Markets rebound except for ASX

  • US stocks continue their bull-trend
  • European stocks strengthen
  • China likewise
  • ASX Energy and Materials sectors under pressure

The S&P 500 broke through the upper border of its broadening wedge formation, signaling a fresh advance with a target of 2300*. Rising 13-week Twiggs Money Flow indicates medium-term buying support. Reversal below 2000 is unlikely, but would warn of another correction.

S&P 500 Index

* Target calculation: 2050 + ( 2050 – 1800 ) = 2300

CBOE Volatility Index (VIX) at 13 continues to reflect low risk typical of a bull market.

S&P 500 VIX

Germany’s DAX broke through resistance at 9400/9500, signaling another test of 10000. Rising 13-week Twiggs Money Flow refllects medium-term buying pressure. Reversal below 9400 is unlikely at present, but would warn of another test of primary support at 9000.

DAX

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

The Footsie is also headed for a test of its long-term high at 6900/6950. The sharp rise on 13-Week Twiggs Money Flow indicates strong medium-term buying pressure. Reversal below 6500 is unlikely.

FTSE 100

China’s Shanghai Composite Index respected support at its 2013 high of 2440, signaling a fresh advance. 13-Week Twiggs Money Flow respect of its rising trendline confirms (medium-term) buying pressure.

Shanghai Composite Index

* Target calculation: 2400 + ( 2400 – 2300 ) = 2500

The ASX 200 is weaker, undergoing another correction. Respect of support at 5250/5300 would indicate the primary up-trend is intact — as would a 13-week Twiggs Money Flow trough above zero. Penetration of primary support at 5120/5150, however, would signal a primary down-trend.

ASX 200

* Target calculation: 5650 + ( 5650 – 5300 ) = 6000

ASX 200 Materials (15.7%) and Energy (6.0%) sectors have commenced a down-trend. This is in sharp contrast to the Financial (46.2% including REITs) and Health Care (5.2%) sectors which continue in a healthy up-trend. It is possible for the first two sectors, with a combined weighting of 21.7%, to reverse the broad index, but is not likely unless the contagion spreads to the Industrial and Financial sectors. Increased risk-weightings for home mortgages and stronger capital ratios for major banks are likely recommendations of the Murray inquiry. These will improve the long-term strength and growth prospects for Financials, but a negative reaction in the short-term could tip the sector into a down-trend.

ASX 200 sectors

Each generation has its own Berlin Wall | Gary Kasparov

Garry Kasparov is Atlas Network’s 2014 Templeton Leadership Fellow and spoke at the closing ceremonies of Atlas Network’s 2014 Liberty Forum & Freedom Dinner.

November 13, 2014 – New York City

Usually saying “thank you for having me here” is a perfunctory opening, but for me, especially on this occasion, it has a very sincere and personal meaning. The kind of brave people in this room, and a few actual people in this room, share some of the credit for my freedom and the freedom of hundreds of millions of people like me who were born behind the Iron Curtain. I thank you and we all thank you for your efforts and your belief that the right to individual liberty should not be based on where you are born.

Unfortunately, that attitude seems to have fallen along with the Berlin Wall. If people like Obama and Cameron had been in charge instead of Ronald Reagan and Margaret Thatcher in the 1980s I would still be playing chess for the Soviet Union!

But instead, I am truly very happy to be here. If only my die-hard Communist grandfather could see me now!

November 9, 1989, was one of the most glorious days in the known history of the world. Hundreds of millions of people were released from totalitarian Communism after generations of darkness.

There is no shortage of scholarship and opinions about why the Wall came down when it did. I am happy to engage in those endless discussions, but we must recognize that looking for a specific cause at a specific moment misses the point. We do know that without the unity of the free world against a common enemy, without a strong stand based on refusing to negotiate over the value of individual freedom, that the Wall would still be standing today.

Yes, there were alliances and rivalries and realpolitik for decades. Yes, individuals played a part on both sides, from Ronald Reagan and Margaret Thatcher to Lech Walesa and Pope John Paul II, to Mikhail Gorbachev unleashing forces he could not control. The critical theme was as simple as it was true: the Cold War was about good versus evil, and, just as importantly, that this was not just a matter of philosophy, but a real battle worth fighting. Society supported the efforts of those great leaders, society supported the fight and the principles behind it. But as Milton Friedman wrote in 1980, “Society doesn’t have values. People have values.” So we must talk to people about these principles of freedom. We must spread this message far and wide.

