Canada’s TSX 60 faces resistance at 820. A sharp fall/divergence on 13-week Twiggs Money Flow warns of short-term selling pressure. Reversal below 810 would indicate a correction, while breakout above 820 would signal an advance to 840*.
* Target calculation: 805 + ( 805 – 770 ) = 840
TSX 60 VIX below 15 continues to reflect low risk typical of a bull market.
The S&P 500 retreated below support at 1850, warning of a correction, but the primary up-trend remains strong. Trend strength is depicted by this weekly chart of Ichimoku Cloud, with a buy signal at the start of 2013 and price holding high above a green cloud indicating trend strength.
Bearish divergence on 13-week Twiggs Money Flow indicates medium-term selling pressure, consistent with a secondary correction, but respect of the rising trendline would signal a healthy up-trend. And recovery above 1850 would offer a target of 1950*.
* Target calculation: 1850 + ( 1850 – 1750 ) = 1950
CBOE Volatility Index (VIX) is rising and a sustained shift above 20 would signal an increase from low to moderate risk.
The Nasdaq 100 also shows bearish divergence on 13-week Twiggs Money Flow, warning of medium-term selling pressure. Breach of the rising trendline would test primary support at 3400, while respect would confirm a healthy up-trend. Recovery above 3650 would offer a target of 3800*.
* Target calculation: 3600 + ( 3600 – 3400 ) = 3800
Hats off to John Mauldin for publishing retired economics professor (North Carolina State University) Dr. John Seater’s rebuttal of the Cynamon and Fazzari article on Income Inequality from last week’s newsletter:
A big whopper, for example, is their assertion that a shift in income from the poor to the rich will reduce total spending. Complete nonsense. What it may do is shift the composition of spending away from consumption a little toward investment. The permanent income/life cycle theory of consumption, developed independently by Modigliani and Friedman in the 1950s questions even that conclusion.
Second, John says most academics accept the view that inequality hinders growth. I don’t know how he knows that. I certainly don’t know that to be true. I am an academic economist, and I am unaware of any such consensus. I also know for sure that few and probably no economists who actually study economic growth (which happens to be my own current field of research) believe such a thing.
Read more at
Income Inequality and Social Mobility | John Mauldin.
John Goodman points out that while the left are extremely vocal on the issue of income inequality, they are largely silent on the issue of reforming the public education system to create equal opportunity for all students.
Here is the uncomfortable reality:
1.Our system of public education is one of the most regressive features of American society.
2.There is almost nothing we could do that would be more impactful in reducing inequality of educational opportunity and inequality overall than to do what Sweden has done: give every child a voucher and let them select a school of choice.
3.Yet on the left there is almost uniform resistance to this idea or any other idea that challenges the power of the teachers unions.
He tells how newly-elected New York City Mayor Bill De Blasio is opposing expansion of some of the city’s best charter schools:
Among the 870 Success Academy seats blocked was a modest 194-student expansion for Success Academy students in Harlem to move into a new middle school. That triggered days of searing press coverage pointing out that those 194 students, all low-income minorities, were coming from a school, Success Academy 4, that killed it on the new state test scores, with 80 percent of the students passing the math test, and 59 percent the English test. The co-located middle school (P.S. 149) the mayor is protecting ….. 5 percent of students passed the math test, and 11 percent the English test.
Read more at Silence of the Left – John C. Goodman.
Hat tip to John Mauldin.
Abstract from a February 28, 2014 paper by Kartik Athreya, Andrew Owens, and Felipe Schwartzman:
The aftermath of the recent recession has seen numerous calls to use transfers to poorer households as a means to enhance aggregate activity. We show that the key to understanding the direction and size of such interventions lies in labor supply decisions. We study the aggregate impact of short-term redistributive economic policy in a standard incomplete-markets model. We characterize analytically conditions under which redistribution leads to an increase or decrease in effective hours worked, and hence, output. We then show that under the parameterization that matches the wealth distribution in the U.S. economy (Castaneda et al., 2003),wealth redistribution leads to a boom in consumption, but not in output.
Read more at Does Redistribution Increase Output? The Centrality of Labor Supply | The Big Picture.
From a Der Spiegel interview with Polish Foreign Minister Radoslaw Sikorski:
SPIEGEL: Why are the Poles so highly engaged in this conflict?
