InvestMacro FX

Source: ForexYard

Yesterday’s downgrade of Greece by Standard and Poor’s ratings agency from B to BB- has put significant pressure on the euro zone’s common currency. The euro was holding near a three-week low versus its primary currency counterpart – the US dollar – yesterday with today’s outlook appearing to favor a consolidation movement.

Economic News

USD – USD Holds Gains versus EUR

The US dollar experienced relatively mild bullish results yesterday as traders began to shift away from the euro following Standard and Poor’s (S&P) downgrade of Greece’s rating from B to BB-, and Moody’s threatened to lower its outlook on Athens by several degrees. The result has been for forex traders in the euro zone to bail out of their long positions on the EUR in exchange for safer currencies like the US dollar.

The United States was strangely absent from the economic calendar yesterday, but is scheduled to come back online today with several reports. The value of the greenback, as a result, held rather steady since no news on the western side of the Atlantic pulled the currency in either direction.

The EUR/USD held near its three-week low of 1.4250, making only mild movements throughout yesterday’s sessions. The USD/JPY, however, did experience some bearishness as traders appear to have preferred the safer island currency over its American counterpart.

For today, as noted previously, traders will witness America’s return to the calendar with several data releases; albeit relatively unimportant. The first is a monthly indicator on the percent-change in value of imported goods purchased domestically, which will be released by the Bureau of Labor Statistics at 13:30 GMT.

While not the only remaining report for the day, the IBD/TIPP measure of economic optimism will also get published at 15:00 GMT and could give forex traders a brief glimpse into the anticipated rise in American optimism regarding economic outlook. The USD looks to have a muted trading day with current values expected to hold relatively steady.

EUR – Greece Downgrade Prevents EUR Bounce

Yesterday’s downgrade of Greece by Standard and Poor’s ratings agency from B to BB- has put significant pressure on the euro zone’s common currency. The euro was holding near a three-week low versus its primary currency counterpart – the US dollar – yesterday with today’s outlook appearing to favor a consolidation movement.

The impact carried onto the EUR by the Greek ratings downgrade potentially holds a longer-term risk throughout the broader euro zone, according to a report by Reuters. The downgrade shifts Greece one step closer to junk status, resulted in a threat by Moody’s to cut its outlook on Greece by several notches, and may spur demands for more favorable conditions by other nations burdened by regional debt. The fear has so far pushed many investors away from the EUR, albeit mildly given the positive trade surplus in Germany published yesterday.

As for today, France and Italy will both publish their industrial production reports. If their data comes in line negatively, as with the other regional industrial figures from the past three weeks, the euro zone could continue to see a downturn in currency values. Switzerland’s State Secretariat for Economic Affairs (SECA) will also publish a significant consumer confidence report later today. Forex traders may look to see the euro continue falling this week so long as Greece debt fears persist.

JPY – USD/JPY Approaching BOJ Intervention Levels

The JPY has been trading with largely positive results since Friday as investors turn their focus towards news out of Europe. After a week of ups and downs, the Japanese yen appears set to make gains today as investors largely flee riskier assets. The low interest rates of the Japanese economy have helped pull many investors into the safety of the yen following yesterday’s downgrade of Greece by S&P’s ratings agency. Rumors of Greece’s exit from the euro zone last week have also sent traders fleeing for safety.

With Japan largely absent from today’s economic calendar, traders still appear to be anticipating another bullish run in the JPY, though not brought about by Japanese market fundamentals. The recent flight to safety has helped the JPY, but a number of analysts and traders are beginning to wonder if or when the Bank of Japan (BOJ) will intervene in the forex market. The USD/JPY is rapidly approaching its intervention level near 80.00; what will happen beyond that point is up for debate, but many believe the BOJ simply cannot afford a stronger yen and will therefore intervene sometime in the days ahead.

Crude Oil – Crude Oil Prices Bounce Back

Oil prices rebounded yesterday with the New York Mercantile Exchange session closing just below the $102 price mark. The price for a barrel of Crude Oil felt a sharp sting last week as the US dollar surged against its main currency rival, the euro. The price for a barrel of oil saw its feet pulled out from underneath it and flopped heavily to as low as $94 a barrel by last week’s closing. Today’s bounce in price, however, may see the price returning to a mark approaching last week’s average.

