Australian dwelling prices: slowdown continues | Westpac

From Matthew Hassan at Westpac:

The CoreLogic home value index held flat in Oct taking annual growth to 7%yr, an abrupt slowdown from the 11.4%yr peak in May.

Policy measures continue to have a material impact. Although official rates remain near historic lows, regulators introduced a new round of ‘macro prudential’ tightening measures in late March. Meanwhile a range of other changes have also seen a progressive tightening of conditions facing foreign buyers.

….Sydney continues to record the sharpest turnaround in conditions, annual price growth slowing to 7.7%yr in Oct, essentially halving since Jul. Melbourne continues to see a much milder turn with price growth still tracking at 11%yr.

….The houses vs units breakdown shows a more pronounced slowdown for houses with annual price growth slowing to 7.2%yr from 12.4% in May. Our monthly seasonally adjusted estimates suggest prices have been declining at about a 2% annualised pace over the last 3mths. ….Notably, the detail suggests the pace of unit price declines in Brisbane and Perth is moderating while price growth in Melbourne units has shown essentially no slowing to date.

The slowdown is likely to carry through to year end. However, the next few months will be a critical gauge of whether markets are starting to stabilise. To date, the timeliest market measures – buyer sentiment, auction clearance rates and prices – are showing few signs of levelling out. However, some of the pressure from macro-prudential measures may ease off a little.

China’s crackdown on capital flight seems to be having an impact on housing prices in Australia. Whether this is sufficient to cause a collapse of the property bubble is doubtful unless there is a general decline in prices, causing mortgage lenders to tighten credit standards.

The banking sector remains my major concern. With CET1 leverage ratios between 4 and 5 percent, the sector could act as an accelerant rather than a buffer (Murray Inquiry) in an economic downturn.

A note on Leverage Ratios:

I use Tier 1 Common Equity (CET1) to calculate leverage rather than the more commonly used Common Equity which includes certain classes of bank hybrids — convertible to common equity in the event of a crisis — as part of capital. Inclusion of hybrids as capital is misleading as conversion of a single hybrid would be likely to panic the entire financial system (rather like a money market fund “breaking the buck”). In the recent banking crisis in Italy, regulators chose not to exercise the conversion option for fear of financial contagion. Instead the Italian government was called on to bail out the distressed banks. Same could happen here.

Source: Westpac IQ – world-class thinking in real time.

Trump to Tap Jerome Powell as Next Fed Chairman – WSJ

WASHINGTON—The White House has notified Federal Reserve governor Jerome Powell that President Donald Trump intends to nominate him as the next chairman of the central bank, according to a person familiar with the matter….

Source: Trump to Tap Jerome Powell as Next Fed Chairman – WSJ

Australia’s world record housing boom is ‘officially’ over, UBS says

A global investment bank has called the end of Australia’s world record housing boom, saying the golden years are “officially” over after home prices fell in Sydney for the second month in a row.”

There is now a persistent and sharp slowdown unfolding”, ending 55 years of unprecedented growth that has seen home values soar by more than 6500 per cent, UBS economists wrote in a note to clients on Thursday.

….recent weakness in auction clearance rates and anaemic price growth over the past five months suggested “the cooling may be happening a bit more quickly than even we expected”, economists George Tharenou and Carlos Cacho wrote in their note, downgrading their growth forecast for 2017 to just 5 per cent.

Not quite a Minsky moment but something to watch closely if you hold bank stocks.

Wikipedia gives a good summary of a Minsky moment:

A Minsky moment is a sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money.

The spiraling debt incurred in financing speculative investments leads to cash flow problems for investors. The cash generated by their assets is no longer sufficient to pay off the debt they took on to acquire them.

Losses on such speculative assets prompt lenders to call in their loans. This is likely to lead to a collapse of asset values.

Meanwhile, the over-indebted investors are forced to sell even their less-speculative positions to make good on their loans. However, at this point no counterparty can be found to bid at the high asking prices previously quoted.

This starts a major sell-off, leading to a sudden and precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity, and a severe demand for cash.

