Can Globalization Be Salvaged?

Populist opposition will shape how trade and immigration expand, if at all

By Greg Ip
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Regardless of the election’s outcome, support for the antiglobalization message of Donald Trump’s campaign is unlikely to go away. Photo: Mark Makela/Getty Images        


No matter what happens in this election,” venture capitalist Peter Thiel said in Washington this week, “what Trump represents isn’t crazy and it’s not going away.”

When it comes to globalization, Mr. Thiel, a prominent donor to Republican nominee Donald Trump, is almost certainly right. Mr. Trump is unique, but his antipathy to free trade and increased immigration isn’t.

Those sentiments are shared in differing degrees by the Democratic voters who propelled Vermont Sen. Bernie Sanders to second place in the party’s primary, by the Britons who voted to leave the European Union in June, and in the populist parties gaining strength across Europe. Hillary Clinton may have turned against the negotiated, unratified 12-nation Trans Pacific Partnership to fend off Mr. Sanders, but is unlikely to flip back. Why spend scarce political capital on a treaty much of her party despises?

 

For advocates, salvaging globalization requires understanding what’s behind the backlash.

Many populists think it’s a zero-sum game that the U.S. is losing. “The sheer size of the U.S. trade deficit shows that something has gone badly wrong,” claims Mr. Thiel. Actually, it doesn’t: The U.S. has had one of the developed world’s fastest growth rates since 1990 despite that deficit, while Japan has had one of the slowest despite a surplus.

Advocates of free-trade deals think the real problem is that the country as a whole benefits from more trade and immigration while only a minority of workers get hit, blame outsiders and turn to politicians like Mr. Trump. Their prescription is to help that minority transition to new and better jobs, something on which the U.S. spends far too little.

Yet this may not be an antidote to populism. The economic impact of free trade is easily overstated. Trade barriers have steadily declined. This means the gains to incremental liberalization are quite small—one reason the number of new pacts has also been slipping. Two studies conclude the Trans-Pacific Partnership would eventually raise U.S. output by 0.2% to 0.5%, a positive but hardly life-changing sum. The gains to Canada and Europe from the just-completed Comprehensive Economic and Trade Agreement are similarly slim.

Nor is opposition to globalization primarily economic. “It’s about fairness, loss of control, and elites’ loss of credibility. It hurts the cause of trade to pretend otherwise,” Dani Rodrik, a Harvard University economist and longtime skeptic of globalization, wrote recently.

Treaties such as TPP seek to level the playing field for companies operating across borders, for example in product regulation, settling disputes with governments, and intellectual property protection. Left-wing populists consider this a surrender of national sovereignty to corporate interests.

Lori Wallach, of the left-leaning advocacy group Public Interest, and Jared Bernstein, a former adviser to Vice President Joe Biden, recently proposed that U.S. agreements should henceforth ditch investor-state dispute settlement, constraints on domestic regulation and other features that favor corporations.

This might satisfy some critics on the left. Indeed, similar concessions by Canada and the EU overcame opposition from the Belgian region of Wallonia to the Canada-EU deal. But it also leaves little to liberalize beyond tariffs, which are already quite low. Narrowing talks down to just that in the U.S. would make it hard to get the support of businesses and Republicans.

For populists on the right, immigration is a bigger worry than free trade. But they too are concerned about more than just their pocketbooks. Many are bothered about cultural change, the pressure on public services, and the inability to control the number of foreign entrants. As my colleagues report this week, support for Trump is strong in counties where the immigrant population has grown the most, even as unemployment falls in these same counties.


Similarly, in Britain, support for Brexit was stronger in regions that experienced larger increases in the migrant share of the population, according to an analysis by Monica Langella and Alan Manning of the London School of Economics. Unemployment had no effect.

So stronger wage growth likely won’t defuse the populist backlash against immigration. What can help are immigration policies better tuned to the host country’s absorption capacity and labor force needs. Canada supports legal immigration by picking candidates for language and work skills, and keeping illegal arrivals to a minimum. For Britain, losing some of the economic benefits of the EU’s common market will be the price of regaining control over immigration. In the U.S., a deal to legalize the illegal population will require satisfying skeptics that strong controls over illegal immigration are in place.

