Australia: ASX 200 breakout

The ASX 200 broke through long-term resistance at 4450, signaling a primary up-trend with an initial target of 4900*. Rising troughs on 13-week Twiggs Money Flow indicate buying pressure. Retracement to test the new support level remains likely, however, in the next few weeks.

ASX 200 Index

* Target calculation: 4450 + ( 4450 – 4000 ) = 4900

The hourly chart reflects buying pressure, with initial retracement to 4475 after the breakout, instead of the expected 4450. Follow-through above 4500 confirms a strong breakout. At some point in the medium term we are still likely to see a test of the 4450 support level. Respect would confirm a healthy primary up-trend.

 

ASX 200 Index

Asia: China, India and Japan

The Shanghai Composite Index is consolidating between 2000 and 2150. Descending 13-week Twiggs Money Flow warns of long-term selling pressure. Respect of resistance at 2150 is likely and breakout below 2000 would signal a decline to 1800*.

Shanghai Composite Index

* Target calculation: 2150 – ( 2500 – 2150 ) = 1800

Shenzhen Composite Index is testing primary support at 800. Again, descending 13-week Twiggs Money Flow indicates long-term selling pressure. Resistance at 900 is likely to be respected, while breakout below primary support would offer a target of 600*.

Shenzhen Composite Index

* Target calculation: 800 – (1000 – 800 ) = 600

Japan’s Nikkei 225 is testing support at 8650/8700. Respect would indicate a rally to 9200, while failure would complete a double top reversal, signaling a test of primary support at 8200. Rising 13-week Twiggs Money Flow suggests medium-term buying pressure but the long-term picture remains negative. Breach of 8200 would signal a primary down-trend with an initial target of 7200*.

Nikkei 225 Index

* Target calculation: 8200 – ( 9200 – 8200 ) = 7200

South Korea’s Seoul Composite Index is consolidating between 1950 and 2000. Rising 13-week Twiggs Money Flow indicates buying pressure. Breakout above 2000 is likely, followed by a test of the year’s high at 2050.

Seoul Composite Index

* Target calculation: 2050 + ( 2050 – 1900 ) = 2200

India’s Sensex is retracing to test the new support level at 18500. Respect would signal a strong up-trend, but even retracement to 18000 would not be cause for concern. Rising troughs above zero on 13-week Twiggs Money Flow indicate buying pressure. Follow-through above 19000 would signal an advance to 21000*.

Sensex Index

* Target calculation: 18.5 + ( 18.5 – 16.0 ) = 21.0

Singapore’s Straits Times Index retreated from resistance at 3100. Expect another test of support at 3000; confirmed if short-term support at 3050 is breached. Recovery above 3100 would confirm an advance to 3300 — as would a 63-day Twiggs Momentum trough above zero.

Singapore Straits Times Index

* Target calculation: 3000 + ( 3000 – 2700 ) = 3300

The unemployment surprise

Headline unemployment may be falling but this extract from John Mauldin summarises the US predicament:

We are employing almost 5% fewer people as a percentage of our population than we were at the beginning of 2008. That means our real unemployment-to-population level is well over 12%. So we’re not even close to where we were in 1999, during the last year of the Clinton administration. And that doesn’t take into account the 50% of college graduates who are underemployed. A significant part of the problem is simply the fact that we are trying to recover from a deleveraging recession. The data suggests that such recoveries may take 10 years. For Japan it is more than 20 years, and counting.

The unemployment surprise (pdf).

IMF: Coping with high debt and sluggish growth [video]

The World Economic Outlook (WEO) presents the IMF staff’s analysis and projections of economic developments at the global level, in major country groups (classified by region, stage of development, etc.), and in many individual countries.

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[time: 38 minutes]

IMF downgrades world outlook [video]

Chief economist Oliver Blanchard on the IMF’s latest forecast.

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  • IMF revises forecast down, global growth projected at 3.3 percent this year
  • World trade slumps, hurting emerging markets, developing countries
  • Prospects could improve if clouds over euro area, U.S. “fiscal cliff” are lifted

Download the full report.

Europe: Testing resistance

Dow Jones Europe Index rallied off support at 250 and is testing primary resistance at 265. Breakout would signal a primary advance to the 2011 high at 310. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Reversal below 250 is unlikely but would warn of another correction.

Dow Jones Europe Index

Germany’s DAX is similarly testing resistance at 7600 after finding support at 7200. Rising troughs above zero on 13-week Twiggs Money Flow indicate strong buying pressure. Breakout would signal a long-term advance to 8400*. Reversal below 7200 is unlikely but would warn of a correction to the (primary) rising trendline.

DAX Index

* Target calculation: 7200 + ( 7200 – 6000 ) = 8400

The FTSE 100 similarly found support at 5740 and is headed for an attempt at 6000/6100. Rising 13-week Twiggs Money Flow (above zero) indicates buying pressure. Expect strong resistance at 6000/6100 but breakout would offer a long-term target of 6750*.

FTSE 100 Index

* Target calculation: 6000 + ( 6000 – 5250 ) = 6750

Canada: TSX60 finds support

The TSX 60 found support at 700, with 13-week Twiggs Money Flow — oscillating above zero — reflecting continued long-term buying pressure. Expect a test of the 2012 high at 725; breakout would signal a primary up-trend. Reversal below 700 is unlikely but would warn of another test of primary support at 640.