The value of the US dollar versus the euro in recent trading has been holding steady near a three-day high near 1.4250, but oil prices continued to rebound strongly as traders price in an expected boost in consumption as the driving season kicks into high gear in the Northern Hemisphere. Should oil prices persist in their bullish uptick, traders may see some corrective resistance being met near the psychological barrier at $104. Rising USD strength could also help push the value back below $100 a barrel if today’s economic calendar events push the pair lower once more.

Technical News

EUR/USD

The pair has recorded much bearish behavior in the past several days. However, the technical data indicates that this trend may reverse anytime soon. For example, the daily chart’s Stochastic Slow signals that a bullish reversal is imminent. An upward trend today is also supported by the 8-hour chart’s RSI. Going long with tight stops may turn out to pay off today.

GBP/USD

The 4-hour chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, there is a fresh bullish cross forming on the daily chart’s Slow Stochastic indicating a bullish correction might take place in the nearest future. Going long might be a wise choice.

USD/JPY

The price of this pair appears to be floating in the over-sold territory on the daily chart’s RSI indicating an upward correction may be imminent. The upward direction on the 2-hour chart’s Slow Stochastic also supports this notion. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.

USD/CHF

The pair has been range-trading for a while now, with no specific direction. The Daily chart’s Slow Stochastic providing us with mixed signals. All oscillators on the 4 hour chart do not provide a clear direction as well. Waiting for a clearer sign on the hourlies might be a good strategy today.

The Wild Card

Gold

Gold prices rose significantly yesterday and peaked at $1513.66 for an ounce. However, the 4-hour chart’s RSI is floating in an overbought territory suggesting that a recent upwards trend is loosing steam and a bearish correction is impending. This might be a good opportunity for
forex traders to enter the trend at a very early stage.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

JG Summit Holdings, Inc or JGS in the Philippine Stock Exchange could be on the verge of knocking out its all-time high at PHP27.50 just like Manny Pacquiao‘s attempt on Shane Mosley and I’ll tell you why shortly. The JGS stocks racked up some hefty gains today closing the trading session up by 6.1% to PHP27.15. For those who do not know, this holdings company majority owned by the Gokongwei family, is invested in air transportation, banking, food manufacturing, hotels, petrochemicals, power generation, publishing, real estate and property development, and telecommunications businesses. Also, its stock price was at PHP1.86 2 years ago so imagine how much profit you would have made. Most of us missed that but there’s still a chance for a few profits given the current chart setup.

In what I see, there could be a 7-month inverted head and shoulders forming and a break above the neckline could propel the stocks to my target price of PHP34.00. I got this by adding the size of the head to the possible breakout point. By the looks of it, we could expect the breakout soon as the recent price movement looks aggressive enough to clear out the neckline. If you notice, the MACD is moving in the positive territory, the stocks are above the 50, 100 and 200-day moving averages and the sudden increase in trading volume the past few days signal the Chicago Bulls are back. However, in any case the JGS stocks drop, the immediate downside could be the 1-month uptrend. If that breaks, the next support could be the PHP24.00 level. If I would have entered at the last traded price, my cut loss will be placed below the right shoulder (PHP24.00).

More on LaidTrades.com …

The Euro Weakened Against The Major Currencies Half Related To Downgrade Greece, But Strengthened Against The Dollar : The Euro fell against the main partners of the half after Standard Poor’s lowers debt rating & Greece debt crisis concerns, updating in the euro zone.

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By JW Jones, optionstradingsignals.com

The Halifax Bank of Scotland published its monthly indicator on housing prices today, revealing a stark downturn in housing prices by approximately 1.4% since March. The reading comes one week after a similar report by Nationwide which highlighted a 0.2% decline in housing prices over the same period.

Many forex analysts have commented that the Halifax indicator tends to be more volatile than its Nationwide counterpart, but forex traders should look to both indicators together to get a feel for what is happening in the housing market across the United Kingdom.

