China: Shanghai & Hang Seng

China’s Shanghai Composite index retreated below resistance at 2300, from the 2010 low. Expect a down-swing to test the lower trend channel at 2000*. 63-day Twiggs Momentum oscillating below zero indicates a strong primary down-trend.

Shanghai Composite Index

* Target calculation: 2150 – ( 2300 – 2150 ) = 2000

Hong Kong’s Hang Seng index is more bullish, but retreat below the new support level at 20000 would indicate hesitancy. And breach of the rising (green) trendline would warn of a bull trap — as would respect of the zero line (from below) by 63-day Twiggs Momentum.

Hang Seng Index

* Target calculation: 20 + ( 20 – 18 ) = 22

Baltic Dry Index reflects falling demand from China

The Baltic Dry Index has fallen by more than 60 percent in the last 3 months, headed for a test of its 2008 low at 600. The index reflects bulk international shipping rates and is dominated by Capesize iron ore and coal shipments to China. Its fall coincides with a 23 percent drop in iron ore spot prices over the last quarter of 2011. Falling demand for raw materials from China warns that economic activity is slowing rapidly and there may not be a soft landing.

Baltic Dry Index

Australia and other resource-rich economies will need to brace themselves for a sharp fall in exports over the year ahead.

Australia and Asia

Australia’s ASX 200 index continues to range between 3850 and 4350. Declining 21-day Twiggs Money Flow reflects medium-term selling pressure, but the long-term rise reflects buying support. Failure of support at 4000 would suggest another test of 3850, but only breakout from the range will offer a clear long-term signal.

ASX 200 Index


China’s Shanghai Composite index respected resistance at 2300, suggesting a decline to 2000*. Deep negative values on 63-day Twiggs Momentum are evidence of a strong primary down-trend.

Shanghai Composite Index

* Target calculation: 2150 – ( 2300 – 2150 ) = 2000

India’s Nifty Index is headed for a test of the upper border of its downward trend channel at 5200. 63-Day Twiggs Momentum holding below zero continues to indicate a strong primary down-trend.

S&P/NSE Nifty Index

* Target calculation: 5600 + ( 6600 – 5600 ) = 5100

Japan’s Nikkei 225 Index fell sharply Monday to test short-term support at 8360. 13-Week Twiggs Money Flow below zero indicates selling pressure. Breakout below 8200 would warn of another primary decline, with a target of 7400*.

Nikkei 225 Index

* Target calculation: 8200 – ( 9000 – 8200 ) = 7400

Asia: Shanghai weakens but India displays support

China’s Shanghai Composite index has been edging lower since breaking support at 2400. 63-Day Twiggs Momentum, declining below zero, confirms a primary down-trend. Expect a test of the 2008 low at 1700 in the months ahead.

Shanghai Composite Index

* Target calculation: 2400 – ( 3200 – 2400 ) = 1600

India’s Sensex Index broke support at 16000 but then retraced to test the new resistance level. An encouraging bullish divergence on 13-week Twiggs Money Flow shows buying pressure. Breakout above 16000 would indicate a rally to 18000. Respect of resistance, however, would confirm the down-swing to 14000*.


BSE Sensex Index

* Target calculation: 16 – ( 18 – 16 ) = 14

Singapore’s Straits Times Index follows a similar course to India. Recovery above 2900 would signal a (primary trend) reversal.

Singapore Straits Times Index


Hong Kong’s Hang Seng Index faces similar resistance at 20000. Respect would indicate another test of 16000, while breakout would signal a reversal.

Hong Kong Hang Seng Index


The weekly chart shows Japan’s Nikkei 225 index on a similar path to Shanghai — headed for a test of its 2008/9 lows. Failure of medium-term support at 8200 would strengthen the signal. 13-Week Twiggs Money Flow below zero warns of selling pressure.

Nikkei 225 Index

* Target calculation: 9 – ( 11 – 9 ) = 7

South Korea’s Seoul Composite index is testing resistance at 1920 but bearish divergence on 13-week Twiggs Money Flow warns of selling pressure. Reversal below 1800 would suggest another test of support at 1650. Upward breakout is unlikely but would indicate a (primary trend) reversal.

Seoul Composite Index

Mega-trends and their impact in 2012

To arrive at an outlook for the year ahead we first need to analyze the big trends that endure for decades and in some cases even longer.

