Heart-warming to see S&P 500 breakout above 1900, with the candle gapping through the resistance level. Expect an advance to 1950*. Completion of a 21-day Twiggs Money Flow trough above zero indicates strong buying pressure. Reversal below 1870 is most unlikely, but would warn of a bull trap (and correction to test primary support at 1750).
* Target calculation: 1850 + ( 1850 – 1750 ) = 1950
CBOE Volatility Index (VIX) below 12 signals low risk typical of a bull market.
By Jason Douglas
Bank of England Gov. Mark Carney said Tuesday the misdeeds of the financial sector risk undermining public support for free markets and called on bankers to radically improve their behavior, a sign of simmering frustration in policy circles over a string of misdemeanors.
In a forthright speech, Mr. Carney said recent scandals in currency and commodity markets highlight “a malaise in corners of finance that must be remedied,” saying such “corruption” has hurt trust in modern capitalism, according to the text of his speech.
His remarks echoed criticism of the financial sector earlier Tuesday by International Monetary Fund Managing Director Christine Lagarde, who accused banks of delaying much-needed reforms to the financial system, which were agreed to in the wake of the crisis that tipped the world into recession in 2009…..
Read more at Bank of England’s Carney Tells Bankers to Clean Up Their Acts – Real Time Economics – WSJ.
James Galbraith describes the research on inequality over the last two decades at the University of Texas Inequality Project:
Since 2000, inequality has declined in the post-neoliberal countries of South America, and we believe it has been falling since 2008 in China. There, ever more comprehensive urbanisation plays a major role. In Europe and the US, inequality fell after the financial crisis, but rose again as stock markets recovered.
Rising inequality is not necessarily a sign of bad times. The boom creates jobs, reduces poverty and expands wellbeing. But high inequality tends to prefigure a crisis. After a crisis inequality falls – like blood pressure after a heart attack. But that is a bit late.
Read more at Policy, not capitalism, is to blame for the income divide – FT.com.
Kyle Bass, founder and principal of Hayman Capital Management, on China’s debt bubble:
China’s banking assets have grown to over 100% of its GDP in the last three years, according to Bass. If the U.S. had engaged in similar policies – which he said would translate to $17 trillion in lending over that time period – it, too, would have achieved more than 7% GDP growth.
China’s banking assets now total approximately $25 trillion, or almost three times the size of its $9 trillion economy. Its low default rate on bank loans – about 1% – is about to rise, according to Bass. Much of that lending is construction-related. Bass said that 55% of China’s GDP growth has been in the construction sector. The marginal return on those loans must be very small, he argued.
“A rolling loan gathers no loss,” Bass said, “and that’s what’s been going on in China for the last few years.” He said it is impossible to believe China could “manipulate” the inputs of its financial system without losing control of the outcomes.
Deflation is also threatening China. Bass said that its GDP deflator is now below zero. He expects the PBoC to engineer a devaluation of the renminbi as a way to stimulate exports and avert further deflation…
China may well attempt to engineer a devaluation of the RMB, but neither the Fed nor the ECB are likely to tolerate China exporting their deflation to the US/Europe.
Read more at Kyle Bass On China And Japan – Business Insider.
What is starting to dawn on Vladimir Putin is that, in a free-market system, one is more beholden to one’s customers than to one’s suppliers. It is easier for customers to take their business elsewhere than for suppliers to do so.
Picture = 1K words: Guess who got the better of the natural gas deal? pic.twitter.com/H9aKZwzLBE
— Quartz (@qz) May 21, 2014
China’s biggest customers are Europe and the United States. Russia is attempting to switch their customer from Europe to China. That would move them further down, not up, the supply chain. As Prof Timothy Snyder points out:
…Putin would have to fall back on China, and Russia would become China’s Ukraine.
From the WSJ:
KIEV—Petro Poroshenko declared victory in Ukraine’s presidential election Sunday after exit polls showed the pro-Europe chocolate tycoon won more than half the vote….
Read more at Crisis in Ukraine – Wall Street Journal – WSJ.com.
Growth in value of exports from China has slowed to single figures since 2012. It will be difficult sustain current GDP growth if this trend continues.
The Harper Petersen index of shipping rates for container vessels, the Harpex, remains near its 2010 low, reflecting continued weakness in Asian manufactured goods exports (a rise in exports from Europe or North America would be absorbed by the high percentage of containers returned empty to Asia on the round trip).
Rising Australian bulk commodity exports reflect the disconnect between Chinese imports and exports, with vast investment in infrastructure and rising stockpiles of raw materials used to sustain economic growth. But diminishing marginal returns on further infrastructure and housing investment mean failed recovery of manufactured goods exports would lead to a hard landing.
