…..on October 22, President John F. Kennedy announced to the nation that Soviet missiles had been discovered in Cuba….. What the president did not discuss with the American public was that, two days prior, Chinese forces attacked Indian forces along a disputed Himalayan border between the countries.
Bruce Riedel from the Brookings Institute discusses newly-declassified evidence that Indian Prime Minister Jawaharlal Nehru asked President Kennedy to use American air power.
….It is Japan’s security, not its economy, that merits the most concern today – and Japan knows it. After decades of contentedly relying on the US for protection, Japan is being shaken out of its complacency by fast-changing security and power dynamics in Asia, especially the rise of an increasingly muscular and revisionist China vying for regional hegemony.
….China has not hesitated to display its growing might. In the strategically vital South China Sea, the People’s Republic has built artificial islands and military outposts, and it has captured the disputed Scarborough Shoal from the Philippines. In the East China Sea, it has unilaterally declared an air-defense identification zone covering territories that it claims but does not control.
With US President Barack Obama hesitating to impose any costs on China for these aggressive moves…..the reality is that ensuring long-term peace in Asia demands a stronger defense posture for Japan.
….Would Japan need to become a truly independent military power, with formidable deterrent capabilities like those of the UK or France?
The short answer is yes. While Japan should not abandon its security treaty with the US, it can and should rearm, with an exclusive focus on defense…..
Read more at: Why Japan Should Rearm by Brahma Chellaney | Project Syndicate
If we don’t learn from the mistakes of the past we will be destined to repeat them (George Santayana). Looking back over the last three decades gives an inkling as to what went wrong and to the level of economic mismanagement.
International trade is a zero sum game: what one country exports, another must import. Likewise, current accounts between nations are a zero-sum game: if one country runs a surplus, another will experience a deficit. Fortunately currency exchange rates act as an automatic stabilizer. If one country exports more than another, its currency will strengthen to the point that balance is restored in the level of trade between the two nations.
At least that is how it is supposed to work. Over the last three decades, Japan followed by China, has been rorting the system [translation: engage in a sharp practice (Australian/NZ)]. Accumulation of massive foreign reserves (e.g. by buying US Treasuries) prevented their currencies from appreciating and allowed them to maintain massive current account imbalances.
These beggar-thy-neighbor policies built up massive imbalances within the US economy.
Which led to the global financial crisis, the Great Recession, the sovereign debt crisis in Europe, the subsequent emerging markets crisis and extended slow recovery we are now experiencing.
The S&P 500 continues to test support at 2000. Failure would warn of another test of support at 1870, but respect is more likely and would indicate another test resistance at the high of 2130. Troughs above zero on 13-week Twiggs Money Flow indicate continued buying pressure. The overall trend remains bearish, however, having broken primary support at 2000. Respect of resistance at 2130 would warn of another test of support at 1870.
* Target calculation: 2000 + ( 2000 – 1870 ) = 2130
The CBOE Volatility Index (VIX) has declined to below 20. A peak below this level (20) would confirm that market risk is easing.
NYSE short sales remain subdued.
Dow Jones Industrial Average is similarly testing support at 17000, with 13-week Twiggs Money Flow holding above zero.
Canada’s TSX 60 is testing support at 800. Breach would warn of another decline, while follow-through below 775 would confirm. Weak 13-week Twiggs Momentum, below zero, indicates the market remains bearish.
* Target calculation: 775 – ( 825 – 775 ) = 725
Germany’s DAX respected support at 10000 and 13-week Twiggs Money Flow recovered above zero. Recovery above 10500 is likely and would indicate a bear rally to 11000.
The Footsie continues to test support at 6250. Respect is more likely and recovery above the descending trendline and resistance at 6500 would suggest another test of 7000. 13-Week Twiggs Money Flow holding above zero indicates long-term buying pressure. Reversal below 6000 is unlikely, but would confirm the primary down-trend.
The Shanghai Composite Index respected resistance at 3500 and is likely to re-test government-backed support at 3000.
Hong Kong’s Hang Seng Index is expected to retrace to test support at 22500 after a similar bear rally. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Respect of 22500 would indicate another test of 24000, but breach of support is as likely and would warn of another test of primary support at 21000.
Japan’s Nikkei 225 also signals medium-term buying pressure on 13-week Twiggs Money Flow. Breakout above resistance at 18500 would suggest an advance to 21000; follow-through above 19000 would confirm.
* Target calculation: 19000 + ( 19000 – 17000 ) = 21000
India’s Sensex displays the strongest buying pressure, with rising 13-week Twiggs Money Flow troughs above zero. Respect of support at 26500 indicates continuation of the rally. Penetration of the descending trendline would suggest an advance to 30000; follow-through above 28500 would confirm. Reversal below 26000 remains unlikely, but would confirm a primary down-trend.
The ASX 200 threatens to break resistance at 5300, with rising 13-week Twiggs Money Flow indicating medium-term buying pressure. Breakout above 5300 would signal a test of the descending trendline. The bear market, however, continues despite recent support and breach of 5000 would confirm a primary down-trend.
