Smart. Strategic. Unfiltered.
For my part, I favour an approach to statecraft that embraces principles, as long as it is not stifled by them;
and I prefer such principles to be accompanied by steel along with good intentions.
~ Margaret Thatcher, Statecraft: Strategies for a Changing World (2002)
We are now approaching the September quarter-end, normally a volatile time for stocks. Investment managers tend to re-balance their portfolios after month-end, selling off poor performers and increasing cash balances to later take advantage of new opportunities. The result is that stocks tend to dip in October. If the fundamental under-pinning of the market is strong, they soon recover and continue on its merry way. But if there are serious flaws, the sell-off can turn into a rout — as in 1987 and 2007.
At present the market outlook appears sound and the bull market is likely to continue. I often use transport stock Fedex as a bellwether for the US economy. If the economy is robust, you can expect Fedex to display a solid up-trend. If weak, Fedex tends to lead the market lower. In November 2007 for example, on the monthly chart below, Fedex signaled a bear market several months ahead of the major indices. The present situation is quite the opposite, with the Fedex in a strong bull-trend, having recently respected support at $145. A 13-week Twiggs Money Flow trough above zero also suggests buying pressure. Economic activity is clearly improving.
* Target calculation: 145 + ( 145 – 130 ) = 160
The S&P 500 break above 2010 proved to be a false break, with the market headed for a re-test of support at 1980. Breach would indicate another correction. Declining 21-day Twiggs Money Flow now indicates medium-term selling pressure; a fall below zero would warn of a primary down-trend.
* Target calculation: 2000 + ( 2000 – 1900 ) = 2100
CBOE Volatility Index (VIX) remains low, however, suggesting continuation of the bull market.
Dow Jones Industrial Average also retreated, testing its new support level at 17150. Reversal below 16950 would indicate a correction, while respect would suggest another advance. Declining 21-day Twiggs Money Flow also suggests medium-term selling pressure.
* Target calculation: 16500 + ( 16500 – 15500 ) = 17500
My conclusion is that the bull market is sound, but likely to encounter some turbulence over the quarter-end. There may be a secondary correction, but respect of recent support levels would indicate a fresh advance.
From William Pesek:
Lindsay David’s new book on Australia deserves a medical disclaimer: Reading this will greatly raise your blood pressure.
In “Australia: Boom to Bust” David sounds the alarm about an Australian housing bubble he argues makes the 12th-biggest economy a giant Lehman Brothers. His thesis can be boiled down to the number 9 — the ratio of home prices to income in Sydney. The multiple compares unfavorably to 7.3 in London, 6.2 in New York and 4.4 in Tokyo. Melbourne is 8.4.
Read more at Irrational Exuberance Down Under – Bloomberg View.
Amir Sufi, professor of Finance at the University of Chicago, testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Economic Policy. His statement titled “Who is the Economy Working For? The Impact of Rising Inequality on the American Economy” makes interesting reading.
“Only 76% of Americans aged 25 to 54 currently have jobs, compared to 80% in 2006 and 82% in 1999…..How did we get into this mess?”
The gist of his argument is:
“Richer Americans save a much higher fraction of their income, ultimately holding most of the financial assets in the economy: stocks, bonds, money-market funds, and deposits. These savings are lent by banks to middle and lower income Americans, primarily through mortgages.”
…And collapse of the housing market caused disproportionate harm to the middle and lower-income groups.
It is true is that middle and lower-income groups have a higher percentage of their wealth invested in their homes and are also far more exposed to mortgages than richer Americans. The source of funding for these mortgages, however, is not the wealthy — who are primarily invested in growth assets such as stocks — but the banks who create new credit out of thin air. The collapse of the housing market caused disproportionate hardship to middle and lower-income Americans because their wealth is concentrated in this area. The rich suffered from a collapse in stock prices, but the market has recovered to new highs while housing remains in the doldrums. That is one of the causes of rising wealth inequality.
Where I do agree with Amir is that credit growth without income growth is a recipe for disaster.
“A tempting solution to our current troubles is to encourage even more borrowing by lower and middle-income Americans. This group of Americans is likely to spend out of additional credit, which would provide a temporary boost to consumption. But unless borrowing is predicated on higher income growth, we risk falling into the same trap that led to economic catastrophe.”
The graph below compares credit growth to growth in (nominal) disposable income:
The ratio of credit to disposable income rose from 2:1 during the 1960s to almost 5:1 in 2009.
There is no easy path back to the stability of the 1960s. A credit contraction of that magnitude would destroy the economy. But regulators should aim to keep credit growth below the rate of income growth over the next few decades, gradually restoring the economy to a more sustainable level.
The worst possible policy would be to encourage another credit boom!
From Jeffrey Frankel:
It is true that capital’s share of income interest, dividends, and capital gains rose gradually in major rich countries during the period 1975-2007, while labor’s share wages and salaries fell, a trend that would support Piketty’s hypothesis if it continued…..
But interest rates have been at all-time lows in recent years – virtually zero. And the claim that in the long run the interest rate must be substantially greater than the economic growth rate is absolutely central to Piketty’s book.
That said, Piketty’s vision is focused squarely on the truly long run….Three century-long movements constitute the essence of the book: a rise in inequality in the nineteenth century, a fall in inequality in the twentieth century, and a predicted return to historically high inequality in the twenty-first century.
