S&P 500 at key resistance while Treasury yields fall

10-Year Treasury yields broke through support at 1.70%. Prior to 2012, the 1945 low of 1.70% was the lowest level in the 200 year history of the US Treasury. Expect a test of primary support at 1.40%.

Falling Treasury yields generally indicate a flight from stocks to the safety of bonds. The S&P 500, however, is consolidating below resistance at 1600. Breakout would suggest an advance to 1650, while reversal below 1540 would indicate a correction to the rising trendline at 1475. Recent weakness on 13-week Twiggs Money Flow favors a correction, but oscillation above zero indicates a healthy primary up-trend. A June quarter-end below 1500 would present a strong long-term bear signal.

S&P 500 Index

* Target calculation: 1475 + ( 1475 – 1350 ) = 1600

The Nasdaq 100 index is testing resistance at 2900. Breakout would offer a target of 3400*, but bearish divergence on 13-week Twiggs Money Flow favors a break of 2800 and test of the rising trendline at 2700.

* Target calculation: 2900 + ( 2900 – 2500 ) = 3400

Gold rallied to test resistance at $1500/ounce. Breakout would suggest a bear trap and a rally to $1600, but respect of resistance is likely and would signal another test of support at $1330/1350. A gold bear market indicates falling inflation expectations, but that could also translate into lower growth in earnings and higher Price Earnings ratios.
Gold

Structural flaws in the US economy have not been addressed and uncertainty remains high, despite low values reflected on the VIX.

April 28, 2013

Australia: Dangerous growth of the welfare state

Michael McLaren from 2GB speaks with Benjamin Herscovitch, Policy Analyst at The Centre for Independent Studies, who discusses the dangerous growth of the welfare state in Australia.

Listen to the audio interview

The CIS has launched a TARGET 30 campaign to restrict government spending — currently 35 percent of GDP — to 30 percent.

April 28, 2013

Capital Regulation after the Crisis: Business as Usual? | Martin Hellwig

This abstract from a 2010 paper by Martin Hellwig sums up the debate about overhauling the financial system:

Whereas the Basel Committee on Banking Supervision seems to go for marginal changes here and there, the paper calls for a thorough overhaul, moving away from risk calibration and raising capital requirements very substantially. The argument is based on the observation that the current system of risk-calibrated capital requirements, in particular under the model-based approach, played a key role in allowing banks to be undercapitalized prior to the crisis, with strong systemic effects for deleveraging multipliers and for the functioning of interbank markets. The argument is also based on the observation that the current system has no theoretical foundation, its objectives are ill-specified, and its effects have not been thought through, either for the individual bank or for the system as a whole. Objections to substantial increases in capital requirements rest on arguments that run counter to economic logic or are themselves evidence of moral hazard and a need for regulation.

The bipartisan bill, Terminating Bailouts for Taxpayer Fairness Act, sponsored by senators Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican, is a courageous attempt to address the undercapitalization that led to the global financial crisis. Abruptly raising bank capital requirements would lead to a credit contraction if introduced in isolation, but the Fed is quite capable of adjusting monetary policy to offset this and a suitable phase-in period would give banks time to adjust. What is important is that we get to the point where banks are properly capitalized to deal with any future instability.

Read the full paper at Capital Regulation after the Crisis: Business as Usual? | Martin Hellwig, July 2010.

April 28, 2013

Richard Koo: Why government has to act as “borrower of last resort” during a financial crisis [video]

Richard Koo is the first speaker on this video

Click [ ] to view full screen.

April 28, 2013

Orcas Play in Boat Wake like Dolphins [video]

….couple Richard and Laura Howard encounter a pod of killer whales which proceed to play with their boat.

Compare this to Orcas in Captivity.

April 28, 2013

Two Senators Try to Slam the Door on Bank Bailouts – NYTimes.com

This is a show-down between Wall Street and the voting public. Gretchen Morgenson at NY Times writes:

THERE’S a lot to like, if you’re a taxpayer, in the new bipartisan bill from two concerned senators hoping to end the peril of big bank bailouts. But if you’re a large and powerful financial institution that’s too big to fail, you won’t like this bill one bit.

The legislation, called the Terminating Bailouts for Taxpayer Fairness Act, emerged last Wednesday; its co-sponsors are Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican. It is a smart, simple and tough piece of work that would protect taxpayers from costly rescues in the future.

This means that the bill will come under fierce attack from the big banks that almost wrecked our economy and stand to lose the most if it becomes law.