In today’s era of globalization and false equivalence it can be hard for many of us to recall that most Cold War leaders had seen true evil up close during World War II. They had no illusions about what dictators were capable of if given the chance. They had witnessed existential threats with their own eyes, seen the horror of the concentration camps and the use of nuclear weapons in war. In some ways it is a shame that today the names of Adolf Hitler and Josef Stalin have become caricatures, as if they are mythological beasts representing an ancient evil that was vanquished long ago.

But evil does not die, just as history does not end. Like a weed, evil can be cut back but almost never entirely uprooted. It waits for its chance to spread through the cracks in our vigilance. It takes root in the fertile soil of our complacency. Like the dragon of Greek myth, whose teeth sprouted from the ground as soldiers, the Berlin Wall fell to pieces, and many of those pieces contained the seeds of evil.

Nor did Communism disappear when the Wall fell. Nearly 1.5 billion human beings still live in Communist dictatorships today. And another billion live in unfree states of different stripes, including, of course, much of the former Soviet Union. The desire of men to exploit and to rule over others by diktat, and by force, did not disappear. What did disappear, or, at least, what faded dramatically, was the willingness of the free world to take a firm stand in support of the oppressed.

The Wall fell and the world exhaled. The long war of generations was over. The threat of nuclear annihilation that hung over all our heads was ending. Victories, however, even great victories, come at a cost.

I have written about what I call “the gravity of past success” in chess. Winning feels great, but it can also inhibit your development. The loser knows that he made a mistake, and that something went wrong, and he will work hard to improve. The happy winner, on the other hand, often assumes he won simply because he is great. It takes tremendous discipline to learn lessons from a victory.

The natural response, the human response, in the aftermath of the Cold War was to embrace the former enemy. Clinton and Yeltsin smiling and laughing. The European Union and NATO welcoming the former Soviet Bloc nations with open arms. The principle was to lead by example, to offer the newly free countries incentives to join as a full partner, with democracy and free market economies. This principle of engagement was a great success in Eastern Europe, despite the bumpy road for many. But this expansive method was also applied in places where the forces of oppression had not been rooted out. They were invited into the club with few demands, with little reciprocity. The prevailing attitude in the West was, “It’s okay, they will come around eventually. Their time has passed. We just have to keep engaging with them and wait.” But the forces of history do not win wars.

It is amazing how quickly the lessons of the Cold War victory were forgotten and abandoned! The strong moral stance and the isolation of evil were rapidly discarded. At the moment of greatest ascendancy of the forces of democracy, they stopped pressing the advantage. With overwhelming military, economic, and moral power on their side, the West changed strategies entirely.

This shift represented the public’s desire to end the tension and the decades of standoffs. Bill Clinton epitomized the mindset that it was time to move beyond the harsh Manichean worldview of the Cold War. Meanwhile, the dragon’s teeth were growing. Belorussian dictator Lukashenko began his lifetime tenure in 1994. His Central Asian dictator colleagues, Nazarbayev and Karimov, will soon celebrate their 25th anniversaries in power. It is no coincidence that the two countries from the former Soviet Union with the greatest potential to break free of this orbit, outside of the Baltics, Georgia and Ukraine, were both attacked by Russia and partially occupied.

There were no truth commissions for Communism, no trials or punishments for the epic crimes of these regimes. The KGB changed its name but it did not change its stripes. And just nine years after the statue of KGB founder Felix Dzerzhinsky was torn down in Moscow, a KGB lieutenant colonel named Vladimir Putin became president of Russia. It was one of many warning signs that went ignored by the free world.

Western soft power had reached its limits and there was no will to bring back the policies of containment. Human rights were treated as an internal issue, especially in places where profitable deals were available.

