Now with the markets closed it is time to enjoy some thoughts by Hugh Hendry. Europe is in trouble, that is no surprise to people. Hendry’s biggest concern though, is not falling markets, but that governments will confiscate assets.
Welcome to the real black swan. It has happened before….Must watch video below.
We have had austerity, increasing unemployment and a few riots taking place in Europe. With poverty increasing, the situation is heading the wrong way. Are we facing a violent revolution due to austerity measures? From Voxeu.
It is not just the election of François Hollande in France. Adopting contractionary fiscal policies in the teeth of a double-dip recession never made sense. And yet, public debts are high and markets in endemic panic. The solution must be based on a comprehensive analysis of the situation, not on arcane debates on the strength of the “confidence factor”. It ought to combine debt restructuring, front-loaded collective fiscal expansion and long-run unbreakable commitments to fiscal discipline.
Is SPX about to move for real? Guest post by Vix and more.
While the bias in stocks for the past three years and two months has definitely been upward, the S&P 500 index (SPX) has struggled to remain above 1400 ever since making a post-2008 high of 1422 on April 2nd.
There are many ways to determine the strength of a trend and one that has a very strong following is the Average Directional Indicator (ADX), which was developed by Welles Wilder and first published in 1978 classic, New Concepts in Technical Trading Systems.
While the ADX has a great deal to recommend it, I am somewhat partial to another trend evaluation tool, the Aroon indicator, which was developed by Tushar Chande. The Aroon is actually two measures in one, an Aroon Up (green line in study below main chart) and an Aroon Down (red line). Essentially, the Aroon Up and Down lines measure the proximity of N-period highs and lows to the most recent trading period, on a 0-100 scale, with 100 indicating that the high or low for the period was made during the most recent trading day and 0 indicating that the high or low was made on the first day of the N-period window.
The default time frame for the Aroon indicator is usually represented as 25 periods, but in some charting software, the default is 14 periods. Since I tend to look at the investing world in months that average 21 trading days, the chart below uses my favored default Aroon setting of 21 days.
The chart shows the SPX over the course of the past year, with a strong uptrend (green line above 50 or 70) since the second week in December that has recently begun to show signs of fatigue on the part of the bulls as it has now been 20 days since that high of 1422. On the other hand, the red line shows that it has now been 15 days since the SPX made its 21-period low of 1357. In other words, the last three weeks have seen neither the high or the low of the 21-day lookback period, as the SPX has meandered in a 65-point range. The result is that both the green line and red line have dipped below 30, signaling the absence of any meaningful bullish or bearish momentum.
If you still haven’t heard about the problems in Spain, here is a great little article of the madness that took place during the boom years. SPain’s Ibex is currently trading down 2%, and about to break the lows. Italy is joining the hung over period after the boom party. It is all about the Med countries. Wonder what happens if Apple starts selling off for real? From Bloomberg.
“Ireland faced up to its problems faster than others and we expect growth there rather soon,” said Cinzia Alcidi, an analyst at the Centre for European Policy Studies in Brussels. “In Spain, there was kind of a denial of the scale of the problem and it may be faced with many years of significant challenges before full recovery takes place.”
Spain, Europe’s fifth-largest economy, is the current focus of attempts to contain the region’s sovereign debt crisis, as Prime Minister Mariano Rajoy struggles to quell speculation it will need a bailout. Developers are showing similar optimism. They continue to build even with 2 million homes vacant around the country, new airports that never saw a single flight being mothballed, and property appraisers and banks reporting values have fallen only about 22 percent, said Encinar, who estimates the real decline is probably at least twice that.
Ireland, where home prices have fallen a record 49 percent since peaking in 2007, is making more progress as it deals with the legacy of a bust that crippled its economy, once the most dynamic in Western Europe. The state purged lenders of 74 billion euros ($98 billion) of mostly toxic commercial mortgages by creating a bad bank, and poured enough cash into the financial system to make it among the best capitalized inEurope. Building virtually halted overnight in 2008 after debt markets seized up globally.
