US & Canada Archives - Page 64 of 174

February 17, 2015

Grantham: Lower oil price is new normal | Macrobusiness

By Houses & Holes
Reproduced with kind permission from Macrobusiness.com.au

From Jeremy Grantham:

The simplest argument for the oil price decline is for once correct. A wave of new U.S. fracking oil could be seen to be overtaking the modestly growing global oil demand.

It became clear that OPEC, mainly Saudi Arabia, must cut back production if the price were to stay around $100 a barrel, which many, including me, believe is necessary to justify continued heavy spending to find traditional oil.

The Saudis declined to pull back their production and the oil market entered into glut mode, in which storage is full and production continues above demand.

Under glut conditions, oil (and natural gas) is uniquely sensitive to declines toward marginal cost (ignoring sunk costs), which can approach a few dollars a barrel – the cost of just pumping the oil.

Oil demand is notoriously insensitive to price in the short term but cumulatively and substantially sensitive as a few years pass.

The Saudis are obviously expecting that these low prices will turn off U.S. fracking, and I’m sure they are right. Almost no new drilling programs will be initiated at current prices except by the financially desperate and the irrationally impatient, and in three years over 80% of all production from current wells will be gone!

Thus, in a few months (six to nine?) I believe oil supply is likely to drop to a new equilibrium, probably in the $30 to $50 per barrel range.

For the following few years, U.S. fracking costs will determine the global oil balance. At each level, as prices rise more, fracking production will gear up. U.S. fracking is unique in oil industry history in the speed with which it can turn on and off.

In five to eight years, depending on global GDP growth and how quickly prices recover, U.S. fracking production will start to peak out and the full cost of an incremental barrel of traditional oil will become, once again, the main input into price. This is believed to be about $80 today and rising. In five to eight years it is likely to be $100 to $150 in my opinion.

U.S. fracking reserves that are available up to $120 a barrel are probably only equal to about one year of current global demand. This is absolutely not another Saudi Arabia.

Saudi Arabia has probably made the wrong decision for two reasons:

First, unintended consequences: a price decline of this magnitude has generated a real increase in global risk. For example, an oil producing country under extreme financial pressure may make some rash move. Oil company bankruptcy might also destabilize the financial world. Perversely, the Saudis particularly value stability.

Second, the Saudis could probably have absorbed all U.S. fracking increases in output (from today’s four million barrels a day to seven or eight) and never have been worse off than producing half of their current production for twice the current price … not a bad deal.

Only if U.S. fracking reserves are cheaper to produce and much larger than generally thought would the Saudis be right. It is a possibility, but I believe it is not probable.

The arguments that this is a demand-driven bust do not seem to tally with the data, although longer term the lack of cheap oil will be a real threat if we have not pushed ahead with renewables.

Most likely though, beyond 10 years electric cars and alternative energy will begin to eat into potential oil demand, threatening longer-term oil prices.

Exactly right, though in my view the equilibrium price will be more like $50 than $30 for the next half decade.

Don’t miss the full report.

February 10, 2015

Putin Will Never Back Down | Institutional Investor’s Alpha

Excellent analysis of the situation in Eastern Europe by Bill Browder, founder of London-based Hermitage Capital Management:

I’m afraid that, based on the reasons behind Putin’s motivations for invading Ukraine in the first place, there is no chance that he will back down. To understand this, all it takes is a simple analysis of how this crisis unfolded.

First, Putin didn’t start this war because of NATO enlargement or historical ties to Crimea, as many analysts have stated. Putin started this war out of fear of being overthrown like Ukrainian president Yanukovych in February 2014. Yanukovych had been stealing billions from the state over many years, and the Ukrainian people finally snapped and overthrew him. Compared with Putin, Yanukovych was a junior varsity player in the field of kleptocracy. For every dollar Yanukovych stole, Putin and his cronies probably stole 50. Putin understands that if he loses power in Russia, he and his underlings will lose all the money they stole; he will lose his freedom and possibly even his life.

I believe that Bill is right. Putin was not reacting to EU or NATO encroachment (they were never a threat), but to Maidan. Especially when we read Michael McFaul’s (former ambassador to Russia) summation of Putin: “He is obsessed with the CIA…..With respect Ukraine he believes the US led the coup in the Ukraine. The Ukrainians had nothing to do with it. It was all the CIA.”

