Canada’s TSX 60 is consolidating in a narrow range on the weekly chart. Upward breakout is likely and would signal contuation of the advance to the 2008 high of 900. Bearish divergence on 13-week Twiggs Money Flow appears secondary, in line with the medium-term consolidation, but a further decline would warn of a correction. Reversal below support at 830 and the rising trendline is unlikely, but would indicate that the primary trend is slowing.
After early skittishness over some dud Institute for Supply Management (ISM) data, the S&P 500 recovered lost ground by the close. Expect an advance to 1950*. Rising 21-day Twiggs Money Flow troughs above zero indicate strong medium-term buying pressure. Reversal below 1900 is unlikely, but would warn of a correction.
* Target calculation: 1850 + ( 1850 – 1750 ) = 1950
CBOE Volatility Index (VIX) below 12 indicates low risk typical of a bull market.
The Nasdaq 100 is testing resistance at 3740/3750. Breakout would signal an advance to 4000*. Rising 21-day Twiggs Money Flow troughs above zero again indicate strong medium-term buying pressure. Reversal below 3700, however, would warn of another correction.
* Target calculation: 3700 + ( 3700 – 3400 ) = 4000
Overview:
The yield on ten-year Treasury Notes broke primary support at 2.50 percent, warning of a decline to 2.00 percent*. Reversal of 13-week Twiggs Momentum below zero confirms weakness. Recovery above 2.80 is most unlikely at present, but would indicate another advance.
* Target calculation: 2.50 – ( 3.00 – 2.50 ) = 2.00
The Dollar Index is testing resistance at 80.50. Recovery of 13-week Twiggs Momentum above zero would increase the chances of a double-bottom reversal (to a primary up-trend), but respect of resistance remains as likely and would test primary support at 79.00. Another 13-week Twiggs Momentum peak below the zero line would signal continuation of the primary down-trend.
* Target calculation: 79.0 – ( 81.5 – 79.0 ) = 76.5
Falling long-term interest rates are likely to boost the housing sector and the broader stock market. The Dow Jones Industrial Average is heading for a test of the recent high at 16750. Rising 21-day Twiggs Money Flow signals medium-term buying pressure. Retracement that respects support at 16500 would confirm an advance to 17000*.
* Target calculation: 16.5 – ( 16.5 – 16 ) = 17
Gold faces conflicting forces: low inflation reduces demand for precious metals, but low interest rates and a weaker Dollar increase demand. At present low inflation seems to have the upper hand, driving gold through support at $1300/$1280 per ounce. Expect a test of primary support at $1200. Reversal of 13-week Twiggs Momentum below zero reinforces the bear signal. Recovery above $1300 is most unlikely, but would warn of a bear trap and rally to $1400.
By Leith van Onselen, with kind permission from Macrobusiness:
I have noted previously how the Coalition has ear-marked tens-of-billions of taxpayer dollars to local defence manufacturing, including a $10 billion to $15 billion-program for 1,000 locally produced armoured vehicles, and locally designed and built submarines for around $40 billion. It has also flagged a multibillion-dollar warship project that will be built locally.Today, The AFR has revealed that an $8 billion contract for local shipbuilder, ASC, to supply three air warfare destroyers for the Australian Navy is running two-and-a-half years late and more than $300 million over budget because the company has no experience in shipbuilding:
- An audit released in March… warned there could be further cost blowouts and delays to come…
- The 320-page audit found defective drawings supplied by Navantia and an inexperienced Australian shipyard workforce were a devastating combination leading to hull blocks not joining up, pipes, air conditioning systems and cabling requiring modification, doors not lining up and equipment being left off and expensive and costly rework.
Surely the above schmozzle casts serious doubts over the Government’s plan to build military hardware locally.
While I acknowledge that there is an argument to retain your own military hardware building capacity, at what cost? The Coalition’s hard line on industry assistance appears to be in stark contrast to its defence procurement policy. Australia could easily purchase proven, fit-for-purpose, military hardware from abroad at a fraction of the cost of developing similar technology locally, saving taxpayers billions in the process.
