Cold War Strategies Are Back in Russia’s Playbook | Opinion | The Moscow Times

From Alexander Golts, deputy editor of the online newspaper Yezhednevny Zhurnal:

Russia is becoming a lonely pariah without alliances or military might, other than its nuclear weapons. And without any other easy means of achieving its objectives, I am afraid that the Kremlin will constantly try to prove it is just crazy enough to use its nuclear weapons. In short, Russia is turning into a second North Korea, only much, much larger, and far more dangerous.

Read more at Cold War Strategies Are Back in Russia's Playbook | Opinion | The Moscow Times.

Asia: Sleeping tigers awaken

Hong Kong’s Hang Seng Index broke long-term resistance at 24000, signaling a primary advance with an intermediate target of 27000*. The recent 13-week Twiggs Money Flow trough at zero indicates long-term buying pressure. Expect retracement to test the new support level. Reversal below 24000 is unlikely, however, and would warn of a correction to the rising trendline.

Hang Seng Index

* Long-term target calculation: 24000 + ( 24000 – 21000 ) = 27000

Singapore’s Straits Times Index likewise broke resistance at 3300, signaling a primary advance to 3600*. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Again, expect retracement to test the new support level, but reversal below 3200 is unlikely and would warn of another test of primary support at 3000.

Straits Times Index

* Target calculation: 3300 + ( 3300 – 3000 ) = 3600

China’s Shanghai Composite Index broke resistance at 2150 as the PBOC aggressively injects bank credit to revive a flagging economy. This may lift the medium-term outlook, but is not sustainable in the long-term and could well aggravate the eventual contraction. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Breakout above 2250 would confirm a primary up-trend. Reversal below 2100 is unlikely at present, but would warn of another test of primary support at 1990/2000.

Shanghai Composite Index

* Target calculation: 2000 – ( 2150 – 2000 ) = 1850

India’s Sensex is retracing to test the new support level at 26000. Breach would indicate a test of 25000. Bearish divergence on 13-week Twiggs Money Flow warns of selling pressure. Failure of support at 25000 would warn of a correction to the primary trendline at 23000. Respect of (or recovery above) 26000, however, would offer a target of 27000*.


* Target calculation: 21000 + ( 21000 – 15000 ) = 27000

Japan’s Nikkei 225 is testing 15500. Breakout from the consolidation of recent weeks would indicate a rally to 16000*. Oscillation of 13-week Twiggs Money Flow above zero indicates healthy long-term buying pressure. Reversal below 15000 is unlikely, but would warn of another test of primary support at 14000.

Nikkei 225

* Target calculation: 15000 + ( 15000 – 14000 ) = 16000

Footsie bullish but DAX selling pressure

The Footsie is headed for another test of 6850/6900. Respect of the zero line by 13-week Twiggs Money Flow indicates healthy long-term buying pressure. Breakout would offer an intermediate target 7300*. Reversal below 6650, however, would warn of a correction to 6400/6500.

FTSE 100

* Target calculation: 6900 + ( 6900 – 6500 ) = 7300

Germany’s DAX is testing support at 9600. Breach would warn of a correction to 9000 — and a weakening primary up-trend. Declining 13-week Twiggs Money Flow indicates selling pressure, but respect of the zero line would suggest the primary trend is intact. Breach of primary support at 8900/9000 is unlikely, but would signal a primary down-trend. Recovery above 10000 is also unlikely at present, but would indicate an advance to 10500*.


* Target calculation: 9750 + ( 9750 – 9000 ) = 10500

Dow and S&P 500 remain bullish

Dow Jones Industrial Average found support at 16950, with long tails indicating short-term buying pressure. Recovery above 17075 would indicate a fresh advance; above 17150 would confirm. A close below 16950 is less likely, but would warn of a correction to 16500. The decline of 21-day Twiggs Money Flow indicates mild selling pressure typical of a consolidation.

Dow Jones Industrial Average

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

The S&P 500 also displays a long tail indicative of buying pressure. Recovery above 1985 would indicate another attempt at 2000. Further consolidation below the 2000 resistance level is likely. Reversal below 1950, however, would warn of a correction to 1900.