….. Putin has never dealt with economic chaos before. Though some may argue that this will bring him to the table to negotiate with the West, in my opinion any negotiation would be seen as a sign of weakness and is therefore the last thing Putin would want to do.

Putin’s only likely response is to escalate in Ukraine and possibly open up new fronts in other countries where there are “Russians to protect.” But doing so will only harden the sanctions, leading to further economic pain in Russia — and further military adventures to distract Russia’s people from that pain.

I cannot imagine a scenario in which there is any compromise, because for Putin compromise means being overthrown. Judging from all of his actions to date, he is ready to destroy his country for his own self-preservation.

We should start preparing ourselves for a war in Europe that may spread well beyond the borders of Ukraine. The only Western response to this has to be containment. This all may sound alarmist, but I’ve spent the past eight years in my own war with Putin, and I have a few insights about him that are worth knowing.

In Putin’s mind, he is fighting for survival. The US/EU/Nato and Ukraine are just a convenient scapegoat. His real enemy is the Russian people. This 1945 image of Benito Mussolini, his mistress Clara Petacci, and three others hanging outside a petrol station in Milan must haunt his dreams.

When they realize they have been duped, the anger of the Russian people will be palpable.

Read the full article at Unhedged Commentary: Putin Will Never Back Down | Institutional Investor's Alpha.

February 9, 2015

Sectoral imbalances: Where have all the jobs gone?

Great post on Twitter from Naufal Sanaullah depicting US sectoral balances using UK economist Wynne Godley’s analytical framework.

Godley Sectoral Analysis

The key to understanding Godley’s analysis is that the sum of the four sectors is always zero. If one sector runs a deficit, it must be funded by a surplus in another sector — and vice versa. For example, if the government runs a deficit (i.e. spends more than it collects by way of taxes) it must borrow the shortfall from another sector — either the private sector (business or households) or foreign investors.

The federal government has run consistent deficits since 1970, apart from a short interval during the Dotcom era. Deficits were expanded massively during the GFC (2008 global financial crisis) to rescue the economy from a contraction in aggregate demand which, if left un-checked, would have resulted in a deflationary spiral on a scale similar to the 1930s. The government deficit was funded by private (household) saving until the early 1980s. Thereafter, household savings shrunk, gradually replaced by foreign investment. More on this later.

The business sector oscillated between deficit (i.e. borrowing more than they earn) and surplus until a massive investment splurge during the Dotcom era. Deficits by the business sector are not a real cause for concern, provided that borrowed funds are used to make productive investments. Unfortunately that was not always the case in the Dotcom era. Of far greater concern was the large surpluses run during the GFC, when the private sector stopped investing and used savings to repay debt. That is the major reason for the output gap (or GDP gap as it is sometimes called) and slow recovery depicted below.

One of the positives to come out of the GFC has been the resumption of household savings — a healthy sign in the economy if not carried to excess. But there are two glaring negatives.

First, the Federal government has been racking up public debt, kicking the can down the road since the 1970s with little effort to address the imbalance. When private sector savings dwindled in the 1980s, a new player appeared. Fiscal deficits were increasingly funded by foreign capital inflows, allowing government to deliver benefits in excess of taxes collected — like the sugar-plum fairy — without taxpayers being aware that the debt millstone around their necks was rapidly growing. Apart from a brief Clinton-era surplus, during the private sector Dotcom splurge, this has been going on for more than four decades — and is unlikely to change until Americans fix their political system.

A second threat is foreign capital inflows, shown in purple on the graph, which commenced in earnest with Japanese purchases of US Treasuries in the 1980s but reached a ‘nuclear’ scale when China joined the party in the early 2000s. While it may appear fairly benign, with foreign investors stepping in to lend Uncle Sam a helping hand, the damage is insidious. Foreign capital inflows are a major cause of the dwindling household surplus. Far from a friendly loan, these capital inflows were intended to undermine the competitiveness of US manufacturers in both domestic and export markets through currency manipulation.

