The circus in Washington | Bob Doll
We don’t want to make light of the mounting troubles the president faces, but we are more focused on metrics such as consumer and business confidence levels as signs of how much the political turmoil will negatively affect financial markets.
Bob Doll, Nuveen Investments – Weekly Commentary
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
East to West: US rallies, China falls
The S&P 500 is testing its January high at 2870. A rising Trend Index indicates buying pressure. Follow-through is likely to test resistance at 3000.
A monthly chart of the NASDAQ 100 illustrates tech stock strength, with a rally from 4500 to 7500 in just two years. Breakout above medium-term resistance at 7500 is more likely, offering a target of 8000, while a correction would test support at 7000. Breakout from the triangle pattern on the Trend Index would indicate index direction.
Canada’s TSX 60 index is also advancing. A rising Trend Index suggests buying pressure. Retracement that respects support at 960 is likely and would signal another advance, with a target of 1040.
China paints the opposite picture, with the Shanghai Composite Index testing long-term support at 2700. Trend Index peaks below zero warn of selling pressure and breach of support would offer a long-term target of the 2014 low at 2000.
Hong Kong’s Hang Seng Index broke support at 28,000/28,500 offering a long-term target of 25,000.
South Korea’s Seoul Composite Index found support above 2200. Retracement to test new resistance at 2350 is likely. A lot depends on progress in peace negotiations with North Korea.
Japan’s Nikkei 225 is consolidating between 23,000 and 24,000 suggesting uncertainty over fallout from a threatened US-China trade war.
India is more on the periphery of current trade disputes, with the Nifty continuing its advance toward a target of 12,000.
In Europe, Dow Jones Euro Stoxx 600 continues to reflect uncertainty, with long-term consolidation below 400. Breakout would signal a fresh advance but don’t hold your breath. It could take a while.
The Footsie is retracing to test support at 7500 but respect is likely and would offer a target of 8000.
North America clearly leads the global recovery, while Asia lags. Europe is sandwiched in the middle, with potential loss of trade in the East and West if a trade war erupts.
Thucydides once wrote “When one great power threatens to displace another, war is almost always the result.” In his day it was Athens and Sparta but in the modern era, war between great powers, with mutually assured destruction (MAD), is most unlikely. What we are witnessing is negotiation to define rules for peaceful coexistence in the 21st century. A lack of clear rules increases the risk of miscalculation and rapid escalation to a hard conflict.
Absent the willingness to use military force, the country with the greatest economic power is in the strongest position to set the rules.
War is a matter not so much of arms as of money.
~ Thucydides (460 – 400 B.C.)
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
Australia’s Debt Bomb
China sees red
From Darren Gray & Kirsty Needham at The Age:
Relations with China have taken another backward step after one of Australia’s biggest exporters, Treasury Wine Estates, was among several companies whose products were being stalled because of new customs rules targeting Australian companies and industries….
“Chinese officials have introduced new and different verification and certification processes and we’ve been working with the Chinese authorities and the officials, as well as with Australian authorities and officials, to ensure that we can meet these new and additional processes, which are not just applied to Treasury Wine Estates, it’s being applied to a number of other companies, across a number of different industries from Australia,” Treasury boss Michael Clarke said.
Australian Trade Minister Steven Ciobo said in Shanghai he had been informed of the situation by Treasury, the largest importer of foreign wine into China, in the past 24-36 hours.
“The questions being asked relate to certificates of origin. We will look at precisely what the situation is and if we can get to the bottom of it,” Mr Ciobo said.
….Amid a looming trade war between the US and China, and threatened punitive tariff packages worth hundreds of billions of dollars, American exporters have also reportedly encountered pre-emptive slow downs and extra scrutiny from Chinese customs in recent weeks.
China is attempting to use trade relationships to coerce trading partners into complying with their political demands, applying Lenin’s dictum “Probe with a bayonet. If you meet steel, stop. If you meet mush, then push.”
Australia faces a clear choice. Acquiesce and the trade issues will likely disappear…for a short time until China wants something else. Effectively we will become China’s southernmost province, responding to the will of the Central Committee in Beijing.
The alternative is a lot tougher: politely but firmly resist any pressure from Beijing and demand to be treated as an equal partner in international relations. The price is high but the rewards are far greater. Our freedom and independence.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
East to West: Headed for war?