Engagement cuts both ways, it turns out. Former Soviet nations used money from globalization and their newfound market access to buy companies, politicians, and influence. Having abandoned our standards, we are being dragged down to the lowest common denominator. While destroying civil society in Russia, Putin could hire former Chancellors to lobby for Gazprom, buy the Olympic Games, and beam a global propaganda network into billions of homes around the world. The West boycotted the Moscow Olympic Games over the invasion of Afghanistan. No such threats are made today about the World Cup despite the ongoing Russian invasion of a European country.

Today’s dictatorships have what the Soviets could scarcely dream of: easy access to global markets to fund repression at home. Not just the petro-states like Russia, Iran, and Venezuela, but the manufacturing states as well. The idea that free world would use engagement for leverage against dictators on human rights has been countered by the authoritarian states because they are willing to exploit it without hesitation, while there is no similar will in the free world.

Engagement has provided dictatorships with much more than consumers of the oil they extract and the iPhones they assemble. They have their IPOs and mansions in London and New York; they use Interpol to persecute dissidents abroad; they write op-eds in the New York Times full of hypocritical calls for peace and harmony. And all of this while cracking down harder than ever at home. This is engagement as a one-way street. This is engagement as appeasement. This is a failure of leadership on a tragic scale.

Even the greatest ideals and traditions can lose focus after a radical change in the landscape. Symbols help us find that focus, leaving us vulnerable when those symbols disappear.

America going to the moon was not so remarkable because there was anything of value there. John F. Kennedy understood that it would become a symbol of American progress, of challenge, of difficulty, and of superiority over the USSR. A generation of new technology was developed thanks to the space race, technology that would power American industrial might into the computer age. But not long after this incredible feat was achieved, the space race fizzled significantly. The symbol was gone and no man has walked on the moon since Eugene Cernan in December, 1972. The symbol of challenge, the symbol of progress, was confused with the challenge itself. When the moon was reached, the great quest it represented was quickly forgotten. As with Hitler and Stalin, a man traveling to the moon is mostly remembered today as mythology.

The Berlin Wall was more than a symbol, of course. It literally divided a city and represented the divide between the free and unfree worlds. When it fell, it was easy to forget that those two worlds, the free and the unfree, still existed even though the Wall did not. The symbol was gone and so what it represented was forgotten. Suddenly, evil no longer had a familiar form. As 9/11 taught us, the dangers are real even though the battle lines are hazy. Allies of convenience have replaced alliances based on history and values. This is the natural result of over twenty years of treating everyone like a potential friend, a practice that emboldens enemies and confuses true allies.

But enemies do exist, whether we admit it or not. They are the enemies of what America and the rest of the free world stand for. Whether it is Putin or ISIS, these forces cannot be defeated with engagement. No, to defeat them will require the unity and the resolve and the principles that won the Cold War. In chess terms, our great predecessors left us with a winning position 25 years ago. They gave us the tools to bring down dictators and showed us how to use them. But we have abandoned these tools and forgotten the lessons. It is past time to relearn them.

Each generation has its own Berlin Wall, its own challenges to meet. Without a clear symbol to focus our energies, strong leadership is required.

America, in Margaret Thatcher’s famous phrase, is the only nation built on an idea, the idea of liberty. That idea must now build a global coalition to defend liberty against its enemies, a coalition that is based on principles, not on borders or language or culture.

In a few weeks I will be in Ukraine, and what message can I bring? That it is Ukraine’s poor luck to be so close to Russia? That the destiny of 45 million human beings is to be a besieged buffer state because it is difficult to confront Vladimir Putin? Really? More difficult than Truman standing up to Stalin and protecting West Berlin in 1948? More dangerous than for JFK during the Cuban Missile Crisis in 1962? No. But will the threat Putin represents continue to grow if left unchallenged? History tells us yes. History tells us that no dictator stops until he is stopped.

Soviet propaganda worked hard to portray Communism and the USSR as the side of good, as representing a utopian future. Putin has no interest in this. His propaganda today is all about national superiority and destiny, the fascist messaging so familiar from the Nazi build-up in the 1930s. Putin’s threat grows because the free world is letting it grow. Too many leaders still want to believe that evil was defeated for good on November 9, 1989. What could be called optimism and wishful thinking twenty years ago must now be called out as dangerous delusions.