Foreign Direct Investment in US

To understand how currency manipulation works, we need to examine the foreign surplus in more detail. There are two parts to currency flows between nations: the current (income) account and the capital account. The current account comprises the trade surplus or deficit (the net sum of all trade flows between the two nations) and the smaller net income flow from investments.

Current Account Balance

The capital account reflects all capital flows, whether investment or loans, between the two countries. Again, the sum of the two is always zero. If there is a deficit on the current account (money flowing out), there must be a surplus on the capital account (loans and investments flowing in) to restore the balance. If not, and Japan/China had to increase their exports to the US without a reciprocal flow of capital, the value of the dollar would plummet against the yen/yuan until the trade balance was restored.

Think of it this way. If an importer in the US buys goods from China, they must purchase yuan to pay for the goods. If there are more imports than exports, the demand for yuan will be higher than demand for dollars; so the yuan will rise against the dollar until demand matches supply. But what currency manipulators do is invest money via capital account (mainly in US Treasuries), purchasing dollars to soak up the shortfall so that their currency doesn’t appreciate despite the massive trade surplus with the US.

The impact of this is two-fold. First US manufacturers shed jobs as they lose market share in both domestic and export markets. That cuts into the household surplus as unemployment rises and real wages fall. Second, the US government runs bigger deficits to make up for the demand shortfall in order to buoy economic growth. The end result is that US taxpayers grow poorer — as the size of the public debt millstone increases — while currency manipulators grow richer. The debt binge that led to the GFC was largely fueled by foreign capital inflows. The fact that this imbalance has been allowed to continue is a damning indictment of political leadership in Washington. There is no way that they can be unaware of the damage being caused to US manufacturers, households and to public finances. Change is long overdue.

February 8, 2015

Here’s How to Achieve Full Employment

Economic Policy Institute President Lawrence Mishel provides the U.S. House Committee on Education and the Workforce with a shopping list of measures he believes are necessary to achieve full employment. Some are right on the mark while others seem to have missed the basic rules of Supply and Demand taught in Econ 101. My comments are in bold.

The goals that economic policy must focus on are, thus, creating jobs and reaching robust full employment, generating broad-based wage growth, and improving the quality of jobs.

Jobs

Policies that help to achieve full employment are the following:

1. The Federal Reserve Board needs to target a full employment with wage growth matching productivity.

The most important economic policy decisions being made about job growth in the next few years are those of the Federal Reserve Board as it determines the scale and pace at which it raises interest rates. Let’s be clear that the decision to raise interest rates is a decision to slow the economy and weaken job and wage growth. There are many false concerns about accelerating wage growth and exploding inflation based on the mistaken sense that we are at or near full employment. Policymakers should not seek to slow the economy until wage growth is comfortably running at the 3.5 to 4.0 percent rate, the wage growth consistent with a 2 percent inflation target (since trend productivity is 1.5 to 2.0 percent, wage growth 2 percent faster than this yields rising unit labor costs, and therefore inflation, of 2 percent). The key danger is slowing the economy too soon rather than too late.

Fed monetary policy should not target one sector of the economy (i.e. wages) but the whole economy (i.e. nominal GDP).

2. Targeted employment programs

Even at 4 percent unemployment, there will be many communities that will still be suffering substantial unemployment, especially low-wage workers and many black and Hispanic workers. To obtain full employment for all, we will need to undertake policies that can direct jobs to areas of high unemployment……

Government programs don’t create jobs, they merely redistribute income from the taxed to the subsidised.

3. Public investment and infrastructure

There is widespread agreement that we face a substantial shortfall of public investment in transportation, broadband, R&D, and education. Undertaking a sustained (for at least a decade) program of public investment can create jobs and raise our productivity and growth…..

Agree. But we must invest in productive assets that generate income that can be used to repay the debt. Else we are left with a pile of debt and no means to repay it.

Policies that do not help us reach full employment include:

1. Corporate tax reform

There are many false claims that corporate tax reform is needed to make us competitive and bring us growth. First off, the evidence is that the corporate tax rates U.S. firms actually pay (their “effective rates”) are not higher than those of other advanced countries. Second, the tax reform that is being discussed is “revenue neutral,” necessarily meaning that tax rates on average are actually not being reduced; for every firm or sector that will see a lower tax rate, another will see a higher tax rate. It is hard to see how such tax reform sparks growth.

