Analysis of the global economy
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.
Ralph Benko shares an insight on US healthcare from columnist Warren Brookes on Forbes:
Brookes shared an indelible insight. He observed that it was possible to provide good health care at an affordable cost through the free market, rationing it by price. And it was possible to provide good health care at an affordable cost by the government through state agencies, rationing it by thoughtful policy. And that America had managed to create a monstrous hybrid of the two, the worst possible system: lousy care at unaffordable prices.
Read more at Mitch McConnell Prepares To Give Barack Obama The Political Shellacking Of A Lifetime – Forbes.
Izabella Kaminska made a strong argument on FT Alphaville last year for the RBA to lower interest rates and weaken the Australian Dollar to protect manufacturing and export industries:
Australia’s current account deficit coupled with a deeply negative net external debt position both provide strong fundamental impetus for currency weakening. Should the RBA want to engineer currency depreciation, lower interest rates are likely to be more than enough. Indeed, even if interest rates decline only gradually to reflect a structurally slowing economy there are plenty of fundamental reasons for the Australian dollar to weaken.
The case for lower interest rates still holds true but the RBA is obviously concerned by signs of recovery in housing prices that could exacerbate the existing property bubble. Robert Gottliebsen at Business Spectator reports:
In less than three months the market price of a bottom of the range Meriton inner-Sydney apartment has risen 6 per cent from about $500,000 to around $530,000……According to Meriton’s Harry Triguboff, local buyers have jumped from 15 to 40 per cent of the market.
There is a solution. The RBA can lower interest rates provided it simultaneously introduces macroprudential steps similar to those being considered by the RBNZ: increase the amount of capital banks must set aside to cover potential losses from high loan to valuation ratio (LVR) home loans. That would make high LVR loans more expensive and discourage property speculation, taking some of the heat out of the housing market.
Australia could also learn from the Chilean experience of resources boom-bust cycles and adopt similar policies to those being considered by Mongolia. Gregory Smith explains:
Eric Parrado, former head of the Chilean ‘Economic and Social Stabilization Fund’, tells us that “if natural resource booms are well managed they can be a blessing” and that “an important general lesson is that governments should avoid temptation to spend significant temporary surpluses”.
Yves Smith reports on attempts to undermine the Volcker Rule and why the rule is so important:
In the US, depositors have actually been put in a worse position than Cyprus deposit-holders, at least if they are at the big banks that play in the derivatives casino. The regulators have turned a blind eye as banks use their depositaries to fund derivatives exposures. And as bad as that is, the depositors, unlike their Cypriot confreres, aren’t even senior creditors. Remember Lehman? When the investment bank failed, unsecured creditors (and remember, depositors are unsecured creditors) got eight cents on the dollar. One big reason was that derivatives counterparties require collateral for any exposures, meaning they are secured creditors. The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders.
Read more at When You Weren’t Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate Derivatives « naked capitalism.
Translation from an interview by Marcel de Boer & Martin Visser with Willem Buiter, chief economist at Citgroup:
Is Europe creating zombie banks?
These already exist. Most of the banks are zombie banks. There is little new lending to businesses and households. Zombie banks will not offer credit even on good projects — that is already evident on a large scale.
Full article (in Dutch) at ‘De meeste banken zijn zombiebanken’ | Het Financieele Dagblad.
The S&P 500 managed to close at a new high, with most fund managers reporting good results for the quarter, but does this signal a new bull market or a last-gasp effort to lock in performance bonuses before the market subsides into a correction?
While markets may be rising, there is strong risk aversion.
“@bespokeinvest: Utilities P/E now up to 16.75, higher than the P/Es of Tech, Financials, Industrials, Health Care, Energy and Materials.”
— Downtown Josh Brown (@ReformedBroker) March 28, 2013
This is definitely not a classic bull market.
One also needs to be wary of September and March quarter-ends. They often represent significant turning points, with new highs (red arrows) and new lows (green arrows) frequently proving unsustainable.
* Target calculation: 1530 + ( 1530 – 1485 ) = 1575
While there is no sign of divergence on 13-week Twiggs Money Flow, which would indicate unusual selling pressure, it is important to remain vigilant over the next quarter rather than blindly follow the herd. Bearish (TMF) divergence or reversal of the S&P 500 below 1500 would warn of a correction.