The world needs a new alliance based on a new Magna Carta, a declaration of rights and practices that all member nations must recognize. Nations that value democracy and individual liberty now control the greater part of the world’s resources as well as its military power. If we band together and refuse to coddle the rogue regimes and sponsors of terror, our authority will be irresistible. Our combined wealth can also fund new technologies to cure our fossil fuel addiction, which currently empowers a majority of the terrorists and dictators.

The goal should not be to build new walls to isolate the millions of people living under authoritarian rule, but to come to their aid. The so-called leaders of the free world talk about promoting democracy while treating the leaders of the world’s most autocratic regimes as equals. A global Magna Carta would forbid this hypocrisy and provide a powerful inducement for reform. The policies of engagement with dictators have failed on every level. It is time to recognize this failure.

As Ronald Reagan said fifty years ago, in 1964, this is not a choice between peace and war, only between fight or surrender. We must choose. We must fight. And it must be a global fight. America must lead, yes, but it is obsolete today to speak only of American values, or even of Western values. Japan and South Korea must act, Australia and Brazil, India and South Africa, and every country that values democracy and liberty. We have every advantage in this fight for freedom. We know it can be done because it has been done before. We must find the courage to do it again. Thank you.

To hear Kasparov’s interview on Voice of America – Russian, click here. (In Russian)

Reproduced with kind permission from the Atlas Network. Atlas Network is a nonprofit organization connecting a global network of more than 400 free-market organizations in over 80 countries to the ideas and resources needed to advance the cause of liberty.

ASX under pressure

The S&P 500 continues to test resistance at 2050, the upper bound of the broadening wedge. Rising 13-week Twiggs Money Flow suggests buying pressure. Breakout would offer a target of 2250*. Reversal below 2000 is less likely, but would warn of another correction.

S&P 500

* Target calculation: 2050 + ( 2050 – 1850 ) = 2250

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

S&P 500 VIX

Dow Jones Euro Stoxx 50 is testing resistance at 3140. Breakout would indicate an advance to 3300. 13-Week Twiggs Money Flow oscillating around zero suggests indecision. Respect of 3140 would test primary support at 3000.

Dow Jones Euro Stoxx 50

The Shanghai Composite Index retraced to test support at 2440, while declining 13-week Twiggs Money Flow indicates medium-term selling pressure. Reversal below the rising trendline at 2400 would warn of a correction, while respect would suggest trend strength.

Shanghai Composite

Hong Kong’s Hang Seng Index is weaker. Reversal below 23000 would warn of a test of primary support at 21200/21500. Twiggs Money Flow (13-week) reversal below zero would also be a strong bear signal.

HSI

The ASX 200 is undergoing another correction. Respect of support at 5250/5300 would indicate reasonable trend strength, but declining 21-day Twiggs Money Flow suggests medium-term selling pressure. With both Energy and Metals & Mining sectors under pressure, a test of primary support at 5120/5150 is likely.

ASX 200

The Aussie Dollar is also falling, having reversed below primary support at $0.8650 to signal a decline to $0.80*.

Aussie Dollar

* Target calculation: 0.87 – ( 0.94 – 0.87 ) = 0.80

Russian policy follows “organized unpredictability”

From Der Spiegel:

….Russian policy, says [German diplomat Gernot Erler], is currently following the “principle of organized unpredictability.

“Foreign Minister Frank-Walter Steinmeier, who sought to establish a “positive agenda” with Moscow when he took office, is particularly frustrated. In recent weeks, Steinmeier has complained several times of significant breaches of trust perpetrated by the Russians and says he doesn’t foresee relations with Moscow normalizing any time soon. Merkel is of the same opinion….

One official at Merkel’s Chancellery says that in some ways the situation is even more difficult than it was during the latter phases of the Soviet Union. Back then, the official says, Moscow at least adhered to agreements.

Read more at Germany Worried about Russian Influence in the Balkans – SPIEGEL ONLINE.

Abenomics doing fine | Ambrose Evans-Pritchard

Monetary Base and deflation

The Monetary Base consists of currency in circulation and commercial bank deposits at the Federal Reserve. Currency in circulation includes notes and coins both in circulation and held in the vaults of commercial banks. Commercial bank deposits at the Fed can be further broken down into required reserves and excess reserves. Excess reserves on deposit have soared — since late 2008 when the Fed started paying interest on reserves — to a level of $2.6 Trillion.

