Earnings Bounty Never Came for Stocks….

From Lu Wang at Bloomberg:

The potential for politics to ruin everything was on the mind of Ray Dalio, the founder and co-chairman of Bridgewater Associates, in an essay published yesterday on LinkedIn. They will probably play a greater role in markets than any time in our lifetimes, he wrote.

“While I see no important economic risks on the horizon, I am concerned about growing internal and external conflict leading to impaired government efficiency (e.g. inabilities to pass legislation and set policies) and other conflicts,” he wrote.

Economically, it was a stellar quarter for profits. Operating income in the S&P 500 rose 11 percent, building on a 14 percent increase in the previous three months for the first back-to-back gains exceeding 10 percent since 2011. Companies surpassed estimates by almost 1 percent on the sales line and 4.5 percent in profits, among the higher beat rates of the bull market.

You wouldn’t have known it in the market. S&P 500 companies fell an average 0.6 percent the day after announcing results, data compiled by Bloomberg show. Individual stocks also sat still after the release of better-than-estimated results, the first time since 2000 that positive surprises were not rewarded, according to Bank of America Corp…..

Source: Earnings Bounty Never Came for Stocks Caught Up in Trump Tumult

Federal Reserve Bank of San Francisco | Forecasting China’s Role in World Oil Demand

From Deepa D. Datta and Robert J. Vigfusson

Although China’s growth has slowed recently, the country’s demand for oil could be entering a period of faster growth that could result in substantially higher oil prices. Because Americans buy and sell oil and petroleum products in the global market, global demand prospects influence the profitability of U.S. oil producers and the costs paid by U.S. consumers. Analysis based on the global relationship between economic development and oil demand illustrates the prospects for Chinese oil demand growth and the resulting opportunities and challenges for U.S. producers and consumers.

The oil market has seen two major surprises in the 21st century. The most recent was the shale revolution, which dramatically increased the amount of oil supplied by North American producers and contributed to the oil price collapse of 2014.

Before the shale revolution, however, there was rapid demand growth from emerging market economies. Propelled by robust GDP growth, China’s demand for oil nearly doubled within a decade, and other emerging markets experienced similar growth. As a consequence, oil prices soared in 2007 and 2008, and advanced economies, including the United States, cut their consumption.

Most studies assume that shifts in global demand over the next decade will be gradual, with oil prices continuing to be driven primarily by supply. The surprising resilience of U.S. shale oil production both to lower oil prices and to coordinated actions by OPEC countries suggests that any oil price recovery will remain subdued (Energy Information Administration 2016). However, one potentially important source of future rapid growth in demand and thus in prices comes from emerging market economies, especially China. Given that Chinese demand helped boost world oil prices in the early 2000s, we consider the implications of a similar surprise in the coming years.

China’s future demand for oil will depend on both its economic growth and its energy choices. A high level of growth combined with energy-intensive choices could result in Chinese oil demand doubling by 2025. Even in a scenario with more moderate growth and less energy-intensive choices, China’s oil demand would still grow by over 30% by 2025. To the extent that U.S. and foreign oil producers do not anticipate this demand increase, prices would have to rise, perhaps dramatically.

Source: Federal Reserve Bank of San Francisco | Forecasting China’s Role in World Oil Demand

Global correction

Global stock markets have mostly experienced selling pressure over the last two weeks but most of the activity is secondary in nature and, apart from longer-term issues in the UK and Canada, is unlikely to affect the primary up-trend.

Starting near the North Korean epicenter of the latest tensions, the Seoul Composite Index is largely unfazed. The monthly chart reflects a secondary correction with moderate selling pressure and no hint of panic selling.

Seoul Composite Index

China’s Shanghai Composite Index rallied after a modest correction.

Shanghai Composite Index

While bearish divergence on Hong Kong’s Hang Seng Index warns of selling pressure and a secondary correction to test 26000.

Hang Seng Index

India’s Sensex is undergoing a correction after breaking its rising trendline but found support at 31000.

BSE Sensex

Moving farther afield, Canada’s TSX 60 continues to consolidate in a narrow line below the former primary support level at 900. Declining Twiggs Money Flow warns of long-term selling pressure. Breach of support at 880 is likely and would confirm a primary down-trend.

