Category: The Big Picture

Failure of western democracy, tensions between the US and China, the Arab Spring and other major global events.

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Putin antics fail to impress markets

For all his macho posturing, Vladimir Putin has demonstrated an inability to move financial markets with his antics in Eastern Ukraine. His latest incursion towards Luhansk, with white-painted military trucks bearing aid to the rebel-held city, unchecked by the Red Cross, passed barely noticed. Instead markets are intently focused on nuances from a 68-year old Jewish mum at Jackson Hole, who also happens to chair the Federal Reserve.

I would have loved to call Janet Yellen a “grandmother”, but son Robert Akerlof — himself a PhD in Economics — does not claim any offspring on his CV. The apple doesn’t fall far from the tree. Husband, George Akerlof, is a Nobel prize-winning economist and professor emeritus at University of California, Berkeley.

The image below highlights the differences between the Fed and the ECB:

The Fed’s more stimulatory approach has paid dividends in terms of economic growth and employment while inflation expectations remain muted. The inflation breakeven rate — 10-year Treasury yield minus the yield on equivalent inflation-indexed securities — continues to range between 2.0% and 2.50%.

Inflation breakeven rate

The ECB’s more austere approach, on the other hand, has caused a world of pain.

Market update

  • S&P 500 tests 2000.
  • VIX continues to indicate a bull market.
  • DAX hesitant rally.
  • China bullish.
  • ASX 200 faces strong resistance.

The S&P 500 hesitated after making a new high on Thursday, but there was no dramatic fall in response to news from Eastern Ukraine. Expect retracement towards 1950, followed by another test of 2000. 21-Day Twiggs Money Flow is likely to re-test the zero line, but respect would indicate strong buying pressure. Breach of support at 1900, warning of a reversal, remains unlikely.

S&P 500

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

Declining CBOE Volatility Index (VIX) indicates low risk, typical of a bull market.

S&P 500 VIX

Germany’s DAX rallied above 9300 on the weekly chart, but 13-week Twiggs Money Flow warns of continued selling pressure. Reversal below support at 8900/9000 would warn of a primary down-trend.

DAX

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

Shanghai Composite Index is testing resistance at 2250. Breakout would confirm a primary up-trend, signaling an advance to 2500*. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Respect of resistance, however, would suggest further consolidation.

Shanghai Composite Index

* Target calculation: 2250 + ( 2250 – 2000 ) = 2500

Tall wicks on ASX 200 daily candles indicate strong resistance at 5650. Respect would suggest retracement to 5550, while follow-through would be a strong bull signal, suggesting an advance to 5850*. Another 21-day Twiggs Money Flow trough above zero would indicate long-term buying pressure. Reversal below 5450 is unlikely, but would warn of a test of primary support.

ASX 200

* Target calculation: 5650 + ( 5650 – 5450 ) = 5850

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Barack Obama: Foreign policy realist?

Harvard professor, Stephen M Walt says Barack Obama isn’t weak and waffling — he’s calculating, coldhearted, and decisive when it counts:

….One can even see elements of this approach in Obama’s handling of China. He has repeatedly emphasized Asia’s importance to the United States, and the much-publicized “rebalancing” was obviously intended to signal to America’s Asian partners that it wasn’t abandoning the region. Obama reinforced these themes during his visit to Asia in April, but the administration has implemented this policy at a measured pace, content to let China’s growing assertiveness do the work for us. Overreacting would alarm the local powers and let them continue to free-ride, while speaking softly makes present and future allies more eager for help and more willing to do what America wants to get it.

The common thread to these various responses is an appreciation not just of the limits of U.S. power, but also of the limited need to exercise it. “Limited” does not mean zero, which is why sensible people oppose a return to 19th-century-style isolationism. But this approach recognizes that the overwhelming majority of problems in the world do not threaten the United States directly and therefore do not require an immediate, forceful, and potentially costly U.S. response.

As Andrew Sullivan likes to say, Obama’s greatest political genius has been his Road Runner-like ability to let enemies beat themselves.

Read more at Is Barack Obama More of a Realist Than I Am?.

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Paul Krugman: Why We Fight Wars | NYTimes.com

…Once upon a time wars were fought for fun and profit; when Rome overran Asia Minor or Spain conquered Peru, it was all about the gold and silver. And that kind of thing still happens. In influential research sponsored by the World Bank, the Oxford economist Paul Collier has shown that the best predictor of civil war, which is all too common in poor countries, is the availability of lootable resources like diamonds. Whatever other reasons rebels cite for their actions seem to be mainly after-the-fact rationalizations. War in the preindustrial world was and still is more like a contest among crime families over who gets to control the rackets than a fight over principles.

