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Thread: Next capitalist economic crisis incoming?

  1. #21
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    Default Ongoing investment plunge in Australia

    Ongoing investment plunge in Australia

    By Mike Head

    25 February 2017

    Australia’s precipitous four-year slump in corporate investment is set to continue, according to official statistics released this week. This has serious consequences for jobs, as well as economic growth and the Liberal-National government’s already large budget deficit.

    Spending by companies on new buildings, equipment and machinery fell for a fourth straight quarter in the three months to December, sliding 2.1 percent from the previous three months—double the contraction forecast by business economists.

    This extends a collapse that began when the country’s mining boom began to implode in 2012. New capital expenditure, seasonally adjusted, fell 15.5 percent during 2016. It has declined overall from about $42 billion a quarter in 2012 to $27 billion per quarter in 2016, a drop of 36 percent.

    There was also another slide in investment intentions for 2017–18. Companies told the Australian Bureau of Statistics (ABS) they would spend just $80.6 billion, or about $20 billion a quarter, in the next financial year. That is 3.9 percent less than they forecast a year ago for the current financial year.

    These indicators have ominous implications, because capital investment is the key driver of economic activity under the capitalist profit system. Workers and young people are already paying for the crash. Unemployment and under-employment now affects more than 2.4 million workers, or nearly 18 percent of the workforce, according Roy Morgan polling company surveys. Of these, 1.3 million are jobless and 1.1 million are under-employed, that is, they want more working hours.

    Despite the government’s claims of delivering a “transition” to a new economy based on being “agile” and “innovative,” the slump extends beyond mining. Mining investment has plunged almost 60 percent since its peak in 2012, and is expected to fall by another 27 percent in 2016-17, but there has been no overall rise in non-mining investment.

    Instead, the mining plunge has flowed onto other areas of the economy, especially in the former mining-dependent states of Western Australia, South Australia and Queensland. This trend is far from over. Plans for mining investment in 2017–18 are down by another 20 percent, and those for manufacturing investment by 1.2 percent. Plans for unspecified “other selected industries” are up 8.3 percent, but nowhere near enough to offset the overall slide.

    The ABS figures are bleaker than those given by the government of Prime Minister Malcolm Turnbull in its December budget update, which forecast a decline of just 12 percent in mining investment, offset by an increase of 4.5 percent in non-mining investment.

    The investment freeze-up highlights how reliant Australian capitalism has become on mining and mining-related financial activity since the turn of the century, primarily driven by China’s economic expansion.

    Mining investment in Australia soared from 2 percent of gross domestic product (GDP) in the early 2000s to 9 percent in 2012, and has now plunged back to just above 3 percent. Over the same period, non-mining investment dropped as a share of GDP from about 12 percent to around 9 percent.

    In a speech on Wednesday, Reserve Bank of Australia governor Philip Lowe conceded that non-mining investment has suffered “significant spill-over effects” from the mining slump. The results undercut his previous claim that “economic headwinds” from the unwinding of the mining boom would soon “blow themselves out.” The central bank chief told international investors in February that 90 percent of the slide had already happened.

    Capital Economics chief economist Paul Dales said the new statistics left “question marks hanging over hopes that non-mining investment will soon rise significantly.” Dales said the figures were disappointing because iron ore and coal prices recovered somewhat during 2016. The results suggested that even if prices remain higher, businesses would “pocket the money rather than boost capex (capital expenditure).”

    Dales further noted that the Reserve Bank has also counted on higher wages growth to boost the economy. But this week’s wages figures showed continued record low growth. Average weekly earnings rose just 1.6 percent in 2016, barely above the official consumer price index rise of 1.5 percent.

    These results indicate that the recession gripping much of the country, outside the financial centres of Sydney and Melbourne, will persist. Despite record low official interest rates of 1.5 percent, the economy contracted by 0.5 percent in last year’s September quarter, and the result would have been worse except for a housing market bubble in these cities.

    The latest fall in investment prompted global financial services firm UBS to cut its growth estimate for the December quarter from 1 percent to 0.7 percent, implying an annual growth rate of just 1.9 percent for 2016. This is far below the 3 percent forecasts on which the government has based its budget calculations.

