Bellwether transport stock Fedex surged to a new high this week, signaling an expected rise in economic activity in the US. A Twiggs Money Flow trough above zero also indicates strong buying pressure.
Dow Jones Industrial Average is testing resistance at 19000. The doji star indicates indecision rather than a reversal. Declining Twiggs Money Flow indicates long-term selling pressure but completion of a trough above zero would negate this. A fall below 18500 would warn of a correction. Follow-through above 19000 is less likely but would indicate a fresh advance.
The S&P 500 is testing resistance at 2200. The evening star pattern again indicates indecision rather than reversal. Breakout would complete a bullish inverted scallop pattern, which commenced in early July, signaling an advance to 2300. Declining Twiggs Money Flow remains bearish, favoring another retracement.
Shanghai Composite Index ran into resistance at 3200 after its recent breakout. Expect retracement to test the new support level at 3100. Respect would confirm the target of 3400* for the advance.
Germany’s DAX is consolidating below 10800 but Twiggs Money Flow still reflects selling pressure. Breakout above 10800 would signal a primary advance with a target of 11500* but another test of 10200 looks equally likely.
You don’t know a tree is hollow until you push hard against it and it falls. The establishments of both parties did not know, a year ago, that they were hollow trees. They thought themselves strong because they always had been, and people think what has been true will continue. Then suddenly the tree is pushed and falls. To me that is the symbol, the image of 2016: the hollowed trees and how easily they fell.
Election night 2016 was not like 1980. That year produced an outcome fully within the political norms: a former two-term governor won the presidency. This year’s outcome went beyond all previous norms. Twenty-sixteen was like nothing in our lifetimes. In the future people will say, “Where were you that election night?” the way they do for other epochal moments.
Much of the mainstream, legacy media continues its self-disgrace. Having failed to kill Donald Trump’s candidacy they will now aim at his transition. Soon they will try to kill his presidency. Any journalists who are judicious toward Trump, who treat him fairly or even as a human being, are now accused of “normalizing” him. This is a manipulation: It is a way of warning your colleagues to approach the president-elect with the proper hostility or be scorned. None of this will do our country any good…..
The Footsie (FTSE 100) is testing support at 6700. Narrow candlestick bodies for the last two weeks signal indecision, while declining Twiggs Money Flow warns of medium-term selling pressure. Breach of 6700 would warn of a correction to 6500. Respect of support is less likely but would indicate another test of 7100.
Last week’s rally exhausted itself and India’s Sensex is again testing support at 26000. Decline of Money Flow below zero reflects selling pressure. Breach of 26000 is likely and would indicate a test of 25000. Support levels are fairly weak all the way down to 23000 because of the absence of strong corrections during the March to September 2016 advance.
Interest rates are climbing steeply as the market anticipates more inflationary policies under a Trump presidency. 10-Year Treasury yields broke through 2.0 percent and are testing resistance at 2.50. Penetration of the descending trendline would warn that the long-term primary down-trend is weakening, signaling a test of 3.0 percent. Breakout above 3.0 is still some way off but would signal the end of the almost 30-year secular down-trend in Treasury and bond yields.
The Chinese Yuan has fallen sharply in response to rising interest rates, with the Dollar headed for a test of resistance at 7.0 Yuan (USDCNY).
Gold responded to rising interest rate expectations with a test of primary support at $1200. Narrow consolidation is a bearish sign, as is reversal of 13-week Momentum below zero. Breach of primary support would signal a primary down-trend with an immediate target of $1050/ounce.
In the long-term, higher inflation and a weakening Yuan could both fuel demand for gold as a store of value. But the medium-term outlook is bearish.
I have often written in this blog and elsewhere about the three policy choices Beijing faces as it tries to manage through the adjustment process. My argument is that subject to two very plausible assumptions, every economic policy Beijing implements ultimately can be abstracted to one choice among three options. These two assumptions are:
China has overinvested in infrastructure and manufacturing capacity to such an extent that in the aggregate the cost of additional public sector investment exceeds the present value of future increases in productivity generated by the investment. China’s public-sector investment, in other words, is value destroying, and because it is funded by debt, additional investment causes China’s real debt servicing costs to rise faster than its real debt servicing capacity.
China’s long-term sustainable growth rate is substantially below the economy’s current GDP growth target, and so the economy is only able to meet the growth target by increasing its debt burden.
…..any policy Beijing chooses must involve, usually implicitly, some combination of three outcomes. In every case, in other words, we will see as a consequence of the policy one or more of the following:
Higher unemployment, the limit of which is largely a political issue involving social instability, with the added wrinkle that certain types of unemployment are likely to be perceived as more politically costly than others – e.g. because returning to family farms acts as a kind of safety valve, even though a significant fall in living standards, unemployment among migrant workers is likely to be less costly, or because university graduates are presumably more communicative and have higher expectations, their unemployment might be more costly.
