In short, the West must stimulate with a credible longer term deficit reduction plan, the East must dump its mercantilism and banks must be reigned in everywhere. All eminently sane — and the opposite of what’s happening.
IMF Survey: Weak and Bumpy Global Recovery Ahead
The risks to the global economy are many, but three in particular demand strong action by policymakers:
• In the euro area, banks must be made stronger, not only to avoid deleveraging and maintain growth, but also, and more importantly, to reduce risks of vicious feedback loops between low growth, weak sovereigns, and weak banks. This requires additional capital buffers, from either private or public sources.
• The top priorities in the United States include devising a medium-term fiscal consolidation plan to put public debt on a sustainable path and to implement policies to sustain the recovery, including by easing the adjustment in the housing and labor markets. The new American Jobs Act would provide needed short-term support to the economy, but it must be flanked with a strong medium-term fiscal plan that raises revenues and contains the growth of entitlement spending.
• In Japan, the government should pursue more ambitious measures to deal with the very high level of public debt while attending to the immediate need for reconstruction and development in the areas hit by the earthquake and tsunami.
Short-Term Stimulus Won’t Help U.S. in Long Run: Glenn Hubbard – Bloomberg
The president’s announced jobs plan centers on the need for additional short-term stimulus designed to boost aggregate demand and jump-start economic growth. In some recession scenarios, such action, if timely, can indeed raise output and employment.
In our current state, however, calling for additional spending and temporary tax relief without addressing longer-term economic challenges may exacerbate the likelihood of another recession in the coming year.
This is because the U.S. economy suffers from structural problems predating the financial crisis, particularly an excessive reliance on household consumption and government spending, and insufficient attention paid to business investment and exports. The financial system and the economy need to adjust in the face of this structural shift.
This observation points out two problems with the case for stimulus being made by Obama. The first is that near-term and temporary support for household incomes does little to counterbalance the chilling effect of announced future policies. Uncertainty becomes the enemy.
via Short-Term Stimulus Won’t Help U.S. in Long Run: Glenn Hubbard – Bloomberg.
Housing Is to the U.S. What Greece Is to the Euro Zone – Real Time Economics – WSJ
The beleaguered housing sector is looking like the Greece of the U.S. economy. Just as the euro zone won’t prosper until Greece gets its act together, the U.S. recovery won’t gain traction until the housing sector deals with the excesses of its past……..
Housing and related mortgage problems remain a large drag on economic growth. In August, housing starts stood at a annual rate of 571,000–just one-third of its pace during the boom. And the weak September reading on home builders sentiment suggest builders see more declines ahead.
via Housing Is to the U.S. What Greece Is to the Euro Zone – Real Time Economics – WSJ.
China to ‘liquidate’ US Treasuries, not dollars – Ambrose Evans-Pritchard
A key rate setter-for China’s central bank let slip – or was it a slip? – that Beijing aims to run down its portfolio of US debt as soon as safely possible.
“The incremental parts of our of our foreign reserve holdings should be invested in physical assets,” said Li Daokui at the World Economic Forum in the very rainy city of Dalian….”We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way.”
via China to ‘liquidate’ US Treasuries, not dollars – Telegraph Blogs.
Why would a poor country with GDP per capita of $4000 and an emerging economy be investing in US Treasurys or blue chip stocks? Perhaps because repatriating funds would cause the yuan to rise to a more realistic level against the dollar and end China’s trade advantage.
Canada: TSX 60
The weekly TSX 60 chart respected resistance at 730 and is retreating to test support at 650/660. Decline of 13-week Twiggs Money Flow below zero warns of further selling pressure. Failure of support would offer a target of 590*.
* Target calculation: 660 – ( 730 – 660 ) = 590
Bear rally and triple-witching
A narrow range with large volume often acts like a compressed spring — absorbing buying pressure before launching a sharp move in the opposite direction. The spike in volume [W] on Dow Jones Industrial Average was due to triple-witching hour on Friday, but we should nevertheless be wary of a fall below 11400, which would indicate another test of 10600.
* Target calculation: 11000 – ( 12000 – 11000 ) = 10000
The weekly chart of S&P 500 shows a similar bear rally. Expect a test of 1250/1260. But 63-day Momentum below zero reminds that the index is in a primary down-trend; a peak below the zero line would warn of another down-swing.
* Target calculation: 1125 – ( 1250 – 1125 ) = 1000
NASDAQ 100 Index displays a particularly strong rally, but this remains a bear market. Expect strong resistance at 2400. Failure of support would offer a target of 1700*.
* Target calculation: 2050 – ( 2400 – 2050 ) = 1700
Chart of the Day: Decoupled from reason – macrobusiness.com.au
First, from long term successful commodity trader Peter Brandt:
It has come to be known as the “risk-on/risk-off” or “all-one-market” phenomena in global markets. It is a situation where seemingly unrelated markets have taken on an historically high correlation. Individual markets seem to be the proxy for all other markets.
I have witnessed periods in the past when unusually strong correlations existed for months and months. But, I have never experienced the level of correlation we have lived with as traders since 2008.
via Chart of the Day: Decoupled from reason – macrobusiness.com.au
Dow rallies on light volume
Dow Jones Industrial Average rallied on unconfirmed news reports that China is set to buy sovereign debt from troubled Italy. Light volume indicates an absence of selling pressure. This is a bear market, however, and rallies are likely to be of short duration, while breach of support would lead to sharp falls.
* Target calculation: 11000 – ( 12000 – 11000 ) = 10000
TSX 60 retreats
The TSX 60 Index retreated to test its rising trendline at 705. Penetration would warn of a test of primary support at 665. And failure of support would signal another down-swing with a target of 600*.
* Target calculation: 665 – ( 735 – 665 ) = 595