Followers of international relations can take their pick of wars at present. There is a trade war brewing between Donald Trump and Xi Jinping, which could descend into a currency war with competing devaluations. We have a Russia waging a cyber war on the West, a Cold War in Eastern Europe and the Baltics, a proxy war in Yemen between Saudia Arabia and Iran, a frozen war in Georgia and Ukraine, and a hot war in Syria that threatens to escalate into a major confrontation between Russia and the West. On top of that we have Kim Jong-un trying to break into the big leagues by test-firing ICBMs over Japan. It’s a tough neighborhood.
The “peace dividend” that was supposed to follow the collapse of Communism is well and truly over. The next major ideological conflict is upon us. Democracy versus the Dictators. For the West to prevail it will have to engage in a coordinated muscular diplomacy over the next few decades. A good start would be Margaret Thatcher’s Statecraft: Strategies for a Changing World (2002):
Margaret Thatcher and Ronald Reagan in the oval office, 1988
“For my part, I favour an approach to statecraft that embraces principles, as long as it is not stifled by them; and I prefer such principles to be accompanied by steel along with good intentions.
…The habit of ubiquitous interventionism, combining pinprick strikes by precision weapons with pious invocations of high principle, would lead us into endless difficulties. Interventions must be limited in number and overwhelming in their impact.
….I should therefore prefer to restrict my guidelines to the following:
Don’t believe that military interventions, no matter how morally justified, can succeed without clear military goals.
Don’t fall into the trap of imagining that the West can remake societies.
Don’t take public opinion for granted — but don’t either underrate the degree to which good people will endure sacrifices for a worthwhile cause.
Don’t allow tyrants and aggressors to get away with it
And when you fight — fight to win.’
But the West also needs to clean up its own house and correct many of the abuses to which Capitalism has been subjected over the last few decades. Martin Wolf sums up the challenges in US-China rivalry will shape the 21st century:
‘The threat is the decadence of the west, very much including the US — the prevalence of rent extraction as a way of economic life, the indifference to the fate of much of its citizenry, the corrupting role of money in politics, the indifference to the truth, and the sacrifice of long-term investment to private and public consumption….’
Bold leadership is required. To fight the wars we have to but, more importantly, to resolve conflicts by other means wherever possible. That doesn’t mean avoiding conflict by retreating from red lines. It means establishing and vigorously enforcing new rules that benefit everyone. No one wins in a war. Whether it is a trade war, a cold war or a hot war. Everyone pays a price.
‘It must be thoroughly understood that war is a necessity, and that the more readily we accept it, the less will be the ardor of our opponents….’
~ Thucydides (circa 400 BC)
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
Outlook for 2018
At this time of year we are usually inundated with projections for the year ahead, from predictions of imminent collapse to expectations of a record year.
We live in a world of uncertainty, where both extremes are possible, but neither is likely.
We are clearly in stage 3 (the final stage) of a bull market. Risk premiums are close to record lows. The yield spread between lowest investment-grade (Baa) bonds and equivalent risk-free Treasuries has crossed to below 2.0 percent, levels last seen prior to the 2008 global financial crisis. The VIX is also close to its record low, suggesting high levels of investor confidence.
Money supply continues to grow at close to 5.0 percent, reflecting an accommodative stance from the Fed. MZM, or Zero Maturity Money, is basically M1 plus travelers checks and money market funds.
Inflationary forces remain subdued, with average hourly wage rates growing at below 2.5 percent per year. A rise above 3.0 percent, which would pressure the Fed to adopt a more restrictive monetary policy, does not appear imminent.
Tax relief and higher commodity prices are likely to exert upward pressure on inflation in the year ahead. But the Fed’s stated intention of shrinking its balance sheet, with a reduction of $100 billion in the first 12 months, is likely to have an opposite, contractionary effect.
The Leading Index from the Philadelphia Fed gave a bit of a scare, dipping below 1.0 percent towards the end of last year. But data has since been revised and the index now reflects a far healthier outlook.
A flattening yield curve has also been mooted as a potential threat, with a negative yield curve preceding every recession over the last 50 years.
A yield differential, between 10-year and either 2-year or 3-month Treasuries, below zero would warn of a recession. When long-term yields fall below short-term yields financial markets stop working efficiently and bank lending tends to contract. Banks, who generally borrow at short-term rates and lend at long-term rates, find their margins are squeezed and become strongly risk-averse. Contracting lending slows the economy and normally leads to recession.