By varying the interest rate payable on excess reserves the Fed can manipulate the amount of currency in circulation. It is no longer reliant solely on Treasury and MBS purchases and sales to increase or decrease the money supply: these are merely one tool in the monetary tool-kit. So announcing that QE (security purchases) have ended does not mean that currency in circulation and the working monetary base (excluding excess reserves) will stop growing or will contract. That would cause deflationary pressure similar to the European experience. Growth, instead, is likely to continue provided that excess reserves are drawn down to compensate for cessation of QE.

US Monetary Base minus Excess Reserves and Currency in Circulation ROC

Deflationary pressures are unlikely to surface provided currency in circulation and the working monetary base continue to grow at above 5% a year. Only if real GDP grew at a faster pace (a problem we would like to have) would we encounter a problem.

Australia has similarly been keeping on the right side of 5% growth since early 2012. Provided this continues we should keep out of trouble.

Australia Monetary Base and Currency in Circulation ROC

A quiet week in the markets

  • US stocks continue their bull-trend
  • European stocks strengthen
  • China likewise
  • ASX retraces to test support

The S&P 500 is testing the upper border of a broadening wedge formation. Retracement that respects support at 2000 would enhance the bull signal and offer a target of 2280*. Rising 13-week Twiggs Money Flow indicates buyers are in control. Reversal below 2000 and the rising trendline is unlikely, but would signal another correction.

S&P 500 Index

* Target calculation: 2040 + ( 2040 – 1820 ) = 2280

Dow Jones Industrial Average has already broken above a similar broadening wedge formation, offering a long-term target of 19000*.

Dow Jones Industrial Average

* Target calculation: 17500 + ( 17500 – 16000 ) = 19000

CBOE Volatility Index (VIX) continues to reflect low risk typical of a bull market.

S&P 500 VIX

Germany’s DAX is testing resistance at 9400/9500, but 13-week Twiggs Money Flow remains weak. Reversal of TMF below zero would warn of another correction. Reversal below 9000 would confirm a primary down-trend. Follow-through above 9500 is less likely, but would suggest another test of 10000.

DAX

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

The Footsie proved more robust, breaking resistance, at 6500/6560 to signal a test of 6900. 13-Week Twiggs Money Flow is rising strongly, signaling buyers are in control.

FTSE 100

China’s Shanghai Composite Index broke resistance at its 2013 high of 2440, signaling an advance. 13-Week Twiggs Money Flow reversal below its rising trendline, however, would warn of (medium-term) selling pressure.

Shanghai Composite Index

* Target calculation: 2400 + ( 2400 – 2300 ) = 2500

The ASX 200 retraced to test support at 5440/5450. Respect would signal another test of the August high at 5650/5660. Failure of support would indicate a test of 5250/5300 and a weaker up-trend. Reversal below 5250 remains unlikely, but would warn of another test of primary support. A 21-day Twiggs Money Flow trough above zero would signal long-term buying pressure.

ASX 200

* Target calculation: 5650 + ( 5650 – 5300 ) = 6000

Henry Kissinger Looks Back on the Cold War

Henry Kissinger, former U.S. Secretary of State joins CFR President Richard Haass to discuss the Cold War. Kissinger reflects on the events, personalities, and thinking that characterized the United States and Soviet Union’s leadership.

Chaos in Eastern Ukraine rebel government

From Christian Neef at Der Spiegel:

….the disputes between leaders in Donetsk and Lugansk are growing — a development Moscow views with dismay. Their citizen militias are disintegrating into different groups that are each pursuing different agendas. Some are refusing to recognize the leaders of the People’s Republics and others don’t want to accept the terms of the Minsk Protocol. One of the biggest problems is the Cossacks, who control 80 percent of the Lugansk region and have now proclaimed their own state, the Lugansk Democratic Republic. The situation in Lugansk itself is especially complicated given that the city is partly under the control of criminal gangs.