TSX 60

Europe also experienced selling pressure, with the Footsie testing primary support at 7300. Breach of support would signal a primary down-trend.

FTSE 100

Germany’s Dax found support at 12000. Respect, with a Twiggs Money Flow trough above zero, would indicate another primary advance.

DJ Euro Stoxx 50

Gold encounters resistance at $1300

The Dollar Index continues to test primary support between 92 and 93. Consolidation or a weak rally is likely but Twiggs Trend Index warns of long-term selling pressure. Breach of support would signal another primary decline, offering a long-term target between 83 and 84* — a bullish sign for gold.

Dollar Index

*Target: 93 – ( 103 – 93 ) = 83

Crude continues to test resistance at $50/barrel. Breakout would be bullish for gold but respect is more likely and would test primary support at $40/barrel.

Nymex Light Crude

Gold encountered strong resistance at $1300/ounce. Expect retracement to test support at $1270 and $1250. Reversal below $1250 remains unlikely.

Spot Gold

Target 1300 + ( 1300 – 1200 ) = 1400

ASX 200 Narrow Line

The ASX 200 continues to consolidate in a narrow line between 5650 and 5800. Declining Twiggs Money Flow warns of selling pressure and breach of support at 5650 would signal a primary down-trend. Follow-through below 5600 would confirm. Breakout above 5800 is unlikely but would test resistance at 6000.

ASX 200

Monthly hours worked are up 1.9% over the last 12 months. Marginally below real GDP but not something to be concerned about unless growth continues to fall.

Monthly Hours Worked - Seasonally Adjusted

Iron ore continues its extended bear market rally, suggesting that the next correction is likely to find support above the primary level at 53.

Iron Ore

ASX 300 Metals & Mining is also likely to find support above 2750. Respect of support at 3000 would signal a strong up-trend.

ASX 300 Metals & Mining

The ASX 300 Banks index continues to warn of selling pressure, with declining Twiggs Trend Index and Money Flow below zero. Breach of support at 8500 would signal another test of primary support at 8000.

ASX 300 Banks

S&P 500 bull market on track

The S&P 500 is undergoing a secondary correction that is likely to test the long-term rising trendline and support at 2400. Bearish divergence on Twiggs Money Flow warns of selling pressure but this seems secondary in nature. The bull market remains on track for further gains.

S&P 500

Target 2400 + ( 2400 – 2300 ) = 2500

The Dow Jones Transportations Average is also undergoing a correction. Bearish divergence with Twiggs Money Flow dipping below zero warns of stronger selling pressure. Expect a test of primary support at 8800.

Dow Transportation Average

The Nasdaq 100 is retreating from resistance at 6000. Bearish divergence warns of secondary selling pressure. Breach of primary support at 5600 is considered unlikely.

Nasdaq 100

ASX 200 Selling Pressure

June Quarter retail sales are up 1.4% over the preceding quarter, the best June Quarter since 2012.

Retail Sales

Vehicle sales for June 2017 also reflect healthy growth over previous financial year ends.

Residential Building Approvals

Despite the good figures, one should not ignore Bill Evans’ more sombre assessment of the latest RBA forecasts:

From our perspective, a fall in housing construction; subdued consumer spending and a drag on services exports from the high Australian Dollar will constrain employment growth through 2018. The [Reserve] Bank sees things differently, expecting recently strong employment growth to persist into 2018, with the unemployment rate expected to fall to 5.4% by the end of 2019 compared to our current forecast that the unemployment rate will in fact be rising through 2018, reaching 6% by year’s end.

Two other domestic factors are important, firstly the Bank is of the view that “wage growth is expected to pick up gradually over the next few years”. That is despite convincing evidence offshore, that countries with full employment, and in the case of the US, an unemployment rate considerably below the full employment rate, are not experiencing wage pressures. This different assessment of household income growth is one of the key explanations behind our more downbeat view of the economic outlook. Secondly, we expect that the wealth effect from sharply rising house prices in NSW and Victoria is about to reverse. There is no argument that household debt levels are elevated. The prospect of very limited further increases of house prices in those markets may start to dampen consumer spending in particular by discouraging households to further subsidise consumption growth by lowering their saving rates…..