For starters, the bill would create an entirely new, transparent and ungameable set of capital rules for the nation’s banks — in other words, a meaningful rainy-day fund. Enormous institutions, like JPMorgan Chase and Citibank, would have to hold common stockholder equity of at least 15 percent of their consolidated assets to protect against large losses. That’s almost double the 8 percent of risk-weighted assets required under the capital rules established by Basel III, the latest version of the byzantine international system created by regulators and central bankers.

This change, by itself, would eliminate a raft of problems posed by the risk-weighted Basel approach……

The outcome is far from clear. The financial muscle of Wall Street can buy a lot of influence on the Hill. But my guess is that they are too smart to incense voters by meeting the bill head-on. Instead they will attempt to delay with amendments and eventually turn it into an unwieldy 1000-page unenforcable monstrosity that no one understands. Much as they did with Dodd-Frank.

If they win, the country as a whole will suffer. Maybe not today, but in the inevitable next financial crisis if this bill does not pass.

April 26, 2013

What Europe could learn from Scandinavia in the 1920s | Lars Christensen

Danish and Norwegian monetary policy failure in 1920s – lessons for today

Reproduced with kind permission from Lars Christensen at The Market Monetarist:

History is fully of examples of massive monetary policy failure and today’s policy makers can learn a lot from studying these events and no one is better to learn from than Swedish monetary guru Gustav Cassel. In the 1920s Cassel tried – unfortunately without luck – to advise Danish and Norwegian policy makers from making a massive monetary policy mistake.

After the First World War policy makers across Europe wanted to return to the gold standard and in many countries it became official policy to return to the pre-war gold parity despite massive inflation during the war. This was also the case in Denmark and Norway where policy makers decided to return the Norwegian and the Danish krone to the pre-war parity.

The decision to bring back the currencies to the pre-war gold-parity brought massive economic and social hardship to Denmark and Norway in the 1920s and probably also killed of the traditionally strong support for laissez faire capitalism in the two countries. Paradoxically one can say that government failure opened the door for a massive expansion of the role of government in both countries’ economies. No one understood the political dangers of monetary policy failure better than Gustav Cassel.

Here you see the impact of the Price Level (Index 1924=100) of the deflation policies in Denmark and Norway. Sweden did not go back to pre-war gold-parity.

While most of the world was enjoying relatively high growth in the second half of the 1920s the Danish and the Norwegian authorities brought hardship to their nations through a deliberate policy of deflation. As a result both nations saw a sharp rise in unemployment and a steep decline in economic activity. So when anybody tells you about how a country can go through “internal devaluation” please remind them of the Denmark and Norway in the 1920s. The polices were hardly successful, but despite the clear negative consequences policy makers and many economists in the Denmark and Norway insisted that it was the right policy to return to the pre-war gold-parity.

Here is what happened to unemployment (%).

Nobody listened to Cassel. As a result both the Danish and the Norwegian economies went into depression in the second half of the 1920s and unemployment skyrocketed. At the same time Finland and Sweden – which did not return to the pre-war gold-partiy – enjoyed strong post-war growth and low unemployment.

Gustav Cassel strongly warned against this policy as he today would have warned against the calls for “internal devaluation” in the euro zone. In 1924 Cassel at a speech in the Student Union in Copenhagen strongly advocated a devaluation of the Danish krone. The Danish central bank was not exactly pleased with Cassel’s message. However, the Danish central bank really had little to fear. Cassel’s message was overshadowed by the popular demand for what was called “Our old, honest krone”.

To force the policy of revaluation and return to the old gold-parity the Danish central bank tightened monetary policy dramatically and the bank’s discount rate was hiked to 7% (this is more or less today’s level for Spanish bond yields). From 1924 to 1924 to 1927 both the Norwegian and the Danish krone were basically doubled in value against gold by deliberate actions of the two Scandinavian nation’s central bank.

The gold-insanity was as widespread in Norway as in Denmark and also here Cassel was a lone voice of sanity. In a speech in Christiania (today’s Oslo) Cassel in November 1923 warned against the foolish idea of returning the Norwegian krone to the pre-war parity. The speech deeply upset Norwegian central bank governor Nicolai Rygg who was present at Cassel’s speech.

After Cassel’s speech Rygg rose and told the audience that the Norwegian krone had been brought back to parity a 100 years before and that it could and should be done again. He said: “We must and we will go back and we will not give up”. Next day the Norwegian Prime Minister Abraham Berge in an public interview gave his full support to Rygg’s statement. It was clear the Norwegian central bank and the Norwegian government were determined to return to the pre-war gold-parity.