Zero-sum thinking. If we want to increase employment, we need to increase investment. Tax rates and allowances should encourage domestic investment rather than offshore expansion.

2. Cutting taxes

There will surely be many efforts in this Congress to cut corporate taxes and reduce taxes on capital income (e.g., capital gains, dividends) and individual marginal tax rates, especially on those with the highest incomes. It’s easy to see how those strategies will not work….

Same as above. We need to encourage investment by private corporations.

3. Raising interest rates

There are those worried about inflation who are calling on the Federal Reserve Board to raise interest rates soon and steadily thereafter. Their fears are, in my analysis, unfounded. But we should be clear that those seeking higher interest rates are asking our monetary policymakers to slow economic growth and job creation and reflect a far-too-pessimistic assumption of how far we can lower unemployment, seemingly aiming for unemployment at current levels or between 5.0 and 5.5 percent….

Agreed. Raising interest rates too soon is as dangerous as raising too late.

Wage growth

It is a welcome development that policymakers and presidential candidates in both parties have now acknowledged that stagnant wages are a critical economic challenge…… Over the 40 years since 1973, there has been productivity growth of 74 percent, yet the compensation (wages and benefits) of a typical worker grew far less, just 9 percent (again, mostly in the latter 1990s)……

Wage stagnation is conventionally described as being about globalization and technological change, explanations offered in the spirit of saying it is caused by trends we neither can nor want to restrain. In fact, technological change has had very little to do with wage stagnation. Such an explanation is grounded in the notion that workers have insufficient skills so employers are paying them less, while those with higher wages and skills (say, college graduates) are highly demanded so that employers are bidding up their wages…….

Misses the point. Technology has enabled employers in manufacturing, finance and service industries to cut the number of employees to a fraction of their former size.

Globalization has, in fact, served to suppress wage growth for non-college-educated workers (roughly two-thirds of the workforce). However, such trends as import competition from low-wage countries did not naturally develop; they were pushed by trade agreements and the tolerance of misaligned and manipulated exchange rates that undercut U.S. producers.

This small paragraph hits on the key reason for wage stagnation in the US. Workers are not only competing in a global labor market, but against countries who have manipulated their exchange rate to gain a competitive advantage.

There are two sets of policies that have greatly contributed to wage stagnation that receive far too little attention. One set is aggregate factors, which include factors that lead to excessive unemployment and others that have driven the financialization of the economy and excessive executive pay growth (which fueled the doubling of the top 1 percent’s wage and income growth). The other set of factors are the business practices, eroded labor standards, and weakened labor market institutions that have suppressed wage growth. I will examine these in turn.

Aggregate factors

1. Excessive unemployment

Unemployment has remained substantially above full employment for much of the last 40 years, especially relative to the post-war period before then. Since high unemployment depresses wages more for low-wage than middle-wage workers and more for middle-wage than high-wage workers, these slack conditions generate wage inequality. ……

The excessive unemployment in recent decades reflects a monetary policy overly concerned about inflation relative to unemployment and hostile to any signs of wage growth……

2. Unleashing the top 1 percent: finance and executive pay

The major forces behind the extraordinary income growth and the doubling of the top 1 percent’s income share since 1979 were the expansion of the finance sector (and escalating pay in that sector) and the remarkable growth of executive pay …… restraining the growth of such income will not adversely affect the size of our economy. Moreover, the failure to restrain these incomes leaves less income available to the vast majority……

Zero-sum thinking.

Labor standards, labor market institutions, and business practices

There are a variety of policies within the direct purview of this committee that can greatly help to lift wage growth:
1. Raising the minimum wage

The main reason wages at the lowest levels lag those at the middle has been the erosion of the value of the minimum wage, a policy undertaken in the 1980s that has never fully been reversed. The inflation-adjusted minimum wage is now about 25 percent below its 1968 level……

Will reduce demand for domestic labor and increase demand for offshoring jobs.

2. Updating overtime rules

The share of salaried workers eligible for overtime has fallen from 65 percent in 1975 to just 11 percent today……

This will continue for as long as the manufacturing sector is white-anted by offshoring jobs.