Population growth and food resources

The number one dynamic over the last century has been the exponential rise in global population. It took 123 years for the world population to grow from 1 to 2 billion (by 1927) and only 12 years to grow from 5 to 6 billion (by 1999). Growth, however, is now slowing and we are predicted to rise from the current 7 billion to a peak of 9 billion in the 2050s.

At the same time we are faced with increasing scarcity of food and water. Advances in technology have improved crop yields, but increased meat consumption in China and other Asian economies will reduce overall output. The area of land required to produce an equivalent amount of edible protein from livestock is 4 to 5 times higher compared to traditional grains and legumes, and up to 10 times higher for beef. Diversion of land use for ethanol production will also restrict food output.

Global warming, whether man-made or a natural cycle, may also contribute to declining food production — through droughts, floods and depleting fish stocks.

Depleting natural resources

We are also depleting global deposits of ferrous- and non-ferrous ores — as well as energy reserves of crude oil and coal — as global industrialization accelerates. Commodity costs can be expected to rise as readily available resources are depleted and we are forced to dig deeper and endure harsher conditions in order to access fresh deposits. Deep water ocean-drilling and exploration within the Arctic and Antarctic circles are likely to increase.

As energy resources are depleted, nuclear energy production is likely to expand despite current safety concerns. Development of technologies such as thorium fluoride reactors hold out some hope of safer nuclear options, but these may be some way off. Wind and solar energy are likely to remain on the fringe until technology develops to the point where they are cost effective compared to alternative sources.

Global competition

Competition for scarce resources will increase tensions between major economic players, with each attempting to expand their sphere of influence — and secure their sources of supply. The Middle East, Africa, South America, Australia, Mongolia and the former USSR are all potential targets because of their rich resource base.

Trade wars

In addition to competition for scarce resources, we are also likely to see increased competition for international trade. Resistance to further currency manipulation — initiated by Japan in the 1980s and perpetuated by China in the last decade — is likely to rise. US Treasury holdings by China and Japan currently sit at more than $2.3 Trillion, the inflows on capital account being used to offset outflows on current account and maintain a competitive trade advantage by suppressing their exchange rate.

Rise of democracy

Another factor contributing to instability is the rise of democracy in some parts of the world. The Arab Spring is still in its infancy, but the development has no doubt caused concern amongst autocratic governments around the globe. Food shortages and rising global prices will act as a catalyst. The likely result is increased suppression in some autocracies and a rapid transition to democracy in others, like Myanmar. But the transition to democracy is never smooth — especially in countries with clear fault lines, such as language, religious, racial or cultural differences — and can lead to decades of conflict before some degree of stability is achieved.

Decay of Democracy

On the other hand we are witnessing the decay of long-standing, mature Western democracies. Undue influence exerted by special interest groups with large cash resources — such as banks, big oil, and armaments manufacturers — force politicians to serve not only their electorate but their financial sponsors. Aging populations pose a new threat: large voting blocs who are not participants in the economic workforce will wield increasing influence over distribution of social welfare payments such as Medicare and Pensions. And politicians are increasingly guilty of over-spending, running up public debt and debasing currencies, in their attempt to keep voters happy and secure re-election.

The long term hope is that we evolve a more consensus-based form of democracy, along the lines of the Swiss model, and away from the excesses of the current winner-takes-all system.

Global debt binge

The decay in Western democracy resulted in a massive debt binge over the last 3 decades, with private debt often growing at double-figure rates, accompanied by burgeoning public debt levels. The massive debt bubble far outstripped GDP growth, effectively debasing currencies and causing soaring inflation of consumer and asset (housing and stock) prices. The GFC marked the peak of the debt expansion and was followed rapid contraction as the private sector diverted income to repay debt. Debt contraction is catastrophic, however, and can cause GDP to fall by up to 25 percent as in the Great Depression of the 1930s.

The response has been a massive expansion of public debt as governments run deficits in order to offset the private debt contraction. Overall debt levels hardly faltered as government spending programs filled the hole left by private debt contraction. While this succeeded in plugging the gap, many Western governments are left with huge public debt and increasingly nervous bond markets.