Broad majorities of the public still think free trade and immigration are good things. The bad news for globalizers is that the populists on the right and left who disagree are increasingly able to stop the process. Contemplating the obstacles to completion of the EU-Canada deal two weeks ago, Donald Tusk, president of the European Council, the EU’s oversight body, and former Polish prime minister, worried that it “could be our last free-trade agreement.”


President-Elect Donald Trump

His victory proves he – and the class of voters who elected him – cannot be overlooked.

By George Friedman


Donald Trump has been elected president of the United States. The extent of the bewilderment is significant. The pollsters were shocked. The media was surprised. The financial markets were stunned. Many in the Republican Party were astonished. And the Democratic Party was totally taken off guard. The thought that a man with Trump’s values and behavior could become president was, to many, unthinkable. I do not mean that they disagreed with him, or hoped that Trump would lose. They thought it inconceivable that a man like Trump could win.
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Republican President-elect Donald Trump delivers his acceptance speech during his election night event at the New York Hilton Midtown in the early morning hours of Nov. 9, 2016 in New York City. Donald Trump defeated Democratic presidential nominee Hillary Clinton to become the 45th president of the United States. Mark Wilson/Getty Images


That is the reason Hillary Clinton lost. The Democratic Party that nominated her has moved far away from the party that Franklin D. Roosevelt crafted or that Lyndon B. Johnson had led.

Their party had as its core the white working class. The liberalism of FDR and LBJ was built around this group, with other elements added and subtracted. Much has been said about this group having become less important. Perhaps so, but it is still the single largest ethnic and social group in the country.

This group, as I have argued before, is in trouble. The middle class, with a median take-home pay in California of about $4,300 a month, can buy a modest house and a car but certainly can’t afford to send their kids to college. Hence the massive student loans their children must take out. The lower-middle class has a take-home pay of about $2,600 a month. A generation ago the lower-middle class could buy a small house in a not-so-great neighborhood. Now they are hard pressed to rent an apartment. Liberals are concerned with inequality. People in the lower-middle class are simply concerned with making enough money to live a decent life. They are two very different things.

Trump, it turns out, understood this problem. He also understood that these people had lost the culture wars that had been waged for the past generation. Their churches and parents raised and taught them that homosexuality is a sin, as is abortion and premarital sex. Evangelical Christianity wasn’t so much the issue, but rather the gut values with which they were raised.

Many of this class had sinned, but they knew it was a sin and they valued the standards they’d been taught, even when they didn’t live up to them.

Within a generation, this lower- and middle-class group had been displaced. Pride that comes from working hard and making a good living for their families was lost. They found that values they had regarded as commonplace were now regarded as phobias, illnesses they must overcome in order to be politically correct. Values they were taught as children could no longer be expressed in public.

This middle-class group no longer had a place in the Democratic Party. They felt the Democratic Party not only had contempt for them, but also that it valued immigrants, and the rights and culture of immigrants, far more than it valued the beliefs of the white middle class.

That was true, but it was not the immigrants the party valued, it was the upper-middle class, college-educated victors in the culture wars.

When Clinton made her extraordinary speech about Trump’s basket of “deplorables,” she was expressing the chasm of contempt that had opened up within the Democratic Party between the educated and the working class. She said there were two baskets. In one was the homophobic, xenophobic misogynists. In the other basket were the poor who had been left behind. It was not clear that this second basket was deplorable, but those in it were certainly not her major concern. Clinton made the “deplorables” statement to make it clear that not only was Trump unacceptable, but his followers were too. Clearly, she didn’t think she needed their votes. But she did need to reinforce her base’s sense of fighting the good fight against evil and failure.

What Clinton and the elite didn’t understand was that this group was sufficient to serve as Trump’s base and that he could add to it. Looking at exit polls, the hostility of women to Trump turned out to not be there. Over 20 percent of Hispanics voted for Trump. Trump built a coalition that Clinton believed could not be built. It was in some ways a broader coalition than she had created. The elite made assumptions about women, Hispanics and others implying it was inconceivable for anyone other than the deplorables to support Trump.

