Category: US & Canada

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Stimulus spending, austerity and public debt: James Galbraith

Prof. James Galbraith on fiscal stimulus and public debt:

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Agree:

  • Fiscal stimulus should not be a short-term program that will run out. The term should be 10 to 20 years so that business can make long-term plans.
  • Stimulus spending should focus on investment that creates assets — to be offset against the accompanying liabilities.

Disagree:

  • Austerity cuts are foolhardy. ~ Austerity cuts should free up money for investment in infrastructure projects.

Strongly disagree:

  • “There is no long-term debt problem here. We’re clearly in a sustainable situation otherwise the markets would not give the US government the (low) rates they are.” ~ Keep telling yourself that!
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S&P 500 and Europe encounter resistance

The S&P 500 pulled back from resistance at 1250 and is headed for a test of short-term support at 1200. Failure would test primary support at 1100, while breakout above 1250 would signal an advance to 1400*. Rising 21-day Twiggs Money Flow continues to indicate secondary buying pressure.

S&P 500 Index

* Target calculation: 1250 + ( 1250 – 1100 ) = 1400

Dow Jones Europe index also ran into resistance at 250, bearish divergence on 21-day Twiggs Money Flow warning of short-term selling pressure. Reversal below 230 would test primary support at 205/210, while breakout above 250 would signal an advance to 290*.

Dow Jones Europe Index

* Target calculation: 250 + ( 250 – 210 ) = 290

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Canada TSX 60

The TSX 60 index also shows a small bullish divergence on 13-week Twiggs Money Flow, suggesting secondary buying pressure. Expect a rally to the descending trendline at 720. Respect would signal another test of primary support at 640. Breakout remains unlikely, but would offer a target of 800*.

TSX 60 Index

* Target calculation: 720 + ( 720 – 640 ) = 800

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2008 Deja Vu

Early May 2008, the S&P 500 index recovered above resistance at the former primary support level of 1400 on its second attempt. 13-Week Twiggs Money Flow broke back above zero, indicating secondary buying pressure. Breakout was followed by two pull-backs in May. The first made a false break below the new support level; the second followed through, commencing a 50% decline to 700.

S&P 500 Index Weekly Chart - 2008

We are now at a similar watershed. Expect retracement in the week ahead to test the new support level at 1250. Respect of support would strengthen the signal, but beware of any penetration. Follow-through above 1300 would signal that the (immediate) danger is over. Until then, consider this a bear market.

S&P 500 Index Weekly - 2011

* Target calculation: 1250 + ( 1250 – 1100 ) = 1400

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Dow not yet out of the woods

Dow Jones Industrial Average followed through on its breakout above the 10600-11700 trading range but expect some resistance at 12000. The index looks set for a decent rally after narrow consolidation below resistance at 11700. Target for the breakout is 12600*.

Dow Jones Industrial Average

* Target calculation: 11600 + ( 11600 – 10600 ) = 12600

Yields on 10-year Treasury notes also rallied as funds flowed back into stocks, but we are not yet out of the woods.

10-Year Treasury Yield

There is bound to be a relief rally when EU leaders announce details of their rescue package — followed by a pull-back when traders figure out the costs involved. The danger is that Germany and France do an “Ireland” and rescue the banks but put themselves at risk. Both have public debt to GDP ratios close to 80 percent and it would not take much to push them into the danger zone. If they are down-graded then the kids are home alone — there will be no adults left in the room. A down-grade would raise their cost of funding and place their own budgets under pressure.

The S&P 500 is also testing resistance at 1260; breakout would confirm a Dow signal. 13-Week Twiggs Money Flow is rising but no bullish divergence means this could be secondary (medium-term) buying pressure.

S&P 500 Index

* Target calculation: 1120 + ( 1220 – 1120 ) = 1320

Nasdaq 100 index displays an ascending broadening wedge as it approaches resistance at 2400. The ascending wedge is a bearish pattern: Bulkowski maintains that it breaks out downward 73% of the time. Target would be the base of the pattern at 2000. Bullish divergence on 13-Week Twiggs Money Flow, however, indicates strong buying pressure. Breakout above 2450 would signal a primary advance to 2600*.