Sikorski: The Ukrainians are our neighbors. They are fighting for the same things we did back in 1989 – for a country that is more democratic, less corrupt and is European.
Read more at Polish Foreign Minister Discusses Weak EU Position in Ukraine Crisis – SPIEGEL ONLINE.
Dalibor Rohac at the Cato Institute suggest the Ukraine should focus on getting its economy back on track:
….to really understand where Ukraine is headed, it’s important to understand the roots of the unrest that led to the ousting of President Viktor Yanukovych.
First, the country’s oligarchic elite, which ruled the country for the past two decades, cared little about the prosperity of ordinary Ukrainians. The evidence is not just in the tacky mansions of President Yanukovych and his men, but also in the fact that the average income in Ukraine is roughly one third of that in Poland even though both countries started from around the same point in 1990.
Second, the change of government in Ukraine follows a miscalculation on the part of the Kremlin, which long considered Ukraine as its client state, dependent on imports of natural gas from Russia. Ukrainians simply lost patience after their government effectively followed instructions from Moscow and canceled the broadly popular association agreement with the EU. Now that the plan to bully Ukrainians into submission has backfired, Russian President Vladimir Putin is likely to leverage the situation to push claims to parts of Russian-speaking Eastern Ukraine — most prominently Crimea and the port of Sevastopol.
Regardless of whether such territorial concessions become a reality, with an interim cabinet in place and a new presidential election scheduled for late May, it is time for Ukraine to reckon with the massive governance failure of the past twenty years.
The best response to Putin’s land grab would be to turn Ukraine into an economic success story and example to its large neighbor to the East.
Read more at How Ukraine Can Move Forward | Cato Institute.
This graph from a FRBSF paper Private Credit and Public Debt in Financial Crises, by Òscar Jordà, Moritz Schularick, and Alan M. Taylor, perfectly illustrates how high public debt levels impede the ability of an economy to recover from a financial crisis:
Figure 3……. shows that high levels of public debt can be a considerable drag on the recovery. The figure displays the path of per capita GDP in a typical recession compared with the paths under three scenarios following a financial crisis resulting from excess growth of private credit. Each of the three scenarios corresponds to a specified level of public debt at the start of the recession. The dotted line represents a low level of debt of about 15% as a ratio to GDP; the solid line represents a medium level of debt of about 50% of GDP, which is the historical average; and the dashed line represents a high level of debt of about 85% of GDP.
Read more at Federal Reserve Bank San Francisco | Private Credit and Public Debt in Financial Crises.
Hat tip to Barry Ritholz
Research by the Federal Reserve Board of San Francisco shows how high credit growth prior to a financial crisis can prolong the recession by three or more years. The graph below compares the average recovery time for a normal recession to recessions preceded by low credit growth [blue or red] and recessions preceded by high credit growth [green or orange].
Differences in public debt growth appear to have little impact, but public debt levels are another matter.
Read more at Federal Reserve Bank San Francisco | Private Credit and Public Debt in Financial Crises.
Hat tip to Barry Ritholz
From a FRBSF paper Private Credit and Public Debt in Financial Crises by Òscar Jordà, Moritz Schularick, and Alan M. Taylor:
Recovery from a recession triggered by a financial crisis is greatly influenced by the government’s fiscal position. A financial crisis puts considerable stress on the government’s budget, sometimes triggering attacks on public debt. Historical analysis shows that a private credit boom raises the odds of a financial crisis. Entering such a crisis with a swollen public debt may limit the government’s ability to respond and can result in a considerably slower recovery.
In financial crises, steep declines in output worsen the ratio of public debt to gross domestic product (GDP) even if the nominal amount of debt remains unchanged. Progressive tax systems cause government revenues to decline at a faster rate than output. Meanwhile, other automatic stabilizers, such as unemployment insurance programs, quickly swell public expenditures. The public sector often assumes private-sector debts to prevent a domino effect of defaults from toppling the financial system. Programs to stimulate the economy put further stress on public finances. As budget deficits balloon, deep economic downturns resulting from a private credit crunch often turn into sovereign debt crises.
Read more at Federal Reserve Bank San Francisco | Private Credit and Public Debt in Financial Crises.
Hat tip to Barry Ritholz