Clinton’s statement about Trump’s followers struck me at the time, and still does, as amazing.

She was then a few points ahead of Trump, which meant that nearly half of the country supported him. By implication, she was saying that half the country is deplorable. Her statement was not only contemptuous, but showed her to be a terrible politician. To win the election, she needed to hold all of her supporters, plus take away some of Trump’s. The deplorable statement drove many off instead.

It was not only bad politics. It also represents a core internal problem. The elite of the United States – and all countries have and need elites – has become profoundly self-enclosed. This is similar to the situation in the U.K. when the elite was enraged at the Brexit referendum result, and hurled epithets at the narrow majority that voted for Brexit, calling them uneducated, incapable of understanding the issues and so on.

Economic stresses build up in all societies at various points. At this moment, European countries are undergoing the same sort of stresses as the United States, but even more intensely.

Nationalist movements are growing in many of those countries. They are hostile to the European Union, oppose uncontrolled immigration and are resentful of policies that impose austerity that affects the middle and lower classes, without significant impact on the elite.

Trump is part of this broader crisis. Where European nationalists oppose the EU, Trump wants to renegotiate NAFTA. Where the Europeans oppose uncontrolled Muslim immigration, Trump opposes Muslim and Mexican immigration. Where the Europeans talk about ending austerity, Trump speaks of tax cuts to stimulate investment.

Whether these policies are appropriate is not what matters here. The issue is that extended economic dysfunction has inevitable political consequences. This presidential campaign pivoted on the fact that Clinton did not understand the political movement that was rising and dismissed it as marginal. Trump did understand it, played to it and won the presidency. But it goes one step deeper. He won the election by arguing that Washington and the media were oblivious to the economic problem. During the later days of the campaign, he consistently made the claim that the Washington elite in particular was completely out of touch with the reality of any Americans outside its class.

I can safely assert Trump was the better politician. He won, not an overwhelming victory, but a decisive one. Clinton’s weakness was that she saw her position at the heart of the political establishment as decisive. She dismissed Bernie Sanders in spite of his strength, and she never really took Trump seriously. She regarded the 3-point lead in the polls as sufficient. That was complacency, but it hid a lack of understanding that a political volcano was building in the middle class, and many others shared in the sense that things were going wrong.

Clinton didn’t see a major problem, although her predecessors in the Democratic Party (LBJ and FDR) had. Her advisers didn’t see it. Instead they saw an intemperate man hurling insults at others, totally unsuited for high office. Unfortunately, voters turned out to be far less interested in Trump’s rudeness than in Clinton’s cluelessness.

Some will lay blame for the loss on FBI Director James Comey’s letter. That undoubtedly contributed to it. But it was not decisive. Economic dysfunction leads to political upheaval, and Clinton didn’t grasp the significance of the dysfunction. And somewhere in her mind the fact that white males without a college degree opposed her indicated that only deplorable people opposed her, although why white males without a college education should be thought of as deplorable is an important question.

In any case, the election is a surprise only because the polls were so wrong. Trump was likely in the lead for quite a while. The decline in the accuracy of polls is noteworthy, primarily because Clinton might have thought more deeply about her situation if she had known she was behind.

Trump executed an obnoxious campaign. I was deeply offended by his attack on John McCain, not over the question of whether McCain was a hero, but rather because Trump said he preferred pilots who don’t get shot down to those who do. As commander in chief, he will, like every president since FDR, have to order troops into harm’s way. How does a commander order his pilots to strike, when they know that if they are shot down, their commander’s respect for them will decline? This was an election where offensive statements abounded. Trump had more than Clinton, but Clinton’s comments were a direct attack on a class of voters, which was more startling. In the end, the voters decided.

Trump will be president and he has made sweeping promises as all candidates do. It is easy to dismiss these promises, as it was easy to dismiss the idea that he would get the Republican nomination, or that he would win the election. Like all political leaders he will be constrained by reality. But seeing reality clearly enough to achieve what others think is impossible is what makes great leaders. I have difficulty imagining what his government will look like, but I was someone who thought he would never get the Republican nomination. It is important to be cautious about dismissing this man.


