Irrational Exuberance Down Under | Bloomberg View

From William Pesek:

Lindsay David’s new book on Australia deserves a medical disclaimer: Reading this will greatly raise your blood pressure.

In “Australia: Boom to Bust” David sounds the alarm about an Australian housing bubble he argues makes the 12th-biggest economy a giant Lehman Brothers. His thesis can be boiled down to the number 9 — the ratio of home prices to income in Sydney. The multiple compares unfavorably to 7.3 in London, 6.2 in New York and 4.4 in Tokyo. Melbourne is 8.4.

Read more at Irrational Exuberance Down Under – Bloomberg View.

Children from 100 years ago were 50% more active than kids today

“In 1970, almost 70% of Australian kids walked or cycled to school. Today, this proportion is barely 25%….”

Amir Sufi: Who is the Economy Working For? The Impact of Rising Inequality on the American Economy

Amir Sufi, professor of Finance at the University of Chicago, testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Economic Policy. His statement titled “Who is the Economy Working For? The Impact of Rising Inequality on the American Economy” makes interesting reading.

“Only 76% of Americans aged 25 to 54 currently have jobs, compared to 80% in 2006 and 82% in 1999…..How did we get into this mess?”

The gist of his argument is:

“Richer Americans save a much higher fraction of their income, ultimately holding most of the financial assets in the economy: stocks, bonds, money-market funds, and deposits. These savings are lent by banks to middle and lower income Americans, primarily through mortgages.”

…And collapse of the housing market caused disproportionate harm to the middle and lower-income groups.

It is true is that middle and lower-income groups have a higher percentage of their wealth invested in their homes and are also far more exposed to mortgages than richer Americans. The source of funding for these mortgages, however, is not the wealthy — who are primarily invested in growth assets such as stocks — but the banks who create new credit out of thin air. The collapse of the housing market caused disproportionate hardship to middle and lower-income Americans because their wealth is concentrated in this area. The rich suffered from a collapse in stock prices, but the market has recovered to new highs while housing remains in the doldrums. That is one of the causes of rising wealth inequality.

Where I do agree with Amir is that credit growth without income growth is a recipe for disaster.

“A tempting solution to our current troubles is to encourage even more borrowing by lower and middle-income Americans. This group of Americans is likely to spend out of additional credit, which would provide a temporary boost to consumption. But unless borrowing is predicated on higher income growth, we risk falling into the same trap that led to economic catastrophe.”

The graph below compares credit growth to growth in (nominal) disposable income:

Credit and Disposable Income

The ratio of credit to disposable income rose from 2:1 during the 1960s to almost 5:1 in 2009.

Credit to Disposable Income

There is no easy path back to the stability of the 1960s. A credit contraction of that magnitude would destroy the economy. But regulators should aim to keep credit growth below the rate of income growth over the next few decades, gradually restoring the economy to a more sustainable level.

The worst possible policy would be to encourage another credit boom!

Piketty’s Missing Rentiers by Jeffrey Frankel | Project Syndicate

From Jeffrey Frankel:

It is true that capital’s share of income interest, dividends, and capital gains rose gradually in major rich countries during the period 1975-2007, while labor’s share wages and salaries fell, a trend that would support Piketty’s hypothesis if it continued…..

But interest rates have been at all-time lows in recent years – virtually zero. And the claim that in the long run the interest rate must be substantially greater than the economic growth rate is absolutely central to Piketty’s book.

That said, Piketty’s vision is focused squarely on the truly long run….Three century-long movements constitute the essence of the book: a rise in inequality in the nineteenth century, a fall in inequality in the twentieth century, and a predicted return to historically high inequality in the twenty-first century.

To me Piketty started with a preconceived idea and selected data to support this. He seems to ignore the impact of industrialization in the 19th century and technological advances in the late 20th century as sources of wealth creation, as well as access to low-cost labor through globalization during the latter period which has eroded manufacturing jobs and real wages.