Spain has so far rejected the bad bank model, even afterStandard & Poor’s last week cut the country’s credit rating to BBB+ from A, on concern the government will need to provide further support to banks.
Europe in reality check mode today. Our readers know The Trader has been rather pessimistic on the Spanish economy and the Spanish markets for the past year. Ibex is currently trading down 3%. The low close in 2009 was at 6820. Are we taking out this level today? Still they tell you equities are good long term.
European dog charts below.
Guest post by Azizonomics.
The entire economics world is abuzz about the intriguing smackdown between Paul Krugman and Ron Paul on Bloomberg. The Guardian summarises:
- Ron Paul said it’s pretentious for anyone to think they know what inflation should be and what the ideal level for the money supply is.
- Paul Krugman replied that it’s not pretentious, it’s necessary. He accused Paul of living in a fantasy world, of wanting to turn back the clock 150 years. He said the advent of modern currencies and nation-states made an unmanaged economy an impracticable idea.
- Paul accused the Fed of perpetrating “fraud,” in part by screwing with the value of the dollar, so people who save get hurt. He stopped short of calling for an immediate end to the Fed, saying that for now, competition of currencies – and banking structures – should be allowed in the US.
- Krugman brought up Milton Friedman, who traversed the ideological spectrum to criticize the Fed for not doing enough during the Great Depression. It’s the same criticism Krugman is leveling at the Fed now. “It’s really telling that in America right now, Milton Friedman would count as being on the far left in monetary policy,” Krugman said.
- Paul’s central point, that the Fed hurts Main Street by focusing on the welfare of Wall Street, is well taken. Krugman’s point that the Fed is needed to steer the economy and has done a better job overall than Congress, in any case, is also well taken.
Thank you very much for inviting me to speak here at the New York Federal Reserve Bank.
Intellectual discourse is, of course, extraordinarily valuable in reaching truth. In this sense, I welcome the opportunity to discuss my views on the economy and monetary policy and how they may differ with those of you here at the Fed.
That said, I suspect my views are so different from those of you here today that my comments will be a complete failure in convincing you to do what I believe should be done, which is to close down the entire Federal Reserve System.
My views, I suspect, differ from beginning to end. From the proper methodology to be used in the science of economics, to the manner in which the macroeconomy functions, to the role of the Federal Reserve, and to the accomplishments of the Federal Reserve, I stand here confused as to how you see the world so differently than I do.
I simply do not understand most of the thinking that goes on here at the Fed, and I do not understand how this thinking can go on when in my view it smacks up against reality.
Please allow me to begin with methodology. I hold the view developed by such great economic thinkers as Ludwig von Mises, Friedrich Hayek, and Murray Rothbard that there are no constants in the science of economics similar to those in the physical sciences.
Still rather bearish, Hussman delivers some good points below. From Hussman funds.
Over the past 13 years, and including the recent market advance, the S&P 500 has underperformed even the minuscule return on risk-free Treasury bills, while experiencing two market plunges in excess of 50%. I am concerned that we are about to continue this journey. At present, we estimate that the S&P 500 will likely underperform Treasury bills (essentially achieving zero total returns) over the coming 5 year period, with a probable intervening loss in the range of 30-40% peak-to-trough.
Why? First, with respect to 5-year prospective returns, it’s important to recognize that returns at that horizon are primarily driven by valuations – not the “Fed Model” kind, but the normalized earnings and discounted cash flow kind. Stocks remain strenuously overvalued here, and only appear “fairly priced” relative to recent and near-term earnings estimates because corporate profit margins are more than 50% above their long-term norm. Meanwhile, corporate profits as a share of GDP are about 70% above the long-term average. As I detailed in Too Little To Lock In, these abnormally high margins are tightly related (via accounting identity) to massive fiscal deficits and depressed household savings rates, neither which are sustainable.
Our projection for 10-year S&P 500 total returns – nominal – is about 4.4% annually, which is far better than the 2000 peak, far inferior to the 2009 trough, and save for the period before the 1929 crash, worse than any prospective return observed prior to the late-1990′s bubble – even in periods having similarly depressed interest rates.