The All-Powerful Bond Market Is Getting Rocked by Trump

Bonds fall as investors see more stimulus under Donald Trump

By Christopher Whittall and Sam Goldfarb
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   Donald Trump at his final campaign event in Grand Rapids, Mich., on Tuesday. Photo: Reuters        


A selloff in government bonds picked up more momentum Thursday, spreading across the world as investors reacted to the prospect of increased fiscal stimulus under a Donald Trump presidency.

Investors are now asking whether Mr. Trump’s victory marks a turning point for fixed-income markets that have been on lengthy bull run.

In recent trading, the yield on the benchmark 10-year U.S. Treasury note was 2.083%, according to Tradeweb, up from 2.070% Wednesday. That came on the back of the biggest one-day jump in the 10-year yield in over three years Wednesday.

Yields rise when bond prices fall.

The yield on 10-year German government bonds rose to 0.274% from 0.177%, on track to close at its highest level since May, according to Tradeweb. Yields on British and French government bonds were also higher, following steep overnight falls in the price of bonds in developed Asian economies.

Government bond yields fell to record lows in the summer following Britain’s vote to leave the European Union, as investors bet on central banks keeping rates lower for longer. But yields have been edging higher in recent weeks amid better-than-expected growth and inflation data, concerns over less accommodative central-bank policy and signs that some governments are open to boosting fiscal stimulus.

While much of Mr. Trump’s policy agenda remains unclear, the president-elect has promised infrastructure spending and tax cuts. Political gridlock is likely to ease with Republicans holding the White House and both chambers of Congress, and reshaping the federal budget could be especially achievable thanks to a Senate rule that allows tax and spending changes without the need for a 60-vote majority.

Many analysts say that increased spending and tax cuts would boost bond supply, economic growth and inflation, potentially hurting fixed-income assets. Investors are particularly concerned that an increase in signs of inflation and growth could push the Federal Reserve to raise interest rates at a faster clip than currently expected.

If broadly adopted around the world, fiscal stimulus could also make it easier for central banks to scale back bond-buying programs, creating less demand for bonds and providing another reason for their yields to rise.

Already, the U.K. government has signaled that it intends to boost infrastructure spending, while some European governments have eased off on their austerity policies.

A 10-year Treasury yield below the Federal Reserve’s annual inflation target of 2% “only seems sustainable in the environment that we were in” with central banks “pumping in quantitative easing ad infinitum,” said Gene Tannuzzo, senior fixed-income portfolio manager at Columbia Threadneedle Investments “You needed a political regime shift to change that and we’ve kind of had that.”

Moves in the $13 trillion U.S. Treasury market will likely echo throughout global debt markets.

Treasurys are used as a benchmark to price the foreign-currency sovereign debt of emerging-market economies and for a lot of corporate debt. A rise in U.S. yields would mean higher funding costs for many of these borrowers.

Investors also look at rate differentials across developed markets, so a rise in Treasury yields naturally has a knock-on effect on German bunds. Higher U.S. interest rates would typically strengthen the dollar and weaken other currencies, easing financial conditions in those countries and reducing the need for central bank support.

Investors are already concerned over the future of the ECB’s massive bond-buying program, currently slated to end in March 2017, which officials are expected to clarify at the bank’s December meeting.

“Generally you’re going to see central banks spending 2017 either dialing down the accommodation they have in place now or talking about it, and that’s going to reprice bond yields higher,” said Bob Michele, global head of fixed income at J.P. Morgan Asset Management.

Still, some investors and analysts caution that bond yields could stabilize or decline as markets move past the initial surprise of the U.S. election.

There have been other times recently when investors predicted a lasting turn in bond yields that never quite happened. Yields moved sharply higher in the spring of 2015, led by the 10-year German bond yield, only to resume their descent later in the year.

A major pillar of Mr. Trump’s candidacy was skepticism toward trade, and a return of his antitrade rhetoric could cause a shift in sentiment.