    Even that prediction will be shattered if the property market bubble and associated apartment construction boom unravels. In Wednesday’s speech, Reserve Bank governor Lowe warned of a “sobering combination” of record levels of household debt and slow wages growth.

    “It is possible that continuing rises in indebtedness, partly as a result of low interest rates, increase the fragility of household balance sheets,” Lowe said. “If so, then at some point in the future, households, having decided that they had borrowed too much, might cut back consumption sharply, hurting the overall economy and employment.”

    On Wednesday, in another symptom of the deepening destruction of manufacturing jobs, Coca-Cola Amatil, a partly-owned Australian subsidiary of the US giant, announced the closure of its bottling plants in South Australia. About 200 jobs will be eliminated, worsening the toll being produced by the closure of Australia’s auto assembly plants by Ford, General Motors and Toyota.

    The investment statistics compound the perplexity in the ruling class over the fact that annual foreign direct investment inflows halved, to less than $30 billion, between 2013 and 2015. Turnbull’s government recently tried to use the foreign investment plunge to ramp up its campaign to slash the company tax rate from 30 to 25 percent over the next decade, and match the sweeping cuts to US corporate taxes promised by President Donald Trump.

    The financial elite is demanding that Turnbull’s government deliver deep cuts to business taxes and social spending, especially welfare, health and education, as well as to workers’ wages and conditions, in order to stem the haemorrhaging of investment. The implementation of these demands will only fuel the already intense popular discontent and escalate the crisis of the government, which only holds a one-seat parliamentary majority following last July’s federal election.

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  2. #22
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    Default US Fed lifts interest rate and reassures markets

    US Fed lifts interest rate and reassures markets

    By Nick Beams

    16 March 2017

    The US Federal Reserve yesterday lifted its base interest rate by 0.25 percentage points and indicated that two further rises were likely this year.

    There had been some belief in financial markets that four rises could occur this year but that now seems unlikely. The “dot plot”—the expectation of members of the Fed’s open market committee (FOMC) as to where interest rates will be over the next period—remained basically unchanged from last December.

    The money markets, which had priced in the 0.25 percent increase, welcomed the decision. All the major indexes ended at just below their record highs after experiencing a rise for the day. The Dow closed near 21,000.

    Bond market yields also fell marginally, as bond prices rose, because of the fading of the prospect of four rate rises this year, rather than three. (Bond prices and yields have an inverse relationship.)

    Markets were reassured by the language of the decision, with most analysts concluding that Fed chairwoman Janet Yellen had “dovish” views on rate rises.

    The FOMC said it expected economic conditions would evolve in a manner that would “warrant gradual increases in the federal funds rate.” That was a slightly more hawkish outlook because its previous statements referred to “only gradual” increases.

    However, the statement indicated that the base interest rate was expected to remain for “some time” below levels that were expected to prevail in the longer run.

    Two other phrases in the FOMC statement boosted the markets. It said the Fed would “carefully monitor” actual and expected inflation developments “relative to its symmetric inflation goal.” This was taken to mean that with inflation now approaching the Fed’s target rate of 2 percent, it would not move too sharply on lifting rates if the inflation rate went above that level.

    The markets also took heart from the FOMC’s statement that the Fed would continue its policy of reinvesting principal payments from its massively expanded holdings of financial assets, including mortgage-backed securities and Treasury security holdings. As a result of its financial asset purchases under its previous “quantitative easing” program, the Fed now holds $4.5 trillion in financial assets, compared to $900 billion before the financial crisis of 2008.

    The statement said the reinvesting policy would continue until “normalization of the federal funds rate is well under way.” Keeping the holdings of longer-term financial assets at “sizable levels” should help maintain “accommodative financial conditions.”

    If the Fed started to sell off its financial holdings, this would push their prices down and lead to a significant rise in market interest rates, with a substantial impact on the stock market.

    The Fed appears to be trying to tread a fine line. It is keeping rates at historically low levels in order to finance the ongoing rise in the stock market. At the same time, it is lifting interest rates in order to improve profit conditions for the banks and other lending institutions.

    By lifting rates it is also signalling that it stands ready to put a clamp on the economy if there is any sign of a movement by workers on wage demands to try to reverse protracted cuts in real pay.