Nasdaq 100 Index

* Target calculation: 2400 + ( 2400 – 2200 ) = 2600

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E-Commerce Shipments to Drive Record FedEx Holiday Volume | FedEx Global Newsroom

MEMPHIS, Tenn., Oct. 24, 2011 – FedEx Corp. (NYSE: FDX) expects to move more than 17 million shipments – almost double its daily average volume – through its global networks on December 12, the projected busiest day in company history. The 10 percent year-over-year increase will be driven by FedEx SmartPost, a residential shipping service designed for online and catalog retailers, as well as expected increased volume at FedEx Ground and FedEx Home Delivery.

via E-Commerce Shipments to Drive Record FedEx Holiday Volume | FedEx Global Newsroom.

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Podcast: Paul Volcker’s Warnings, the S.E.C.’s Privacy Problem and Some Economic Pitfalls – NYTimes.com

Paul Volcker, the former Federal Reserve chairman, warns that we are not out of the woods yet….. Mr. Volcker focuses on two big problems.

First, he says, money market funds should be treated like other mutual funds — whose price can fluctuate — rather than as guaranteed stores of value, like bank accounts. In addition, he says, the United States needs to plan on eventually shutting down Fannie Mae and Freddie Mac, the two agencies that now dominate the mortgage market.

via Podcast: Paul Volcker’s Warnings, the S.E.C.’s Privacy Problem and Some Economic Pitfalls – NYTimes.com.

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The Dismal Optimist by Peter T. Treadway

Supply side measures are something most macro economists – with a few exceptions – never consider. By supply side I mean those rules, regulations, laws and taxes that hold back economic growth. Supply side measures are growth enhancers and would include:

1. A simplified tax code that maximizes revenue and does not punish the successful. Raising taxes in the midst of a recession, as is now being tried in Greece, is simply the wrong approach.

2. Reform and liberalization of the labor markets. This is particularly important in Europe which suffers from rigid labor laws. German labor reforms under former Chancellor Gerhard Schroeder have been cited as a major reason for increased German productivity over the last few years.

3. The removal of massive regulatory burdens and government bureaucracies supporting them. The recent media report that the government-based Washington DC area now has the highest income of any area in the United States is not good news. (I am told by people in the energy field that the US is now swimming in oil and natural gas thanks to new discoveries and new technologies. But the current US Administration is blocking their development).

4. The removal of barriers to commerce such as protectionist tariff and non-tariff regulations etc.

5. The elimination of government subsidies to pet industries be they green or gray.

6. A privatized approach to education to train people to compete in the globalized, technologically accelerating, highly competitive twenty first century world.

via The Dismal Optimist by Peter T. Treadway.

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Regulators Seize Main PMI Subsidiary – WSJ.com

The main subsidiary of mortgage insurer PMI Group Inc. has been seized by insurance regulators in Arizona, and will begin paying just 50% of claims beginning Monday, according to its website…… Mortgage insurers have suffered from billions of dollars in losses on policies they sold in the years just before the housing bubble burst. PMI alone has reported about $3 billion in losses since the fourth quarter of 2007.

via Regulators Seize Main PMI Subsidiary – WSJ.com.

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Obama Announces Complete Drawdown of U.S. Troops From Iraq by Year’s End – ABC News

“Today, I can report that as promised, the rest of our troops in Iraq will come home by the end of the year,” the president [Obama] said. “After nine years, America’s war in Iraq will be over.”

via Obama Announces Complete Drawdown of U.S. Troops From Iraq by Year’s End – ABC News.

Doesn’t it just inspire you with confidence in the political system when battlefield decisions are made to coincide with the presidential election campaign — and enemies are notified of troop withdrawals two months in advance — so they can plan a “going away” party for your troops.

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