Before taking an abrupt turn, government bond yields initially fell Tuesday evening as a victory by Mr. Trump became more likely, reflecting concerns about his potential impact on the economy.

“Our call for lower bond yields was based on the structural drivers, which include the debt overhang, demographics, productivity and wealth inequality,” said Steven Major, global head of fixed-income research at HSBC. “President-elect Trump will not be able to fix all of these in one go. Indeed, based on the campaign rhetoric he might well make some of these worse.”


Understanding Latin America’s New Political Paradigm

Ernesto Talvi

Newsart for Understanding Latin America’s New Political Paradigm

MONTEVIDEO – Center-left and populist governments’ hegemony in Latin America for most of the last decade now seems to be coming to an end, with center-right parties rising to power in Argentina, Brazil, Guatemala, Paraguay, and Peru.
 
We should not be surprised that Latin America’s “red tide” is receding. Historical evidence from the last 40 years shows that political cycles within the region are highly synchronized, and tend to reflect economic booms and busts.
 
From 1974 to 1981, Latin America’s economy grew at an average annual rate of 4.1%, compared to its annual 2.8% historical average, owing to the 1970s oil-price spike. Petrodollars flooding into the region financed huge public-spending increases and real-estate booms, and fueled an economic bonanza that propped up the continent’s military dictatorships. At the time, authoritarian regimes took credit for the economic boom, because they had reestablished stability and order on the continent.
 
But this period turned out to be the proverbial calm before the storm. The party was cut short in the early 1980s, when then-Federal Reserve Chairman Paul Volcker took away the punch bowl, by engineering a sudden interest-rate hike to stem inflation. The “Volcker shock” created a triple whammy: the US entered a deep recession; commodity prices plummeted; and Latin America’s capital inflows abruptly reversed, shifting toward US dollar-denominated instruments that offered better yields.
 
What followed was a “lost decade” of economic depression, stagnant growth, and currency, debt, and banking crises, as Latin American countries’ output contracted or collapsed. This severe downturn created widespread social discontent, and with the fall of the Berlin Wall and the end of US support for military regimes in the region, every Latin American dictatorship except Cuba’s was upended.
 
For the most part, center-right, democratically elected governments replaced the military dictatorships, and they exchanged the previous economic paradigm – import substitution, state intervention, and overregulation – for the Washington Consensus, which called for fiscal discipline, price stability, trade and financial liberalization, privatization, and deregulation.
 
By the early 1990s, the 1989 Brady Plan had resolved Latin America’s debt crisis by providing debt relief in exchange for economic reforms, and interest rates in the US had fallen. Foreign capital flooded in again, and the new consensus view was that bond-driven capital inflows would impose market discipline on Latin America’s historically profligate governments, because, presumably, only credit-worthy agents would be able to borrow. Another bonanza ensued, which Latin American policymakers at the time attributed to the Washington Consensus.
 
Democracy, together with sensible and credible economic policies, seemed to have finally done the trick. But then came the 1997 Asian financial crisis and the 1998 ruble crisis, in which the Russian government defaulted on its debt. Capital fled emerging markets, sending Latin American countries into another nosedive and resulting in economic depression and more currency, debt, and banking crises.
 
In the early 2000s, Latin America’s economic malaise again gave rise to social discontent, and center-right governments started to fall like dominos, to be replaced by center-left – and, in some cases, populist – administrations.
 
The new center-left governments, unlike their populist peers, did not repudiate previous commitments to fiscal discipline, low inflation, and open markets. Rather, they built lavish social-welfare and economic-redistribution programs on top of those commitments. This was possible only because of the boom in commodity prices that began in 2003, and the surge in capital inflows until 2012, as developed-country investors searched for yield in the wake of the 2008 global financial crisis.
 
Once again, high commodity prices and cheap, abundant capital had fueled a decade-long economic boom. And once again, governments in the region attributed their economic success to the reigning paradigm, which this time combined economic orthodoxy with redistributive policies. What’s more, center-right governments had peacefully transferred power to the newly elected center-left governments, which led many people to believe that this time would be different.
 