Once again, it is these sorts of inconsistencies that undermine the Government’s goal of “ending the age of entitlement”. While it slashes benefits to vulnerable sections of the community, it is allowing egregious lurks and subsidies to remain in others, which is undermines the Government’s calls for “shared sacrifice”, whilst also ensuring that the burden of adjustment is not broad-based, reducing its efficacy. As I’ve said before, a much clearer framework for these decisions is needed.
Past experience of Australian military hardware (e.g. Collin’s class submarines) is that locally built generally means over-priced and second-rate (….be kind). While that does not necessarily extend to armoured vehicles, naval vessels such as frigates, destroyers and submarines appear beyond present capabilities. Commissioning local development is no doubt intended to create jobs, but is at the expense of selling short our soldiers and sailors — equipping them with second-rate equipment in situations where it can mean the difference between life and death. Which is why military procurement, like the selection of infrastructure projects, should be above the political process.
Read more at War on entitlements doesn’t extend to military | | MacroBusiness.
I came across this opinion piece I wrote for Memorial Day three years ago. How little has changed:
Who kept the faith and fought the fight;
The glory theirs, the duty ours.
I would like to make this quote from Wallace Bruce the theme of today’s newsletter on Memorial Day, May 30th.
We often take for granted the institutions that our ancestors sacrificed so much to secure. Have we fulfilled our duty to preserve the freedoms that they sacrificed so much for? And have we held the members of our institutions to account for the neglect of their duties?
Some legislators only wish vengeance against a particular enemy. Others only look out for themselves. They devote very little time to consideration of any public issue. They think that no harm will come from their neglect. They act as if it is always the business of somebody else to look after this or that. When this selfish notion is entertained by all, the commonwealth slowly begins to decay.
Little seems to have changed since Thucydides made this observation in about 400 BC, a century after the foundation of democracy in ancient Athens. The fundamental weakness of democracy seems to be that those who are elected to office tend to place their own interests ahead of the interests of their electorate — and ahead of the interests of the nation. Not surprising when, as Thucydides pointed out, they believe that little harm will come from their neglect. But if enough legislators place their own interests ahead of those of the country, they will cause irreversible damage.
By placing their own interests first, I do not necessarily mean that office holders seek to enrich themselves at the expense of the taxpayer — although that does occasionally happen. Rather that they define their primary duty to their country as re-election. The pressure to get re-elected is bound to influence their thoughts and actions on almost every issue.
The temptation to manipulate the system to maximize your chance of re-election is too great for most politicians to resist. In fact it has become so ingrained that the whole economy, and the stock market particularly, is subject to the political cycle. Jeremy Grantham explains the presidential cycle in his last quarterly newsletter:
In the first seven months of the third year (of the presidential cycle) since 1960, Year 3 has returned 2.5% per month for a total of 20% real (after inflation adjustment)…. Now, 20% is perilously close to the total for the whole 48-month cycle of 21%. This means, of course, that the remaining 41 months collectively return a princely 1%.
The third rule of politics is don’t run for re-election during a recession. Ask George H. W. Bush who, despite successful prosecution of the first Iraq war, was beaten by Bill Clinton in 1992 with the slogan “It’s the economy, stupid.” (The second rule, by the way, is: never forget Rule #1)
Successive presidents/governments have failed to find a way to re-schedule elections to a time that bests suits them (despite many examples in the rest of the world). They soon, however, came up with an ingenious alternative: re-schedule the recession.
As soon as politicians realized they could spend future taxes as well as current taxes, the demise of the current system became inevitable. Prior to the Great Depression of the 1930s, governments were assessed on their ability to balance the books. Previous disasters with fiat currencies (continental and confederate dollars) were still fresh in the national consciousness. Only during times of war could they justify running a deficit. So much so that Herbert Hoover refused to run a deficit despite the deflationary spiral following the 1929 Wall Street crash.
When FDR lifted that constraint in the 1930s, with the acquiescence of a desperate public who were willing to try almost anything, an immense new power was born. Unfortunately with immense power comes immense responsibility — and successive governments have proved themselves unequal to the task.
It has become too easy for whoever is in power to spend future taxes to stimulate the economy and postpone a recession. The result is that their successor inherits a pile of debt, which if they attempt to repay, is likely to lead to a recession. So the game becomes one of pass the parcel, with each elected government adding to the debt and passing it on to the next.