Read more at Piketty’s Missing Rentiers by Jeffrey Frankel – Project Syndicate.

What Ukraine needs most now – Evidence from Slovakia Reforms | VoxUkraine

From Ivan Mikloš (former Minister of Finance and deputy Prime Minister of the Slovak Republic):

…Twenty-five years ago Slovakia produced antiquated Soviet tanks and another heavy military equipment but not one car. Today we are the number one producer of cars in the whole world, per capita. The most important reason for that success is reforms. Let me illustrate this by comparing convergence success of the Visegrad countries from 2004 until 2008. Over those four years, GDP per capita in PPP in comparison with the EU average improved in Hungary by 1%, Czech Republic by 3%, Poland by 5% and Slovakia by 16%. These were the first four years of EU membership for all of these countries, therefore the big difference among their convergence progress has to have had different reasons. This reason is reforms.

Slovakia during 2003 prepared, and from the beginning of 2004 implemented, a very bold and complex package of deep structural reforms. In 2004 Slovakia was named the most reformist country globally by the World Bank. I am not writing this in order to praise my country or myself. I am writing this because of two main reasons. Firstly, it shows that reforms work. It shows that if country is able to implement a deep and comprehensive package of reforms it will bring relatively quick results. Secondly, I think that our experience shows Ukraine now has a real chance to achieve similar success and progress if necessary reforms are implemented.

Read more at VoxUkraine.

Trouble in the East

Poland, Ukraine and Lithuania plan to form a common brigade:

Ben Judah, author of Fragile Empire: How Russia Fell In And Out Of Love With Vladimir Putin observes:

“This emerging military alliance between Ukraine and Poland/Lithuania is a sign that the US/EU ability to control it allies decreasing fast.”

Lack of leadership from their Western allies is forcing Eastern NATO states to form their own alliances, which could drag NATO into a conflict with Russia. Garry Kasparov in an interview with Maria Bartiromo sums up the situation:

“If you try to lead from behind no one will follow you….Obama shows unwillingness to engage the challenges that are there.”

Garry Kasparov on Putin

Click on image to play video

Obama is no Ronald Reagan and his reluctance to confront Putin is encouraging further risk-taking. As Petro Poroshenko told the House:

We appreciate the blankets and night-vision goggles that you sent us….but we cannot fight a war with blankets.”

The ceasefire in the East is tenuous and likely to collapse at any time.

If the ceasefire does collapse, Putin will continue to escalate, destroying Obama’s and NATO credibility with their allies in the East. Sanctions have not worked as a deterrent. Brent crude is falling

Nymex and Brent Crude

But the impact on Russia is cushioned by the falling Rouble.


In the long-term this will cause inflation. But the immediate deterrent effect is negligible.

Scotland’s “No” vote

Scots voted “No” to independence, with a clear 55% to 45% majority. Alex Salmond has announced he will resign as First Minister and SNP leader, with the words: “For me as leader my time is nearly over, but for Scotland the campaign continues and the dream shall never die.” Like Bruce’s spider of legend, I doubt he will give up after failing at the first attempt.

S&P bullish but Asia, Europe weak

Weekly highlights:

  • Scotland votes “No” and the Pound rallies
  • Treasury yields (long-term) are rising and the Dollar strengthens
  • Gold and crude oil fall
  • European stocks remain bearish
  • Asian stocks also remain bearish despite Hong Kong/Shanghai breakout
  • US stocks still reflect a bull market

Stock markets

Dow Jones Europe Index is retracing after a weak rally that reached 335. Failure of support at 320 would signal a primary down-trend. Follow-through below 315 would confirm. A 13-week Twiggs Momentum peak below zero strengthens the bear signal.

* Target calculation: 320 – ( 340 – 320 ) = 300

Dow Jones Asia Index is testing primary support at 3200 despite bullishness on the Hang Seng and Shanghai Composite. Bearish divergence on 13-week Twiggs Momentum warns of a test of 3100. Breach of 3200 would signal a primary down-trend, while follow-through below 3100 would confirm.