They were wrong. Starting in 2012, Latin American economies cooled significantly, owing to the European debt crisis, China’s slowdown, collapsing commodity prices, and capital flight from emerging markets, as rattled investors sought refuge in safe assets. Some Latin American countries faltered, and others fell into deep recessions.
 
Latin American governments had again convinced not only themselves, but also voters, that their policies were behind the previous boom. When voters’ expectations clashed with the new socioeconomic reality, they took to the streets to protest. Corruption scandals in some countries added fuel to the fire, and a new crop of center-right governments was elected.
 
Latin America’s 40-year history of political swings between center-right and center-left governments is evolutionary: each new stage builds upon the previous one. Much like creative destruction, evolution preserves what works, discards what does not, and sometimes adds new, disruptive features.
 
Assuming this pattern holds, what can we expect from the new crop of mostly center-right, mainstream Latin American governments?
 
Most likely, they will continue the evolutionary process, by preserving some of the basic Washington Consensus tenets, while pursuing new redistribution policies when feasible. But resources will be scarce, so they will need to redesign social-spending programs and infrastructure projects to maximize efficiency and get more bang for their buck. I call this new paradigm “intelligent austerity.” If Latin American governments implement it successfully, they truly will deserve to claim credit for the economic gains that result.
 
 


Gold Cycles In Every Time Frame

by: Andrew McElroy

 
Summary
 
- Gold cycles help us visualize and map out expectations.

- No asset trades in a vacuum; the cycles of related markets must reconcile.

- Medium-term upside targets and longer term direction.

 
The precious metal (GLD) bottomed a bit earlier than I thought, but the move up is not unexpected from a cycle perspective.
 
In this article, I will look at what we can expect in terms of upside moves for the precious metal. Is it the start of the move to a new high, or simply a re-test of the breakdown point?
I use Elliott Wave and fractals to identify patterns and cycles of buying and selling. More on Elliott Wave can be found here. It is a very useful way of identifying stages in trends and mapping out expectations. I also use historical comparisons, correlations and fractals to identify which of the many alternative counts is most probable.
My Position
Allow me to get this out of the way first as I notice some readers fixate on an author's position or previous calls.
 
I stopped out of my gold short for a $70 gain at $1,264 as tweeted at the time. The market constantly provides us with new information and it is up to us to figure out how it changes the bigger picture. We must be adaptable and have no bias when viewing the market. Gold was not moving down as far as I expected and its stability next to a rising Dollar showed its strength. Gold is currently trading at $1,297 so I am happy with closing my shorts when I did.
 
I also called gold to new highs and a Dollar (UUP) decline in this article on October 26th. I am not long gold, but I am short USD/JPY which, as you can see, is a very similar trade:
 
Source: Google finance
 
 
I just want to make it clear that I have no bias. This is essential when viewing charts as there are many different methods and counts and it's possible to make a chart say whatever you want.
Short Term
 
The chart below shows gold's cycle from the July highs.
 
Wave C was exactly 161.8* wave A at $1,241. It's the perfect Fibonacci based measurement for a wave C and the reaction at this point suggests the cycle completed there.
 
However, this chart only shows us one part of the picture. To give it context and to figure out what could happen next, we need to view the longer term charts.
 
Long Term
 
Firstly, let's check the gold cycle on the weekly chart:
 
I know some people expect gold to fly to new highs, but at this stage, it is all a matter of opinion. I personally don't think gold has fully corrected the long wave III and it has only completed the first leg down of wave IV. A four-year correction is not at all proportional to the previous bear market of 1980-2000.
 
This suggests we are in a 'b' wave rally that will eventually reverse and make a new low in a wave 'c'. If this decline takes us back to the 1980 highs is not clear at the moment. I've only mapped it there as a logical area to test at some stage in the future.
 
The point is I am not expecting new highs in gold quite yet.
 
I have read some quite persuasive arguments about how gold is likely to double and triple from here due to hyper inflation and even the fall of fiat currency. I personally don't want to bet on something that has never happened before. I believe there will be an inflationary spike in gold, and this could take it as high as $2,500, but things are never as straightforward as we imagine.
 