Source: Australia’s world record housing boom is ‘officially’ over, UBS says

3 principles to create safer artificial intelligence | TED

The King Midas problem with artificial intelligence (AI):

“We had better be quite sure that the purpose put into the machine is the purpose we really desire.” ~ Norbert Weiner (1960)

How can we harness the power of super-intelligent AI while also preventing the catastrophe of robotic takeover? As we move closer toward creating all-knowing machines, AI pioneer Stuart Russell is working on something a bit different: robots with uncertainty. Hear his vision for human-compatible AI that can solve problems using common sense, altruism and other human values.

What Political Science Tells Us About the Risk of Civil War in Spain

Sara Plana is a PhD student in the Department of Political Science at MIT, and former country analyst for the Department of Defense in Washington, DC:

As soon as Friday, the Spanish government could take up arms against its own people. The Spanish parliament is set to approve a call by the central government to suspend Catalonia’s autonomy in response to the region’s successful independence referendum on Oct. 1. The parliament’s vote will kick off Spanish efforts to reassert control over the region—likely by force.

….This is just the latest unsettling sign that the standoff over Catalan independence could ignite wider violence and even civil war. Observers should not fall into the mistake of underestimating the prospects of civil war — as many were wont to do before the last major civil war on the European continent, over twenty years ago in the former Yugoslavia.

….In perhaps the most alarming parallel to Yugoslavia, a number of nations within Spain have separatist aspirations, and an independent Catalonia could be just the first of many dominos to fall.

What Can We Do Now?

Political science not only helps us predict conflict; it also offers insight on how to avoid it.

The Catalan regional government has indicated that it prefers negotiations, giving Spain several opportunities to pump the brakes on the looming conflict. The Spanish government could negotiate some appeasement of Catalonia’s economic grievance over redistribution (the major accelerant of the current independence push). Even many within Basque Country claim that separatist sentiment there has decreased in large part because Spain has successfully assuaged their economic resentment. The central government could also make amends for the recent forceful tactics and reverse the recent exclusionary legal verdicts that have fueled Catalans’ political grievances.

Spain could also forestall violence by avoiding actions that might enhance the security dilemma. Continued repression or heavy-handed governance would only increase Catalans’ perception that they need to defend themselves, which would in turn inspire Spain to do the same, creating a spiral of confrontation that is often hard to reverse….

Good advice that I hope will be heeded.

Source: What Political Science Tells Us About the Risk of Civil War in Spain

Seven Weeks of Gains, Seven Equity Themes | Bob Doll

Great market summary from Bob Doll at Nuveen Asset Management:

  1. Economic data remains strong and hurricane effects have been surprisingly muted. Real third quarter gross domestic product was reported to be 3.0%, with nominal growth hitting 5.2%. Both numbers came in higher than expected, with nominal growth reaching its strongest pace since 2006.
  2. Home sales are increasing, demonstrating that economic growth remains broad. New home sales hit their highest level since 2007.
  3. The Federal Reserve is on track to increase rates again in December. We expect the central bank will enact its third hike of the year, while continuing to reduce its balance sheet. Fed policy remains accommodative, but is clearly normalizing.
  4. Corporate earnings are on track for another strong quarter. We are past the halfway point of reporting season, and the vast majority of companies have beaten expectations. On average, companies are ahead of earnings growth expectations by 4.9%.
  5. Stock buybacks appear to have slowed, but companies are still deploying cash in shareholder-friendly ways. From our vantage point, we are seeing companies pour more resources into hiring and modest amounts of capital expenditures.
  6. Tax reform prospects still appear uncertain, but we have seen progress on the regulatory front. While President Trump has struggled to enact his pro-growth legislative agenda, he has had success in rolling back regulatory enforcement. The financial and energy sectors in particular appear to be benefiting from less scrutiny.
  7. It is possible that tax reform will focus on corporate rather than individual rates. The most controversial aspects of tax reform are focused on possible changes to individual tax rates (such as arguments over the deductibility of state and local taxes). In contrast, corporate tax reform appears less controversial, as Congress seems to have broad agreement on the need to reduce corporate taxes and solve the issue of overseas profits. While still a small probability, Republicans may choose to separate the two issues and proceed solely on a corporate tax bill.

Economic growth remains muted but earnings are exceeding expectations. High levels of stock buybacks in the last few years must be playing a part.

Rising home sales are a bullish sign.

The Fed remains accommodative for the present but I expect increasing inflationary pressure to temper this next year.

Slow rates of investment remain a cause for concern and could hamper future growth — buybacks are cosmetic and won’t solve the low growth problem in the long-term.