  • Falling housing construction;
  • Slow consumption growth;
  • Slow services export growth;
  • Slow employment growth;
  • Slow wages growth; and
  • Slowing house price growth.

I think Bill is right on the money, but there are always other variables like iron ore and Chinese financial markets that can disrupt even the best forecasts.

Iron ore looks set to retrace to test support between 68 and 70. Respect would signal a primary advance but I suspect that support at 60 is likely to be tested.

Iron Ore

ASX 300 Metals & Mining is also likely to retrace, but bearish divergence on Twiggs Trend Index warns of selling pressure. Respect of 2950 would signal a primary advance but a test of primary support at 2750 is as likely.

ASX 300 Metals & Mining

The ASX 300 Banks index retreated below support at 8500. Follow-through would test primary support at 8000. Declining Twiggs Money Flow, with a large peak below zero, warns of strong selling pressure.

ASX 300 Banks

Declining Twiggs Money Flow also flags strong selling pressure on the ASX 200. Breach of support at 5650 is likely and would signal a primary down-trend. Follow-through below 5600 would confirm.

ASX 200

US: Low CPI and soft Treasury Yields

The Consumer Price Index (CPI) and Core CPI (excluding food and energy) both came in at a low 1.7% p.a. for the 12 months ended July 2017.

Consumer Price Index (CPI) and Core CPI

Source: St Louis Fed, BLS

Long-term interest rates are trending lower as CPI moderates. Breach of support at 2.10% by 10-Year Treasury Yields would signal another primary decline with a target of 1.80%*.

10-Year Treasury Yields

Target: 2.10% – (2.40% – 2.10%) = 1.80%

Bank credit growth is slowing, to the level where it is tracking nominal GDP growth, avoiding some of the excesses of previous cycles. But if bank credit falls below GDP growth that would warn of tighter monetary conditions and the economy is likely to slow.

Bank Credit and GDP growth

Source: St Louis Fed, FRB, BEA

The S&P 500 is testing its long-term rising trendline, while bearish divergence on Twiggs Money Flow warns of selling pressure. But the market appears to have shrugged off Donald Trump’s promises of North Korean “fire and fury” and both of these movements seem secondary in nature. A correction is likely but the primary trend remains on track for further gains.

S&P 500

Target 2400 + ( 2400 – 2300 ) = 2500

Selling pressure surges around the globe

Canada’s TSX 60 fell sharply this week. Twiggs Trend Index below zero warns of long-term selling pressure. Breach of support at 880 would confirm a primary down-trend.

TSX 60

In the UK, the Footsie is testing primary support at 7300. Twiggs Trend Index below zero again warns of long-term selling pressure. Breach of support would signal a primary down-trend.

FTSE 100

Dow Jones Euro Stoxx 50 is testing long-term support at 3400. Twiggs Trend Index, again below zero, warns of long-term selling pressure

DJ Euro Stoxx 50

India’s Sensex is undergoing a correction after breaking its rising trendline and support at 31500. Expect strong support at 29000.

BSE Sensex

China’s Shanghai Composite Index is also testing support. Breach of 3200 would warn of another test of primary support at 3000.

Shanghai Composite Index

Gold & Silver advance

The Dollar Index is testing primary support between 92 and 93. Expect consolidation or a weak rally but Twiggs Trend Index warns of sustained selling pressure. Breach of support would signal another primary decline, offering a long-term target between 83 and 84* — a bullish sign for gold.

Dollar Index

*Target: 93 – ( 103 – 93 ) = 83

Crude respected resistance at $50/barrel, suggesting another test of support at $40/barrel, continuing the primary down-trend. Twiggs Trend Index again warns of selling pressure. Breakout above $50 is now unlikely.

Nymex Light Crude

Gold is headed for a test of resistance at $1300/ounce, while a rising Twiggs Trend Index signals buying pressure. Breakout above $1300 is likely and would indicate another primary advance, with a target of $1400*. Reversal below $1250 is now unlikely but would warn of another test of primary support at $1200.