3. Strengthening rights to collective bargaining

The single largest factor suppressing wage growth for middle-wage workers over the last few decades has been the erosion of collective bargaining (which can explain one-third of the rise of wage inequality among men, and one-fifth among women)……

How will this improve Supply and Demand?

4. Regularizing undocumented workers

Regularizing undocumented workers will not only lift their wages but will also lift wages of those working in the same fields of work…..

How will this improve Supply and Demand?

5. Ending forced arbitration

One way for employees to challenge discriminatory or unfair personnel practices and wages is to go to court or a government agency that oversees such discrimination. However, a majority of large firms force their workers to give up their access to court and government agency remedies and agree to settle such disputes over wages and discrimination only in arbitration systems set up and overseen by the employers themselves…..

How will this improve Supply and Demand?

6. Modernizing labor standards: sick leave, paid family leave

We have not only seen the erosion of protections in the labor standards set up in the New Deal, we have also seen the United States fail to adopt new labor standards that respond to emerging needs……

No issue with this. But how will it improve Supply and Demand?

7. Closing race and gender inequities

Generating broader-based wage growth must also include efforts to close race and gender inequities that have been ever present in our labor markets…….

No issue with this. But how will it improve Supply and Demand?

8. Fair contracting
These new contracting rules can help reduce wage theft, obtain greater racial and gender equity and generally support wage growth……

No issue with this. But how will it improve Supply and Demand?

9. Tackling misclassification, wage theft, prevailing wages

There are a variety of other policies that can support wage growth. Too many workers are deemed independent contractors by their employers when they are really employees……

No issue with this. But how will it improve Supply and Demand?

Policies that will not facilitate broad-based wage growth

1. Tax cuts: individual or corporate

The failure of wages to grow cannot be cured through tax cuts. Such policies are sometimes offered as propelling long-run job gains and economic growth (though they are not aimed at securing a stronger recovery from a recession, as the conservatives who offer tax cuts do not believe in counter-cyclical fiscal policy). These policies are not effective tools to promote growth, but even if they did create growth, it is clear that growth by itself will not lift wages of the typical worker…….

Zero-sum thinking. Compare economic growth in high-tax countries to growth in low tax countries and you will find this a highly effective policy tool.

2. Increasing college or community college completion

……advancing education completion is not an effective overall policy to generate higher wages……. What is needed are policies that lift wages of high school graduates, community college graduates, and college graduates, not simply a policy that changes the number of workers in each category.

Better available skills-base leads to increased competitiveness in global labor market and more investment opportunities in the domestic market.

3. Deregulation

There is no solid basis for believing that deregulation will lead to greater productivity growth or that doing so will lead to wage growth. Deregulation of finance certainly was a major factor in the financial crisis and relaxing Dodd–Frank rules will only make our economy more susceptible to crisis.

What we need is (simple) well-regulated markets rather than (complex) over-regulation.

4. Policies to promote long-term growth

Policies that can substantially help reduce unemployment in the next two years are welcomed and can serve to raise wage growth. Policies aimed at raising longer-term growth prospects may be beneficial but will not help wages soon or necessarily lead to wage growth in future years. This can be seen in the decoupling of wage growth from productivity over the last 40 years. Simply increasing investments and productivity will not necessarily improve the wages of a typical worker. What is missing are mechanisms that relink productivity and wage growth. Without such policies, an agenda of “growth” is playing “pretend” when it comes to wages.

Long-term investment is the only way forward. To dismiss this in favor of short-term band-aid solutions is nuts!

My proposal is a lot simpler, consisting of only five steps:

Invest in productive infrastructure.
A simplified tax regime with low rates and few deductions apart from incentives to increase domestic investment.
Restrict capital inflows through trade agreements and maintain a fair exchange rate.
Fed monetary policy supportive in the short-term but with long-term target of neutral debt growth — in line with GDP (nominal).
Move education up the priority list for government spending. Improve the education standards and training of teachers — they are the lifeblood of the system — rather than increasing numbers.

January 14, 2015

Corporate profits and employee compensation

Employee compensation as a percentage of net value added by nonfinancial corporations has been falling since its Dotcom peak in 2000 and is now approaching lows last witnessed in the 1960s. Both rising productivity, through technological advances, and offshoring of blue-collar jobs have contributed to the fall.