If you’re a modern, wealthy nation, however, war — even easy, victorious war — doesn’t pay….We might add that modern war is very, very expensive….So the thesis of “The Great Illusion” was right: Modern nations can’t enrich themselves by waging war. Yet wars keep happening. Why?

One answer is that leaders may not understand the arithmetic…..The larger problem, however, is that governments all too often gain politically from war, even if the war in question makes no sense in terms of national interests.

Read more at Why We Fight Wars – NYTimes.com.

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Novorossiya Is Coming Apart at the Seams

From Anna Nemtsova:

Pro-Kremlin think tank analyst and insider Yuri Krupnov explained the shift to me: “There’s a crisis of management in Russia,” he said. “Moscow elites have managed to convince Putin to give up the idea of Novorossiya. Many in Moscow can’t wait for European Union sanctions to be lifted, so Putin will meet with [Ukrainian President] Poroshenko and [E.U. Commission President] Barroso soon and most probably cut a deal.” But Krupnov hastens to add that Russia’s willingness to bargain with Kiev does not signal an end to the conflict: “Moscow has betrayed Novorossiya,” he says, “but that doesn’t mean it will guarantee peace.”

Read more at Novorossiya Is Coming Apart at the Seams.

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Vladimir Putin’s pointless conflict with Europe leaves it a vassal of China – Telegraph

From Ambrose Evans-Pritchard:

European officials calculate that Mr Putin will not dare to cut off energy supplies, since to do so would bring the Russian state to its knees within months. But even if he tried – as a shock tactic – it would not achieve much. Oil can be obtained anywhere.

Europe’s gas inventories have risen to 81pc of capacity, up from 46pc in March. Britain is at 94pc……Japan has just given the go-ahead for two nuclear reactors to restart in October, with seven likely by the end of the year. Koreans are also firing up closed nuclear reactors. All this frees up LNG.

Whether this is fruit of a co-ordinated strategy, the net effect is that inventories and spare LNG could cover a Russian cut-off for a long time, probably through the winter with rationing. Areas of eastern Europe have no pipeline supply from the West, but “regas” ships could plug some gaps in an emergency. The gas weapon is not what it seems.

The Kremlin is counting on acquiescence from the BRICS quintet as it confronts the West, and counting on capital from China to offset the loss of Western money. This is a pipedream. China’s Xi Jinping drove a brutal bargain in May on a future Gazprom pipeline, securing a price near $350 per 1,000 cubic metres that is barely above Russia’s production costs….

Read more at Vladimir Putin's pointless conflict with Europe leaves it a vassal of China – Telegraph.

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Ukraine: An opposing point of view

I received this from a long-time subscriber and requested permission to publish in the interest of presenting both points of view:

Dear Colin,
Being a subscriber to Incredible charts for many years and liking it very much, for some external reasons I was not reading articles for a long time, but when I happened to read the latest “Europe leads markets lower” article I was completely taken aback how it is politically charged and how it seems to be based on mass media propaganda, not on unbiased facts and analysis… It does not leave a good impression at all. I don’t mind other people having their own opinion, but I think that it should not be imposed on others in supposedly non-political, business articles, so may we respectfully ask your editors to refrain from politically motivated language and argumentation in the business articles and leave it to politicians and political forums instead ? I am talking about the anti-Russian bias and rhetoric – I am a Ukrainian citizen and lived in Ukraine for 30 years before moving to Australia 20+ years ago and I still have friends living in Ukraine, so I think that I am a bit more qualified on this topic than Mr. Abbott’s speeches or Mr. Murdoch’s newspapers. The plain fact is that neo-nazi thugs came to power in Ukraine as the result of coup-de-tat in February (supported and sponsored by some Western countries) and once the Constitution was thrown out of window, the law and order does not exist any more there (so called theory of “controlled chaos” is in full swing), all power ministry heads and many personnel were replaced with ultra-nationalists, civil war was started and atrocious war crimes are committed as we speak – anyone with the different view to people in power at the moment is declared an enemy, people are disappearing, burned alive (in Odessa on 2nd of May), etc. Ukrainian army and semi-legal “national guards” battalions are bombarding south-east regions after they declared that they are not recognising Kiev’s neo-nazi government and everyone who knows a little bit of history would understand why that was their choice voted in referendum by majority of these regions population. This has nothing to do with Russia, but has everything to do with the people in power in Ukraine and their western supporters. In fact, Russia’s showed and still showing a great deal of patience for so many years and seems to be the only country that tries to find some peaceful solution without depriving people of their basic rights to choose the way of living. As for Crimea, this was Russian people/territory for hundreds of years until year 1954 when it was given (read stolen) by decree from the then General Secretary of USSR communist party of Ukrainian nationality and that decree was not legal even by laws of that time – no one raised strong objections at the time simply because it was the same country anyway. Later, when breaking apart Soviet Union (again not legally and against the will of people who spoke on referendum), no one cared about sorting this out properly and for 23 years Ukraine was ruling in Crimea while Russia and people of Crimea were somewhat patient about it until the February coup-de-tat in Kiev and neo-nazi coming to power. Parliament and people of Crimea made their choice very clear in law and referendum where 97% of people voted to become independent state (not unlike Kosovo so cherished by Western countries) and their natural choice and only protection would be to ask Russia to join it which Russia accepted and why it should not ? People of Crimea were saying at the time that “we may not be joining the Heaven in Russia, but definitely we are escaping the Hell” which is exactly what happens now in the former south-east region of Ukraine. If anything, Mr. Obama and other western leaders should stop baseless and counter-productive aggression against Russia and tell their buddies in Kiev to stop this violence and start diplomatic efforts. My apologies for such a long email, but I am just very saddened by the way how it is portrayed in Western media – brainwashing people who are not multilingual and cannot access alternative points of view.
Regards,
Name Withheld