If the ancient Greeks had the same power, the decline of Athens may have been a lot sooner. Their modern counterparts have demonstrated that the game cannot continue indefinitely. At some point the market will begin to question government’s ability to repay, raising interest rates to compensate for the risk of sovereign default. Their fears become a self-fulfilling prophecy, with higher servicing costs increasing the burden on the already-precarious fiscal budget.
The second actor in this modern form of Greek tragedy is the Federal Reserve. Without a compliant Fed, government efforts to kick the can down the road would be largely negated. An independent Fed could put the brakes on government efforts to stimulate the economy with borrowed money, merely by acting as a counter-balance to their actions. Unfortunately the Board of Governors are political appointments, nominated by the President and confirmed by the Senate. The Federal Open Market Committee (FOMC) may be more evenly balanced with the addition of the president of the Federal Reserve Bank of New York and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis, but is still dominated by the seven Board members. You can be sure that very few mavericks are appointed as governors and that most dissenting votes come from the regions.
Elections are an expensive business and no candidate is likely to achieve re-election without financial backers, making them especially vulnerable to outside influence. The finance industry alone made $63 million in campaign contributions to Federal Candidates during the 2010 electoral cycle, according to the Center for Responsive Politics. That will buy you a lot of influence on the Hill, but is merely the tip of the iceberg. Interest groups spent $3.5 billion in that year on lobbying Congress and federal agencies ($473 million from the finance sector). While that money does not flow directly to candidates it acts as an enticing career path/retirement plan for both Representatives and senior staffers.
The revolving door between Capitol Hill and the big lobbying firms parachutes former elected officials and staffers into jobs as lobbyists, consultants and strategists — while infiltrating their best and brightest into positions within government; a constant exchange of power, influence and money. More than 75 percent of the 363 former senators or representatives end up employed by lobbying firms, either as lobbyists or advisors.
Are we likely to experience slow decay that Thucydides predicted? The present system is entrenched and likely to resist any attempts at reform. Evolution, however, does not occur in small increments. The norm is quite the opposite, with species enjoying long periods of stability followed by violent change when threatened with extinction. The current GFC presents just such an opportunity for change. The Tea Party movement, for example, is attempting to re-define the way that the system works, while I am sure that there are many Democrats who mistrust the motives of Washington.
If they fail to succeed, there is bound to be a next time. And probably sooner than we think.
The state that separates its scholars from its warriors will have its laws made by cowards,
and its fighting done by fools.~ Thucydides (c. 460 BC – c. 400 BC).
Heart-warming to see S&P 500 breakout above 1900, with the candle gapping through the resistance level. Expect an advance to 1950*. Completion of a 21-day Twiggs Money Flow trough above zero indicates strong buying pressure. Reversal below 1870 is most unlikely, but would warn of a bull trap (and correction to test primary support at 1750).
* Target calculation: 1850 + ( 1850 – 1750 ) = 1950
CBOE Volatility Index (VIX) below 12 signals low risk typical of a bull market.
By Jason Douglas
Bank of England Gov. Mark Carney said Tuesday the misdeeds of the financial sector risk undermining public support for free markets and called on bankers to radically improve their behavior, a sign of simmering frustration in policy circles over a string of misdemeanors.
In a forthright speech, Mr. Carney said recent scandals in currency and commodity markets highlight “a malaise in corners of finance that must be remedied,” saying such “corruption” has hurt trust in modern capitalism, according to the text of his speech.
His remarks echoed criticism of the financial sector earlier Tuesday by International Monetary Fund Managing Director Christine Lagarde, who accused banks of delaying much-needed reforms to the financial system, which were agreed to in the wake of the crisis that tipped the world into recession in 2009…..
Read more at Bank of England’s Carney Tells Bankers to Clean Up Their Acts – Real Time Economics – WSJ.
My concerns with the inequality debate are twofold:
Marginal welfare loss is the loss in consumer welfare per dollar of revenue raised for a small increase in each tax (the extent of compensation required to restore consumer satisfaction reflects the distorting effect of the tax on the economy). Taxes at the top of the graph are the most inefficient in terms of outcomes, while those at the bottom achieve the greatest net benefit.
