Analysis of the global economy
Noah Smith’s conclusion sums up the state of macroeconomics:
After the financial crisis, a bunch of people realised how little macroeconomists do know. I think people are now slowly realising just how little macroeconomists can know. There is a difference.
Read more at Why Macroeconomics Doesn’t Work Very Well | Business Insider Australia.
Steven Russolillo at WSJ reports:
Actions by central bankers across the globe are propping up asset prices to artificial levels that are potentially putting investors at risk, Pimco CEO Mohamed El-Erian said in an interview with the Wall Street Journal.
“Investors should recognize that in virtually every single market segment, we are trading at very artificial levels,” El-Erian told WSJ’s Francesco Guerrera. “It’s true for bonds, it’s true for equities. It’s true across the board.”
This reinforces my long-term bullish outlook for gold. Central banks are unlikely to cease their easy money policies any time soon. What we are currently witnessing is the opposite, with the Bank of Japan going ‘nuclear’ in an attempt to kill persistent deflation that has dogged them for over two decades.
I strongly recommend that you watch the video interview at Pimco’s El-Erian: Markets Trading at ‘Very Artificial Levels’ – MoneyBeat – WSJ.
The S&P 500 is set to break resistance at 1600, which would suggest an advance to 1700, but expect a correction to test the new support level before the quarter ends. Troughs above zero on 13-week Twiggs Momentum indicate a healthy primary up-trend.
* Target calculation: 1350 + ( 1350 – 1100 ) = 1600
The red and green arrows above indicate previous turning points at March and September quarter ends. A correction that respects support at 1500 in the current quarter would confirm the breakout.
Falling 10-year Treasury yields suggest that inflation expectations are falling. Breach of 1.70% would indicate another test of primary support at 1.40%, but rising Twiggs Momentum indicates that a bottom is forming.
Reversal of gold below $1500/ounce confirms that demand for gold as a safe-haven and inflation-hedge is fading — a bullish sign for stocks.
Bellwether transport stock Fedex dipped below $100 after an earnings disappointment but remains in a primary up-trend. Recovery above $100 would suggest that the economic recovery is on track, while breach of the rising trendline (and support at $85) would warn of a down-turn.
Structural flaws in the US economy remain, but the market is gaining momentum and the current advance shows no signs of ending.
Gabriele Steinhauser at WSJ writes:
A group of key crisis managers believes cleaning up weak banks is the only way to get Europe’s economy to grow again, after superlow interest rates and large-scale liquidity injections from the ECB have failed to produce the desired results. These officials see continued doubts over the health of many lenders as the main reason banks are reluctant to lend to companies, especially in the continent’s weaker countries.
“We’ve been stuck in this rubbish for five years, because we’ve been doing everything to prevent the banks from being recapitalized properly and the stress tests from being stringent enough,” said a senior EU official. “If we don’t do this, we will stay in this trap until 2020.”
The time has come to clear up the mess from the GFC and strengthen bank balance sheets — not only in Europe — so that a similar financial crisis is unlikely to ever happen again. Moves are also afoot in the US where Senators Sherrod Brown (D-Ohio) and David Vitter (R-La.) are working on a bipartisan bill to end too-big-to-fail banks. The bill does not attempt to break up big banks but focuses on improving bank capital ratios. Risk-weighted capital ratios as suggested by Basel III disguise banks’ true leverage and encourage risk-taking. Australian banks are particularly exposed to low risk-weighting of residential mortgages. Eliminating risk-weighting would force banks to strengthen their underlying capital base and discourage risk concentration in low risk-weighted areas.
The biggest obstacle to change, however, is the banks who benefit from an implicit taxpayer-funded guarantee in the event of failure. Being able to rely on a bailout enables them them to take bigger bets than their balance sheets would otherwise allow. Columbia University’s Charles Calomiris points out that the banks are able to get away with this because they are supported by populist democratic governments who trade off banking instability in return for political (and financial) support.
Read more at New Drive for Tougher Testing of European Banks – WSJ.com.
Victoria McGrane at WSJ reports on a paper by Columbia University’s Charles Calomiris, presented at the Atlanta Fed’s 2013 Financial Markets Conference.