Central banks such as the Fed and BOE stepped into the breach, purchasing government bonds with newly-created money. Apart from putting gold performance on steroids, central bank asset purchases had little impact on inflation because the effect was offset by the deflationary debt contraction. But cessation of the debt contraction would let the genie out of the bottle.

Outlook for 2012

Here is how I believe these big trends will impact on 2012. I do not claim to have a crystal ball and it may be amusing to review these predictions at the end of the year:

  • Further debt contraction
    Contraction of private debt and constraints on government borrowing will strengthen deflationary forces.
  • Further QE
    The Fed and BOE are likely to expand their balance sheets to support public borrowing. The ECB may make a limited response because of constraints imposed by member states such as Germany.
  • Low inflation
    Deflationary forces will outweigh the inflationary effect of QE by central banks.
  • Low global growth
    Debt contraction and a euro-zone banking crisis will ensure low growth.
  • Euro-zone banking crisis will require further bank rescues
    Placing further stress on public debt levels, and pressure on the ECB to act.
  • China “soft” landing
    A second massive stimulus focused on low-cost housing and quelling social unrest will restore economic activity, but export markets will remain flat and the banking sector inundated with non-performing loans.
  • Easing of commodity prices slows
    Massive stimulus from China will support commodity prices.
  • Further social unrest amongst autocratic regimes
    The Arab Spring will continue sporadically across a far wider area.
  • Crude oil prices remain high, aided by further conflict
    High crude prices will also contribute to low growth.
  • US current account deficit shrinks as yuan rises
    Increased pressure from the US will prevent China from expanding its Treasury investments causing the yuan to strengthen against the dollar.
  • Dollar strengthens against euro
    A euro-zone banking crisis will ensure that the dollar preserves its safe-haven status.
  • Gold bull-trend when QE resumes
    Resumption of QE by the Fed would ensure that gold resumes its bull-trend against the dollar.

I wish you peace and prosperity in the year ahead but, most of all, the good health to enjoy it.

Regards,
Colin Twiggs

China Pins Hopes on Public Housing – WSJ.com

One of the biggest public-housing projects in history will help determine whether China can remake its real-estate sector fast enough to prevent its economy from flaming out.

China is in the midst of a crash program to build 36 million subsidized apartments by the end of 2015—enough units to house the entire population of Germany. The goal is twofold: to head off social unrest by ensuring decent places to live for low-wage workers, but also to cushion an expected fall in high-end construction—the result of policies to tame property speculation—by ramping up construction at the low end: so-called social housing.

via China Pins Hopes on Public Housing – WSJ.com.

Comment: ~ This is good news for iron ore and (coking) coal miners in Australia and Brazil: steel prices should recover.

China’s Real Estate Bubble May Have Just Popped | Foreign Affairs

Sudden, steep price reductions are upending real estate markets across China. According to the property agency Homelink, new home prices in Beijing dropped 35 percent in November alone. And the free fall may continue for some time. Centaline, another leading property agency, estimates that developers have built up 22 months’ worth of unsold inventory in Beijing and 21 months’ worth in Shanghai. Everyone from local landowners to Chinese speculators and international investors are now worrying that these discounts indicate that “the biggest bubble of the century,” as it was called earlier this year, has just popped, with serious consequences not only for one of the world’s most promising economies — but internationally as well.

via China’s Real Estate Bubble May Have Just Popped | Foreign Affairs.

Mark Carney: Growth in the age of deleveraging

Today, American aggregate non-financial debt is at levels similar to those last seen in the midst of the Great Depression. At 250 per cent of GDP, that debt burden is equivalent to almost US$120,000 for every American (Chart 1).

US Debt/GDP 1916 - 2011

…..backsliding on financial reform is not a solution to current problems. The challenge for the crisis economies is the paucity of credit demand rather than the scarcity of its supply. Relaxing prudential regulations would run the risk of maintaining dangerously high leverage – the situation that got us into this mess in the first place.

As a result of deleveraging, the global economy risks entering a prolonged period of deficient demand. If mishandled, it could lead to debt deflation and disorderly defaults, potentially triggering large transfers of wealth and social unrest.

Managing the deleveraging process

Austerity is a necessary condition for rebalancing, but it is seldom sufficient. There are really only three options to reduce debt: restructuring, inflation and growth. Whether we like it or not, debt restructuring may happen. If it is to be done, it is best done quickly. Policy-makers need to be careful about delaying the inevitable and merely funding the private exit.