I should explain that my attitude to welfare is shaped by my own experience. My mother was widowed when I was four and faced the daunting prospect of raising children on her own. She went back to work and, because of her circumstances, was offered a partial interest rate subsidy (on a mortgage) by the local municipality. This enabled her to build a modest home and raise four children, who (apart from myself) grew up to make a useful contribution to society. Without assistance, I shudder to think how we would have fared. But I appreciate that the help offered was to restore our independence, rather than foster ongoing dependency and a sense of entitlement.
When I hear President Obama talk of the top 1%’s share of “our income” or their share of “our nation’s wealth” I do a double-take. It is not “our” income or wealth, but “theirs”. We have not earned it and have no claim to the income or assets of others other than that they pay their fair share of taxes. And shifting a disproportionate share of taxes onto them is just as misguided and immoral, in my opinion, as exploiting the less fortunate. For an economy to succeed you need a healthy partnership between the haves and have-nots, where both will benefit from prosperity. Not like the present tug-of-war, with abuses and mistrust on both sides. Raising taxes would drive a further wedge between the two sides rather than restore trust and cooperation. We need to seek a win-win outcome, rather than an outcome where all of us will lose.
In my opinion the inequality debate and higher taxes are a red herring, designed to distract the public from the real issue: globalization and the insidious partnership between large corporations and their Asian suppliers. Globalization opened up new export markets for corporations while lowering input costs through access to cheap labor. On its own, globalization is manageable, but politicians turn a blind eye to currency manipulation by Asian exporters like China. By saying much but doing little, they allow a continual drain of jobs to offshore markets. Many corporations silently welcome a weak RMB because it lowers the cost of imports while enabling others to make offshore investments and acquisitions cheaply with the strong Dollar.
Corporate profits as a percentage of GNP have soared…
…while manufacturing workers suffer from a shrinking job market and lower wages.
If you want to fix inequality, don’t raise taxes. Instead, reduce progressive tax rates while closing many of the loopholes to create a level playing field. But, most importantly, end currency manipulation to ensure that the Dollar trades at a fair, market-clearing rate. That should help regain international competitiveness, go some way to revive a struggling manufacturing sector…
… and restore jobs lost over the last two decades.
James Galbraith describes the research on inequality over the last two decades at the University of Texas Inequality Project:
Since 2000, inequality has declined in the post-neoliberal countries of South America, and we believe it has been falling since 2008 in China. There, ever more comprehensive urbanisation plays a major role. In Europe and the US, inequality fell after the financial crisis, but rose again as stock markets recovered.
Rising inequality is not necessarily a sign of bad times. The boom creates jobs, reduces poverty and expands wellbeing. But high inequality tends to prefigure a crisis. After a crisis inequality falls – like blood pressure after a heart attack. But that is a bit late.
Read more at Policy, not capitalism, is to blame for the income divide – FT.com.
Kyle Bass, founder and principal of Hayman Capital Management, on China’s debt bubble:
China’s banking assets have grown to over 100% of its GDP in the last three years, according to Bass. If the U.S. had engaged in similar policies – which he said would translate to $17 trillion in lending over that time period – it, too, would have achieved more than 7% GDP growth.
China’s banking assets now total approximately $25 trillion, or almost three times the size of its $9 trillion economy. Its low default rate on bank loans – about 1% – is about to rise, according to Bass. Much of that lending is construction-related. Bass said that 55% of China’s GDP growth has been in the construction sector. The marginal return on those loans must be very small, he argued.
“A rolling loan gathers no loss,” Bass said, “and that’s what’s been going on in China for the last few years.” He said it is impossible to believe China could “manipulate” the inputs of its financial system without losing control of the outcomes.
Deflation is also threatening China. Bass said that its GDP deflator is now below zero. He expects the PBoC to engineer a devaluation of the renminbi as a way to stimulate exports and avert further deflation…
China may well attempt to engineer a devaluation of the RMB, but neither the Fed nor the ECB are likely to tolerate China exporting their deflation to the US/Europe.
Read more at Kyle Bass On China And Japan – Business Insider.