The Fed will have a tough job juggling inflation and interest rates without crashing related markets, but I believe they can keep things relatively stable. At least for now.

As a very rough guide, this is the kind of large range we could expect in gold and related markets in the years to come:
 
 
Of course, I don't expect the red lines to be respected exactly, and not every market will move concurrently, but I want to illustrate how interrelated markets will have correlated cycles. I believe they could all trade in a large range for many years to come.
 
For those who believe gold isn't correlated to bonds and the dollar, I will remind you of this chart: gold compared to 30yr T-bonds divided by the dollar.
 
Actually, there is an interesting short-term divergence in recent sessions which suggests gold may be getting a bit ahead of itself. It may well retrace the recent move up and bonds could get a bid to narrow the discrepancy.
 
The main takeaway is gold is not going to double or triple without massive moves in related markets. I don't see this happening for some time.
 
Since 2011
 
The view from the weekly chart is given more weight by the daily chart, which shows one completed wave down in 5 waves.
 
 
The blue channel has clearly broken and now gold is recovering from this wave 'A' in a corrective rally with 3 waves (wave "W").

The first leg of the recovery tested the red trendline, but it should be noted this type of trendline is not really significant; it merely connects three high points and doesn't represent a trend channel like the blue lines. Therefore, I'd expect a break of the trendline on the next attempt. A few small down bars below the trendline (now in the $1,330s) would signal gold is coiling for the break.
 
After the break, there are a number of options. A clean break and a move up for wave 'Y' targets a minimum of 90% of wave 'W' at $1,537.
 
However, this assumes a clean break and gold likes to surprise. If the Dollar and yields have another rally in 2017, like I think they will, it will dampen gold's rally and there may be a more complex correction like this -
 
This is my preferred count for now. It delays the next part of gold's rally and will likely stop out short-term players of the break-out. A move to $1,460 is a 161.8* extension of the recent move down and is nearly a 50% correction of the bear market decline. Depending on where bonds and the Dollar trade, I will reassess my view there.
 
Conclusions
 
Cycles are a way of mapping out moves in different time frames and visualizing what is possible and probable. They are a useful tool, but should not be viewed as some sort of crystal ball to foresee where the market will go.
 
Based on my interpretation, and what I see as probable in related markets, I expect gold to rally to $1,460. There is the possibility of $1,537, but I think this is less likely. I will update if and when there are further developments.


Fears rise over auto loan crisis as repo men see sales’ dark side

As lending standards eased, borrowers have taken on debt they may fail to repay

by: Joe Rennison in New York

Repo man Jeff Grevelding breaks into a vehicle while repossessing it after its owner fell behind with loan payments Photo by John Moore/Getty Images) © Getty

A wire fence topped with barbed wire surrounds a packed plot of land, housing a white Jeep, an orange Audi and a host of other repossessed cars. Sergio Tavano, owner of T-Birds Automotive in Red Hook, Brooklyn, sits in his car outside the lot with two of his employees.

“The number of repossessions we are doing has definitely risen,” he says. “It’s the highest I have ever seen it.”

Repossessions in the US hit 1.6m in 2015, the third highest level on record for data going back 20 years, falling short of the 1.8m and 1.9m peaks seen in 2008 and 2009, respectively.
That number is predicted to rise to 1.7m this year, according to Tom Webb, chief economist at Cox’s Automotive.
Ron Neglia, T-Birds’ manager, adds that the uptick from July of this year to now has been “significant”. And that the nature of the job has shifted as well, presenting a troubling insight into the state of the current economy and for areas of the booming market for auto asset backed securities. 

A year ago most of the cars that Mr Neglia repossessed were from fraudulent schemes — people renting cars under a fake name and not returning them, for example. Today, he sees a larger number of individuals simply unable to repay on their loans.



“More and more it is people down on their luck and getting their cars taken,” he says. “You feel bad for some people. You are finding them at financially the worst time in their lives … It’s unfortunate, but it’s business.”