Dear Name Withheld,
I appreciate you taking the time to write and express your views.

I am very concerned about the state of affairs in Eastern Europe. It is, and always has been, a tinder box. And one unintentional spark can start a fire that none of the parties intended. Respect for borders and for the rights of other countries and their citizens is one of the fundamental safeguards to prevent such outbreaks of war. Russia, no matter how strong a regional power, does not have the right to simply take territory by force because it once belonged to them or because they need the territory as a “buffer” to protect themselves from “encirclement” or outright aggression. If all states acted like that we would be in a constant state of war. They have to respect the conventions designed to safeguard the world from future wars and pursue the matter through negotiation or the international courts.

If history serves me correctly, the territory is neither Russian or Ukrainian, but Crimean. It should be up to the people who reside in the region and those who originate from there, like the Tartars, to negotiate its future and not be subjected to a ballot at the point of a gun.

Please can I post your letter on my blog in the interests of giving both points of view — with your name withheld if you wish.

Regards,
Colin

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For Chinese Power Game, a Changing Equation

From Sebastian Veg, Research Professor at the School of Advanced Studies in Social Science in Paris:

By shaking up the unwritten rules that have prevailed since Deng Xiaoping consolidated power, Xi is taking a political risk. In exchange for the immunity that PBSC members were granted, they were expected to retire at the end of their term, and to remain loyal to collective decisions. If immunity is denied, both of these tenets may begin to be questioned. Why should powerful leaders retire if they can then be targeted? Why should they accept decision by consensus if they can later be made to pay the consequences as is alleged in Zhou’s case with the vote on Bo? They may be better off spending their terms gathering compromising material on other colleagues. Xi no doubt understands the risk, and believes it must be taken because the Party’s legitimacy is in danger. However, by disturbing the carefully crafted institutional balance, he runs the risk of overplaying his hand.

Read more at For Chinese Power Game, a Changing Equation.

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Has Vladimir Putin taken a dangerous ideological turn?

Vladimir Putin has long shown himself to be ruthless and cynical. But also pragmatic and rational.

In his third term in the Kremlin, however, and particularly in the Ukraine crisis, Putin appears to have taken a decisive ideological turn.

As pressure mounts from Western sanctions and Russia becomes more isolated, speculation has intensified about whether Putin will seek an exit strategy from the Ukraine crisis, or whether he will escalate yet again.

The answer largely depends on which Putin — the pragmatist or the ideologue — the West is dealing with.

On the latest “Power Vertical Podcast” Brian Whitmore discusses the issue with co-host Mark Galeotti, a professor at NYU, an expert on Russia’s security services, and author of the blog “In Moscow’s Shadows”; and Kremlin-watcher Ben Judah, author of the book “Fragile Empire: How Russia Fell Out Of Love With Vladimir Putin.”

Also on the podcast, Mark, Ben, and Brian discuss how attitudes in Europe about Russia are changing — and changing dramatically.

From Radio Free Europe/ Radio Liberty.

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