Japan & South Korea buying pressure

Japan’s Nikkei 225 Index retreated Tuesday, but has completed a small double bottom, indicating a test of 9000. Bullish divergence on 13-week Twiggs Money Flow flags strong buying pressure. Breakout above 9000 would indicate an advance to 10000.

Nikkei 225 Index

* Target calculation: 9000 + ( 9000 – 8400 ) = 9600

The Seoul Composite Index shows a weaker divergence on 13-week Twiggs Money Flow. Breakout above 1900 would offer a target of 2150, while respect would re-test primary support at 1650.

Seoul Composite Index

* Target calculation: 1900 + ( 1900 – 1650 ) = 2150

South Africa & Brazil

The JSE Overall Index is testing both resistance and the descending trendline at 31500. Breakout would test the 2008/2011 high of 33000, but respect would warn of a test of 30000. Reversal below 30000 would signal a primary decline to 26000. 13-Week Twiggs Money Flow indicates medium-term buying support but long-term selling pressure.

JSE Overall Index

* Target calculation: 28500 – ( 31500 – 28500 ) = 25500

Brazil’s Bovespa index also shows medium-term buying support but long-term selling pressure. Respect of resistance at 58000 would indicate another test of primary support at 50000. Breakout above 58000 is unlikely, given global market conditions and falling iron ore prices, but would signal reversal to a primary up-trend.

Bovespa Index

* Target calculation: 50 – ( 58 – 50 ) = 42

Southern Europe Could Learn From Ireland – WSJ.com

Efforts to cut the deficits in these [EU Mediterranean] countries are not failing because of different reasons in each nation, although there are some such. They are failing because of misguided austerity plans.

Spending cuts and tax increases drive GDP down faster than the deficit, causing the deficit:GDP ratio to rise rather than fall. These measures are being imposed on economies with rigid labor markets, no history of entrepreneurial innovation, high taxes, and regulations that strangle their private sectors. That is not to say that the roles played by governments should not be reduced: They should. But without growth-inducing reforms, all the cutting will continue to be for naught.

via Southern Europe Could Learn From Ireland – WSJ.com.

US Stock Market: Bulls vs. Bears; Historians vs. Risk Takers? | The Big Picture

Very negative pictures can be painted on the outcomes of the European sovereign debt crisis. Other negatives can point to more deteriorating factors in the United States, such as the weak housing market and the high unemployment rate. In our view, all of these factors are known. They have been established for some time. They have been mixed into the pricing expectations in markets. In essence, they are “old news”.

via US Stock Market: Bulls vs. Bears; Historians vs. Risk Takers? | The Big Picture.

I have heard this often of late: “all of these risks are already priced into the market”. Isn’t that the same old Efficient Market Hypothesis that failed so spectacularly? The market will price the risk, but there is no guarantee that the risk is correctly calculated. Look no further than June 2007 to May 2008 for an example of how the market priced risk at the start of the sub-prime crisis.

Terms of trade shock brewing? – macrobusiness.com.au

As a simple exercise to give you some idea of where we’re headed, let’s refer to Rumplestatskin this morning, who shows that iron ore alone represents almost 30% of the export basket that makes up the terms of trade. Coal makes up another large component above 20%:

……So, if we use the conservative Westpac projection of a 16% fall in the value of iron ore and a 5% fall in value of total coal exports (which is obviously a very conservative guess because we don’t know the coking coal weighting), that would translate to a terms of trade fall around 12% in January next year.

via Terms of trade shock brewing? – macrobusiness.com.au | macrobusiness.com.au.

Fed’s Kocherlakota on Why Balance Sheet Expansion Need Not Be Inflationary – Real Time Economics – WSJ

I’ve mentioned how the Federal Reserve has bought over $2 trillion of government securities. It has funded that purchase by tripling the amount of deposits held by banks with the Fed — what are called bank reserves.

……. Banks have few good lending opportunities, and so they’re not trying to attract deposits. As a result, they are keeping nearly $1.6 trillion of reserves at the Fed in excess of what they need to back their deposits.