A key factor will be the strength of the RMB against the US Dollar. Ambrose Evans-Pritchard suggests that China will meet strong resistance in its attempts to export its deflation to the West. Treasury’s forex report to Congress (April 2014) highlight’s sensitivity toward further exchange rate manipulation:
In China, the RMB appreciated during 2013 on a trade-weighted basis, but not as fast or by as much as is needed, and large-scale intervention resumed. The RMB appreciated by 2.9 percent
against the dollar in 2013. However, as a result of the depreciation of the yen and many emerging market currencies, the RMB strengthened more on a trade-weighted basis, with the RMB’s nominal and real effective exchange rates rising 7.2 and 7.9 percent, respectively. For most of 2013 the RMB exchange rate was at, or very near, the most appreciated edge of the daily trading band, suggesting continuous pressure for greater RMB appreciation. During 2014, however, the exchange rate has reversed direction, depreciating by a marked 2.68 percent year to date.There are a number of continuing signs that the exchange rate adjustment process remains incomplete and the currency has further to appreciate before reaching its equilibrium value. China continues to generate large current account surpluses and attracts large net inflows of foreign direct investment; China’s current account surplus plus inward foreign direct investment in 2013 exceeded $446 billion. The reduction in the current account surplus as a share of China’s GDP has largely been the reflection of the unsustainably rapid pace of investment growth. Finally, China has continued to see rapid productivity growth, which suggests that continuing appreciation is necessary over time to prevent the exchange rate from becoming more undervalued. All of these factors indicate a RMB exchange rate that remains significantly undervalued. Further exchange rate appreciation would help to smoothly rebalance the Chinese economy away from investment toward consumption.
The Chinese authorities have been unwilling to allow an appreciation large enough to bring the currency to market equilibrium, opting instead for a gradual adjustment which has now been partially reversed . The expectation that the RMB would continue to appreciate over time resulted in large and increasing capital inflows in 2013. The PBOC’s policy of gradual adjustment triggered expectations of continued appreciation, and resulted in large-scale foreign exchange intervention. China’s foreign exchange reserves increased sharply in 2013, by $509.7 billion, which was a record for a single year. China has continued large-scale purchases of foreign exchange in the first quarter of this year, despite having accumulated $3.8 trillion in reserves, which are excessive by any measure. This suggests continued actions to impede market determination.
In short, China has been buying US Treasurys as a form of vendor financing, allowing them to export to the US while preventing the RMB from appreciating to its natural, market-clearing level against the Dollar. The fact that they are attempting to disguise this manipulation, using third parties, means that Congress is unlikely to tolerate further suppression of the RMB against the Dollar and will be forced to take action.
Is China hiding its FX reserves in…Belgium? MT @michaellachlan A picture tells the story? pic.twitter.com/cTSwssLLKq
— Robin Harding (@RobinBHarding) May 20, 2014
Feared sales of US Treasury investments by China, leading to a collapse of the Dollar, are most unlikely and would be a death knell for Chinese exports. Reversal of capital flows would cause rapid appreciation of the RMB against the Dollar, up-ending China’s former competitive advantage and boosting US exports.
Even without a reduction of existing Treasury holdings, appreciation of the RMB against the Dollar and Euro appears inevitable. This would be disastrous for China, causing them to forfeit their competitive advantage in export markets. And without access to the level of technology and global branding enjoyed by their Western counterparts, Chinese exporters are likely to struggle to hold existing markets, let alone achieve further growth. With diminishing returns on infrastructure and housing investment, China could soon run out of options to stimulate its economy. And its path as a global economic powerhouse may well follow that of its predecessor, Japan.
Leonid Bershidsky writes:
Vladimir Lenin famously lambasted “bourgeois intellectuals” for taking “one step forward and two steps back.” Vladimir Putin believes in the opposite formula: Having taken two steps forward in Ukraine, he is now taking a step back.
Read more at Putin Wants Business as Usual. So Do Western Businesses. – Bloomberg View.
Interesting conclusion from Hans-Joachim Voth and Nico Voigtländer, writing at VOX.
Long before the Nazi regime committed its singular crimes, it had become remarkably popular in Germany (Evans 2006). Voting records from 1933 and 1934 reveal the effect of one factor that, according to many historians, boosted support for the regime – the building of the Autobahn. Using detailed information on the geography of road-building, we isolate the effect of construction on voting behaviour by analysing the ‘swing’ in favour of the regime over a nine-month period (November 1933 to August 1934). We find that opposition declined much faster where the new ‘roads of the Führer’ ran.
Direct economic benefits for residents in Autobahn districts may have played a role, but they were probably small. More importantly, the new roads provided concrete proof of the regime’s actions, delivering on its promise to get ‘Germany moving again’. Within a couple of months of taking power, a highly ambitious highway construction project was under way at 17 different locations all over the country, affecting more than 100 electoral districts. In other words, the visible progress of road construction made the regime’s ability to follow through on its promises salient for many Germans.
Combined with effective propaganda trumpeting the regime’s successes, the roads succeeded in winning the hearts and minds of many Germans. Nor were they the only ones to be impressed. When the US Army rolled into Germany at the end of World War II, one of the officers taken with the ease of transport on motorways was Dwight D. Eisenhower. When he became President of the United States, he lead the initiative to built the country’s interstate highway system.
Read more at Nazi pork and popularity: How Hitler’s roads won German hearts and minds | vox.
Interesting extract from Spiegel interview with Prof. Timothy Snyder from Yale:
SPIEGEL: What motivates Putin?
Snyder: I think Putin is playing an all-or-nothing game, geopolitically speaking. He no longer cares about tolerable relations with the EU or about a solid relationship with Ukraine. Putin has opted for something else, a much larger project, to destabilize Ukraine and the EU. It’s an all-or-nothing game because there is no going back, now that he has embarked on this path.
SPIEGEL: Can he win?
Snyder: There are two options now: Either he achieves his goals, or the European Union achieves political unity and ideological stringency. It would have to define itself as Russia’s adversary and, most of all, develop a joint energy policy with which it could affect Putin. If the EU could do that, there would be radical consequences for Russia. Then Putin would have to fall back on China, and Russia would become China’s Ukraine.
via Experts Discuss What Ukraine Crisis Means for Future of Europe – SPIEGEL ONLINE.