Resistance is even stirring in Donetsk. Three weeks ago, a party calling itself “New Russia” held a protest in the city center and pilloried leaders of the separatist republic for agreements they had made with Kiev. Speakers at the demonstration said the cease-fire must be ended immediately and that attacks against Ukrainian positions should resume. A short time later, assailants perpetrated an assassination attempt against New Russia’s leader, who as recently as this spring had been the “people’s governor” of Donetsk….

Read more at The Chaos Republics: The Real Test for Rebels Will Come in Winter – SPIEGEL ONLINE.

Will the stock market collapse when QE is withdrawn?

This chart in Westpac’s Northern Exposure chart summary implies that US stocks rely on Fed balance sheet expansion (QE) for support.

Fed Securities Held Outright v. S&P 500

The curve shows an almost perfect fit. There are just two things wrong with it. First, the scales on the left and right sides of the chart are not proportionate: the scale on the left compares a 9 times increase to a 3 times increase on the right. Second, while the Fed has expanded its balance sheet to more than $4 Trillion, a large percentage of that money has washed straight back to the Fed — deposited by banks as excess reserves.

Fed Total Assets and Excess Reserves

The impact on the working monetary base (monetary base adjusted for excess reserves) is far smaller: a rise of 66% (or $544 billion) over the past 7 years.

Fed Total Assets minus Excess Reserves compared to Working Monetary Base

A chart since 1985 shows nominal GDP (GDP before adjustment for inflation) normally expanded between 5% and 7.5% a year outside of recessions. But NGDP has not recovered above 5% after 2008. This may be partly attributable to lower inflation, but the Fed would clearly want to see NGDP above 5% — roughly 3% real growth and 2% inflation.

Working Monetary Base Growth compared to NGDP

We can also see that growth of below 5% in the working monetary base is often precursor to a recession, 1995/1996 being one exception. The second is when the Fed took their foot off the gas pedal too early, after QE1 in 2010, but were able to resume in time to head off a major contraction. They have been far more circumspect the second time and are likely to maintain monetary base growth North of 5%. Too sharp a slow-down would be cause for concern.

When we calculate the ratio of total US stock market capitalisation to the working monetary base [blue line] it is apparent that market response to the increase in monetary base is far more cautious than it was in 1998/1999.

Working Monetary Base Growth compared to NGDP

With Forward Price to Earnings Ratios for the S&P 500 and Nasdaq close to their long-term average (Westpac Northern Exposure, Page 118), I consider the likelihood of the QE taper precipitating a major market collapse to be remote.

Sensex narrow consolidation

India’s Sensex displays narrow consolidation below resistance at 28000, suggesting continuation of the up-trend. Reversal below 27000 and the secondary trendline is less likely, but would warn of a correction. Troughs above zero on 13-week Twiggs Money Flow indicate buying pressure.

Sensex

* Target calculation: 28000 + ( 28000 – 27000 ) = 29000

Dow, Nasdaq advance

Broadening wedges are not patterns on which I place a great deal of reliance, but you can depend on them to generate false signals — in both directions. Dow Jones Industrial Average broke resistance at 17300 and has now penetrated the upper border of the broadening wedge. Follow-through above 17600 would confirm a primary advance with a target of 19000*. Rising 13-week Twiggs Money Flow indicates long-term buying pressure. Reversal below 17000 is unlikely, but would warn of another test of primary support and the rising trendline at 16000.

Dow Jones Industrial Average

* Target calculation: 17500 + ( 17500 – 16000 ) = 19000

The Nasdaq 100 offers a target of 4500*, having broken resistance at 4100. 13-Week Twiggs Money Flow drifting sideways reflects a lack of enthusiasm, but recovery above 35% would flag renewed buying pressure. Reversal below 4000 is unlikely.

Nasdaq 100

* Target calculation: 4100 + ( 4100 – 3700 ) = 4500

Global Bank Regulator Calls for Larger Capital Cushions | CFO

Matthew Heller reports that the Financial Stability Board, chaired by BOE Governor Mark Carney, is set to table fresh proposals at the upcoming G20 meeting in Brisbane. The world’s top 30 “systemically important” banks will be required to substantially increase their capacity to absorb losses without requiring a bailout.