This is the impact on the real GDP level of the gold-insanity in Denmark and Norway. Sweden did not suffer from gold-insanity and grew nicely in the 1920s.

The lack of reason among Danish and Norwegian central bankers in the 1920s is a reminder what happens once the “project” – whether the euro or the gold standard – becomes more important than economic reason and it shows that countries will suffer dire economic, social and political consequences when they are forced through “internal devaluation”. In both Denmark and Norway the deflation of the 1920s strengthened the Socialists parties and both the Norwegian and the Danish economies as a consequence moved away from the otherwise successful laissez faire model. That should be a reminder to any free market oriented commentators, policy makers and economists that a deliberate attempt of forcing countries through internal devaluation is likely to bring more socialism and less free markets. Gustav Cassel knew that – as do the Market Monetarists today.

—-

My account of these events is based on Richard Lester’s paper “Gold-Parity Depression in Denmark and Norway, 1925-1928″ (Journal of Political Economy, August 1937)

April 25, 2013

Forex: Aussie consolidates while Sterling surprises

The euro is consolidating between $1.30 and $1.32. Upward breakout is more likely and would test the high of $1.37. Reversal below $1.30 would warn of another decline, to around $1.24*. In the long-term, breakout above $1.37 would signal a primary advance to $1.50. A 13-week Twiggs Momentum trough at the zero line would reinforce this.

Euro/USD

* Target calculation: 1.28 – ( 1.32 – 1.28 ) = 1.24

Pound sterling surprised with a reversal above resistance at $1.53. Follow-through above $1.54 would suggest an advance to around $1.58, while retreat below $1.52 would signal a down-swing to $1.43*. Declining 13-week Twiggs Momentum, below its 2011 lows, strengthens the bear signal.

Sterling/USD

* Target calculation: 1.53 – ( 1.63 – 1.53 ) = 1.43

The Aussie Dollar rallied off primary support at $1.015. Narrow fluctuation of 63-day Twiggs Momentum around zero suggests a ranging market. Respect of support suggests another test of $1.06.

Aussie Dollar/USD

Canada’s Loonie found support above $0.97 against the greenback, suggesting another test of $0.99. Breach of the rising trendline, however, would indicate another down-swing.

Canadian Dollar/USD

The greenback is testing resistance at ¥100 against the Japanese Yen. The 30-year down-trend of the dollar is over. Breakout above ¥100 is likely, and would suggest an advance to the 2007 high at ¥125*.

USD/JPY

* Target calculation: 100 – ( 100 – 75 ) = 125

The Fed, ECB and BOJ are all printing money and debasing their currencies. The US dollar, although taking on water, is viewed as the safest — because it is sinking slower than the others. There are signs the Fed is likely to slow quantitative easing in the next 6 to 12 months.

April 25, 2013

Gold rallies while treasury yields fall

Gold is testing short-term resistance at $1440. Bear market rallies are notoriously unreliable and reversal below $1400 would warn of another down-swing. Breach of $1330 would confirm another decline, with the next major support level at the 2008 high of $1000.

Spot Gold

* Target calculation: 1550 – ( 1800 – 1550 ) = 1300

I am still bullish on gold in the long-term. We face a decade of easy monetary policy from central banks, with competing devaluations as nations struggle to recover at the expense of each other. This WSJ interview with PIMCO CEO Mohamed El-Erian offers a realistic long-term outlook.

Dollar Index

There has been no major strengthening of the Dollar, which one would expect if gold’s fall was caused by revision of the market’s inflation outlook. The primary trend is up, but so far resistance at 84.00 has held. Breakout would signal an advance to 89.00/90.00.

Dollar Index

Treasury Yields

Ten-year treasury yields continue to test support at 1.70%. Follow-through below 1.65% would test the July 2012 low at 1.40%. Prior to 2012, the 1945 low of 1.70% at the end of WWII was the lowest level in the 200 year history of the US Treasury. Money flowing back into treasuries is a bearish sign for stocks.

Dollar Index

Crude Oil

Brent Crude is falling sharply, while Nymex WTI rallied back above $90/barrel. The gap between the two is narrowing as the European economy slows. Falling crude prices are a healthy long-term sign for the economy, but indicate falling demand and medium-term weakness. Nymex reversal below $90 would confirm a primary down-trend.

Brent Crude and Nymex Crude