Corporate tax reform would be a smart move, creating a more level playing field, while avoiding the acrimony surrounding individual tax rates.

Stage 3 of the bull market continues…..

Source: Weekly Investment Commentary from Bob Doll | Nuveen

George Orwell’s 1984 on steroids is growing right under our noses

“These companies (Facebook, Google and other social media giants) advertise that their products are free ….but we are the products being sold.”

We’re building an artificial intelligence-powered dystopia, one click at a time, says techno-sociologist Zeynep Tufekci. In an eye-opening talk, she details how the same algorithms companies like Facebook, Google and Amazon use to get you to click on ads are also used to organize your access to political and social information. And the machines aren’t even the real threat. What we need to understand is how the powerful might use AI to control us — and what we can do in response.

Having trouble loading? Click here.

The power is already there. Can we trust politicians not to use it?

GDP slow growth as stocks power on

GDP growth for the third quarter is out and I can see little to indicate that growth is improving despite tweets to the contrary from the White House.

Nominal GDP is growing at just over 4 percent per year, continuing the narrow band established since late 2010. Growth closely follows our monthly estimate: total weekly hours worked multiplied by the average wage rate.

Nominal GDP

Real GDP, beset by problems in accurately measuring inflation, grew by 2.3 percent over the last 4 quarters. But growth remains relatively soft and our latest monthly estimate (growth in total weekly hours worked) slowed to 1.2 percent in September.

Real GDP

The S&P 500 powers on, climbing to a new high of 2581, while rising Twiggs Money Flow signals buying pressure.

S&P 500

Retracement of the Nasdaq 100 successfully tested its new support level at 6000, confirming a fresh advance.

Nasdaq 100

Bellwether transport stock Fedex is advancing strongly while a Twiggs Money Flow trough above zero suggests strong buying pressure. A bullish sign for broad economic activity.


Stage 3 of the bull market continues.

It was never my thinking that made big money for me. It was my sitting…Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn.

~ Jesse Livermore

ASX and the Aussie Dollar

The Aussie Dollar broke support against the US Dollar at 77 cents, warning of a decline to test long-term support between 71.50 and 72.00.

Aussie Dollar

Iron ore continues to test new resistance at $62/tonne. Respect would warn of a test of primary support at $53. Declining Twiggs Trend Index indicates selling pressure.

Iron ore

The ASX 300 Metals & Mining index fared better, testing resistance at its three-year high of 3300. But the index is likely to follow iron ore lower. Breach of support at 3100 would warn of a decline to 2700.

ASX 300 Metals and Mining

The ASX 300 Banks index retreated from resistance at 8800. Respect warns of another test of primary support at 8000.

ASX 300 Banks

If banks and miners are both headed in the same direction, the index is sure to follow.

The ASX 200 continues to test resistance at 5900. Follow-through above 5920 would be a strong bull signal, indicating an advance to 6000. Reversal below 5880 would suggest retracement to test the new support level at 5800 (top of the narrow ‘line’ formed over the last four months). Twiggs Money Flow reversal below zero would be a bearish sign.

ASX 200

Despite the falling Dollar and iron ore, the present outlook continues to favor the bull side.

Crude oil tests 2-year high

Nymex Light Crude is rising steeply, testing resistance at its two-year high of $54.50/barrel.

Nymex Light Crude

Breakout would signal a primary up-trend but I would wait for confirmation from a retracement that respects the new support level.

Rising crude prices would be a bullish signal for gold; the two tend to rise and fall together over the long-term.

Crude oil rising

Nymex Light Crude broke resistance at $52/barrel, signaling an advance to $54. Expect stronger resistance at $54 to $54.50, a 2-year high.

Nymex Light Crude

A primary up-trend in crude prices would be a bullish signal for gold. The two tend to rise and fall together over the long-term.

Gold hurt by Euro fall

From FXWire:

The euro dipped against [the] dollar on Thursday as the European Central Bank’s decision to extend its bond purchases into 2018 at a reduced rate spurred selling of the single currency.


The Dollar spiked upward on the Euro fall, with the Dollar Index breaking resistance at 94 to signal another (bear) rally. Target for the extended rally is 97.

Dollar Index

Spot Gold fell in response to the Dollar, testing support at $1260/ounce. Penetration of support and the rising trendline would warn that the up-trend is losing momentum.