TSX 60 Index

* Target calculation: 725 + ( 725 – 640 ) = 810

US: Continued selling pressure

Resistance on the S&P 500 has shifted from 1450 to 1475, Friday’s weak close and declining 21-day Twiggs Money Flow indicate selling pressure. Breakout above 1475 would signal a primary advance, while reversal below 1430 would warn of a correction.

S&P 500 Index

* Target calculation: 1420 + ( 1420 – 1280 ) = 1560

The Nasdaq 100 (weekly chart) is similarly testing support at 2800/2750. Bearish divergence on 63-day Twiggs Momentum indicates a weakening up-trend; reversal below zero would warn of a primary down-trend. Respect of support is would indicate another advance, while failure would strengthen the bear signal.

Nasdaq 100 Index

* Target calculation: 2800 + ( 2800 – 2450 ) = 3150

Is the high Australian Dollar the real culprit?

Excellent comment from Loonyright at Macrobusiness.com.au on damage to Australian industry caused by the higher dollar:

Australia has been losing investment in research and manufacturing well prior to 2002. The volatility of our currency is of nothing compared to the static, elevated cost of doing business – all resulting from higher wages, unattractive taxation, and unattractive levels of regulation. We are a stable, well educated populace – this should be the ideal home of all kinds of investment. Instead we have slowly and steadily dug ourselves into an entitlement mindset out of proportion to our ability to fund it. If we truly want a competitive, diversified economy that is not reliant on commodity prices and low interest rates to drive activity via the property market, then our uncompetitive wages, taxation and regulation MUST be addressed. It is fantasy to think we can change our fortunes without changing these factors.

via Gotti canvasses the unthinkable | | MacroBusiness.

Income inequality: Cause of our predicament or a convenient scapegoat?

A reader reminded me of this 2011 Vanity Fair article, where Joseph Stiglitz argues that growing income inequality will harm future US economic growth.

“What matters, [some people] argue, is not how the pie is divided but the size of the pie. That argument is fundamentally wrong……..

First, growing inequality is the flip side of something else: shrinking opportunity. Whenever we diminish equality of opportunity, it means that we are not using some of our most valuable assets — our people — in the most productive way possible.

Second, many of the distortions that lead to inequality — such as those associated with monopoly power and preferential tax treatment for special interests — undermine the efficiency of the economy. This new inequality goes on to create new distortions, undermining efficiency even further. To give just one example, far too many of our most talented young people, seeing the astronomical rewards, have gone into finance rather than into fields that would lead to a more productive and healthy economy.

Third, and perhaps most important, a modern economy requires ‘collective action’ — it needs government to invest in infrastructure, education, and technology……. America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead. None of this should come as a surprise—it is simply what happens when a society’s wealth distribution becomes lopsided. The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs.”

There are obvious flaws in Stiglitz’ argument. First, he equates income inequality with unequal opportunity. These are two different concepts. Michael Jordan might earn more income than me, but this does not necessarily indicate unequal opportunity. Even with the same opportunity I am unlikely to ever succeed as a basketball player. Equal opportunity is important in maximizing economic growth but will not achieve equal outcomes.

Distortions associated with monopoly power and unequal treatment of taxpayers both promote inefficiency. But we must be careful not to “put the cart before the horse.” Increasing taxes on the rich will not eliminate these distortions. We need to eliminate monopoly power and unequal treatment of taxpayers to promote greater economic efficiency — not greater income equality.

I have no argument against increased investment in infrastructure, education, and technology, but it is a stretch to blame under-investment in this area on the wealthy. There are a multitude of other interests, including defense and welfare, that have diverted funds away from investment in these areas. Economic growth benefits us all — the interests of the wealthy are generally aligned with those of their fellow citizens. In fact, as a group, top income earners benefit more from economic growth than any other group and are unlikely to act against their own self-interest.

No doubt there are interest groups who argue for lower taxes or favorable treatment of specific industries, just as there are interest groups that argue for increased welfare payments to retirees. What needs to be addressed — in the interests of greater economic efficiency and equity — is the amount of influence these interest groups exert over political decisions.

Economists often confuse arguments for greater efficiency with arguments for greater equity. Stiglitz tries to draw a line from greater equity to greater efficiency. Unfortunately most of the evidence points to the opposite. Societies, like the UK in the 1960s and 1970s and Sweden in the 1970s and 1980s, who focused on greater equity, ended up damaging economic efficiency and growth — harming the very people their policies were intended to help.

As Ross Gittins argues, we need to achieve both efficiency and equity. My suggestion is twofold. Start by designing a tax system based on efficiency, where we maximize economic output while minimizing costs of tax collection. This requires greater simplicity, removal of progressive tax rates, and elimination of favorable treatment for specific industries and/or voting blocs. Complexity increases costs as well as creating opportunities for tax avoidance.

When we have maximized tax revenues through increased output and efficient collection, we can then focus on equity when deciding how tax revenues are spent. Redressing the imbalances of income inequality is unachievable. Instead concentrate on ensuring equal opportunity for all. Long-run investment in education, additional support for disadvantaged students, increased spending on infrastructure, and on research will have payoffs in terms of economic efficiency. And an efficient economy will benefit everyone.

The “size of the pie” really does matter but how it is shared will also make a difference to future growth.