Spot Gold

Target 1300 + ( 1300 – 1200 ) = 1400

Silver broke through resistance at $17/ounce, a bullish sign for gold. Retracement that respects the new support level would strengthen the bull signal, indicating a test of the April high at 18.50.

Spot Silver

China is the biggest credit bubble in the world today | Crescat Capital

From Nils Jenson at Crescat Capital:

History has proven that credit bubbles always burst. China by far is the biggest credit bubble in the world today…….

The Bank for International Settlements (BIS) has identified an important warning signal to identify credit bubbles that are poised to trigger a banking crisis across different countries: Unsustainable credit growth relative to gross domestic product (GDP) in the household and (non-financial) corporate sector. Three large (G-20) countries are flashing warning signals today for impending banking crises based on such imbalances: China, Canada, and Australia….

The trouble with credit bubbles is they always burst. The problem is we don’t know when. “Imminent” could mean next week or it could mean in 3 years time. Keep a close watch on the PBOC for signs that it has run out of options. They will kick the can down the road for as long as possible, but the time will come when that is no longer viable.

Great Analysis, worth reading the entire report: Crescat Capital Quarterly Investor Letter Q2 2017 | Crescat Capital

Gold as ‘Trump insurance’

Yesterday’s solid blue candle on the gold chart [XAUUSD] confirms my view of the precious metal as a form of “Trump insurance”. After Trump and North Korea exchanged threats suggesting nuclear retaliation, gold gained 1.32%, breaking resistance at $1275/ounce. Follow-through above $1300 would signal a primary advance, with a target of $1400*.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1200 ) = 1400

From the BBC:

US President Donald Trump says North Korea “will be met with fire and fury” if it threatens the US.

His comments came after a Washington Post report, citing US intelligence officials, said Pyongyang had produced a nuclear warhead small enough to fit inside its missiles.

This would mean the North is developing nuclear weapons capable of striking the US at a much faster rate than expected.

The UN recently approved further economic sanctions against the country.

The Security Council unanimously agreed to ban North Korean exports and limit investments, prompting fury from North Korea and a vow to make the “US pay a price”.

The heated rhetoric between the two leaders intensified after Pyongyang tested two intercontinental ballistic missiles (ICBM) in July, claiming it now had the ability to hit the US.

Mr Trump told reporters on Tuesday: “North Korea best not make any more threats to the US. They will be met with fire and fury like the world has never seen.”

Glen Campbell Dead at 81 | Variety

Country legend Glen Campbell, whose crossover hits “Gentle on My Mind,” “By the Time I Get to Phoenix” and “Rhinestone Cowboy” forged a lasting bridge between country and pop music, died Tuesday. He was 81.

In 2011, Campbell announced he had been diagnosed with Alzheimer’s disease and mounted a well-publicized farewell tour. His official Twitter posted the news. His daughter, Ashley Campbell, also shared a heartfelt message…..

Campbell was hardly the first country artist to break out of the rural regional radio ghetto — the Nashville Sound of Patsy Cline and Jim Reeves had produced several wide-appeal hits in the early ’60s — but his influence in expanding country music’s parameters and fanbase was substantial. His signature hits often combined orchestral arrangements and traditional pop hooks with countrified lyrical themes and vocal stylings, catalyzing both the “countrypolitan” and soft rock subgenres that would proliferate in the 1970s. (John Denver and Kenny Rogers both owe much of their careers to Campbell’s example.)

He sold more than 45 million records in his career and topped the country singles chart 12 times.

Crossover came naturally to the tall, solidly built Campbell, who enjoyed a pre-stardom career as a prolific session musician for rock, pop and country acts alike. He possessed a calmly authoritative tenor and impeccable guitar chops, but his genial, easygoing charm as a performer was thrown into sharp relief by his hotheaded offstage character, with his reputation marred by substance abuse and allegations of domestic violence. Later becoming a born-again Christian, Campbell continued to maintain a steady audience well into his seventh decade, opening his own theater in Branson, Mo.

Born into a sharecropping family in a tiny town in southwestern Arkansas, Campbell was the seventh of 12 children. Picking up guitar at an early age, he left home at age 14 to pursue music, eventually landing in Los Angeles, where he fathered his first child at age 17. Out west, Campbell soon found himself an in-demand session musician with the now-storied studio conglomerate dubbed the Wrecking Crew, recording guitar parts for such varied acts as Nat “King” Cole, Frank Sinatra, the Monkees, Merle Haggard and Elvis Presley.