* Target calculation: 5000 – ( 5400 – 5000 ) = 4600
The biggest mistake in investing is believing the last three years is representative of what the next three years is going to be like.
~ Ray Dalio, Bridgewater Associates
From Michael Pettis’ OpEd in the Wall St Journal:
History suggests that developing countries that have experienced growth “miracles” tend to develop risky financial systems and unstable national balance sheets. The longer the miracle, the greater the tendency. That’s because in periods of rapid growth, riskier institutions do well. Soon balance sheets across the economy incorporate similar types of risk.
….Over time, this means the entire financial system is built around the same set of optimistic expectations. But when growth slows, balance sheets that did well during expansionary phases will now systematically fall short of expectations, and their disappointing performance will further reinforce the economic deceleration. This is when it suddenly becomes costlier to refinance the gap, and the practice of mismatching assets and liabilities causes debt, not profits, to rise.
China's conundrum: Selling FX reserves to support the yuan threatens deflation. But falling yuan fuels capital flight http://t.co/XGz6S4HPz6
— Colin Twiggs (@Colin_Twiggs) August 29, 2015
AND capital flight causes collapsing stock and real estate prices, which could lead to…… deflation.
Dow Jones Shanghai Index broke support at 440. Expect more government efforts, near the close, to shore up support. As futile as attempting to hold back the tide. Target for the breakout is 330*.
* Target calculation: 440 – ( 550 – 440 ) = 330
Patrick Chovanec writes:
On Aug. 11, the People’s Bank of China announced a decision to devalue China’s currency — the renminbi, or RMB — by 1.9 percent, by resetting the daily band within which it’s traded…..
The Chinese will try to argue they are just letting the market have its way. This is misleading: For years, the Chinese prevented the RMB from rising in value by buying nearly $4 trillion in foreign currency. The current market “equilibrium” is predicated on that massive distortion. The only way to get to a truly market-based RMB is to first unwind China’s past intervention by supporting the RMB and drawing down China’s foreign currency reserves. We shouldn’t want the RMB to float until that happens…..
Read more at Let the Global Race to the Bottom Begin | Foreign Policy.
The Shanghai Composite today found support at 3500 today after plunging more than 8% on Monday. The large divergence on 13-week Twiggs Money Flow continues to warn of selling pressure.
* Target calculation: 4000 – ( 5000 – 4000 ) = 3000
From Wikipedia:
The Japanese asset price bubble….. was an economic bubble in Japan from 1986 to 1991 in which real estate and stock market prices were greatly inflated. The bubble was characterized by rapid acceleration of asset prices and overheated economic activity, as well as an uncontrolled money supply and credit expansion. More specifically, over-confidence and speculation regarding asset and stock prices had been closely associated with excessive monetary easing policy at the time.
By August 1990, the Nikkei stock index had plummeted to half its peak by the time of the fifth monetary tightening by the Bank of Japan (BOJ)…..the economy’s decline continued for more than a decade. This decline resulted in a huge accumulation of non-performing assets loans (NPL), causing difficulties for many financial institutions. The bursting of the Japanese asset price bubble contributed to what many call the Lost Decade.
“…uncontrolled money supply and credit expansion….overheated stock market and real estate bubble.” Sound familiar? It should. We are witnessing a re-run but this time in China. Wait, there’s more…..
…..At the end of August 1987, the BOJ signaled the possibility of tightening the monetary policy, but decided to delay the decision in view of economic uncertainty related to Black Monday (October 19, 1987) in the US.
…..BOJ reluctance to tighten the monetary policy was in spite of the fact that the economy went into expansion in the second half of 1987. The Japanese economy had just recovered from the “endaka recession” ….. closely linked to the Plaza Accord of September 1985, which led to the strong appreciation of the Japanese yen.
…..in order to overcome the “endaka” recession and stimulate the local economy, an aggressive fiscal policy was adopted, mainly through expansion of public investment. Simultaneously, the BOJ declared that curbing the yen’s appreciation was a “national priority”……
Global stock market crash leads to prolonged monetary easing…… aggressive expansion of public investment to stimulate the domestic economy…..central bank efforts to curb appreciation of the currency. We all know how this ends. We’ve seen the movie before.
It’s like deja-vu, all over again. ~ Yogi Berra
From Reuters:
BEIJING — China’s factory sector contracted by the most in 15 months in July as shrinking orders depressed output, a preliminary private survey showed on Friday, a worse-than-expected result that should reinforce bets the struggling Chinese economy will get more stimulus.
The flash Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) dropped to 48.2, the lowest reading since April last year and a fifth straight month below 50, the level which separates contraction from expansion.
Read more at Chinese Manufacturing Activity Falls in July – The New York Times.
From Ye Xie and Belinda Cao at Bloomberg:
While China’s economic expansion beat analysts’ forecasts in the second quarter, the country’s debt levels increased at an even faster pace.
Outstanding loans for companies and households stood at a record 207 percent of gross domestic product at the end of June, up from 125 percent in 2008, data compiled by Bloomberg show.
Read more at China's Debt-to-GDP Ratio Just Climbed to a Record High – Bloomberg Business.