Unfortunately, both reports for the past month tell the same story: housing prices are in decline. Both British HPI reports gather their information by looking at the value of homes listed on new mortgage approvals.

A recent article in the Financial Times noted that high unemployment, tightening monetary policies, negative real income growth, and recent declines in consumer confidence across the UK have all played a significant part in the depreciation of home values. Furthermore, elevated debt levels and the increased difficulty in getting a mortgage due to bank limitations have also generated a downturn in the British housing market.

What this could mean for traders reading this forex blog is that the British pound (GBP) is coming under the pressure of market forces which have indirect links to the value of currencies. If consumer spending is in decline, which it tends to be when confidence drops and paychecks become weakened, the respective value of the currency also tends to enter a downturn.

Remember back in 2009 when the government required banks to take stress tests to see if they could handle another financial crisis? We learned a lot about how safe banks were from those tests. Many of them had to raise the amount of cash they held, just in case more loans went bad.

Well, maybe we should all be putting our investment portfolios through a stress test.

I was reading a Wall Street Journal article on this very idea yesterday. Most of it focused on diversification. (We’ve talked a lot about this idea here in Smart Investing Daily.) But that’s not really a test, is it? It’s more of a solution for some investors.

A MarketWatch.com article also talks about stress-testing, and offers a way for you to test your portfolio.

It says, “When planning for retirement, assume negative investment portfolio returns and high inflation in the first two years of retirement.”

For this test, you will need to know how much money you have in your retirement nest egg. You’ll also need to know how much money you will need to live on for a year. This is your “annual distribution.” And to make this test realistic, you will need a list of investment portfolio returns. Using an average return won’t give you realistic results.

Finding the Right Figures

You could use your financial advisor’s annual returns for the past few decades. The longer the time frame, the better.

(Investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy simplify the retirement process for you with our easy-to-understand investment articles.)

For simplicity’s sake, I chose to use the Fidelity Balanced Fund as our example for today.

Note: This is not an endorsement of any Fidelity fund, nor does Smart Investing Daily have any affiliation with Fidelity Investments.

This fund has returned 9.41% a year over its lifetime. Not bad… But that return masks the -31.31% the fund had in 2008. That’s why it’s important to look at actual returns on a year-by-year basis.

Take a look:

Now, let’s get down to the nitty-gritty. Here’s a chart of the Consumer Price Index changes for the same years:

This is inflation, and it eats away at your portfolio gains. These are middle-of-the-road figures. We’ve seen much higher inflation — back in 1979, inflation was 13.3%. We’ve also seen severe deflation — in 1921, inflation was -10.8%.

Stress-Test Your Investment Portfolio

Here’s your stress test. Take your annual payout from your retirement fund, and raise it by the CPI figure. That means if you’re taking out $50,000, and inflation is 3.4%, your following year’s payout will be $51,700. The year after that? Your payout is $52,527, using 1.6% inflation from the CPI chart above.

At the end of 10 years, your payout has increased to $64,218, just to keep up with inflation!

Next, for each year, you’ll need to account for your portfolio gains and losses. Let’s say your portfolio is $1 million strong. At the end of a decade, using the gains and inflation figures above, you will have $966,135 left in your account.

At the end of 30 years, your annual payout climbs to $105,994, and your nest egg has only $37,025 left.

Note: To find these numbers, we repeated the decade of annual fund gains and annual CPI.

Is 30 years enough for you? Maybe… But let’s add some more stress. Let’s bump up inflation and slash some gains. This will help you find out if your $1 million portfolio will last you long enough.

Let’s say that for the first two years in the Fidelity Balanced Fund, it didn’t make any gains. And let’s say that inflation was at 5% and 6% respectively.

With these new rates, $1 million only lasts 22 years!

In fact, if you want your nest egg to last 30 years in this stressful environment, you’ll need to have another $275,000 tucked away.

But now, let’s say the first two years of your retirement, your investment portfolio loses value. A modest 5% loss for both years. Your $1 million portfolio lasts only 19 years. You’d need more than $1.5 million in order to make it through 30 years of.

