The Chip on China’s Shoulder | WSJ

…..Fully 70% of Chinese television dramas have plots related to war with Japan, he tells us, and in 2012 alone 700 million imaginary Japanese were killed in Chinese movies. Mr. French’s findings on this count are ominous: “Up until the present day,” he writes, “East Asia has never proven large enough for two great powers to coexist peacefully.”

….he points to the enormous demographic shift under way in China as the population ages and birthrates fall far short of replacement. China is on course to have more than 329 million people over the age of 65 by 2050, while the younger, working-age population is set to plummet. The inexorable aging of the population will, Mr. French predicts, restrain the country’s ability to project power in the future. It will halve the size of the military-age population while saddling workers and the government with enormous expenses to care for the elderly. He suggests that the incredible pace with which China is currently trying to assert control over the South China Sea is driven by President Xi Jinping’s awareness that the country has a window of at most 20 or 30 years before demographics catch up to it and such an expansion becomes impossible.

China’s attempt to dominate East Asia (if not Asia) brings it into direct conflict with Japan. Expect increased militarization of Japan as China attempts to expand its sphere of influence. The Korean peninsula and Vietnam are simply sideshows.

Source: The Chip on China’s Shoulder – WSJ

More evidence of a bull market, except in Australia

One of my favorite indicators of financial market stress is Corporate bond spreads. The premium charged on the lowest level of investment-grade corporate bonds, over the equivalent 10-year Treasury yield, is a great measure of the level of financial market stress.

Moodys 10-year BAA minus Treasury yields

Levels below 2 percent — not seen since 2004 – 2007 and 1994 – 1998 before that — are indicative of a raging bull market. The current level of 2.24 percent is slightly higher, reflecting some caution, but way below elevated levels around 3 percent.

The Financial Stress Index from St Louis Fed measures the degree of stress in financial markets. Constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators. The average value of the index is designed to be zero (representing normal market conditions); values below zero suggest low financial stress, while values above zero suggest high market stress.

St Louis Financial Stress Index

Current levels, below -1, also indicate unusually low levels of financial market stress.

Leading Index

The Leading Index from the Philadelphia Fed has declined slightly in recent years but remains healthy, at above 1 percent.

Philadelphia Fed Leading Index

Currency in Circulation

Most recessions are preceded by growth in currency in circulation falling below 5 percent, warning that the economy is contracting.

Currency in Circulation

Current levels, above 5 percent, reflect healthy financial markets.

Australia

On the other side of the Pacific, currency growth is shrinking, below 5 percent for the first time in 7 years. A sustained fall would warn that the economy is contracting.

Australia: Money Supply

Further rate cuts, to stimulate the economy, are unlikely. The ratio of Household Debt to Disposable Income is climbing and the RBA would be reluctant to add more fuel to the bonfire.

Australia: Household Debt

There is no immediate pressure on the RBA to raise interest rates, but when the time comes the impact on the housing market could be devastating.

Dow warns of a correction

The commentator’s curse. Three days after I posted that Dow Jones Industrial Average was consolidating in a bullish narrow band below resistance at 21000, the Dow breached support at 20800. Downward breakout warns of a correction with support at 20000. Declining 21-day Twiggs Money Flow indicates medium-term selling pressure. Follow-through below 20600 would strengthen the (medium-term) bear signal but the primary trend remains up.

Dow Jones Industrial Average

The false break above 21000 was a hint that all was not well with the trend. Unfortunately we often only see what we expect and miss the subtle clues.

The Dow is in Stage III of a bull market. This is confirmed by a primary up-trend on the Transportation Average, although the current month shows a correction.

Dow Jones Transportation Average

Small Caps indexes like the Russell 2000 also display a strong up-trend, reinforcing the Stage III conclusion.

Russell 2000 Small Caps

Likewise, the Nasdaq 100.

Nasdaq 100

I have not drawn conventional trendlines, on the above charts, through the lowest points in the up-trend. Instead I have dragged a linear regression line down to “touch” the mid-point lows. I find this offers a better fit in many cases where there is an initial (bounce) spurt at the start of the trend.

ASX stalls at 5800

Banks have run into resistance, with the ASX 300 Banks Index retreating below 9000. The recent false break (above 9000) is a mildly bearish sign but the long-tail on this week’s candle is mildly bullish. Follow-through above 9100 remains more likely and would signal an advance to 9500*.

ASX 300 Banks

* Target medium-term: 9000 + ( 9000 – 8500 ) = 9500

This is not a criticism of the policy, but recent rate hikes on investor mortgages become a self-fulfilling prophecy. Concerns about the housing market lead banks to hike rates. Higher rates discourage new borrowing, leading to a contraction in demand. Which in turn leads to lower house prices.

Miners continue their downward path. The ASX 300 Metals & Mining Index has broken its long-term rising trendline, while Declining Twiggs Money Flow peaks below zero warn of strong selling pressure.