Net Value Added: Employee Compensation & Corporate Profits

Corporate profits (as a percentage of net value added by nonfinancial corporations) have shown a corresponding rise for the same period, demonstrating an inverse relationship over the last half-century. Rises and falls in both employment costs and corporate profits (as a percentage of net value added) are most likely attributable to fluctuations in output per employee (productivity) rather than fluctuating wage rates.

The question is: are rises in corporate profits and corresponding falls in employee compensation, as a percentage of net value added, sustainable? Is this time different, or are we likely to witness a peak followed by a sharp fall as in the 1960s? Productivity improvements through offshoring jobs are likely to continue for as long as the Dollar remains strong relative to Asian exporters. In other words, a very long time. Technological advances such as automation may also reduce employment costs per unit of output. But there is no clear answer as to how far profit margins will be eroded by increased competition from Europe and Asia. All we can do is monitor the relationship between employee compensation and net value added for nonfinancial corporations for clues. So far, there is no indication that the decline is reversing.

January 14, 2015

Health Care

One of the top-performing sectors, both in the US and Australia, is Health Care.

DJUS Health Care

The strength of a momentum strategy is the ability to identify and concentrate investment in outperforming sectors like this. Our S&P 500 Momentum strategy is overweight (40%) in this sector, with investments in Pharmaceuticals, Health Care Supplies and Biotechnology stocks.

January 14, 2015

Dollar rises as yields fall

Flight to safety is driving demand for the Dollar, with the Dollar Index breaking resistance at 90 to signal a long-term up-trend.

Dollar Index

Long-term Treasury yields are falling in response to a lower inflation outlook. But foreign Treasury purchases may also be a contributing factor, with China seeking to protect its advantage in export markets.

10-Year Treasury Yields

Expect strong support at 1.40 to 1.50 percent. Yields are unlikely to fall below that level unless there is a serious risk of deflation. Recovery above 3.0 percent appears some way off, but would warn that the 30-year secular bull market in bonds is coming to an end.

December 23, 2014

Markets back on track

Threat of a Russian collapse roiled markets in early December, but the immediate crisis now seems to have passed.

Recovery of the S&P 500 above resistance at 2080 would indicate another advance , with a target of 2150*. Rising 13-week Twiggs Money Flow troughs indicate long-term buying pressure. Reversal below 2000 is most unlikely.

S&P 500 Index

* Target calculation: 2000 + ( 2000 – 1850 ) = 2150

A 10-year view of CBOE Volatility Index (VIX) suggests low to moderate risk typical of a bull market.

S&P 500 VIX

My favorite bellwether, transport stock Fedex, also underwent a correction. The long tail suggests buying pressure and breakout above the recent high would confirm a strong bull trend, indicating rising economic activity.

Fedex

Dow Jones Euro Stoxx 50 found support at 3000 and is likely to test 3300. Rising 13-week Twiggs Money Flow indicates buying pressure, but the index is likely to continue ranging between these two levels until tensions between Russia and Eastern Europe are resolved.

DJ Euro Stoxx 50

China’s Shanghai Composite Index is in a strong bull trend, having broken resistance at 2500, and is likely to test the 2009 high at 3500. Rising 13-week Twiggs Money Flow indicates strong (medium-term) buying pressure.

Shanghai Composite Index

I continue to question China’s ability to sustain this performance, given their poor economic foundation.

RT @TomOrlik Puns are now banned in China so I'll just say that November electricity, cement, & steel output was weak pic.twitter.com/4FY3Uc6s1R

— Patrick Chovanec (@prchovanec) December 12, 2014

Japan’s Nikkei 225 Index breakout above its 2007 high of 18000 would signal an advance to 19000*. Rising 13-Week Twiggs Money Flow indicates strong buying pressure. Index gains are largely attributable to rising inflation and a weaker yen.

Nikkei 225 Index

* Target calculation: 18000 + ( 18000 – 17000 ) = 19000

India’s Sensex found support at 27000. Recovery above 28000 would suggest another advance. Breakout above 29000 would confirm a target of 31000*.