But we are some way from there. If we take the last cycle as an example, the yield curve started flattening in 2005 (when yield differentials fell below 1 percent) but a recession only occurred in 2008. The market could continue to thrive for several years before the impact of a negative yield curve is felt. To exit now would seem premature.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
Gold as ‘Trump insurance’
Yesterday’s solid blue candle on the gold chart [XAUUSD] confirms my view of the precious metal as a form of “Trump insurance”. After Trump and North Korea exchanged threats suggesting nuclear retaliation, gold gained 1.32%, breaking resistance at $1275/ounce. Follow-through above $1300 would signal a primary advance, with a target of $1400*.
* Target calculation: 1300 + ( 1300 – 1200 ) = 1400
From the BBC:
US President Donald Trump says North Korea “will be met with fire and fury” if it threatens the US.
His comments came after a Washington Post report, citing US intelligence officials, said Pyongyang had produced a nuclear warhead small enough to fit inside its missiles.
This would mean the North is developing nuclear weapons capable of striking the US at a much faster rate than expected.
The UN recently approved further economic sanctions against the country.
The Security Council unanimously agreed to ban North Korean exports and limit investments, prompting fury from North Korea and a vow to make the “US pay a price”.
The heated rhetoric between the two leaders intensified after Pyongyang tested two intercontinental ballistic missiles (ICBM) in July, claiming it now had the ability to hit the US.
Mr Trump told reporters on Tuesday: “North Korea best not make any more threats to the US. They will be met with fire and fury like the world has never seen.”
Tillerson: Not many good North Korea options | Reuters
From Reuters:
U.S. Secretary of State Rex Tillerson said on Friday there would not be many good options left on North Korea if the peaceful pressure campaign the United States has been pushing to curb Pyongyang’s nuclear and missile programs failed….
The United States, Japan and South Korea agreed on Friday to push for a quick U.N. Security Council resolution to apply new sanctions on North Korea. U.N. diplomats said the United States had given China a draft sanctions resolution.
But Washington faces an uphill struggle to convince Russia and China to give quick backing to new U.N. sanctions.
Experts say North Korea’s ICBM launch on Tuesday was a major step forward in its declared intent to create nuclear-tipped missiles capable of hitting the United States. Some U.S. experts say the missile appeared to have the range to hit Alaska, Hawaii and parts of the U.S. Pacific Northwest.
Washington has warned it is ready to use force if need be to stop North Korea’s weapons programs but the consequences of that could be catastrophic and it prefers global diplomatic action.
Source: Not many good North Korea options if pressure fails: Tillerson | Reuters
Warsaw: Trump unequivocally commits to Article V | CNN
….As long as we know our history, we will know how to build our future. Americans know that a strong alliance of free, sovereign and independent nations is the best defense for our freedoms and for our interests. That is why my administration has demanded that all members of NATO finally meet their full and fair financial obligation.
As a result of this insistence, billions of dollars more have begun to pour into NATO. In fact, people are shocked. But billions and billions of dollars more are coming in from countries that, in my opinion, would not have been paying so quickly.To those who would criticize our tough stance, I would point out that the United States has demonstrated not merely with words but with its actions that we stand firmly behind Article 5, the mutual defense commitment. (Applause.)
Words are easy, but actions are what matters. And for its own protection — and you know this, everybody knows this, everybody has to know this — Europe must do more. Europe must demonstrate that it believes in its future by investing its money to secure that future.
That is why we applaud Poland for its decision to move forward this week on acquiring from the United States the battle-tested Patriot air and missile defense system — the best anywhere in the world. (Applause.) That is also why we salute the Polish people for being one of the NATO countries that has actually achieved the benchmark for investment in our common defense. Thank you. Thank you, Poland. I must tell you, the example you set is truly magnificent, and we applaud Poland. Thank you. (Applause.)
We have to remember that our defense is not just a commitment of money, it is a commitment of will. Because as the Polish experience reminds us, the defense of the West ultimately rests not only on means but also on the will of its people to prevail and be successful and get what you have to have. The fundamental question of our time is whether the West has the will to survive. Do we have the confidence in our values to defend them at any cost? Do we have enough respect for our citizens to protect our borders? Do we have the desire and the courage to preserve our civilization in the face of those who would subvert and destroy it? (Applause.)
We can have the largest economies and the most lethal weapons anywhere on Earth, but if we do not have strong families and strong values, then we will be weak and we will not survive. (Applause.) If anyone forgets the critical importance of these things, let them come to one country that never has. Let them come to Poland. (Applause.) And let them come here, to Warsaw, and learn the story of the Warsaw Uprising….