S&P 500

* Target calculation: 1500 + ( 1500 – 750 ) = 2250

The CBOE Volatility Index (VIX), trading at low levels last seen in 2005/2006, is typical of a bull market.

VIX Index

Platinum founder warns on property “act of faith”

ScreenHunter_3505 Jul. 29 08.50

By Leith van Onselen

The founder of Platinum Asset Management, billionaire investor Kerr Neilson, has released an interesting report warning about Australia’s frothy house price valuations and the risks of a correction once “conditions change, [and] a lot of the assumptions are found wanting”.

The report highlights four “facts” about Australian housing:

1. Returns from housing investment are often exaggerated and flattered by inflation.
2. Holding costs of rates, local taxes and repairs are estimated to absorb about half of current rental yields.
3. Long-term values are determined by affordability (wages + interest rates).
4. To be optimistic about residential property prices rising in general much faster than inflation is a supreme act of faith.

It then goes on to examine each of these facts.

On returns, the report notes that “the rise in the price of an average home in Australia…[has] been about 7% a year since 1986. In dollar terms, the average existing house has risen in value by 6.3 times over the last 27 years. No wonder most people love the housing market!”

But rental returns have gotten progressively poor:

…we earn a starting yield of say 4% on a rented-out home or if you live in it, the equivalent to what you do not have to pay in rent. But again, looking at the Bureau of Statistics numbers, they calculate that your annual outgoings on a property are around 2%. This takes the shape of repairs and maintenance, rates and taxes, and other fees. This therefore reduces your rental return to 2%, and what if it is vacant from time to time?

And the prospect for future solid capital growth is low due to poor affordability:

…the last 20 or so years has been exceptional. Australian wages have grown pretty consistently at just under 3% a year since 1994 – that is an increase of about 1% a year in real terms.

Affordability is what sets house prices and this has two components: what you earn and the cost of the monthly mortgage payment (interest rates).

…even though interest rates have progressively dropped, interest payments today absorb 9% of the average income, having earlier been only 6% of disposable income.

ScreenHunter_3506 Jul. 29 09.21

Today, houses cost over four times the average household’s yearly disposable income. At the beginning of the 1990s, this ratio was only about three times household incomes. As the chart over shows, this looks like the peak.

ScreenHunter_3507 Jul. 29 09.22

Finally, the report argues that for Australian home prices to significantly outpace inflation over the next ten years, as they have in the past, “would require a remarkable set of circumstances”, namely a combination of:

1. Continuing low or lower interest rates.
2. Willingness to live with more debt.
3. Household income being bolstered by greater participation in the income earning workforce.
4. Average wages growing faster than the CPI.

The last point is improbable seeing that wages and the CPI have a very stable relationship, while the other points are not very likely.

Reproduced with kind permission from Macrobusiness.

Is unemployment really falling?

US unemployment has fallen close to the Fed’s “natural unemployment rate” of close to 5.5%. Does that mean that all is well?

Not if we consider the participation rate, plotted below as the ratio of non-farm employment to total population.

Employment Participation Rate

Participation peaked in 2000 at close to 0.47 (or 47%) after climbing for several decades with increased involvement of women in the workforce. But the ratio fell to 0.42 post-GFC and has only recovered to 0.435. We are still 3.5% below the high from 14 years ago.

When we focus on male employment, ages 25 to 54, we exclude several obscuring factors:

  • the rising participation rate of women;
  • an increasing baby-boomer retiree population; and
  • changes in the student population under 25.

Employment Rate Men 25 to 54

The chart still displays a dramatic long-term fall.

Let the Past Collapse on Time! by Vladimir Sorokin | The New York Review of Books

From Vladimir Sorokin:

Yeltsin, who was tired after climbing to the top of the pyramid, left the structure completely undisturbed, but brought an heir along with him: Putin, who immediately informed the population that he viewed the collapse of the USSR as a geopolitical catastrophe. He also quoted the conservative Alexander III, who believed that Russia had only two allies: the army and the navy. The machine of the Russian state moved backward, into the past, becoming more and more Soviet every year.

In my view, this fifteen-year journey back to the USSR under the leadership of a former KGB lieutenant colonel has shown the world the vicious nature and archaic underpinnings of the Russian state’s “vertical power” structure, more than any “great and terrible” Putin….A country such as this cannot have a predictable, stable future….

