Archive for August, 2013

China is starting to be really alarmed at the unintended consequences of the One Child Policy.

Some stats

In 2012 over 13,600 primary schools closed and the number of students dropped from 200 million to 145 million.

The elderly people are now standing at 192 millions and by 2025 this number will increase to over 300 million.

As a difference from the rest of the world, the majority of these 300 million will be classified in poverty status.

Naturally the Chinese politicians are aware of this and they take different steps (raising working age and relaxing the one child policy). But there is no solution to this social crisis


Bond yield and shares

Posted: August 21, 2013 in Uncategorized

Quite a few clients ask me what is the relationship between bond yield and shares.

Simplifying a bit I came with an answer

The link between bond yield and shares is a bit complicated….but I will try to simplify.
First of the yield (dividend) on share in the world is approximately 2%pa (not like Australia on average 4.5%pa)
The big movement in the markets are caused mainly but the so called called (internationally) sovereign fund (includes international pension fund and Government “liability” funds (let’s say where the Government park their money from which you get paid medicare rebates, public pension, benefits…specially US and European).
The mandate of these funds is actually to “discharge a benefit”. In order to discharge a benefit they need income. Until the bond of US treasuries (more secure than share) was approx 1.7%-2.2%pa these funds were compelled to invest in share as the yield in bond was not enough to pay their liability. Once the yield in bond come close to 3%, there is a clear advantage in bond (safer and better yield). So these funds have to follow their mandate and divest from shares and invest in bond. Potentially this move could happen in the week of 2 September (after US Labor Day all the big banks boards come back from holiday)
Due the sheer mass of these funds such a move can create a worldwide correction in the market of approximately 5-10%pa. As everything nothing is certain as the Federal Reserve knows this and can limit the damage. But we cannot trust the deeds of the FED (also called market manipulation).

Increase in fear level

Posted: August 21, 2013 in Uncategorized

The bond market is sending strong alert warning. The US Treasury bond yield is actually yielding more than 2.8%pa after the largest bond outflow in US history (foreign owners dumped over USD40 billion in one month!).

This sharp rise (last year the 10 year T bond was at 1.7%pa) cannot not have an effect on the stock market at least between now (specially after the 2 September when Northern Hemisphere investors come back from holiday) and the 18 September (the day in which the FED will really say what they do about tapering).

We could be in for a 5%/10% selloff (ASX200: 4,600/4,750). It also could be that the sell off will stop the Fed.

But definitely a yield over 2.8%pa on the 10y US T-Bond will have an effect.

In order to understand (or better said starting to understand China), we need to go back to the academic idea of “Social Contract”. Every nation or even human congregation is based on the social contract.

The traditional family social contract was the man provides shelter/protection/food and the wife is providing family and taking care of daily needs.

In a democracy such as Australia, US, UK the social contract is based on freedom (at least perceived).  If this contract is rendered void, you will find yourself in a situation primed for revolution.

In China this social contract is based on full employment. The Chinese citizen will not rebel until there is a perceived situation of full employment.

Once you understand that and the world dynamics you can understand what the political class is trying to achieve and the malaise of the Chinese economy.

For over 20 years it relied on cheap labor and a growing G7+ economy for full employment….and now it is all finished.

The Chinese political class has to enact fast reform to transform a massive export economy to a massive consumer economy. Otherwise there will be a break in a social contract.

And they know it as it is one of the smartest political class in the world (in China, all the best mind go to the public sector, not the private sector).

To achieve this objective they will have to clean corruption and literally wage war on their own system.

Unfortunately for them and the world, they most probably will lose (not now, do not worry). In order to change the economy from export driven to consumer driven, they need to change the mindset of the Chinese. And this can be done only inter generational (20+ years). Chinese are people that loves savings (consequences of no pension system, once child policy, famine, poor healthcare system) and nobody can change. Even the dodgy statistics released by the Chinese Government reveal that actually the rate of savings increased in the last 5 years.

What does this mean. China will never overtake the US.

The best case scenario is 20-30 years of this kind of Chinese malaise, where China, in the Western media at least, looks always like overtaking the entire world – but somehow never happens.

Another scenario is actually a break-up of China in State-countries

Another scenario is that China becomes military aggressive (there are already sign of that, not only against Japan, Philippines, Vietnam – but also -unreported by the media – against India) in order to distract the population from the economic issues.

And Yes it will be also more aggressive with the US, but careful to be just a war of world as they know it is a dangerous game*

*Military note:  naval warfare is one of the most complicated kind of war as there is both logistic and underwater-sea-airborne coordination. The only Navy with real experience in this sector is the US Navy and it is an advantage that nobody with a brain will ever underestimate.


Sp 500 destination 1580

Posted: August 19, 2013 in Uncategorized
Tags: , ,

The sp500 closed under its 10 weeks average and also the RSI is weakening. In all it seems we are going towards the 35 moving average 1580 before the next Fed reserve meeting (18 Sept)

September will be dominated by the Fed decision about tapering or not tapering (well reducing tapering).

The question is hard: the Fed needs to taper as “QE infinite” would be disastrous (spike in inflation for real) – but tapering has its own risk

– taper would start a rally in the USD (main driver of export)

-taper is already increasing the yield in 10 US years treasuries which already had an effect on risk assets, but above all it is already a reduction in US mortgage lending indicator (US house prices tracks pretty well this indicator) which has been the major driver of the US recovery.

So what the FED will do? It will use more a war of words and, maybe, very small tapering.