ASX 200

With its two biggest sectors meeting resistance, the ASX 200 is stuck at 5800. But rising troughs on Twiggs Money Flow (above zero) signal buying pressure. Breakout above 5800 is likely and would signal a test of 6000*. Reversal below 5600 is unlikely but would warn of a correction.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

S&P 500 Bollinger Band Squeeze

John Bollinger says that a Band Width squeeze has preceded many spectacular moves on the S&P 500. A Bollinger Band squeeze highlights when the bands contract into a narrow “neck” indicating low volatility. The squeeze is normally signaled by a fall in the Band Width indicator to below 2.0%.

S&P 500

Upward breakout from a narrow “squeeze” in late January flagged a strong advance, from 2280 to 2400.

Now we have the opposite, with breakout below 2360 warning of a correction. But Bollinger warns that the market often starts with a fake move, in the wrong direction, before the real move commences. So we need to be cautious.

Dow breaches support

The commentator’s curse. Three days after I posted that Dow Jones Industrial Average was consolidating in a bullish narrow band below resistance at 21000, the Dow breached support at 20800. Downward breakout warns of a correction. Expect support at 20000. The false break above 21000 was a hint that all was not well with the trend. Unfortunately we often only see what we expect to see and miss the subtle clues.

Dow Jones Industrial Average

The Dow is in Stage III of a bull market, with long-term Twiggs Money Flow signaling strong buying pressure. Chances of a (primary trend) reversal seem low.

[Correction: Breach of support was at 20800, not 21800.]

Sensex breakout

India’s Sensex broke through resistance at 29000, signaling another advance. Twiggs Money Flow swung upward, the trough above zero indicating strong buying pressure. Resistance at the 2015 high of 30000 may yet prove stubborn, but the target for the advance is 32000*.

Sensex Index

* Target: 29000 + ( 29000 – 26000 ) = 32000

Europe advances

Germany’s DAX is testing the band of resistance between 12000 and its April 2015 high of 12400. Rising troughs on Twiggs Money Flow indicate strong buying pressure. Breakout is expected but we are likely to experience consolidation below 12400, or a moderate correction, ahead of this.

DAX

The FTSE 100 followed through above resistance at 7350, signaling another advance. Rising troughs on Twiggs Money Flow indicate strong buying pressure. Target for the advance is 7600*.

FTSE 100

* Target: 7350 + ( 7350 – 7100 ) = 7600

Don’t Believe the Hype: China’s North Korea Policy is All Smoke and Mirrors

Dr. Van Jackson is an Associate Professor at the Asia-Pacific Center for Security Studies, and author of the book Rival Reputations: Coercion and Credibility in US-North Korea Relations:

Social media is abuzz with news that China’s Ministry of Commerce announced it will suspend coal imports from North Korea as part of U.N. Security Council sanctions enforcement for the North’s most recent nuclear and ballistic missile tests in violation of prior Security Council resolutions. So China is finally standing arm-in-arm with the United States and international community to actually do something about North Korea. That’s great, right? Wrong.

China’s suspension of coal imports is smoke and mirrors; an act of geopolitical misdirection. The United States is being played, as it has in the numerous past instances when China supported sanctions resolutions against North Korea at the United Nations only to fail to implement them….

….China’s “emotions” toward North Korea don’t drive its policy. China has a long tradition of paying lip service toward cooperation with the United States and the international community while largely failing to apply any meaningful pressure on North Korea, and for good reason: It doesn’t want a nuclear-armed neighbor on its border to become a nuclear-armed enemy. We ignore China’s enduring strategic interests in North Korea at our peril.

Source: Don’t Believe the Hype: China’s North Korea Policy is All Smoke and Mirrors

The Catch-22 in U.S.-Chinese Relations | Carnegie-Tsinghua Center

Paul Haenle served as the director for China, Taiwan, and Mongolian Affairs on the National Security Council staffs of former presidents George W. Bush and Barack Obama prior to joining Carnegie:

When, at the no-necktie summit in California in 2013, Xi [Chinese President Xi Jinping] put forward the [strategic partnership] concept, he mentioned three foundational principles: no conflict and no confrontation; mutual respect, including for both countries’ core interests and major concerns; and win-win cooperation. The United States has long reiterated that the relationship should be based not on slogans but on the quality of the cooperation.

….But China’s call for respect for core interests has been a showstopper in Washington, seen as an indication that what China really seeks is U.S. concessions on areas of long-standing disagreement between the two countries.

Historically China has defined its core interests as including Taiwan, Tibet, and Xinjiang (the Uyghur Autonomous Region) but these have lately expanded to include the South China Sea (9-dash line) and Diaoyu (Senkaku) islands administered by Japan.

Vladimir Lenin advocated: “Probe with a bayonet. If you meet steel, stop. If you meet mush, then push.”

Any attempt at conciliation would encourage further expansion.

Source: The Catch-22 in U.S.-Chinese Relations – Carnegie-Tsinghua Center – Carnegie Endowment for International Peace