If the time horizons of investors are predominantly long, correlations on assets should be low in the short-run, because investors don’t make decisions to trade off of short-term macro factors. But when a large part of the investor base is skittish and is always running to or from the latest bit/byte/bite of data – that leads to high correlations.
ETFs aren’t necessary for high correlations, but they seem to help the process by creating easy ways for people to implement decisions that are a simple idea. “I want financials, I don’t want energy, buy the long bond, sell gold.”
Thus high short-term correlations indicate a momentum mindset in the investor base.
Aussie stronger
The Aussie Dollar followed commodities higher, breaking through $1.06 to signal a test of resistance at $1.10. 63-Day Momentum holding above zero suggests continuation of the up-trend. In the long term, breakout above $1.10 would offer a target of $1.20* — though this is only likely if we see more quantitative easing from the Fed.
* Target calculation: 1.10 + ( 1.10 – 1.00 ) = 1.20
The Aussie Dollar is testing the upper trend channel against its Kiwi counterpart; breakout would warn that the down-trend is weakening. Reversal below $1.245 would warn of a test of the lower trend channel.
* Target calculation: 1.24 – ( 1.28 – 1.24 ) = 1.20
Euro checks support
The euro is headed for another test of support at $1.40 after respecting resistance at $1.45. The descending triangle suggests a downward breakout with a target of $1.30. Momentum crossing below zero would strengthen the signal.
* Target calculation: 1.40 – ( 1.50 – 1.40 ) = 1.30
The pound sterling is also headed for a test of support, this time at $1.60. Breach of the rising trendline warns of trend weakness; a Momentum cross below zero would again strengthen the signal. Failure of support would offer a target of $1.53*.
* Target calculation: 1.60 – ( 1.67 – 1.60 ) = 1.53
When debt levels turn cancerous – Telegraph Blogs
The professoriat has been a little too cavalier in arguing that debt does not really matter for the world as a whole because we all owe it to ourselves. Debtors are offset by creditors (not always from friendly countries). Common sense suggest that this academic solipsism is preposterous, and so it now proves to be.
“As modern macroeconomics developed over the last half-century, most people either ignored or finessed the issue of debt. Yet, as the mainstream was building and embracing the New Keynesian orthodoxy, there was a nagging concern that something had been missing…..There are intrinsic differences between borrowers and lenders; non-linearities, discontinuities… It is the asymmetry between those who are highly indebted and those who are not that leads to a decline in aggregate demand.”
Creditors do not step up spending to cover the shortfall when debtors are forced to retrench suddenly. So the economy tanks.
via Ambrose Evans-Pritchard|When debt levels turn cancerous – Telegraph Blogs.
Reminder: we’re in a bear market
Don’t be fooled by current month-end froth in the markets — into thinking that the bear market is over or that the early August plunge was a false signal. The S&P 500 Index has made little headway after completing a double bottom at 1200 despite average volumes indicating the absence of strong selling. 63-Day Momentum peaking below the zero line indicates a primary down-trend. Expect the bear rally to test resistance at 1250/1260 before a retreat to 1100. Breach of 1100 would find support at the 2010 low of 1000, but the calculated target is even lower*.
* Target calculation: 1100 – ( 1250 – 1100 ) = 950
The Nasdaq 100 performed better, clearing 2200 to complete a double bottom with a target of 2350*. Bullish divergence on 13-week Twiggs Money Flow indicates buying pressure. But this is a bear rally in the middle of a bear market, and further falls on the Dow/S&P 500 would drag the Nasdaq lower.
* Target calculation: 2200 + ( 2200 – 2050 ) = 2350
Fedex and UPS remain in a primary down-trend, indicating that economic activity levels remain poor.
HEARD ON THE STREET: Life in the New Macro World – WSJ.com
Macro issues such as the solvency of European countries and fears of a global economic slowdown have overshadowed fundamental differences between companies. The consequence is that stocks are moving in tandem, indicating a high degree of correlation.
Based on one-month trailing movements, S&P 500-index stocks have a correlation of 80%, even higher than the 73% peak reached during the crisis in late 2008, says Ana Avramovic of Credit Suisse.
via HEARD ON THE STREET: Life in the New Macro World – WSJ.com.
Vital Signs: Private Hiring Slows – Real Time Economics – WSJ
Hiring slowed last month. According to Automatic Data Processing, the private sector added 91,000 jobs in August, fewer than the 109,000 added in July. The payroll firm’s figures don’t reflect the effects of the Verizon strike, which Friday’s employment report from the Labor Department likely will.
via Vital Signs: Private Hiring Slows – Real Time Economics – WSJ.
One Number Says it All – Stephen S. Roach – Project Syndicate
The number is 0.2%. It is the average annualized growth of US consumer spending over the past 14 quarters – calculated in inflation-adjusted terms from the first quarter of 2008 to the second quarter of 2011. Never before in the post-World War II era have American consumers been so weak for so long. This one number encapsulates much of what is wrong today in the US – and in the global economy.
……With retrenchment and balance-sheet repair only in its early stages, the zombie-like behavior of American consumers should persist. The 2.1% consumption growth trend realized during the anemic recovery of the past two years could well be indicative of what lies ahead for years to come.
via One Number Says it All – Stephen S. Roach – Project Syndicate.
Polish Economy Defies Europe’s Woes – WSJ.com
Poland’s economy expanded robustly in the second quarter despite slowing growth in the euro zone, outpacing Central European peers more dependent on exports to Germany.
……Much of the strength in Poland’s domestic demand was the result of government spending on infrastructure, supported with European Union subsidies, which more than offset a slight slowdown in the rate of growth in private consumption.
The Second Great Contraction – Kenneth Rogoff – Project Syndicate
…The only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning.
Some observers regard any suggestion of even modestly elevated inflation as a form of heresy. But Great Contractions, as opposed to recessions, are very infrequent events, occurring perhaps once every 70 or 80 years. These are times when central banks need to spend some of the credibility that they accumulate in normal times.
via The Second Great Contraction – Kenneth Rogoff – Project Syndicate.