Spot Gold

But the Euro price of gold hasn’t budged.


Nor has the price of gold in Australian Dollars.


Which is why the All Ords Gold Index ($XGD) remains bullish, building a solid base for further gains. A higher low suggests buying support and breakout above 5000 would signal a new primary advance.

All Ords Gold Index ($XGD)

Morningstar’s Star System Was Always a Bright Shiny Object | Bloomberg

From Barry Ritholz:

The front page of yesterday’s Wall Street Journal called out mutual-fund analytics firm Morningstar and its five-star rating system.

The Journal’s conclusion? Top-rated funds “drew the vast majority of investor dollars, but most didn’t continue performing at that level.” Morningstar, of course, said “its ratings were not supposed to be predictive and they should be a starting point for investors selecting funds.”

….Retail and professional investor alike seem to ignore the fact that every single document ever generated by any investment-related firm has a warning on it to the effect that “Past performance is not an indicator of future returns.” Every chart ever drawn, each investing idea back-tested and every single historical comparison is testament to how little mind humans pay to that disclaimer.

To borrow from and paraphrase the Bard, the fault lies not in the stars, but in ourselves…..

To be fair to investors, Morningstar’s star system is supposed to be more than a rating of past performance. It should also reflect an assessment of whether a fund or company is likely to repeat that performance. That requires more in-depth analysis than just measuring past returns, whether earnings or the stock price.

At the same time, investors need to beware of basing long-term investment decisions on past performance. Instead focus on expense ratios for funds, profit margins for companies, and their positioning to take advantage of long-term structural trends in the global economy.

Source: Morningstar’s Star System Was Always a Bright Shiny Object – Bloomberg

PwC survey shows global R&D spending on all-time high | DW

The world’s 1,000 most innovative companies increased their R&D spending by 3.2 percent in 2017, pushing it to an all-time high of $702 billion (597 billion euros), according to the Global Innovation 1000 survey published by consultancy PwC on Tuesday.

The figure marked a resumption of meaningful growth in innovation spending following flat results in 2016…..

For the first time in the study’s 13-year history, a software and internet company, Amazon, is leading the top 20 R&D spenders, with outlays of $16.1 billion.

The US online retail giant is followed by Google’s parent company Alphabet Inc., with an outlay of $13.9 billion in 2017, and ahead of US chipmaker Intel and Korean electronics firm Samsung with $12.7 billion each.

German carmaker Volkswagen (VW) dropped to fifth place in 2017, with spending of $12.2 billion, and after leading the tables for the five previous years.

Click here to view the full company rankings from the PwC Global Innovation Study.

Source: PwC survey shows global R&D spending on all-time high | Business | DW | 24.10.2017

Fed flunks econ 101: understanding inflation | MarketWatch

Caroline Baum’s opinion on the Fed’s approach to inflation:

For all the sturm und drang about the Fed debasing the dollar and sowing the seeds of the next great inflation, the public’s demand for money has increased. The increased desire to hold cash and checkable deposits has risen to meet the increased supply. Velocity, or the rate at which money turns over, has plummeted.

The Fed has two choices. It can adopt the Dr. Strangelove approach and learn to stop worrying and live with low inflation and low unemployment. Or it can do something about it, which runs counter to its stated intention to raise the funds rate and reduce the size of its balance sheet.

Option #1 involves learning to live with a low, stable inflation rate about 0.5 percentage point below the Fed’s explicit 2% target.

Not only has the Fed has achieved price stability in objective terms, but it has also fulfilled former Fed Chairman Alan Greenspan’s subjective definition of price stability: a rate of inflation low enough that it is not a factor in business or household decision-making.

Option #2 means taking some additional actions to increase the money supply by lowering interest rates or resuming bond purchases. The Fed is taking the opposite approach. It began its balance sheet normalization this month, allowing $10 billion of securities to mature each month and gradually increasing the amount every quarter. And it has guided markets to expect another 25-basis-point rate increase in December….

The Fed faces a delicate balancing act. Unemployment is low but capacity utilization is also low, indicating an absence of inflationary pressure.

Capacity Utilization

Janet Yellen understandably wants to normalize interest rates ahead of the next recession but she can afford to take her time. The economy is unlikely to tip into recession unless the Fed hikes rates too quickly, causing a monetary contraction.