To me Piketty started with a preconceived idea and selected data to support this. He seems to ignore the impact of industrialization in the 19th century and technological advances in the late 20th century as sources of wealth creation, as well as access to low-cost labor through globalization during the latter period which has eroded manufacturing jobs and real wages.
Read more at Piketty’s Missing Rentiers by Jeffrey Frankel – Project Syndicate.
Maajid Nawaz used to be a recruiter for an extreme Islamist group in the United Kingdom. NPR’s Scott Simon speaks with Nawaz about how the recruiting process works, and how it can be thwarted.
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From Ivan Mikloš (former Minister of Finance and deputy Prime Minister of the Slovak Republic):
…Twenty-five years ago Slovakia produced antiquated Soviet tanks and another heavy military equipment but not one car. Today we are the number one producer of cars in the whole world, per capita. The most important reason for that success is reforms. Let me illustrate this by comparing convergence success of the Visegrad countries from 2004 until 2008. Over those four years, GDP per capita in PPP in comparison with the EU average improved in Hungary by 1%, Czech Republic by 3%, Poland by 5% and Slovakia by 16%. These were the first four years of EU membership for all of these countries, therefore the big difference among their convergence progress has to have had different reasons. This reason is reforms.
Slovakia during 2003 prepared, and from the beginning of 2004 implemented, a very bold and complex package of deep structural reforms. In 2004 Slovakia was named the most reformist country globally by the World Bank. I am not writing this in order to praise my country or myself. I am writing this because of two main reasons. Firstly, it shows that reforms work. It shows that if country is able to implement a deep and comprehensive package of reforms it will bring relatively quick results. Secondly, I think that our experience shows Ukraine now has a real chance to achieve similar success and progress if necessary reforms are implemented.
Read more at VoxUkraine.
Poland, Ukraine and Lithuania plan to form a common brigade:
Agreement on a joint Ukraine-Poland-Lithuania military brigade signed in Warsaw – v @DefenceU https://t.co/12beNEuXrU pic.twitter.com/20f1x2z800
— Olga Tokariuk (@olgatokariuk) September 19, 2014
Ben Judah, author of Fragile Empire: How Russia Fell In And Out Of Love With Vladimir Putin observes:
“This emerging military alliance between Ukraine and Poland/Lithuania is a sign that the US/EU ability to control it allies decreasing fast.”
Lack of leadership from their Western allies is forcing Eastern NATO states to form their own alliances, which could drag NATO into a conflict with Russia. Garry Kasparov in an interview with Maria Bartiromo sums up the situation:
“If you try to lead from behind no one will follow you….Obama shows unwillingness to engage the challenges that are there.”
Click on image to play video
Obama is no Ronald Reagan and his reluctance to confront Putin is encouraging further risk-taking. As Petro Poroshenko told the House:
We appreciate the blankets and night-vision goggles that you sent us….but we cannot fight a war with blankets.”
The ceasefire in the East is tenuous and likely to collapse at any time.
Picture and video from artillery fire tonight in #Mariupol http://t.co/MZ1NMmSibR @InfoResist |EMPR #Ukraine pic.twitter.com/DyPONpCb5N
— Euromaidan PR (@EuromaidanPR) September 19, 2014
If the ceasefire does collapse, Putin will continue to escalate, destroying Obama’s and NATO credibility with their allies in the East. Sanctions have not worked as a deterrent. Brent crude is falling
But the impact on Russia is cushioned by the falling Rouble.
In the long-term this will cause inflation. But the immediate deterrent effect is negligible.
Scots voted “No” to independence, with a clear 55% to 45% majority. Alex Salmond has announced he will resign as First Minister and SNP leader, with the words: “For me as leader my time is nearly over, but for Scotland the campaign continues and the dream shall never die.” Like Bruce’s spider of legend, I doubt he will give up after failing at the first attempt.
Weekly highlights:
Dow Jones Europe Index is retracing after a weak rally that reached 335. Failure of support at 320 would signal a primary down-trend. Follow-through below 315 would confirm. A 13-week Twiggs Momentum peak below zero strengthens the bear signal.
* Target calculation: 320 – ( 340 – 320 ) = 300
Dow Jones Asia Index is testing primary support at 3200 despite bullishness on the Hang Seng and Shanghai Composite. Bearish divergence on 13-week Twiggs Momentum warns of a test of 3100. Breach of 3200 would signal a primary down-trend, while follow-through below 3100 would confirm.
* Target calculation: 3100 + ( 3100 – 2800 ) = 3400
The S&P 500 recovered above 2000 to signal a fresh advance. Follow-through above 2010 confirms a target of 2100*. Reversal below 1980 is unlikely. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure.
* Target calculation: 2000 + ( 2000 – 1900 ) = 2100
CBOE Volatility Index (VIX) remains low, typical of a bull market.
The ASX 200 correction found support at 5300/5350. But 13-week Twiggs Money Flow below zero, after a long-term bearish divergence, warns of further weakness. Breach of 5300 would indicate a test of 5000. Recovery above 5550 is unlikely, but would suggest a fresh advance.
* Target calculation: 5650 + ( 5650 – 5350 ) = 5950