* Target calculation: 3100 + ( 3100 – 2800 ) = 3400

The S&P 500 recovered above 2000 to signal a fresh advance. Follow-through above 2010 confirms a target of 2100*. Reversal below 1980 is unlikely. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure.

S&P 500

* Target calculation: 2000 + ( 2000 – 1900 ) = 2100

CBOE Volatility Index (VIX) remains low, typical of a bull market.

S&P 500 VIX

The ASX 200 correction found support at 5300/5350. But 13-week Twiggs Money Flow below zero, after a long-term bearish divergence, warns of further weakness. Breach of 5300 would indicate a test of 5000. Recovery above 5550 is unlikely, but would suggest a fresh advance.

ASX 200

* Target calculation: 5650 + ( 5650 – 5350 ) = 5950

Dow, S&P 500 make new highs

Dow Jones Industrial Average followed through above 17150, confirming a primary advance to 18000*. Rising 21-day Twiggs Money Flow suggests buying pressure. Reversal below support at 16950 is most unlikely, but would warn of a correction.

Dow Jones Industrial Average

* Target calculation: 17150 + ( 17150 – 16350 ) = 17950

The S&P 500 similarly followed through above 2010, confirming a primary advance with a target of 2070*. Reversal below support at 1980 is most unlikely, but would warn of a correction.

S&P 500

* Target calculation: 1990 + ( 1990 – 1910 ) = 2070

CBOE Volatility Index (VIX) is now back at 12, continuing to indicate low risk typical of a bull market.

VIX Index

A Premature Party for Poroshenko

From Leon Aron, Director of Russian studies at the American Enterprise Institute:

…By withholding military assistance to Ukraine — the only thing that could have changed Putin’s mind by giving Kiev a chance to turn the tide on the battlefield — the West has greatly contributed to [Ukrainian President] Poroshenko’s decision to accept a very bad deal. No amount of ovation, not even a standing one, during Poroshenko’s address to the joint session of Congress today can obscure this grim reality.

Read more at A Premature Party for Poroshenko.

Defence With A “C”: The Russian Bear Cometh!

From Chris at Defence with a C:

Russia has spent the last decade talking about programs to upgrade its armed forces and spend more money on things like training, logistics and maintenance. The fruits of this investment, or even just the investment itself, appear to be taking a very long time to actually materialise.

This is not to say that NATO shouldn’t sleep with one eye open, or that NATO should stop investing in its collective defence. Vigilance is the first stage of preparedness after all. But to say that Russia is an imminent threat to NATO is over egging the pudding I feel….

Read more at Defence With A "C": The Russian Bear Cometh!.

Poroshenko: ‘Today Ukraine is bleeding for its independence and territorial integrity’

From Ukrainian President Petro Poroshenko’s speech to the Canadian parliament in Ottawa on September 17:

Today Ukraine pays a very high price for defending what we believe in – democracy and freedom to choose our own future. For more than two decades we proudly stated that Ukraine gained its independence without shedding a single drop of blood.

Today Ukraine is bleeding for its independence and territorial integrity.

Read more at Poroshenko: 'Today Ukraine is bleeding for its independence and territorial integrity' VIDEO.

Gold and silver fall

Gold respected the new resistance level at $1240 after a brief retracement, confirming a primary down-trend. Declining 13-week Twiggs Momentum below zero strengthens the bear signal. Expect further support at $1200/ounce, breach would add further confirmation.

Spot Gold

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

Silver is testing primary support at $18.50 per ounce. Breach of support would signal a down-trend and strengthen the bear signal for gold. Respect is unlikely, but would suggest further consolidation.

Spot Silver

Interest Rates and the Dollar

A rising Dollar and rising Treasury yields both put downward pressure on gold.

The Dollar Index is testing resistance at the 2013 high of 84.50. Rising 13-week Twiggs Momentum above zero signals a primary up-trend. Reversal below 81.50 is most unlikely. Upward breakout would offer a long-term target of 89*.

