The Anatomy of Global Economic Uncertainty – Mohamed A. El-Erian – Project Syndicate

Mohamed A. El-Erian, CEO of PIMCO, describes four key dynamics that will shape the future of the global economy:

  1. Many economies have built up excessive debt that is now causing market instability. They have three options for de-leveraging: default, like Greece; austerity, like the UK; or “financial repression” like the US — where “interest rates are forced down so that creditors, including those on modest fixed incomes, subsidize debtors”.
  2. Economic growth would reduce the ratio of debt to incomes: “Many countries, including Italy and Spain, must overcome structural barriers to competitiveness, growth, and job creation through multi-year reforms of labor markets, pensions, housing, and economic governance. Some, like the US, can combine structural reforms with short-term demand stimulus. A few, led by Germany, are reaping the benefits of years of steadfast (and underappreciated) reforms.”
  3. It is also important that the benefits of economic growth be shared across the entire community,  reducing income inequality and related social instability.
  4. Political systems in Western democracies, designed to support the status quo, are ill-equipped to deal with these “structural and secular changes”. Failure to adjust is the greatest risk.

“Those on the receiving end of these four dynamics – the vast majority of us – need not be paralyzed by uncertainty and anxiety. Instead, we can use this simple framework to monitor developments, learn from them, and adapt. Yes, there will still be volatility, unusual strains, and historically odd outcomes. But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.”

via The Anatomy of Global Economic Uncertainty – Mohamed A. El-Erian – Project Syndicate.

Aussie and Loonie test support

The Aussie is testing support at parity against the greenback. The “iceberg” on 63-day Twiggs Momentum indicates a primary down-trend. Failure of parity would test primary support at $0.94 and, in the long-term, breach of primary support would signal a decline to $0.80*.

AUDUSD

* Target calculation: 0.94 – ( 1.08 – 0.94 ) = 0.80

63-Day Twiggs Momentum indicates a stronger down-trend on Canada’s Loonie. Failure of support at $0.975 would test primary support at $0.94 and, in the long-term, breach of the $0.94 level would signal decline to $0.80*.

CADUSD

* Target calculation: 0.94 – ( 1.01 – 0.94 ) = 0.87

The Aussie and Loonie normally move in sympathy with the CRB Commodities Index and a CRB break of its primary down-trend would warn of a reversal on the above two currencies.

Auditor Says F.H.A. Could Need Bailout – NYTimes.com

WASHINGTON — The Federal Housing Administration has a “close to 50” percent chance of requiring a bailout if the housing market deteriorates next year, the agency’s independent auditor said in a report released Tuesday.

The F.H.A., which offers private lenders guarantees against homeowner default, has just $2.6 billion in cash reserves, the report found, down from $4.7 billion last year.

The agency’s woes stem from the national foreclosure crisis. In the last three years, the F.H.A. has paid $37 billion in insurance claims against defaulting homeowners, shrinking its cash cushion.

via Auditor Says F.H.A. Could Need Bailout – NYTimes.com.

Canada TSX 60

Canada’s TSX 60 index is consolidating between 680 and 720. Upward breakout would penetrate the descending trendline, indicating that the primary down-trend is weakening. A 13-week Twiggs Money Flow trough that respects the zero line would signal a primary up-trend. Reversal below 680, however, would warn of another test of primary support at 620.

TSX 60 Index

* Target calculation: 720 + ( 720 – 680 ) = 760

Nasdaq fails to dispel fears of a bear market

The Nasdaq 100 is consolidating in a narrow band below resistance at 2400 on the weekly chart, suggesting an upward breakout. Follow-through above 2450 would confirm the target of 2800*. 13-Week Twiggs Money Flow continues to signal buying pressure after an earlier bullish divergence.

Nasdaq 100 Index

* Target calculation: 2400 + ( 2400 – 2000 ) = 2800

The Dow Industrial Average is consolidating below 12300. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure. Breakout above 12300 would offer a target of 12800*. Failure of support at 11600 is less likely, but would mean another test of primary support at 10600.