Campbell reached the height of his session player power in 1965, when he became a touring member of the Beach Boys — playing bass to compensate for the absent Brian Wilson — as well as contributing guitar parts to the group’s landmark “Pet Sounds” album. All the while, Campbell had been erratically pursuing a solo career, recording mostly unremarkable singles for Crest Records and later Capitol. Though he broke onto country radio a few times, he began to lose favor with Capitol label heads, who by the mid-’60s were pondering dropping him from the roster.

Fortunately they didn’t, as Campbell’s career experienced a sudden, dramatic upswing in 1967, when he recorded a rendition of John Hartford’s “Gentle on My Mind.” Though the 45 barely breached the top-40 singles chart, the titular LP was a runaway success, topping the country album chart and reaching No. 5 on the pop charts.

Follow-up single “By the Time I Get to Phoenix” was an even bigger hit, reaching No. 2 on the country chart and marking the beginning of Campbell’s collaborations with songwriter Jimmy Webb, whose compositions would provide Campbell with hits for years to come. Underscoring the universality of the burgeoning star’s appeal, Campbell won four Grammys for the two songs at the 1967 awards — two in country categories, the other two in pop categories.

This turned out to be the opening salvo in a remarkable streak of hits for the singer. Starting with “Gentle,” Campbell managed to rack up seven consecutive country album chart-toppers over a two year period, recording such iconic tracks as “Wichita Lineman,” “Galveston,” “Dreams of the Everyday Housewife” and a string of duets with Bobbie Gentry. LP “By the Time I Get to Phoenix” won Campbell an album of the year Grammy in 1968.

Source: Glen Campbell Dead: Country Legend Was 81 | Variety

Odds of a recession appear low | Bob Doll

Sensible view from Bob Doll:

…The odds of a recession appear low, but so does a significant acceleration in growth. The regulatory environment is loosening, consumer spending appears solid and jobs growth remains strong. As such, we do not expect a recession any time soon. At the same time, however, we see no catalyst to push the economy into a higher gear unless the White House and Congress make progress on their pro-growth agenda.

Progress on tax reform would revive the bulls.

Source: Weekly Investment Commentary from Bob Doll | Nuveen

This oil price rally has reached its limit – On Line Opinion

Good summary of the oil market by Nicholas Cunningham – posted Friday, 4 August 2017:

There are several significant reasons why oil prices have regained most of the lost ground since the end of May….

  1. OPEC cuts;
  2. US shale expansion is slowing;
  3. Several OPEC members have promised deeper cuts; and
  4. Drawdowns in U.S. crude oil inventories suggest the market is finally rebalancing.

But inventories are still high, not just in the U.S. And the US (despite shale slowing), Libya and Nigeria are all expected to increase output.

Also, the recent rally is largely attributable to short-covering rather than hedge funds taking fresh long positions.

But there is a wild card:

The one variable that could upend all market forecasts is Venezuela, which has been in economic turmoil for quite some time but is entering a new phase of crisis. The involvement of the U.S. government, which is retaliating against Venezuela for what it argues is a step towards dictatorship, threatens to accelerate the oil production declines in the South American nation.

If Venezuela sees its exports disrupted in a sudden way, the ceiling for oil prices in 2017 could be quite a bit higher than everyone expects at the moment. Otherwise, there is not a lot of room on the upside for oil prices in the short-term.

…it could go up, it could go down, but not necessarily in that order.

Using fundamentals to predict short-term cycles is at best a 50/50 proposition. It’s normally best to stick to technicals (for short time frames). Looks like a secondary rally in a bear market.

Nymex Light Crude

Source: This oil price rally has reached its limit – On Line Opinion – 4/8/2017

Boris Johnson wrong to link Australia’s economic growth to the resources boom

In criticizing Boris Johnston, Ross Gittins at The Herald, unwittingly highlights the hubris of the economics profession:

When Boris Johnson, Britain’s Foreign Minister, visited Oz lately, he implied that our record 26-year run of uninterrupted economic growth was owed largely to the good fortune of our decade-long resources boom.