The new rules would require global systemically important banks to hold minimum capital of 6% of total assets against losses — twice the provisional leverage ratio required by Basel III rules. In addition, banks would be required to have capital equal to at least 16% and as much as 20% of their risk-weighted assets, such as loans.

Even if the big four banks in Australia are not on the list, they are systemically important from an Australian perspective and should hold similar levels of capital.

Read more at Global Bank Regulator Calls for Larger Capital Cushions.

A leash is being thrown over the Australian mortgage monster | Macrobusiness

Posted by Houses and Holes
Published with kind permission from Macrobusiness.

This post is long but you must read it. The Australian economy faces a potential decades long turning point on events that transpired late Friday. The following speech was delivered by Chairman Australian Prudential Regulation Authority Wayne Byers.

Good afternoon.

Let me start by posing a question: are Australian banks adequately capitalised?

That’s a pretty important question, and one that the Financial System Inquiry is rightly focussed on. When compared against the Basel III capital requirements, they certainly seem to be. At end June 2014, the Common Equity Tier 1 ratio of the Australian banking system was 9.1 per cent, well above the APRA minimum requirement of 4.5 per cent currently in place, or 7.0 per cent when the capital conservation buffer comes into force in 2016. And in APRA’s view, after adjusting for differences in national application of the Basel standards, the largest Australian banks appear to be in the upper half of their global peers in terms of their capital strength. But the question remains: is that adequate?

The first point to make is that Mr Byers is being diplomatic here but essentially siding with MB’s Deep T. and his critique of the big bank’s use of capital comparisons with overseas peers. Regular readers will recall that critique was subsequently taken up in the mainstream press by Morgij’s Graham Anderson.

Byers is an expert on dodgy internal risk-weighting models having led the BIS’s inquiry into how various banks around the world game the Basel III system using whacky modelling. To say that the banks are only in the “top half” of the group debunks the bank’s claims that they are in the “top quartile”. Back to Byers:

There is no easy answer to that question. To answer it, you need to first answer another question: adequate for what?

Adequate to generate confidence is one simple answer. We require banks to have capital because they make their money by taking risks using other people’s money. That is not intended to sound improper; the financial intermediation provided by banks is critical to the efficient functioning of the economy. However, as very highly leveraged institutions at the centre of the financial system, investing in risky assets and offering depositors a capital guaranteed investment, we need confidence that banks can withstand periods of reasonable stress without jeopardising the interests of the broader community (except perhaps for their own shareholders). But what degree of confidence do we want?
Risk-based capital ratios are the traditional measure used to assess capital adequacy. Risk weights can be thought of as an indicator of likely loss on each asset on (and off) a bank’s balance sheet.2 So they tell us something about the maximum loss a bank can incur. But they don’t tell us anything about how likely, or under what scenario, those losses might eventuate.

Over the past decade, and particularly in the post-crisis period, regulators and banks have supplemented traditional measures of capital adequacy with stress testing. Stress testing helps provide a forward-looking view of resilience in a way in which static comparisons or benchmarks cannot. It provides an alternative lens through which the adequacy of capital can be assessed. In simple terms, it tries to answer the question: does a bank have enough capital to survive an adverse scenario – can we be confident it has strength in adversity?
Stress testing practices in Australia

In focussing on stress testing, APRA doesn’t try to predict the probability of a period of stress, let alone the precise scenario by which it will arrive. We simply start with the premise that there are financial and business cycles, and sometimes there will be periods where financial institutions – individually or collectively, and of their own making or otherwise – will experience adversity and be placed under severe stress. We are simply asking: what if? In Australia, following a very long period of benign conditions, this has even greater resonance because there is less experience of living through financial stress than elsewhere. Let me be clear: that lack of experience is a good thing, but we shouldn’t be blind to the risks that nevertheless exist.

But it is difficult to get right! For that reason, APRA has in recent years increased the attention it gives to ensuring that banks improve their governance, modelling and (ultimately) complex judgements to make stress testing more meaningful. APRA’s approach differs somewhat from international practice, with the onus on the industry first and foremost to improve their capabilities.