Unpredictability has always been Russia’s calling card, but since the Ukrainian events, it has grown to unprecedented levels: no one knows what will happen to our country in a month, in a week, or the day after tomorrow. I think that even Putin doesn’t know; he is now hostage to his own strategy of playing “bad guy” to the West…..If you compare the post-Soviet bear to the Soviet one, the only thing they have in common is the imperial roar. However, the post-Soviet bear is teeming with corrupt parasites that infected it during the 1990s, and have multiplied exponentially in the last decade. They are consuming the bear from within. Some might mistake their fevered movement under the bear’s hide for the working of powerful muscles. But in truth, it’s an illusion.

Translated from the Russian by Jamey Gambrell.

Read more at Let the Past Collapse on Time! by Vladimir Sorokin | The New York Review of Books.

A compassionate conservative: Arthur C. Brooks

Bill Moyers interviews the American Enterprise Institute’s president Arthur C. Brooks on how to fight America’s widening inequality.

“The problem is we have a bit of a conspiracy between the right and left to have people now who are tending to be more part of the machine…We need a new kind of moral climate for our future leaders.”

Bill Moyers seems a bit light on the economics of the Walmart situation. Raising the minimum wage would reduce welfare payments to Walmart employees, but WMT is a rational entity with the primary goal of maximizing profits and shareholder value. An increase in the minimum wage would increase the appeal of automation and result in a reduction in staff numbers, causing an increase in unemployment, or alternatively WMT will pass on the additional cost in the form of increased prices to consumers, causing a rise in inflation. The only sustainable long-term solution is not an easy one: to increase economic growth and employment so that market-driven wage rates rise. Interference with the pricing mechanism in a market — whether through legislated minimum wages, price controls or Fed interest rates — is misguided and unsustainable. It may defer but also amplifies the original problem.

Work for the Dole doesn’t work – but here is what does

From Jeff Borland, Professor of Economics at University of Melbourne:

…95% of the time a government spends thinking about unemployment should be spent thinking about ways to promote economic growth.

Read more at Work for the Dole doesn't work – but here is what does.

Calm before the storm as Europe poised to join economic war against Russia – Telegraph Blogs

From Ambrose Evans-Pritchard:

Vladimir Putin

Russia is battening down the hatches. The central bank was forced to raise interest rates this morning to 8pc to defend the rouble and stem capital flight, $75bn so far this year and clearly picking up again.

The strange calm on the Russian markets is starting to break as investors mull the awful possibility that Europe will impose sanctions after all, shutting Russian banks out of global finance.

…Lars Christensen from Danske Bank said the inflexion point will come if the EU does in fact impose “Tier III” measures aimed at crippling the Russian banking system, as now seems likely. “That is when the lights will turn off for the Russian market. We will see capital flight of a whole different nature,” he said.

The world is entering a dangerous phase. Having escalated the conflict in Eastern Ukraine into a proxy war, the Kremlin seems unwilling or unable to back down despite rising US and EU sanctions. This is not another Afghanistan. The stakes are far higher. The 100th anniversary of the outbreak of WWI reminds us that Eastern Europe is a tinder box for major global conflicts. While a ‘hot war’ is unlikely — both sides have too much to lose — Eastern Ukraine could well ignite another cold war. Peace proves elusive.

Peace is an armistice in a war that is continuously going on.

~ Thucydides ( c. 460 – c. 395 BC), History of the Peloponnesian War

Read more at Calm before the storm as Europe poised to join economic war against Russia – Telegraph Blogs.

World wakes to APRA paralysis | Macrobusiness

Posted by Houses & Holes:

Bloomberg has a penetrating piece today hammering RBA/APRA complacency on house prices, which will be read far and wide in global markets (as well as MB is!):

Central banks from Scandinavia to the U.K. to New Zealand are sounding the alarm about soaring mortgage debt and trying to curb risky lending. In Australia, where borrowing is surging, regulators are just watching.

Australia has the third-most overvalued housing market on a price-to-income basis, after Belgium and Canada, according to the International Monetary Fund. The average home price in the nation’s eight major cities rose 16 percent as of June 30 from a May 2012 trough, the RP Data-Rismark Home Value Index showed.