Higher debt, by which I really mean a higher debt burden, or an increase in debt relative to debt-servicing capacity, and this can rise until credit growth can no longer be forced up to the point where it can be used to roll over existing debt with enough margin fully to fund as much new economic activity that Beijing targets.
Higher wealth transfers, in which governments – and because the Xi administration is seeking to centralize power this is most likely to involve local governments rather than central government entities – must liquidate assets and use the proceeds directly or indirectly either to increase household wealth or to pay down debt, with the main constraint on Beijing’s ability to direct this process likely to be the tremendous political opposition of the so-called “vested interests”, for whom government control of these assets is an important source of power, patronage, and wealth.
The trade-offs between a higher debt burden, higher unemployment and greater wealth transfers to the household sector may come into sharper relief in 2016 because although unemployment still seems to be fairly low, in spite of much lower growth in the past three years, there is now reason to worry that any additional reduction in growth may begin to show up in the unemployment numbers…..
Centrally-planned economies inevitably get weighed down by cronyism and inefficiencies. Economist Thomas Sowell describes how he used to be a Marxist but working for the federal government cured him of the notion that centralized government could successfully manage anything, let alone the entire economy.
From Francis J. Gavin, Frank Stanton Professor in Nuclear Security Policy Studies at MIT and author of Nuclear Statecraft: History and Strategy in America’s Atomic Age:
It is not always clear in real-time what matters most, though a historical sensibility can sensitize us to look for real-world consequences in unusual places. Will the recent U.S. presidential election seem like the key issue we faced 30 or 40 years from now, when perhaps some deeper, more fundamental shifts (the climate or demographics, for example) or a completely unexpected event shapes the realities of that future world? We don’t know, but it is worth considering.
Relatedly, history conditions decision-makers to understand that policy decisions made in world capitals are often far less important in shaping what matters in the world that other, often less visible historical forces. Culture, technology, demographics, and geography, for example — all are critical forces that are less pliable to policy than we often think.
My favorite examples are three events that took place within a very short period of time: the sale of the early Apple personal computer, the release of Star Wars — the highest grossing motion picture of all time, and the famous 1976 “judgment of Paris” in which previously unknown wines from Napa Valley bested established French wines in a blind taste test. In other words, policymakers in Washington in the mid-1970s who were pouring over economic data, looking at crime statistics and urban crisis, witnessing political chaos abroad, and fearing a Soviet military behemoth that appeared to be winning the arms race had little reason to be optimistic about the future.
But the future was being made elsewhere and in different ways than policymakers understood in places like California, where deep and often obscure historical forces were working to transform the U.S. economy, society, technological base, and culture in ways that would have profound effects on American power and world history.
A deep historical perspective should also allow the decision-maker to avoid outcome or retrospective bias, or fall into the trap of what I call “understanding the Third Balkan War.” As former National Security Advisor Sandy Berger pointed out: “History is written through a rear-view mirror but it unfolds through a foggy windshield.” If the past is to be of use to policymakers, it must be exploited in a way that avoids what economists call “the curse of knowledge,” or that cognitive bias that emerges that in hindsight, the outcome of a historical event was more predictable than was likely the case. Since we know how past events have turned out, we can easily assume that the causal path that led to the event was inevitable. But most complex and difficult policy choices involve what former Secretary of State Henry Kissinger has called “51/49” decisions: In other words, it is very difficult to know, a priori, whether a difficult policy choice will turn out correctly, even if in retrospect it seemed obvious. This is true for good policies as well as bad, which an immersion in history and an understanding of the past should tell us…..
Investors are in a way historians too. They study past events and extrapolate them into the future. They also suffer from the same challenge: the outcome of past events appears abundantly clear while the future is murky and obscure. Most investments are “51/49 Decisions”, hopefully with better probabilities, but still uncertain outcomes.
As with leaders of state, we face an uncertain future. Most important is often broad-based policy, or strategy, rather than specific actions. To use a farming analogy: investors need to till and feed the soil, creating fertile ground to sow seeds and wait for opportunities to grow. All the while exercising discipline to eliminate weeds and pests before they can spread and hurt your portfolio.
I’m beginning to sound like Chauncey Gardiner, the slow-witted gardener played by Peter Sellers in the 1979 motion picture Being There (1979), who through a case of mistaken identity becomes a close advisor to the US president.
[Kerr Neilson, the founder of $23 billion Platinum Asset Management] said China “absolutely smashes America” when measured by physical goods, producing more motor cars, eight times more steel and 10 times more cement.
“We’re just comatose. We have no idea, particularly in the West, what’s really changing. So we have all this debate, that’s the politicians’ hard sell. You can no longer make these silly promises and say ‘we’ve got to be more equitable’,” he said.
“Sure, it’s a great idea, but in fact the place we’re competing against, these other teams … they play a very hard game. It’s no good complaining about the referee.”