    In her press conference, Yellen tried to give the impression of a US economy returning to “normal” conditions. Near-term risks to the economic outlook, she said, “appear roughly balanced” and the decision to “make another gradual reduction in the amount of policy accommodation reflects the economy’s continued progress.”

    While there has been some improvement in economic conditions—sparking fears of a possible wages movement—the US economy is far from returning to conditions that prevailed before the 2008–09 financial crisis. The long-term growth rate continues to remain at around 2 percent, well below the level experienced in any post-war economic recovery.

    According to the Atlanta Federal Reserve, US annualised gross domestic growth for the first quarter may be as low as 0.9 percent, following growth of only 1.6 percent in 2016, the worst result for five years.

    The stock market, however, is continuing to rise on the expectation of major cuts in corporate and personal tax rates by the Trump administration, the scrapping of regulations that inhibit profit making and an infrastructure spending program which will benefit corporations through massive tax write-offs.

    Since Trump’s election on November 8, the stock market has surged, with the Dow up 17 percent, the S&P 500 14 percent and the tech-based NASDAQ 16 percent.

    According to Yale economist and Nobel Prize winner Robert Shiller, the market is “way over-priced.” He told Bloomberg that investors may be valuing a narrative rather than economic fundamentals, as took place in the dot-com bubble at the turn of the century.

    “They’re both revolutionary eras,” he said. “This time a ‘Great Leader’ has appeared. The idea is, everything is different.” A kind of herd mentality was developing in which everyone piled into the market because the cost of losing out on making gains was greater than staying out.

    Another area of concern is the impact of rising US interest rates on global bond markets. There is now a divergence between the policies of the world’s three major central banks. While the Fed is lifting rates, the European Central Bank (ECB) is still buying €80 billion worth of bonds a month and has kept its base interest rate at minus 0.4 percent. The Bank of Japan is keeping the rate on its 10-year bonds at between zero and 0.1 percent.

    With the rate on the US Treasuries hovering at around 2.6 percent, money is coming into US financial markets from Europe and Japan.

    But that situation could change rapidly, according to long-time bond market trader Bill Gross. In an interview with the business channel CNBC yesterday, he said that “hell could break loose in terms of the bond market on a global basis” once ECB president Mario Draghi began to taper—probably not for a few months—the €80 billion a month purchases were reduced and restrictions on the Japanese rate were eliminated.

    In comments reported by the Financial Times earlier this week, Gross warned that the US economy was like a “truckload of nitroglycerine on a bumpy road.” A mistake could “set off a credit implosion.”

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  3. #23
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    Default Concerns over Trump crisis roil financial markets

    Concerns over Trump crisis roil financial markets

    By Barry Grey

    23 March 2017

    Mounting concerns in financial circles over the political crisis of the Trump administration intersected with negative economic trends to send US stocks sharply lower on Tuesday. The sell-off on Wall Street, the first drop of more than 1 percent since the giddy rise triggered by the November 8 election of the billionaire real estate speculator, spilled over to the European and Asian exchanges on Wednesday, sending shares substantially lower. The US markets were relatively stable on Wednesday, with minor losses on the Dow accompanied by a slight gain on the S&P 500 index and a bigger uptick on the Nasdaq.

    The Dow Jones Industrial average fell 237 points, or 1.1 percent, on Tuesday, its worst day since September. The S&P 500 dropped 29 points, or 1.2 percent, and the Nasdaq Composite lost 107 points, or 1.8 percent.

    The sell-off hit bank shares, which have led the so-called “Trump Trade” surge since Election Day, the hardest. Bank of America tumbled 5.8 percent, Goldman Sachs fell 3.8 percent, JPMorgan Chase lost 3.1 percent, Wells Fargo declined 3.1 percent and Citigroup was 2.6 percent lower. Despite these losses—the S&P financials index sank 2.9 percent, its biggest daily fall since June—the S&P financial sector is still up 18 percent since Trump’s election and Goldman Sachs has risen by more than 40 percent since the end of September.

    Whatever the short-term trend on the financial markets, Tuesday’s downturn reflected the underlying unsustainability of the massively inflated stock valuations—a defining feature of the so-called “recovery” from the Wall Street crash of 2008. The Obama administration systematically fed the record rise on the stock market with trillions of dollars in bank bailouts and trillions more in super-cheap credit and cash pumped into the financial system by the Federal Reserve, combined with austerity and wage-cutting imposed on the working class.