“There’s definitely room for caps on lending,” said Martin North, Sydney-based principal at researcherDigital Finance Analytics. “Global house price indices are all showing Australia is close to the top, and the RBA has been too myopic in adjusting to what’s been going on in the housing market.”

Australian regulators are hesitant to impose nation-wide rules as only some markets have seen strong price growth, said Kieran Davies, chief economist at Barclays Plc in Sydney.

…“The RBA’s probably got at the back of its mind that we’re only in the early stages of the adjustment in the mining sector,” Davies said. “Mining investment still has a long way to fall, and also the job losses to flow from that. So to some extent, the house price growth is a necessary evil.”

…The RBA, in response to an e-mailed request for comment, referred to speeches and papers by Head of Financial Stability Luci Ellis.

…The RBA and APRA have acknowledged potential benefits of loan limits “but at this stage they don’t believe that this type of policy action is necessary,” said David Ellis, a Sydney-based analyst at Morningstar Inc. “If the housing market was out of control and if loan growth, particularly investor credit, grew exponentially then it’d be introduced.”

What do you call this, David:

ScreenHunter_3294 Jul. 14 11.51

Reproduced with kind permission from Macrobusiness

It started with a Super Bowl ring, now Putin is taking whole countries

Robert Kraft, owner of the New England Patriots, says Vladimir Putin stole his prize Super Bowl ring in 2005:

“I took out the ring and showed it to [Putin], and he put it on and he goes, ‘I can kill someone with this ring.’ I put my hand out and he put it in his pocket, and three KGB guys got around him and walked out.”

Kraft revealed that he hadn’t intended to part with his prize from the Patriots’ win over the Philadelphia Eagles in Super Bowl XXXIX. He claims that a call from the White House kept him from attempting to recover it. The official overcame Kraft’s objections, repeatedly saying:

It would really be in the best interest of US-Soviet relations if you meant to give the ring as a present.

This may have been a mistake by the Bush administration, considering that Vladimir Putin has graduated to seizing parts of Georgia, the Crimea and now has his eyes on Eastern Ukraine. As Winston Churchill would have said:

An appeaser is one who feeds a crocodile hoping it will eat him last.

Read more at Kraft: Putin stole Bowl ring | NY Post.

Diversification – the only ‘free lunch’ in investing

Diversification is often referred to as “the only free lunch in investing” because it affords investors the opportunity to reduce investment risk without reducing returns. Most investments involve a trade-off between risk and return, with higher returns requiring investors to expose themselves to greater risk. But effective diversification allows investors to reduce risk, by spreading their investments, while maintaining higher levels of return.

What is effective diversification?

Not all diversification is effective. Many investors buy a wide range of stocks in the belief that this will protect them from risk. The benefits of such diversification are likely to be insufficient if the stocks are all listed on the same exchange and selected using the same method. The entire portfolio will tend to rise and fall in unison — as in the well-known adage “a rising tide lifts all boats.” The key is to select stocks or investments that have low correlation.

What is correlation?

Correlation is the degree to which separate investments rise and fall together. Correlation measures the tendency of investments to advance or decline independently of each other. The correlation coefficient, identified by the symbol r, expresses the level of dependency between two variables (stocks in our case). Values for the correlation coefficient range from 1.0, for stocks that are perfectly correlated, to -1.0 for stocks that move inversely to each other.

Only two shares of the same stock, like BHP Billiton, are likely to have a correlation as high as 1.0. But stocks from the same sector are likely to share high values. And stocks from the same market are also likely to share a reasonable degree of correlation in larger time frames (i.e. the primary cycle).

You are also unlikely to find stocks that are the perfect inverse of each other — a coefficient of -1.0 — except possibly from an index ETF and its bear counterpart.

We are not necessarily looking for stocks with negative correlation, however, but stocks or investments with low correlation — closer to zero than to 1.0. As you can imagine, going long and short the same stock would protect you from any variation in prices, but would not deliver much in the way of return. If we had a spread of investments with low correlation (i.e low dependency) their price movements will tend to offset each other, providing a smoother portfolio return.