Making Smart Decisions

Obviously, these are only tests. We can’t say for sure how high inflation will be over the next decade or three. And we don’t know how well portfolios will perform, either. But testing your portfolio can give you a better idea of how ready you might be for retirement.

You may need to adjust your lifestyle now and try and save some more before you retire. You may need to rethink your standard of living for your retirement. In the worst stress-test example, a $40,000 payout at the start of your retirement will make your portfolio last six years longer.

There are lots of unforeseen risks out there. And there are known risks with uncertain values, like inflation.

You know the expression, “Expect the best, prepare for the worst”? This can be applied to your retirement strategies as well. So put your portfolio through a stress test, and see if it can withstand some hard times.

You might be surprised at what you find out.

Editor’s Note: When I sifted through this huge government report, I couldn’t believe my eyes. Now I’m saying “what recession?” While others were losing their retirement accounts and jobs, I discovered this secret billionaire blueprint. Works in an up market or down. I’ll tell you all the details here…

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By Jared Levy, Editor, Smart Investing Daily, taipanpublishinggroup.com

Unless you have been hiding under a rock, you probably know that silver has had a major correction over the past week. The precious metal plummeted about 30% from a high of almost $50 an ounce to less than $35 yesterday. This six-day drop is one of the largest since 1983.

Silver has given back just about all of its gains for the past month and some traders are thinking it might be time to get long. But before you run and buy silver, there are a couple things to consider.

Forces That Move Silver

The U.S. Dollar

There are many theories on why this sell-off is happening. Obviously, any real strength or even support in the U.S. dollar will generally be bearish for precious metals like gold and silver. This is mostly because the U.S. holds the largest stockpiles of these metals and they are traded in U.S. dollars globally. Even though gold is more of a recognized currency, they both have sensitivity to changes in the U.S. dollar’s value.

The falling U.S. dollar has recently leveled out. That means we’ve seen a small correction in dollar-denominated commodities and metals overall. Earlier this week, the European and London central banks held their rates steady. The ECB also hinted that they may not raise their rates next month either. This is good news for the U.S. dollar.

The U.S. dollar traded higher late in the day yesterday and sent other dollar-sensitive commodities like oil and even stocks much lower on the day. Oil had its largest percentage drop in three years. If you don’t believe that the dollar is in control here, think again…

For now, it seems that the U.S. dollar will continue to be relatively weak. The rally seems more like a short-term bump rather than a long-term trend. Current Federal Reserve policy puts general downward pressure on the U.S. dollar.

Gold/Silver Ratio

Then there is the historical ratio between gold and silver. A good “average” ratio of gold to silver is about 55, according to many experts. That means 1 oz. of gold should buy 55 oz. of silver. The gold premium is because there is much more silver on this Earth than gold. Even though silver has industrial uses beyond gold, there is a global desire, respect and currency reserve with gold that silver just does not have.

If that ratio gets extremely high, like 100, that means that silver is cheap relative to gold and may be a good value. If the number is low, silver may be getting overly expensive.

On April 28, the gold-silver ratio was about 30, relatively low. Now the ratio is back up around 43, still low, but not extreme. I’d like to see that ratio above 48 if I were thinking of buying.

Using current gold prices of $1,494, that means a drop in silver prices to $31.12 an ounce. Remember, though, that ratios are a two-way street. That means gold prices can climb, too, putting the ratio closer to its “good average.”

(Sign up for Smart Investing Daily and let me and fellow editor Sara Nunnally simplify the market for you with our easy-to-understand articles.)

Technicals

Technical formations also play an important role in finding buy and sell points. Looking at iShares Silver Trust (SLV:NYSE), you can see the sharp sell-off on the right side of the chart. In my opinion, it seems that we are nearing a short-term bottom. The lower Bollinger band (gray area) was just broken yesterday, as prices dipped below the lowest level of the band. This is generally an indicator of an oversold condition just before a bounce.