Sensex

* Target calculation: 29000 + ( 29000 – 27000 ) = 31000

ASX 200 performance remains weak. Breach of the recent descending trendline suggests that the correction is over, but only breakout above 5550 would complete a double-bottom formation, suggesting a fresh advance. Rising troughs on 13-week Twiggs Money Flow indicate medium-term buying pressure. Reversal of TMF below zero, or breach of support at 5000/5150, is now less likely, but would warn of a down-trend.

ASX 200

* Target calculation: 5500 + ( 5500 – 5000 ) = 6000

December 7, 2014

A long-term view

Better than expected US jobs data and strong German factory orders helped to rally markets Friday. Also, ECB chief Mario Draghi’s Thursday announcement is seen as supporting broad-based asset purchases (QE) early in 2015. A long-term view of major markets may help to place current activity in perspective.

The S&P 500 continues a strong advance, with rising 13-week Twiggs Money Flow indicating medium-term buying pressure. Long-term and medium targets coincide at 2250* and we should expect further resistance at this level.

S&P 500 Index

* Target calculation: 1500 + ( 1500 – 750 ) = 2250; 2050 + ( 2050 – 1850 ) = 2250

CBOE Volatility Index (VIX) continues to indicate low risk typical of a bull market.

S&P 500 VIX

Germany’s DAX broke resistance at its earlier high of 10000, suggesting a further advance. Recovery of 13-week Twiggs Momentum above zero indicates continuation of the up-trend. The long-term target is 12500*, though I cannot see this being reached until tensions in Eastern Europe are resolved.

DAX

* Target calculation: 7500 + ( 7500 – 2500 ) = 12500

The Footsie is testing long-term resistance at 6900/7000. Respect of the zero line by 13-Week Twiggs Money Flow indicates long-term buying pressure. Breakout above 7000 would signal a fresh primary advance, with a long-term target of 10500*.

FTSE 100

* Target calculation: 7000 + ( 7000 – 3500 ) = 10500

China’s Shanghai Composite Index broke resistance at 2500 and is likely to test the 2009 high at 3500. Rising 13-week Twiggs Money Flow indicates strong (medium-term) buying pressure.

Shanghai Composite Index

Japan’s Nikkei 225 Index is testing resistance at its 2007 high of 18000. 13-Week Twiggs Money Flow respecting the zero line indicates long-term buying pressure. Breakout would signal another primary advance. A long-term target of 28000* seems unachievable unless one factors in rising inflation and continued devaluation of the yen.

Nikkei 225 Index

* Target calculation: 18000 + ( 18000 – 8000 ) = 28000

Weak ASX 200 performance is highlighted by the distance below its 2007 high of 6850. Falling commodity prices have retarded the recovery and are likely to continue for some time ahead.

The 2005-2008 Australian commodities boom was squandered, damaging local industry and hampering the current recovery. Norway successfully weathered a similar commodities boom in the 1990s, protecting local industry while establishing a sovereign wealth fund that is the envy of its peers. Their fiscal discipline set a precedent which should be followed by any resource-rich country looking to navigate a sustainable path through a commodities boom and avoid the dreaded “Dutch Disease”.

Respect of support at 5000 would indicate the primary up-trend is intact — but declining 13-week Twiggs Money Flow indicates selling pressure. Reversal of TMF below zero or breach of support at 5000/5150 would warn of a down-trend.

ASX 200

* Target calculation: 5000 + ( 5000 – 4000 ) = 6000

The daily chart shows a slightly improved perspective. 21-Day Twiggs Money Flow oscillating around zero signals indecision. Recovery above 5400 would suggest the correction is over. But reversal below 5200 is as likely and would warn of a test of primary support at 5120/5150.

ASX 200 daily

December 4, 2014

A 3-Sentence Explanation Of What Crashing Oil Prices Mean For America | Business Insider

Charles Schwab’s Liz Ann Sonders offers some simple maths that puts it all into perspective. In three sentences:

Consumer spending represents 68% of the US economy. Oil and gas capex represents about 1% of US GDP and less than 9% of US total capex (which in turn represents about 12% of US GDP). Therefore, the benefit of lower energy prices to the consumer and many businesses greatly outweighs the significant hit to energy companies and/or energy-oriented capex, especially in energy-oriented states.