It comes amid rising concern about a crisis in the auto loan market. Analysts say that as competition has grown, lenders have relaxed lending standards, offering bigger loans to consumers and giving them more time to pay the loans back, resulting in borrowers taking on debt that they may not be able to repay. The auto loan market has grown from $750bn in 2011 to $1.1tn at the end of June, according to data from the US Federal Reserve.

The issue is particularly acute for the subprime ABS market, where issuers take loans from less creditworthy borrowers and package them up into bonds that are then sold to investors.

“While we have seen a gradual loosening in underwriting in recent years it has gotten to a point now where it is becoming unstable,” says Peter McNally, a senior analyst at Moody’s, another rating agency.
The subprime auto ABS market has grown to $38.1bn, down slightly from its second quarter high of $41.2bn, according to data from the Securities Industry and Financial Markets Association. Fitch Ratings defines subprime ABS as a deal with expected net losses above 7 per cent. Net losses across subprime auto ABS hit 9.29 per cent in September, according to Fitch — 23 per cent higher than a year earlier.



The losses are still broadly within the rating agency’s expectations but for some investors, concern still surrounds the growth of newer, non-bank issuers that rely heavily on securitisation markets as a source of funding.

The fear is that if losses continue to climb, investors will stop buying bonds issued by less diversified companies. If their access to funding stops, it could impair the credit quality of the issuer itself, throwing doubt over the quality of existing bonds and ricocheting through the market, raising borrowing costs for other issuers as well.

“There are ingredients here — particularly the build-up of losses — that can be a triggering event … We feel that the risk is building,” says Mr McNally.

A number of the newer, smaller issuers that increasingly comprise a larger slice of ABS issuance are also supported by private equity firms. Blackstone-backed Exeter and Perella Weinberg Partners’ Flagship both appear in the top 10 issuers for 2016, but were absent from the rankings 10 years ago.

Moody’s notes in a recent report that the involvement of private equity can lead to weaker loan terms in a bid to juice higher returns.

But so far, the risks have not turned to reality in the ABS market. Wells Fargo notes in a recent report that there have been 435 ratings upgrades across the subprime auto sector this year, and no downgrades. Borrowing costs for issuers across the subprime spectrum have also reduced through 2016 as investors continue to clamour for the relatively high returns offered by the products. 



Some, such as Semper Capital, say that the high loss protections in the way the deals are structured — allowing for 50 per cent of the underlying loans to default before hitting senior bond holders in some cases — eases concerns about rising delinquencies.

“Even if you see a big pick-up in delinquencies going forward it’s hard for that to actually break through to investors,” says Ilan Bensoussan, a trader at Semper Capital.

But for consumers facing mounting debts, the broader economics pale into insignificance, especially with the looming potential for repossession. 

“It’s a big problem, I’m worried,” says a repo man at another company who asked to remain anonymous.



If China Stalls, Here’s Who Is Most Exposed

Countries with strong trade ties are the most vulnerable to a slowdown

By Ian Talley



The risk of China’s economic slowdown morphing into something far more dangerous has rattled markets for the last two years.

Who’s most exposed?

While Beijing’s recent efforts have temporarily stabilized the economy, many warn trouble is still brewing ahead. The government’s slow-walking of economic overhauls, continued reliance on stimulus to subsidize manufacturing, and the failure to rein in a worrisome surge in credit all could lead to a reckoning in the not-too-distant future.

“Just as China fostered strong global-trade growth during the expansion, its transition is likely playing a role in the current slowdown,” says the International Monetary Fund. If growth slows much faster, it could shake the global economy.

Countries with strong trade ties are the most vulnerable. Besides pushing prices back into a funk, a stalled Chinese economy would see demand from the world’s second-largest economy plummet.

Commodity exporters that rely heavily on Chinese demand would be hit with a double punch.

Asian countries, given their proximity, are some of the most prone to trouble. Mongolia, for example, is in talks with the IMF for an emergency bailout after the economy collapsed in the wake of China’s surprisingly fast deceleration and associated commodity-price fall. But many African nations are also susceptible after building heavy trade relationships with the Asian powerhouse. Angola’s economy, like several others on the continent,  is on the verge of crisis.

But the effects would be global given how many countries rely on exports to China.