I also would look to the 50% Fibonacci retracement line (dotted) of about $33 for support. (For more info on Fibonacci retracement lines, read this Smart Investing Daily article.) The danger here is the fact that we have broken below the 50-day moving average, which is not good for the bulls. To solidify a strong trend, I would like to see the price of SLV get above that 50-day moving average, at about $38.

You can’t simply view the charts in a vacuum. There are other things “manipulating” the market.

View Larger Chart

Margin Requirements

The manipulation here is the recent 500% jump in margin requirements for silver futures. When you buy a futures contract on silver (one futures contract is for 5,000 ounces of silver), you are required to put up a deposit called “margin.” That initial cost has risen tremendously as of late. They have also raised the amount of margin you have to pay once you are already in the trade and it starts to go against you.

If traders cannot meet the new margin requirements, they are forced to sell their contracts. This new rule will deter new buyers.

It’s like someone raising your rent from $1,000 to $5,000 in a month. Higher margin requirements can also make a sell-off worse, as contracts are sold to cover losing positions. These requirements affect everyone from individual traders to hedge funds. This is one of the main reasons why silver is making 10% moves daily.

Now in all fairness, the dollar cost of margin will rise as the price of silver rises, but the CME (COMEX) has increased the margin requirements abnormally in the past week and will raise them again Monday.

May traders are selling ahead of this hike.

ETFs

ETFs like the SLV hold actual silver and futures contracts. At present there are about 600 million ounces of silver held by ETFs. When traders begin to sell shares of an ETF like SLV, the ETF may sell silver futures to keep everything in balance. About 6 million ounces of silver have exited ETFs in the past week.

ETFs can also add to the domino effect, both long and short. But remember that stocks usually take the escalator up and the elevator down!

Once the hype settles down and the CME completes its margin increase on Monday, we should see silver prices stabilize. From my perspective, I see $33 as a level I may cautiously begin to buy. If silver breaks below that level, I think support will be around $29 until the Fed decides it’s time to cool inflation.

I am sure that Ben B. was feeling quite happy with the corrections in gold, oil and silver this week. Perhaps Americans will feel some reprieve as well…

Editor’s Note: Silver ETFs may be taking a big hit with these margin increases, but they’re not the only way to play silver right now. Michael Robinson, editor of 180 Trader, has been riding the silver bull, and this most recent drop might give his subscribers another great opportunity. For more information on silver and the companies Michael’s been recommending, check out 180 Trader.

About the Author

Jared Levy is Editor of WaveStrength Options Weekly, our options trading research service and Editor of Smart Investing Daily, a free e-letter dedicated to guiding investors through the world of finance in order to make smart investing decisions. His passion is teaching the public how to successfully trade and invest while keeping risk low.

Jared has spent the past 15 years of his career in the finance and options industry, working as a retail money manager, a floor specialist for Fortune 1000 companies, and most recently a senior derivatives strategist. He was one of the Philadelphia Stock Exchange’s youngest-ever members to become a market maker on three major U.S. exchanges.

He has been featured in several industry publications and won an Emmy for his daily video “Trader Cast.” Jared serves as a CNBC Fast Money contributor and has appeared on Bloomberg, Fox Business, CNN Radio, Wall Street Journal radio and is regularly quoted by Reuters, The Wall Street Journal and Yahoo! Finance, among other publications.

A strenghtening USD meant that the commodity market was hit hard last week. What about the coming week?

Senior Strategist Ib Fredslund Madsen gives his view.

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Video courtesy of en.jyskebank.tv

By Money Morning

Today and for the next two weeks your editor will write to you from the US east coast city of Baltimore, Maryland.

Or, as the cab driver insisted on calling it, Balymore.

But even though we’re 16,467 km from our usual writing hovel in St Kilda, we’re still keeping track of what’s happening back home… and what’s happening elsewhere.

Such as 8,192 km to our east where the outlook for Europe’s debt problems is worse than it’s ever been.

As we’ve pointed out before, one of the most effective indicators of risk and uncertainty is the level of interest rates.

If you look at the chart below, you’ll see Greek bond yields are higher than at any point since financial markets imploded in 2008:

Source: Bloomberg

Right now investors demand a 15% yield on 10-year Greek government bonds.