……Some have suggested that higher inflation may be a way out from the burden of excessive debt. This is a siren call. Moving opportunistically to a higher inflation target would risk unmooring inflation expectations and destroying the hard-won gains of price stability.

…..With no easy way out, the basic challenge for central banks is to maintain price stability in order to help sustain nominal aggregate demand during the period of real adjustment. In the Bank’s view, that is best accomplished through a flexible inflation-targeting framework, applied symmetrically, to guard against both higher inflation and the possibility of deflation.

The most palatable strategy to reduce debt is to increase growth. In today’s reality, the hurdles are significant. Once leverage is high in one sector or region, it is very hard to reduce it without at least temporarily increasing it elsewhere.

In recent years, large fiscal expansions in the crisis economies have helped to sustain aggregate demand in the face of private deleveraging. However, the window for such Augustinian policy is rapidly closing. Few except the United States, by dint of its reserve currency status, can maintain it for much longer.

…..The route to restoring competitiveness [in the euro-zone] is through fiscal and structural reforms. These real adjustments are the responsibility of citizens, firms and governments within the affected countries, not central banks. A sustained process of relative wage adjustment will be necessary, implying large declines in living standards for a period in up to one-third of the euro area.

…..With deleveraging economies under pressure, global growth will require global rebalancing. Creditor nations, mainly emerging markets that have benefited from the debt-fuelled demand boom in advanced economies, must now pick up the baton. This will be hard to accomplish without co-operation. Major advanced economies with deficient demand cannot consolidate their fiscal positions and boost household savings without support from increased foreign demand. Meanwhile, emerging markets, seeing their growth decelerate because of sagging demand in advanced countries, are reluctant to abandon a strategy that has served them so well in the past, and are refusing to let their exchange rates materially adjust. Both sides are doubling down on losing strategies. As the Bank has outlined before, relative to a co-operative solution embodied in the G-20’s Action Plan, the foregone output could be enormous: lower world GDP by more than US$7 trillion within five years. Canada has a big stake in avoiding this outcome.

Mark Carney: Growth in the age of deleveraging.

Comment: ~ One of the most important papers I have read this year. Mark Carney, Governor of the Bank of Canada and Chairman of the Financial Stability Board — established by the G-20 in 2009 to further global economic governance — maps out the hard road to recovery from the current financial crisis.

Fragile and Unbalanced in 2012 – Nouriel Roubini – Project Syndicate

The outlook for the global economy in 2012 is clear, but it isn’t pretty: recession in Europe, anemic growth at best in the United States, and a sharp slowdown in China and in most emerging-market economies.

……Adjustment of relative prices via currency movements is stalled, because surplus countries are resisting exchange-rate appreciation in favor of imposing recessionary deflation on deficit countries. The ensuing currency battles are being fought on several fronts: foreign-exchange intervention, quantitative easing, and capital controls on inflows. And, with global growth weakening further in 2012, those battles could escalate into trade wars.

via Fragile and Unbalanced in 2012 – Nouriel Roubini – Project Syndicate.

An ex-ambassador in Beijing: Master of ping-ping diplomacy | The Economist

“Here we know there’s a reason why someone’s pinged for corruption or someone’s not pinged for corruption and usually there’s something sits behind it, so when there’s an anti-corruption campaign in Guangdong or Shenzhen, then it’s a fair bet that that’s somehow tied to elite politics, because why ping Person A and not B? And I think that is the context in which law is practiced here,” [Geoff Raby, who from 2007 until this summer served as Australian ambassador to China] said. “There is rule by law here…But there’s no rule of law. There’s nothing that sits above the political processes of the [top leadership].”

…….“We have never seen in world history, with Nazi Germany perhaps to one side, a global economic power that has stood so far apart from the international norms of social and political organisation, so it’s something different. It really, really is different,” Mr Raby said. He later assured me that when he uses this line in speeches, he throws in a mention of Nazi Germany to pre-empt the nitpickers of history, not as a point of comparison to China. That would be rather undiplomatic indeed.

via An ex-ambassador in Beijing: Master of ping-ping diplomacy | The Economist.