Dollar Index

* Target calculation: 84 + ( 84 – 79 ) = 89.00

The yield on ten-year Treasury Notes broke resistance at 2.50 percent and is now consolidating at 2.60. Follow-through above 2.65 would signal an advance to 3.00. Respect would signal a decline to 2.00 percent*. 13-Week Twiggs Momentum recovery above zero would suggest a primary up-trend.

10-Year Treasury Yields

* Target calculation: 2.65 + ( 2.65 – 2.30 ) = 3.00

S&P 500 healthy bounce

The S&P 500 bounced off support at 1980/1985 and is once again testing resistance at 2000. Follow-through above 2010 would confirm a primary advance, targeting 2100*. Failure of short-term support at 1980 remains unlikely, but would warn of a correction to 1950.

S&P 500

* Target calculation: 2000 + ( 2000 – 1900 ) = 2100

CBOE Volatility Index (VIX) retreated below 13, indicating low risk typical of a bull market.

VIX Index

Dow Jones Industrial Average breakout above 17150 would strengthen the bull signal, offering a target of 17500*. Rising 21-day Twiggs Money Flow suggests buying pressure. Reversal below support at 16950 is unlikely, but would warn of a correction.

Dow Jones Industrial Average

* Target calculation: 16500 + ( 16500 – 15500 ) = 17500

Putin Attacks the West’s Soft Underbelly | World Affairs Journal

From Arthur Milikh at the Heritage Foundation:

Alexander Hamilton lamented long ago, in Federalist 25, what may become our tendency to act as if “all that kind of policy by which nations anticipate distant danger and meet the gathering storm must be abstained from.” Putin knows we want to be deceived. But what nation would choose, as Hamilton puts it, to “receive the blow before we could even prepare to return it”?

Putin’s new genre of war in part stems from our Western intellectual deficiencies. He knows we cannot countenance full-on conventional warfare in such a critical region—but we can swallow ambiguity. He knows that we will likely intervene only on account of moralism or shame, but we will not act strategically, trusting in our judgment. Putin will provide us with empirical data to sufficiently muddy the waters and thereby destroy our confidence in our own intuition. The incursion of a “humanitarian” convoy of 200-plus trucks into Ukraine last month was a masterful example of this….

Read more at Putin Attacks the West's Soft Underbelly | World Affairs Journal.

Putin’s Playbook |

From Maxim Trudolyubov, opinion page editor of the business newspaper Vedomosti:

…So what is Mr. Putin up to, my American friends and colleagues keep asking. He is, quite simply, bent on preserving and expanding his personal and Russia’s international power. Some of his methods were inherited from the Soviets, some were developed in the absence of domestic political traditions, and some were borrowed from the West. There is no consistent ideology. Nor is there is anything particularly Russian about his beliefs. But the methodology in his playbook is constant and ruthless. It involves techniques that function when all past checks on power — institutional constraints and traditional values — are gone. If it’s true that much of the world is moving in this same ruthless direction, then, yes, Mr. Putin’s methods are indeed political guidelines for the future.

Read more at Putin's Playbook –

Aussie dollar leads ASX lower

The Australian Dollar found short-term support at $0.90 after last week’s fall. Reversal of 13-week Twiggs Momentum below zero warns of another decline, but expect support at $0.89/$0.90 and at $0.8650/$0.8700. Breach of the latter would confirm a target of $0.80*.


* Target calculation: 0.87 – ( 0.94 – 0.87 ) = 0.80

The ASX 200 is testing a wide band of support between 5420 and 5460. Reversal of 21-day Twiggs Money Flow below zero warns of strong selling pressure. Breach of the rising trendline would suggest a correction to test the primary trendline around 5000. Support levels are indistinct because of frequent back-filling, however, and could establish anywhere between 5300 and 5450.

ASX 200

The ASX 200 VIX is rising, but levels below 20 are typical of a bull market.

ASX 200