That’s much higher than the rate demanded 12 months ago when Europe’s debt problems started to make front-page news.

In other words, for all the talk about Europe working together and multi-billion-dollar bailouts, the problem has only gotten worse.

Another Euro bailout looms

So now Bloomberg reports:

“European Union officials may require Greece to provide collateral for aid as policy makers struggle to prevent the euro area’s first sovereign debt restructuring…”

“Debt restructuring” is the polite word for default.

It means one of two things.  Bond holders either take a hit on the principal repayment, or the coupon (interest payment) is adjusted.  Either way it means bond holders will get back less than they thought.

As an investor that’s bad news.

But as bad as it may be, it’s better than forcing taxpayers to foot the bill again for the Greek government’s spending extravagance… especially when the taxpayers footing the bill didn’t get the benefit of the spending… because it’s the German, Fins and other European taxpayers who are paying for it.

Yet it’s not just the Greeks or the Americans with debt problems.  Xinhua.net reports:

“[Treasurer, Wayne] Swan is due to release the budget on Tuesday, and some economists are predicting that it will include a deficit of about 56 billion U.S. dollars, compared with the 45.6 billion U.S. dollars predicted at the time of the mid-year budget review last November.”

While The Australian reports:

“One measure to be announced tomorrow will be a 60 per cent increase in skilled migrant intakes under the Regional Sponsored Migration Scheme, whereby employers can sponsor a skilled migrant on the condition they live and work in the area for at least two years.”

According to Mr. Swan this will be part of his grand plan to “convert a mining boom into an opportunity boom.  The whole theme of everything I do is that we create prosperity to spread opportunity.”

Australia’s debt burden

When, we wonder, will the politicians figure out they’re the cause of economic problems, not the solution?

But that’s not his only idea.  Again according to Xinhua.net:

“He [Swan] added that the budget would provide up to 5500 U.S. dollars write-off on the purchase of a new vehicle by small businesses.”

Hmm.  Who does that help?  Non-unionised small businesses or unionised car manufacturers?

It’s typical for a politician to think that pure spending is the answer to economic woes.

And don’t for a minute think Australia is fine, just because government debt is low compared to other nations’ levels.  Australia has a whopping great private sector debt – as you know.

A debt that’s getting more expensive to service.

Money Morning reader Brett sent us the following news link:

“ANZ Banking Group boss Mike Smith warns banks’ borrowing costs may spike due to ‘massive’ credit market volatility as Europe’s debt crisis progresses.”

After the Christchurch earthquake and Queensland floods, you might remember your editor pointed out these events wouldn’t be good for either economy.

Many disagreed with us.  They said it would be good for the economy because insurance companies would foot the bill.

As usual, those who argued the point couldn’t see what isn’t seen.  They didn’t take into account that insurance companies and reinsurers would seek to recover their costs by increasing premiums.

Something insurance companies and reinsurers have already started doing.

While it’s not directly related to Europe’s debt problems, the point is interest rates in Australia aren’t just determined by what happens in Australia.  Interest rates will rise here if investors can get better yields elsewhere.

Just as banks need to increase rates to compete for investor funds in the Aussie market, banks will need to increase the rates offered to bond investors in order to compete for funds.

Not only that, but it’s a poke in the eye to those mainstream economists who claim interest rates are at a new “structural low”.  In other words, interest rates are low and will stay low… not so.

Anyway, back to our point.  Look, your editor isn’t about to speak for Australia’s hundreds of thousands of small businesses.  But we doubt if there’s more than half a dozen small business owners who believe buying a new car will increase business revenue and profits.

The only boost it’ll provide is to the unionised car manufacturers.

And the only small businesses that will benefit from it are those that will take the tax break on the car for “business use” but will most likely use the car for personal use.  And fair play to them.

Redistribution of wealth

This shows the redistributive nature of taxes.  Taxing individuals or businesses that don’t use a car for work – even though they may use a car to get to work – while giving a tax break to someone who can claim they use the car for business purposes.

