just Climbed to a Record High – Bloomberg Business

From Ye Xie and Belinda Cao at Bloomberg:

While China’s economic expansion beat analysts’ forecasts in the second quarter, the country’s debt levels increased at an even faster pace.

Outstanding loans for companies and households stood at a record 207 percent of gross domestic product at the end of June, up from 125 percent in 2008, data compiled by Bloomberg show.

Read more at China's Debt-to-GDP Ratio Just Climbed to a Record High – Bloomberg Business.

China’s stock market falling off a cliff: Why, and why care? | Alicia García-Herrero at

Great insight from Alicia García-Herrero:

….The need for Chinese corporations and banks to avail themselves of fresh equity cannot be underestimated. On the one hand, corporate debt has grown sixfold from 2005 levels. On the other hand, Chinese banks are not only heavily exposed to these corporates, being still their main source of financing, but also to local governments whose huge borrowing from banks is starting to be restructured. To make a long story short, China’s governments needed a bull stock market to transfer part of the cost of cleaning up its corporates’ and banks’ balance sheets from the state to private investors, including foreigners. The PBoC danced to the Government’s tune, easing monetary policy since November last year. This was done through several interest rate cuts and by lowering the liquidity ratio requirements. The problem with all of this liquidity is that it only fueled additional leveraging, including for gambling on the stock market…..

The sudden collapse of the Chinese stock market had two triggers. First, the was a wave of profit taking after the Shanghai benchmark index broke through 5 000 in early June and doubts emerged about further easing from the PBoC. At that very same moment, China’s securities regulator announced measures to cool down the market, which amounted to banning brokerage firms from providing unregulated margin funding to investors. This was more of a shock to the system than one might imagine, as margin financing in China is much larger than in other stock markets.

Japan had zombie banks, looks like China could end up with a zombie stock market.

Read more at China's stock market falling off a cliff: Why, and why care? | Alicia García-Herrero at

Could a new property tax save the economy?

Interesting article by Robin Christie | 16 Jul 2015

Property levies could be the key to fixing state and territory budgets, and could raise as much as $7 billion a year, the Grattan Institute has claimed.

Grattan’s ‘Property Taxes’ report…..explores how imposing a broad-based property levy could help Australia’s state and territory governments to boost their deteriorating budgets.

According to the report, a levy of just two dollars for every $1,000 of unimproved land value would raise $7 billion a year.

…….While it accepts that property taxes can be unpopular because they are highly visible and hard to avoid, it states that they are also both efficient and fair. In addition, it argues that property taxes don’t change incentives to work, save and invest.

“Our proposal is manageable for property landowners, and protects low-income people,” said Daley. “Low-income retirees with high-value houses could defer paying the levy until their house is sold.”

Key points

According to the paper, other key arguments in favour of property taxes include:

Unlike capital, property is immobile – it cannot shift offshore to avoid taxes.

Over the last 25 years, taxes on property and property transactions have been the only significant growth taxes for states, with revenues keeping pace with the economy.

Shifting from stamp duty to a property levy would provide more stable revenues for states, and add up to $9 billion in annual GDP.

“Concerns about the risks of multinational tax avoidance, the increasing mobility of capital around the world, and the increasing value of residential property relative to incomes, should make property taxes a priority in any tax reform,” states the paper.

“Higher property taxes could also be used to fund the reduction and eventual abolition of state stamp duties on property. Stamp duties are among the most inefficient and inequitable taxes available to states, and their revenues are inherently volatile.”

Abolition of stamp duties would remove the temptation for State governments to restrict land release, driving up prices in order to increase stamp duty revenue. But high prices act as a deterrent for young families to purchase their own homes. Land taxes instead would create an incentive for states to release new land for development, widening property ownership and their tax base.

Read more at Could a new property tax save the economy?.