Wednesday, 31 August 2011
Quick thoughts on FTSE.I am not around much today to update charts etc but with FTSE at 5325 just wanted to say it is looking like C of ABC correction (or E of triangle or whatever it is) may be ending and the next leg down might be upon us soon.September seasonality is usually poor.A decent reversal day today (or tomorrow,)would be an important trigger I think.Much of the oversold nature has been unwound and we should retest the lows at least.Today is the 8th trading day from the low
Tuesday, 30 August 2011
The way forwardBy Colin Twiggs
August 30th, 2011 3:00 a.m. ET (5:00 p:m AET)
There were plenty of central bankers and economists with glum faces at Jackson Hole, Wyoming this week as speakers reviewed the challenges ahead. So far the global economy has not responded to various rescue plans, with GDP slowing and national debt rising across a whole slew of economies.
Before we look at the daunting challenges ahead,we should review what has already been achieved. We avoided a global banking collapse, an accompanying deflationary spiral and a depression similar to the 1930s. There have been a few side-effects, but do not underestimate the importance of avoiding a deflationary spiral.
Deflationary SpiralIn times of uncertainty, households and corporates save at higher than normal rates. Savings contribute to economic growth when channeled through the financial system into new investment, but in a financial crisis they are applied to pay down debt, causing a savings-investment mismatch. Any amount saved that is not re-invested in the economy, whether it used to pay down debt or buried in a tin at the bottom of the garden, causes a fall in national income.
If 2% of every trillion dollars earned, for example, is used to repay debt, then people who would have supplied 1 trillion dollars worth of goods and services will only receive $980 billion in income. That doesn't seem so bad, but if 2% of the reduced income is similarly applied to repay debt, then income available contracts to $960.4 billion. And keeps contracting each time income is recycled. In extreme cases the above scenario could be replayed many times over before the behavior ends, causing a sharp fall in national income. Repetition of the above cycle twenty times, for example, would reduce available income by a third. That is a deflationary spiral. Something to be avoided at all costs.
Side-effectsThe proven antidote to deflation is to run a fiscal deficit: government expenditure in excess of revenue helps to offset the savings-investment shortfall. Stimulus programs, however, have been badly managed, with no thought as to how the burgeoning national debt would be repaid. Mountains of national debt were incurred to head off the deflationary spiral, but there is very little to show for it. Deficits spent on school halls, public fountains, checks in the mail and tax cuts offer no means of repayment. Investment in infrastructure projects that offer a market-related return on investment — that can be used to repay the debt over time — have so far been scarce.
The result of a weak fiscal balance sheet is instability. High unemployment, low consumer spending, restricted consumer credit, and a falling housing market are all consequences of increased uncertainty.
Also, private capital investment remains scarce despite super-low interest rates and cashed up corporate balance sheets. For the same reason that cashed up banks are not lending to small business: uncertainty. Both banks and business face an unpredictable environment, with the possibility of further falls in employment and consumer spending, restricted consumer credit, a falling housing market, unsustainably low interest rates, and the threat of increased taxes. Uncertainty equals risk, and any CEO worth his/her salt would scale back on expansion plans until they have a clearer picture of what the future holds.
Unemployment will remain high and GDP growth low until capital investment is restored. The problem is: how?
Possible solutionsThe answer may sound simplistic, but we need to reduce uncertainty to provide business with a stable foundation on which to plan future investment. There are four possible solutions, but none of them are pretty.
The first is austerity: cutting government expenditure to match revenues. Austerity is important but on its own is likely to deliver even lower growth than at present — and risks a deflationary spiral. Cutting government expenditure while private savings are being used to pay down debt, without an equivalent cut in tax revenues, would court disaster.
Raising taxes is another popular option: getting everyone to pay their fair share. Though the notion of fair share varies widely depending on who the speaker is — and who pays their campaign contributions. Revising the tax code to achieve a more equitable distribution of the tax burden may contribute to long-term stability — a fair tax system is more likely to stand the test of time — but increasing tax revenues to repay national debt would also risk a deflationary spiral.
A third solution is massive public works programs similar to those undertaken by China during the GFC. Infrastructure projects directly stimulate local business and increase employment while also delivering savings in unemployment benefits. Government infrastructure investment, however, has a checkered history. Cost overruns and failure to meet revenue projections make private sector funding difficult to obtain. And government funding would further increase the national debt.