…… Some observers are concerned that ……. the banks’ excess reserves will serve as kindling for an inflationary fire. This concern would have been entirely appropriate three years ago. But in October 2008, Congress granted the Federal Reserve the power to pay interest on bank reserves. Right now, that interest rate is 25 basis points, or 0.25%. By raising that rate judiciously, the Fed has the ability to deter banks from using their reserves to create money, and through this mechanism, the Fed can prevent inflation.

via Fed’s Kocherlakota on Why Balance Sheet Expansion Need Not Be Inflationary – Real Time Economics – WSJ.

Monetary expansion through further asset purchases by the Fed (quantitative easing) would be ineffective, simply boosting the level of excess reserves held by banks on deposit at the Fed. Monetary tightening would be more difficult, but could be achieved by raising the interest rate paid on excess reserves in order to discourage banks from using their excess reserves. That would raise the overnight rate (fed funds rate) in the market and restrict banks from expanding their balance sheets.

Debt crisis: live – Telegraph

12.05 German Chancellor Angela Merkel’s spokesman Steffen Seibert is doing his best to sprinkle a bit of reality back on to the euro crisis. He said:

Dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled.

via Debt crisis: live – Telegraph.

A leveraged EFSF is pure poison – Telegraph Blogs

If Europe’s leaders do indeed leverage their €440bn bail-out fund (EFSF) to €2 trillion or €3 trillion through some form of “first loss” insurance on Club Med bonds – as markets now seem to assume – the consequences will be swift and brutal.

Professor Ansgar Belke, from Berlin’s DIW Institute, said any leveraging of the EFSF would be “poisonous” for France’s AAA rating and would set off an uncontrollable chain of events.

“It counteracts all efforts made so far to stabilize the eurozone debt crisis, which are premised on the AAA rating of a sufficiently large number of strong economies. In extremis, it would probably cause the break-up of the eurozone”, he told Handlesblatt.

…..Dr Belke said France is already under pressure. BNP Paribas, Société Générale, Crédit Agricole may need €20bn in fresh capital, with knock-on risk for the French state. He warned that France’s public debt (Now 82pc of GDP) would shoot up to 90pc of GDP if the debt crisis rumbles on. Variants of this theme were picked up by other German economists in a Handelsblatt forum.

via A leveraged EFSF is pure poison – Telegraph Blogs.

Of Blind Men and Elephants – Grasping China’s Economy – China Real Time Report – WSJ

Former Australian Ambassador to China and current board member of Australian miner Fortescue Metals Geoff Raby had a different take.

….While he clearly felt the recent sell-off of stocks on fears that China’s economy was slowing was hugely overblown, he had more time for concerns about Chinese corporate disclosures. He said he didn’t think corporate transparency was any worse now than before, but “I don’t know why people believed [the numbers] so much in the past.”

That the Shanghai Stock Exchange’s benchmark index is trading at a fraction its 2007 peak is a sign that “people are finally starting to work it out.”

via Of Blind Men and Elephants – Grasping China’s Economy – China Real Time Report – WSJ.

A Proven Principle Behind Obama’s Jobs Plan – NYTimes.com

It wasn’t until the 1940s that economists realized that a balanced-budget stimulus could be effective, too. As I’ve discussed in earlier columns, economists starting with Walter S. Salant and Paul A. Samuelson realized that during a depression or in near-depression conditions, any government expenditure fully funded by taxes will increase national income approximately one for one, without raising national debt. This is known as the balanced-budget multiplier.

The public improvements suggested in the president’s proposal would have been fully paid for by the bill’s tax surcharge. And any new legislation we now consider could also pay for such improvements with tax increases, so as not to raise the national debt even temporarily. This idea should still have common-sense appeal to Americans in this time of high unemployment, just as the idea of winter work does on the farm.

via A Proven Principle Behind Obama’s Jobs Plan – NYTimes.com.