In a nutshell, we’re not talking about government creating new opportunities. We’re talking about the government stirring the tax pot.  We’re talking about taking food from Peter to feed Paul.

Peter starves. Paul becomes obese.

And as for the idea of funding immigrants to work in regional areas, again the government is trying to take credit for fixing a problem it caused.  That is the abandonment of regional Australia by younger generations.

Why do younger Australians leave regional areas?  A lack of job opportunities is one reason.  But that’s only because red tape and regulations makes it hard for regional businesses to compete.  And those businesses that take the biggest hit are typically those in the non-services sector.

Not only that, but it’s partly to do with the obsession with getting kids to university when they may be better suited to entering the workforce.  That hurts small and large businesses.

Think about it. A kid who may be prepared to do blue-collar  or white-collar work straight from school in his or her regional home town is less likely to consider it once they’ve got a degree to their name – that goes for city kids too.

In other words, government incentives and programmes designed to address so-called skills shortages are only required because the government distorted the market in the first place.

But again, it’ll just result in further distortions to the economy.

If Mr. Swan really wants to “create prosperity” and “spread opportunity” all he needs to do is get out of the way… left to the free market, prosperity and opportunity are automatic.

It just happens.

And for the next two weeks your editor is in the nation with one of the best historical records of free market prosperity and opportunity.  A record that has been tarnished since the early twentieth century when Progressive politics took hold.

The fact is, prosperity and opportunity don’t need a helping hand from politicians.  Especially not from a former lecturer at a second-rate Queensland university.

Back to the beginning

Which brings us back to where we started.  Europe’s and the US’s debt problems.  These debt problems were caused by programmes intended to “create prosperity” and “spread opportunity”.

And they’ve just ended up creating debt and spreading despair.

Think about it.  When the US and Greek governments went on their spending binges, what was their justification for doing it?  Did they say from the outset that all the lovely government-funded programmes would be squandered on short-term benefits that would result in long-term problems?

Or did they say they were creating prosperity and opportunity?

Some will claim politicians have good intentions.  That they’re just trying to do the best for the people they represent.  We disagree.

We believe they either knowingly implement unaffordable policies that result in future taxpayers footing the bill, or they’re just incompetent fools… or both!

So the idea of giving a tax break so small businesses can buy a new car or truck will lead to prosperity and opportunity is just ridiculous.

Just as ridiculous as the idea that giving a tax break to property investors leads to prosperity and opportunity.

Of course the property spruikers like to claim it leads to both, because without negative gearing investors wouldn’t invest in property and therefore there would be fewer properties available for rent.

In a word: nonsense.

Negative gearing just takes from one bunch of taxpayers and gives to another.

Just like any other form of government interference it distorts the economy and destroys prosperity and opportunity.  However, unlike most, your editor doesn’t believe negative gearing should be outlawed.

That may surprise you.  But it shouldn’t.  We’re in favour of anyone reducing their tax bill.  The last thing we’d want is for more cash to end up in the hands of federal politicians.

The only thing we object to is someone paying for someone else’s tax cut.

What we’d prefer to see is tax breaks for everyone.  A better – but still flawed – option would be to make owner-occupied mortgage repayments and rent payments tax deductible.

But even that would create distortions in the economy, and would likely result in a further inflation of the property bubble.  But it just goes towards making our point.  That any interference designed to close loopholes only results in more loopholes.

That’s why free markets are best.  The market decides what works rather than relying on political intervention.

And so, the only answer is to eliminate the single cause of these problems – interventionist governments.  Simple eh!

Anyway, we’ll be back tomorrow with more from the US.  In the meantime, as we write it’s Sunday afternoon and so we’re going to take in what Baltimore has to offer.  Including a visit to Camden Yards to see the Baltimore Orioles in action.

Cheers.

Kris Sayce
Money Morning Australia

How to Create Prosperity and Opportunity

Video courtesy of ForexCT – A leading Australian forex broker, liscensed by the Australian Securities & Investments Commission, offers the MetaTrader4 and PROfit Platform to retail traders. Other services include Segregated Accounts, Trading workshops, Tutorials, and Commodities trading.