I believe the Fed chair is relying on the outflow from more than $2 trillion of excess reserves held by banks on deposit with the Fed to offset the contractionary effect of any rate hikes.

Capacity Utilization

If pushed, the Fed could lower the interest rate paid on excess reserves in order to encourage banks to withdraw excess deposits. But so far this hasn’t been necessary. The attraction of higher interest rates in financial markets has been sufficient to encourage a steady outflow from excess reserves, keeping the monetary base (net of reserves) growing at a steady clip of close to 7.5% p.a. despite rate hikes so far.

Capacity Utilization

Inflation is always and everywhere a monetary phenomenon. ~ Milton Friedman

Makes you wonder why Donald Trump would even consider replacing the Fed chair when she is doing such a great job of managing the recovery.

Source: Fed flunks econ 101: understanding inflation – MarketWatch

Dow Hits Another Milestone, But Signs of Caution Loom – WSJ

By Corrie Driebusch and Michael Wursthorn Updated Oct. 18, 2017 9:04 p.m. ET

The Dow Jones Industrial Average powered past 23000 on Wednesday, but the latest milestone masks a potentially worrisome trend: investors keep yanking money out of stock funds.

Investors pulled roughly a net $36 billion out of U.S. stock mutual and exchange-traded funds in the third quarter, according to EPFR Global. Overall in 2017, more money has flowed out of such funds than has flowed in, EPFR data show, even as the Dow has climbed to 51 fresh highs this year….

Source: Dow Hits Another Milestone, But Signs of Caution Loom – WSJ

Gold and Crude Oil

Nymex Light Crude continues to test resistance at $52/barrel. A rising Trend Index signals buying pressure. Breakout above $52 would offer a target of $54. There is a broad band of resistance between $50 and $54 as illustrated on the chart below. Breakout above $54/barrel would signal another long-term advance. But long-term consolidation below $54 is as likely.

Nymex Light Crude

High gold prices historically tend to coincide with high crude prices. The chart below shows crude oil and gold prices over the last 50 years, after adjusting for inflation.

Gold and Crude prices adjusted by CPI

Present low crude prices suggest that gold will weaken.

Spot Gold rallied off support at $1260/ounce on the daily chart but encountered resistance at $1300. Consolidation between $1290 and $1275 now indicates uncertainty, while a declining Trend Index warns of selling pressure.

Spot Gold

Target 1300 + ( 1300 – 1200 ) = 1400

Dollar strength is another key influence on gold prices. After a lengthy sell-off, the Dollar Index found support at 91. Breakout above resistance at 94 would indicate this is more than just a typical bear market rally. Until then, another test of primary support at 91 remains likely; breach would warn of another major decline.

Dollar Index

China’s bank chief warns of a ‘sharp correction’

Ambrose Evans-Pritchard reports on a statement by Zhou Xiaochuan, the governor of the People’s Bank (PBOC):

Mr Zhou told China Daily that asset speculation and property bubbles could pose a “systemic financial risk”, made worse by the plethora of wealth management products, trusts, and off-books lending.

He warned that corporate debt had reached disturbingly high levels and that local governments were using tricks to evade credit curbs.”If there is too much pro-cyclical stimulus in an economy, fluctuations will be hugely amplified. Too much exuberance when things are going well causes tensions to build up. That could lead to a sharp correction, and eventually lead to a so-called Minsky Moment. That’s what we must really guard against,” he said.

The function of the central bank is to remove the punch bowl just as the party really gets going (William McChesney Martin jr., Fed chair 1951 – 1970). It looks like the PBOC may have left it too late:

Non-financial debt has galloped up to 300 per cent of gross domestic product – uncharted territory for a big developing economy.

The International Monetary Fund says debts in the shadow banking system grew by 27 per cent last year.

Less widely known is that the “augmented” budget deficit – including local government spending and the deficits of quasi-state entities – has jumped to 13 per cent of GDP. This is an astonishing level of fiscal stimulus at this stage of the economic cycle. It was around 6 per cent in 2010….

What this means is that public and quasi-public debt in China is growing at the rate of 13% of GDP. China has achieved its growth targets but at what cost to economic stability? There are no free lunches, especially from the “perpetual leveraging doomsday debt machine”.

Source: China’s bank chief warns of a ‘sharp correction’