In populist democracies, such as the United States, the regulation of banking is used as a political tool to favor some parties over others. It is not that the dominant political coalition in charge of banking policy desires instability, per se, but rather, that it is willing to tolerate instability as the price for obtaining the benefits that it extracts from controlling banking regulation………..
Smart economists with their regulatory ideas are sort of dead on arrival. Political coalitions will decide — not whether you’ve got the right VAR model — [but] whether a banking system is going to be set up with rules that will lead it to be stable and have abundant credit or not.
Charles Calomiris has absolutely nailed it: Populist democracies are prone to financial instability. If you want a stable financial system, you first need to overhaul the political system.
Read more at Why Canada Can Avoid Banking Crises and U.S. Can’t – Real Time Economics – WSJ.
Extract from an interview with Michael Pettis [professor of finance at Peking University in Beijing] on the Daily Ticker talking about China’s economy, which he claims is not headed for disaster, but will necessarily slow as the economy rebalances. Full HD interview can be watched here: http://finance.yahoo.com/blogs/daily-ticker/plenty-things-worry-china-bird-flu-not-one-174030450.html
The S&P 500 is headed for resistance at 1575, after repeated tests of support at 1540. Breakout above 1575 would test 1600*, but reversal below 1540 remains as likely and would warn of a correction. Although ripe for a correction, 13-week Twiggs Momentum troughs above zero continue to reflect a strong primary up-trend.
* Target calculation: 1475 + ( 1475 – 1350 ) = 1600
Jesse Eisinger’s interview with risk specialist John Breit highlights an issue facing Australian banks. Residential mortgages are allocated a low risk weighting — 15% to 17% because of historic performance — compared to 50% for US banks. The big four banks piled into this area because of the perceived low risk, leveraging up to 50 times capital. Risk-weighted capital ratios (around 10%) still appear healthy, but they conceal a hidden danger from the resulting housing bubble.
[Breit] despises the concept of “risk-weighted assets,” where banks put up capital based on the perceived riskiness of the assets. Inevitably, he argues, banks will “pile into” the same types of supposedly safe investments, creating bubbles that make the risks far more severe than the initial perceptions. Paradoxically, risk-weighting can leave banks setting aside the least capital to cover the biggest dangers.
“I could not be more disappointed,” he said. “The cynic in me thinks this is all in the interests of senior management and regulators to avoid blame. They may not think they can prevent the next crisis, but they then can blame the statistics.”
Read more at Why Risk Managers Should Be Spymasters – ProPublica.
The yield on 10-year Treasury Notes retreated below 2.00%. Falling bond yields indicate the expected time horizon for low short-term interest rates is lengthening — a negative reflection on the economy.
The first line of support for $TNX is 1.70%; breach would signal another attempt at 1.40%. Bullish divergence on 13-week Twiggs Momentum indicates that a base is forming and primary support is unlikely to be broken.
The S&P 500 retreated from its 2007 high at 1575.
* Target calculation: 1530 + ( 1530 – 1485 ) = 1575
Bearish divergence on 21-day Twiggs Money Flow continues to warn of mild selling pressure. Breach of support at 1530 — and the rising trendline — would warn of a correction.
The Russell 2000 Index is stronger, having broken clear of its 2007 high at 860. A correction that respects the new support level (860) would confirm a strong primary up-trend.
While there are structural flaws in the US economy, QE from the Fed has forced investors to increase risk in search of yield. The current advance shows no signs of ending.
Mercedes Whie reports on a lecture by developmental economist Lant Pritchett:
One common belief among people working in international development is that a poor country can be changed by improving its education system, but Pritchett’s research suggests otherwise. The problem in poor countries is that they cannot make effective use of their people’s skills, Pritchett said, so giving them more skills does lead to development. Counter-intuitively, his research has shown that countries whose education system improves actually grow slower on average. He suggests that one reason for this may be that putting more educated people into a corrupt bureaucracy may result in more sophisticated corruption.
Read more at Everything you think you know about poverty is wrong | Deseret News.