Dow Jones Industrial Average

* Target calculation: 12200 + ( 12200 – 11600 ) = 12800

The S&P 500 is similarly consolidating between 1220 and 1300. Expect strong resistance at 1350.

S&P500 Index


Comparing to early 2008, the S&P500 displays a similar pattern, with the index testing resistance at 1400. We are close to a watershed: reversal below medium-term support (1220) would be a strong bear signal, while follow-through above recent highs would dispel fears of another bear market.

Index

EconoMonitor : EconoMonitor » Europe Begins Its Endgame. Watch and Learn, for Europe’s Problems Are the World’s.

The current structure of Europe cracks under the slowly rising stress of vendor financing: export-based prosperity for some, debt-financed consumption by others. Unless reformed, this can only end badly. The global economy has similar imbalances. In 2010 the trade surpluses of China, Russia, and East Asia (China being half the total) were almost equal to the US trade deficit of $560 billion. OPEC, Germany, and Japan accumulated another $518 billion surplus. These numbers continue year by year, accumulating stress that will eventually break the current global financial order.

We should watch and learn from Europe’s experience in the months to come. We, and the rest of the world, may follow them sooner than we expect.

via EconoMonitor : EconoMonitor » Europe Begins Its Endgame. Watch and Learn, for Europe’s Problems Are the World’s..

Global Liquidity ‘on the Cusp’ of Drying Up – WSJ.com

“Global liquidity has fluctuated wildly over the past five years and we are on the cusp of another retrenchment,” [Bank of Canada Governor Mark Carney] said in the text of a speech, which was focused on global liquidity, to the Canada-U.K. Chamber of Commerce in London.

Mr. Carney, who was appointed chairman of the Financial Stability Board at last week’s G20 Summit, said market volatility is increasing and activity declining as global liquidity shrinks. “The effect on the real economy will soon be felt,” he said. The Bank of Canada expects the euro-area to experience a brief recession.

via Global Liquidity ‘on the Cusp’ of Drying Up – WSJ.com.

Canada TSX 60

The TSX 60 is testing the band of resistance from 720 to 730 and the descending trendline. Upward breakout would indicate that the primary down-trend is weakening, while respect would warn of another test of primary support. The sharp rise on 13-week Twiggs Money Flow indicates buying pressure, but there is no sign yet of a reversal.

TSX 60 Index

* Target calculation: 650 – ( 720 – 650 ) = 580

Nasdaq threatens breakout

The Dow is testing medium-term support at 11600. Failure would mean another test of primary support at 10600, while respect of support (with breakout above 12300) would confirm the primary advance to 12800*. Rising 21-day Twiggs Money Flow continues to indicate buying pressure, favoring an advance.

Dow Jones Industrial Average

* Target calculation: 11600 + ( 11600 – 10400 ) = 12800

The S&P 500 is also testing medium-term support, this time at 1220. Respect would signal an advance to the 2011 high, while failure would re-test 1100. In the long-term, breach of 1100 would offer a target of 900* and breakout above 1350 would signal an advance to 1600.

S&P 500 Index

* Target calculation: 1100 – ( 1300 – 1100 ) = 900

Bullish divergence on the Nasdaq 100 indicates strong buying pressure and a likely reversal. Breakout above 2440 would signal an advance to 2800*. Reversal below 2300 is less likely, but would warn of another test of primary support at 2000.

Nasdaq 100 Index

* Target calculation: 2400 + ( 2400 – 2000 ) = 2800

S&P 500 2008 weekly comparison

The similarity between the current weekly chart and 2008 continues.

S&P 500 Index Weekly 2008

The index is now retracing to test support at 1220, in a similar fashion to support at 1380 in 2008. Failure of support would be a strong bear signal, but confirmation would only come if primary support at 1100 is broken.

S&P 500 Index Weekly

* Target calculation: 1100 – ( 1300 – 1100 ) = 900