    The post-election surge to new record highs was entirely based on the anticipation of an unprecedented profit windfall from Trump’s policies of corporate deregulation, corporate tax cuts and corporate-friendly infrastructure spending, alongside an historic attack on social programs, from health care, to education, to housing.

    The underlying economy, however, remains stagnant, and Trump’s policies of economic nationalism and trade war threaten to intensify the tendencies toward a new financial crash and full-scale depression.

    The immediate cause of Tuesday’s sell-off appears to have been rising uncertainty over Trump’s ability to carry through his pro-corporate pledges. The doubts in boardrooms and bankers’ retreats were focused on the mounting political warfare over allegations of Trump administration connections to Russian officials and the murky prospects for the Republican-controlled House of Representatives to pass Trump’s health care overhaul in a floor vote scheduled for Thursday.

    As the Financial Times put it, the “deepening political tussle in Washington over an overhaul of the health care industry prompted fears over whether Donald Trump will be able to drive through the economic stimulus he has promised.”

    The newspaper cited Jerry Lucas of UBS Wealth Management as saying, “The current valuation of the S&P 500 is very much dependent on Trump getting his economic agenda through. If Trump runs into problems with health care, it could make tax reform harder… and passage of tax reform is critical.”

    Reuters wrote, “Bank lobbyists who opened the Trump era with great expectations for sweeping regulatory reform are privately striking an increasingly dismal tone as hopes for a quick and thorough rewrite of Dodd-Frank legislation dim.”

    The BBC quoted R. J. Grant, head of trading at Keefe, Bruyette & Woods in New York, as complaining, “The market is starting to get a little fed up with the lack of progress in health care because everything else is being put on the back burner.”

    These fears are compounded by unstated concerns over the growth of social discontent and popular opposition to the Trump administration’s assault on social benefits, as well as its police-state vendetta against immigrants.

    Without the massive stimulus to corporate profits from Trump’s promised program of social reaction, there is no basis for sustaining the record bull market. Hopes of a boost to economic growth are dwindling. A running projection for first-quarter economic growth from the Atlanta Federal Reserve has fallen to 0.9 percent.

    The stagnant pace of economic growth and world trade has been reflected in declining prices for basic commodities such as oil, copper and iron ore. Oil prices fell to almost four-month lows on Wednesday after data showed US crude inventories rising faster than expected, adding to already bulging global stockpiles.

    The dollar has continued to fall, raising fears of a new eruption of inflation, despite the Fed’s decision last week to raise its benchmark interest rate another 0.25 percent. The markets interpreted the Fed’s move as “dovish” because the central bank indicated it had no plans to raise rates this year more than the two additional times it had previously signaled.

    The starkest measure of growing nervousness in financial markets is the continuing rise in gold, the most basic of all investment safe havens. Gold rose 1 percent to $1,247 a troy ounce on Wednesday, its highest level in almost three weeks. It is up nearly 7 percent since the start of the year, and Bank of America is predicting it will jump $200 by the end of the year to surpass $1,400 per troy ounce.

    At the same time, the short-term prospects for US corporate profits are weakening. As the Financial Times reported Monday: “The US corporate profit outlook has dimmed in recent weeks, with analysts paring back their forecasts in a fresh sign of the risks facing the Wall Street rally that has powered equities to peaks.”

    The newspaper noted recent data showing earnings of companies in the S&P 500 index rising by 9 percent in the first quarter of this year, significantly lower than the 12.3 percent increase predicted at the start of the year. The smaller-than-expected rise in profits will intensify concerns over the extraordinarily high price-to-earnings ratio that already prevails on US financial markets. According to a measure developed by Yale economist Robert Shiller, the cyclically adjusted PE ratio hit its highest point in 15 years this month.

    The Financial Times reported Tuesday that a recent Bank of America Merrill Lynch survey showed more investors saying stocks are overvalued than undervalued than at any point since 2001. The New York Times on Wednesday noted that US stock prices relative to earnings have been higher than today only in 1929 and 1999, on the eve of major stock market crises followed by economic slumps.

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