3 Ways to achieve diversification

We are likely to find investments with low correlation using three different techniques:

  • Diversification by asset class;
  • Diversification by geographic location; and
  • Diversification by strategy.

Asset class

There are a number of asset classes available to investors. Asset classes as diverse as stocks, real estate and fine art, however, are all subject the vagaries of the economic cycle and tend to rise and fall together.

Bonds tend to have low correlation to stocks. We need to make a distinction here between government bonds with low risk premiums, which fluctuate largely with the interest rate cycle and tend to be counter-cyclical (i.e negatively correlated) to stocks, and corporate bonds which are subject to far higher risk premiums that may expand and contract in line with the stock market cycle. Credit spreads tend to be low when the stock market is bullish and widen sharply during a contraction.

There are other asset classes such as insurance funds, where risks such as weather events tend to have low correlation to the economic cycle, but investors need a fair degree of expertise to assess the risks associated with these investments.

Geographic location

Australian investors tend to be highly concentrated in the Australian market, with only about 15% of assets invested offshore, both directly and indirectly through managed funds. Most major stock markets tend to rise and fall together, but diversification, especially to US markets, affords investors the opportunity to diversify into sectors not available on the local exchange.

By strategy

Diversification by strategy is often overlooked. If an investor, for example, diversifies their stock portfolio across several value-based fund managers they are likely to find that their investments rise and fall in unison. Even though the managers may hold a wide spread of stocks, they are all selected using a similar process and will tend to behave in a similar manner.

By spreading investments across several strategies, the investor is likely to achieve more effective diversification and more stable returns. Diversification between value-based strategies and our own momentum strategy is an obvious example. Recent research shows ASX 200 Prime Momentum has a low correlation of 0.3368 with the popular Perpetual Industrial Share Fund [PER0011AU] and moderate correlation of 0.4263 with Colonial First State Australian Share – Core [FSF0238AU].

Diversification is not the only “free lunch” available to investors — effective tax planning also enables investors to enhance returns without increasing risk — but it is important and should not be neglected. It is a complex area and we recommend that you consult your financial adviser before taking any action.

The best argument for mutual funds is that they offer safety and diversification.
But they don’t necessarily offer safety and diversification.

~ Ron Chernow

Consolidation expected

  • S&P 500 retreats below 1985.
  • VIX continues to indicate a bull market.
  • ASX 200 breaks resistance.

The S&P 500 retreated below its new support level at 1985, indicating a false break. Consolidation between 1950 and 1985 is likely — below the psychological barrier at 2000. Respect of support at 1950 would confirm. Declining 21-Day Twiggs Money Flow continues to signal mild, medium-term selling pressure. Further resistance is likely at the 2000 level — and at 4000 on the Nasdaq 100. Breakout would offer a long-term target of 2250*.

S&P 500

* Target calculation: 1500 + ( 1500 – 750 ) = 2250

CBOE Volatility Index (VIX) recovered to above 12. Low levels continue to indicate a bull market.

S&P 500 VIX

Dow Jones Euro Stoxx 50 is consolidating above medium-term support at 3150. Breach would signal a test of the primary level at 3000. Descent of 13-week Twiggs Money Flow warns of modest long-term selling pressure. Recovery above 3250 is less likely at present, but would suggest a target of 3450*.

Dow Jones Euro Stoxx 50

* Target calculation: 3300 + ( 3300 – 3150 ) = 3450

China’s Shanghai Composite Index broke resistance at 2100 and is headed for a test of 2150. Breakout would suggest a primary up-trend, but I would wait for confirmation at 2250. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Reversal below 2050 is unlikely at present but would warn of another test of primary support at 1990/2000.

Shanghai Composite

* Target calculation: 2000 – ( 2150 – 2000 ) = 1850

The ASX 200 broke clear of resistance at 5540/5560 on strong results from BHP. Expect retracement to test the new support level, but Friday’s long tail and rising 21-day Twiggs Money Flow indicate short-term buying pressure. Respect of support would indicate a long-term advance to 5800*. Reversal below 5540 is unlikely, but would warn of a correction.

ASX 200

* Target calculation: 5400 + ( 5400 – 5000 ) = 5800