The fourth option, a soft default on existing debt, through inflation, is obviously tempting. Debasing the currency by selling Treasurys directly to the Fed, for example, would:
- Reduce national debt in real terms;
- Create a surge in investment demand for real assets as a protection against inflation — lifting stock prices and the housing market;
- Bail out the banks, who are threatened by shrinking housing prices; and
- Give currency manipulators a sizable haircut on their existing Treasury investments and discourage further "pegging" against the dollar. China and Japan collectively hold more than $2 trillion in US Treasurys [Washington Post], accumulated to suppress appreciation of their currencies against the greenback and create a trade advantage.
The way forwardWhile each of the options has their downside, a combination of the first three seems to offer the best solution. Funding infrastructure investment through a combination of private sector funding, austerity cuts and increased taxes could avoid the risk of a deflationary spiral, with minimal increase in the national debt. It would also facilitate direct channeling of private savings into investment, reduce wasteful government expenditure (through an austerity drive) and could be used to justify a more equitable distribution of the tax burden (if we all benefit we should all expect to pay).
The fourth option, a soft default through inflation, should be seen as a last resort. And is probably why QE3 was not put forward at Jackson Hole last week. Once you awaken the (inflation) dragon, he can prove difficult to slay.
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Wisdom consists not so much in knowing what to do in the ultimate as knowing what to do next.
~ Herbert Hoover
~ Herbert Hoover
Monday, 29 August 2011
If the nasdaq rally exceeds the first leg up in price (Aug 9th-17th) I would abort the bear view mentioned on Friday (short-term).I am nervous about the bullish turn in Ron's Walker's indicators.It may still work but in retrospect waiting for a reversal signal would have been more prudent.I feel happier shorting gold here (1790) for a trade
Ron Walker's daily video.Very good and contradicting my bear call on NDX ! 3 of his 4 indicators have turned bullish..Bullish percentage indicator being the most important.However pattern still bearish.Ron describes the contradictory signals facing the market really nicely but opts to go with the bullish BPI,all still within the context of a bear market (price below 50dma,which is below 200dma)
I am re-evaluating this in the light of NEM,HMY,FRES charts and have to say it looks quite bullish.Previously I had focussed on the bearish triple top but there are also 3 lows (arrowed) so a battle is taking place above the previous high,which is itself bullish,and it is a 3rd attempt at a level ie usually succeeds.So on balance a buyer with a stop under the 3rd low.Does this mean gold is not going to have a big correction ?...confusing
Sunday, 28 August 2011
Mexican silver and gold play with UK listing..I had a nice Gann setup for a top (time and price conjunction) posted a few weeks ago but it blew through it and the weekly now looks v bullish.Flag may even be a MP consolidation.Shorter term can count 5 waves from 13 (fib!) to 21 (fib) and 50% retrace at 16.8 now critical support .Would be looking to buy confirmed lows above this level.Wll consider the bearish potential if we break below.On the quarterly candle chart there is only one lower low since listing !!
I posted a long term chart a week ago.Here is September contract.Looks like a test of the high (which was almost Gann 100% off low resistance.)Possible we see a false break.Obviously we could keep going so the trade is to wait for a reversal (or buy a breakout) Low 386,high 764 2xlow =772
Another way to look at this - 1 year move (360 degrees) and 400 + 360= 760
Another way to look at this - 1 year move (360 degrees) and 400 + 360= 760
Saturday, 27 August 2011
Friday, 26 August 2011
Well Bernanke's speech somewhat of a damp squib and feels like he may be saving his firepower for the likely seasonal weakness in September (and see link from Jesse's Cafe Americain posted earlier) We dont have a reversal signal yet but the Nasdaq is up against multiple resistance now at 2160-80 from the gap,the broken double bottom and Gann 100% From 1080.The risk to selling here is if they manage to gap it up on Monday but my feeling is that even if they do it will meet selling.We are also in the 4 month (Gann 120 degrees) time cycle from the April high now,which would be good for a reversal
Yesterday was a bearish reversal,almost an engulfing candle but not quite.All eyes on JacksonHole today for Mr Bernanke's speech.Will he disappoint the QE3 awaiters and will we see a dollar rally and commodity and stock selloff ? A lower low today would be a sell signal I think but it could be a volatile session
This is another key indicator,like the Dax in my opinion and it is not looking good,BLT is the biggest mining stock in the world and a great lead for Chinese and global growth.We have a fast move down off a 3rd high,break below trendlines and previous peaks,a dead cross of the 50and 200dma and now appear to be consolidating in a bear flag formation below the broken trendline before the next plunge down