Current polls are for a USD 10  billion reductions  (from 85 to 75). In June the same polls were indicating a 20 Billion reduction (hence the bounce back).

It could be even less.


The current candidates are (in order of current odds)


Summers, an academic. He has very good connections (he is a personal friend of President Obama). It would be scary for the markets as he is a non-believer in the Quantitative Easing. He does not believe it works and he will look into terminating it. He is not a diplomat and somewhat relishes stirring a few feathers.


Yellen, an academic. She is a close second choice, so pretty much in the race. She is a natural born diplomat and will go on with the Bernanke philosophy. She actually is one of the minds behind QE. The markets would love her. The danger with her is that she wants to maintain QE until unemployment is well under 6.5% (she looks at the participation rate data). The issue with it is that a too long QE could act as a spike in interest rate and create havoc. She is a skilled negotiator and consensus builder (the Fed decisions are never a one man party)


The “dark horse” (surprise candidate in Fed Jargon) is Don Kohn a Fed veteran (over 40 years of service). He was the right hand of Greenspan since the 1987 crisis. An also he played a great part as right hand of Bernanke. Even if quite a few link, quite reasonably, the action of Greenspan as the real trigger of the Great Financial Crisis at the moment is the best candidate of the three.


But it is quite usual the appearance of the real candidate much later in the game.


Other names are Geithner, Fischer and Ferguson.


By the way….for who likes conspiracy theories…almost all Fed Chairmen are Jewish  (all of the above, except Ferguson (which has a Jewish wife). Yes Ben Bernanke and Alan Greenspan are Jewish.


And by some accounts the Rothschild  of London hold 57% of the non tradable stock of the FED

In order to understand what is happening in Europe, it is necessary to back of how and why Europe has been formed.

The European Union has been essentially built after the 2 World War to contain the USSR and build a Golden Cage for Germany.

Every time Germany has been let free (1871 and 1933), we all know that it created a few issues (namely, 2 wold wars).

So Germany has been given a Golden Cage  (also called free markets with competitive advantage), since putting sanctions and ravaging the country after the 1 World War clearly did not work.

With the Euro, the Golden Cage became perfect as it took away the only advantage the other European countries had, their own currencies.

At this point, the rest of Europe was unable to defend itself by the competitive efficiency of the Germans (praise to them. To be honest it took all the world to stop them in the Second World War and thank God they had a madman at the wheel). When the US hit the world with the GFC, the latent issues got brought forward.

The issues are various:

– The Deutsche Mark has been converted incorrectly into Euro (undervalued in respect to the other currencies)

– Europe is a Monetary Union without a financial Union (praise this time our politician for thinking (dreaming?) it could work)

-Europe does not exist (ever met a tourist say I am from Europe….usually they say I am from France, italy, Spain…Germany!)

So Germany had a massive advantage from Europe….a captive market and  a weak currency.

That is why Germany, even with this European Crisis, had a massive growth. It actually need to prolong the crisis to keep the Euro down and maintain the growth profile (that is why the German High Court is challenging the ECB Bond Buying…..they do not want the crisis to be solved).

It seems that now they are getting what they want. Pay attention to what you think. In 1942 the German war machine seemed already to have won.

The issue is that until last year there was an axis German-Sarkozy-France that was pro austerity. Now the Hollande-France is leaning towards growth and there is a strong anti-German push in the European population.

The unemployment level is particularly scary as unemployment can lead to social unrest and even revolution (thinking Greece now, 65% of youth unemployment).

This could introduce a systemic risk in Europe, also because of the TARGET 2 issue *

So Germany is playing a very subtle poker game of remaining in “crisis mode” without eating the duck the lays the golden eggs. unless someone call their bluff.

More article will follow as it is a very intricate argument, but that is essentially why we have to muddle through and we cannot solve the situation: it is all real-politik.

Now, most probably, they will have to show the situation as improving as the risks above (youth unemployment) are starting to be too real.



Gold, update

Posted: August 14, 2013 in Uncategorized

Gold pricing is now above the 50 days moving average, but needs to push through USD 1,340 – USD 1,350 with momentum to go higher. If it stays at this level will move under its MA with target 1,280.

In this market is a bit hard to see a consistent push through, with the FED QE issues next months.

Markets at Pivot Point

Posted: August 13, 2013 in Uncategorized

Institutions until now did not fully participate to this rally. But as institutions go they have their own mandate (usually to stay within 8-12% of the index), so they are now at a pivot point…join the rally or try to bring it down.


Other times (noticeably in April 2013) they joined the rally.


This time could be different for a series of motivations


In September after the US Labor Day (2 September), Northern Hemisphere investors and traders will start come back and will be focusing on  a raft of uncertain data point


-Resuming European Parliaments with the unresolved issues of the Italian Berlusconi (head of one of the main Coalition Parties now convicted for tax fraud) and the allegation of  bribery for Spanish MP Rajoj.


US tapering (FOMC 17-18 September) and discussion about the next US Chairman in January 13 (and Summers, one of the main candidate, spells trouble for the market as he is clearly anti QE)


German Elections 22 September and just after the German High Court Challenge to the ECB Bond Buying program


Finally, in October, the US will reach again the Debt Ceiling (the famous discussion already postponed in March 13).


In all it should be a small correction in order of 10% – 20%, but, as usual, small cap will suffer more.


The Australian market as a clear support at ASX4,600 / 4,740 (and could be supported by a Liberal win) and US Market SP500 1,560/1,630.


So we could be still having a false break of SP 500: 1,710 (ASX: 5,250), but be wary.