Johnson, no economist, can be forgiven for holding such a badly mistaken view – especially since many Australian non-economists are just as misguided. They betray a basic misconception about the nature of macro-economic management and what it’s meant to do.

It’s clear that Johnson, like a lot of others, hasn’t understood just why it is that 26 years of uninterrupted growth is something to shout about.It’s not that 26 years’ worth of growth adds up to a mighty lot of growth. After all, most other countries could claim that, over the same 26-year period, they’d achieved 23 or 24 years’ worth of growth.

No, what’s worth jumping up and down about is that little word “uninterrupted”. Everyone else’s growth has been interrupted at least once or twice during the past 26 years by a severe recession or two, but ours hasn’t.

That’s the other, and better way to put it: we’ve gone for a record 26 years without a severe recession.But now note that little word “severe”. As former Reserve Bank governor Glenn Stevens often pointed out, we did have a mild recession in 2008-09, at the time of the global financial crisis, and earlier in 2000-01.

So, yet another way to put the Aussie boast is that we’ve gone for a period of 26 years in which the occasional increases in unemployment never saw the rate rise by more than 1.6 percentage points before it turned down again.

What you (and Boris) need to understand about macro-economic management is that its goal isn’t to make the economy grow faster, it’s to smooth the growth in demand as the economy moves through the ups and downs of the business cycle.

This is why macro management is also called “demand management” and “stabilisation policy”. These days, the management is done primarily by the Reserve Bank, using its “monetary policy” (manipulation of interest rates), though both the present and previous governor have often publicly wished they were getting more help from “fiscal policy” (the budget).

When using interest rates to smooth the path of demand over time, your raise rates to discourage borrowing and spending when the economy’s booming – so as to chop off the top of the cycle – and you cut rates to encourage borrowing and spending when the economy’s busting – thereby filling in the trough of the cycle.This is why the economic managers find it so annoying when the Borises of this world imagine that the decade long resources boom – the biggest we’ve had since the Gold Rush – must have made their job so much easier.Just the opposite, stupid. Introducing a massive source of additional demand in the upswing of the resources boom made it that much harder to hold demand growth steady and avoid inflation taking off.

But then, when the boom turned to bust, with the fall in export commodity prices starting in mid-2011, and the fall in mining construction activity starting a year later, it became hard to stop demand slowing to a crawl.

We’re still not fully back to normal.This is why the macro managers’ success in avoiding a severe recession for 26 years is a remarkable achievement, and one owed far more to their good management than to supposed good luck (whether from China or anywhere else).

But what exactly is the payoff from the achievement? Twenty-six years in which many fewer businesses went out backwards than otherwise would have.

Twenty-six years in which many fewer people became unemployed than otherwise, and those who did had to endure a far shorter spell of joblessness than otherwise.

The big payoff from avoiding severe recessions – or keeping them as far apart as possible – is to avoid a massive surge in long-term unemployment that can take more than a decade to go away – and even then does so in large part because people give up and claim disability benefits or become old enough to move onto the age pension.

Dr David Gruen, a deputy secretary in the Department of the Prime Minister and Cabinet, has demonstrated that, though the US economy had a higher proportion of its population in employment than we did, for decades before the global crisis, since then it’s been the other way around.”The key lesson I draw from this comparison is that the avoidance of deep recessions improves outcomes in the labour market enormously over extended periods of time,” he concluded.

“What you (and Boris) need to understand about macro-economic management is that its goal isn’t to make the economy grow faster, it’s to smooth the growth in demand as the economy moves through the ups and downs of the business cycle.”

Well how’s that been working for ya, Ross, over the last three decades. Attempts at smoothing the global economic cycle (primarily led by the US Fed) have achieved two of the most severe recessions in the last century. Smoothing out the natural creative destruction of the capitalist system allows imbalances to build. Periods of uninterrupted growth may be longer, but when the dam wall breaks, as it did in 2008, the severity of the backlash when the economy tries to restore equilibrium (or “balance” as us non-economists like to describe it) threatens to break the very foundations of the financial system.

Not exactly a time for high-fives and self-congratulation for the economics profession. To me economics should focus on the study of unintended consequences, of which there are many examples in the last 30 years.

The presumption that macro-economists can improve on the performance of an economy by constant intervention has clearly been demonstrated to be a fallacy.

Mechanical engineers in the 1800s were confronted with a similar problem when building large steam engines that worked under variable load. Attempts to smooth the load using a governor, adjusting braking in response to detected acceleration or deceleration was the obvious solution. But these governors created a feedback loop — highlighted by James Clark Maxwell in his famous 1868 paper On Governors to the Royal Society of London — that made these giant steam engines prone to self-destruct.

Constant interference with market forces in an effort to smooth economic growth has a similar effect on the economy. The lag between an actual event and its measurement, reporting and subsequent monetary policy response is susceptible to creating a feedback loop that amplifies the cycle instead of smoothing it, causing the system to self-destruct.

Economists on graduation should be required to make a pledge similar to the Hippocratic oath of the medical profession which starts with the words: “First do no harm….”

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.

~ Mark Twain (Samuel Clemens)

Source: Boris Johnson was wrong to link Australia’s economic growth to the resources boom

Nasdaq and S&P500 meet resistance

July labor stats are out and shows the jobless rate fell to a 16-year low at 4.3%. Unemployment below the long-term natural rate suggests the economy is close to capacity and inflationary pressures should be building.

Unemployment below the long-term natural rate

Source: St Louis Fed, BLS

But hourly wage rates are growing at a modest pace, easing pressure on the Fed to raise interest rates.

Hourly Wage Rates

Source: St Louis Fed, BLS

Fed monetary policy remains accommodative, with the monetary base (net of excess reserves) growing at a robust 7.5% a year.

Hourly Wage Rates

Source: St Louis Fed, FRB

Our forward estimate of real GDP — Nonfarm Payroll * Average Weekly Hours — continues at a slow but steady annual pace of 1.79%.

Real GDP compared to Nonfarm Payroll * Average Weekly Hours

Source: St Louis Fed, BLS & BEA

The Nasdaq 100 has run into resistance at 6000. No doubt readers noticed Amazon [AMZN] and Alphabet [GOOG] both retreated after reaching the $1000 mark. This is natural. Correction back to the rising trendline would take some of the heat out of the market and provide a solid base for further gains. Selling pressure, reflected by declining peaks on Twiggs Money Flow, appears secondary.

Nasdaq 100

The S&P 500 is also running into resistance, below 2500. Bearish divergence on Twiggs Money Flow warns of moderate selling pressure but this again seems to be secondary — in line with a correction rather than a reversal.

S&P 500

Target 2400 + ( 2400 – 2300 ) = 2500

Australia: Housing, Incomes & Growth

A quick snapshot of the Australian economy from the latest RBA chart pack.

Disposable income growth has declined to almost zero and consumption is likely to follow. Else Savings will be depleted.

Disposable Income & Consumption

Residential building approvals are slowing, most noticeably in apartments, reflecting an oversupply.

Residential Building Approvals

Housing loan approvals for owner-occupiers are rising, fueled no doubt by State first home-buyer incentives. States do not want the party, especially the flow from stamp duties, to end. But loan approvals for investors are topping after an APRA crackdown on investor mortgages, especially interest-only loans.

Housing loan approvals

The ratio of household debt to disposable income is precarious, and growing worse with each passing year.

Household debt to disposable income

House price growth continues at close to 10% a year, fueled by rising debt. When we refer to the “housing bubble” it is really a debt bubble driving housing prices. If debt growth slows so will housing prices.

House price growth

Declining business investment, as a percentage of GDP, warns of slowing economic growth in the years ahead. It is difficult, if not impossible, to achieve productivity growth without continuous new investment and technology improvement.

Business investment

Yet declining corporate bond spreads show no sign of increased lending risk.

Corporate bond spreads

Declining disposable income and consumption growth mean that voters are unlikely to be happy come next election. With each party trying to ride the populist wave, responsible economic management has taken a back seat. Throw in a housing bubble and declining business investment and the glass looks more than half-empty.

Every great cause begins as a movement, becomes a business, and eventually degenerates into a racket.

~ Eric Hoffer