My predecessor outlined some principles for stress testing best practice two years ago, at this same forum.3 These were structured around five key areas:

 the use of stress testing to drive decision-making within the institution, as an integral part of risk management and the setting of capital buffers;
 strong governance, with results routinely reported to board risk committees and senior management, and challenged by them;
 the development of “severe but plausible” scenarios;
 the importance of robust data and IT systems to support the stress testing process; and
 credible modelling, combining quantitative approaches and expert judgement to effectively translate economic scenarios into financial impacts.

Against these principles, APRA supervisors have been reviewing banks’ current practice and, where necessary, identifying areas for further development.

At quite a number of banks, there has been considerable investment in their stress testing programs in recent years. Where this is working effectively, there is a clear role for stress testing in planning capital, considering risk limits and highlighting vulnerabilities. Rather than an ex post validation of capital sufficiency, it is a central part of setting the forward capital strategy within the bank’s internal capital adequacy assessment processes (ICAAPs).

Consistent with this has been a general strengthening of governance frameworks, with greater senior management oversight and informed discussion on both the design of stress tests and the assessment of the results. At larger banks, there are dedicated resources to coordinate stress testing exercises, and to develop and improve the modelling infrastructure that is so essential to delivering them.

However, there are three areas where there is still scope for improvement: scenario development, modelling and data. Developing a well-targeted and sufficiently adverse scenario is fundamental to any stress testing exercise. For some banks, however, there is not a great deal of innovation in the design of scenarios, which are not always customised to the institution’s particular risk profile and most importantly not always pushing to the boundary of adversity.

To help overcome this, from 2015 APRA intends to provide banks with a common scenario to be used in their ICAAP processes, in addition to the more tailored scenarios that they will continue to develop themselves. This is intended to ensure an appropriate degree of severity is considered as part of banks’ capital planning processes, and enables APRA to compare and aggregate results to gain an industry perspective on an annual basis – albeit with some caveats that I will talk more about in a moment.

Modelling also remains a challenge. There is a wide range of stress test modelling approaches across banks, with varying degrees of sophistication. In reviewing these, APRA looks to test that models are reasonably calibrated, sufficiently granular, and appropriately validated.

The most credible models have been built with intuitive risk drivers, including macro-economic factors and inherent risk characteristics of the particular asset class being modelled. These models are sensitive to different economic scenarios: they estimate a reasonable level of loss, and on a profile consistent with the shape of the scenario. At some banks, there is more to do to comfortably reach this point. Some models still rely too heavily on a single economic driver or judgement alone, lacking a convincing link to the scenario or taking a high-level approach that misses the differences in risk across different types of asset.

(For example, in the Phase 1 stress test results described below, one bank estimated an identical underlying loss rate (ie before mortgage insurance) across all mortgage lending LVR buckets. In other words, its stress test was built on the assumption that, in a scenario where house prices fell substantially, it would lose the same amount on a defaulted loan with a 60% LVR as it would on one with a 95% LVR.)

And for all models, they are only as good as the data that feeds them. This applies both to the internal risk data, such as accurate records of LVRs, and external economic data. The paucity of loss data in Australian experience is a particular challenge for estimating losses, especially on residential mortgages – again, this is a good dilemma to have, but still a problem for the modellers!

Industry stress tests
Since 2012, APRA increased its own investment in stress testing. This has included expanding our central coordination team with additional resources, developing a consistent framework for testing across different regulated industries, as well as providing specialist training for frontline supervisors.

A core part of our stress testing strategy, in addition to more detailed reviews of banks’ own stress testing practices, are periodic industry stress tests run by APRA. These are needed, in our view, to ensure scenarios are consistent and suitably severe, modelling approaches can be benchmarked and improved, and results can be aggregated to provide a system-wide perspective.

Bank stress tests are more art than science but bringing a consistent approach to the bank’s modelling is obviously a pre-requisite to usefulness. The problem with stress tests is usually that they are static versus the realty which is dynamic, and taking a snapshot in time, or a series of them, can’t account for the feedback loops, tipping points and the reflexivity that can shift loss-making parameters much more quickly and deeply than in any model.

That is not to say that they aren’t useful, just that they should be taken with a large grain of salt.

Moreover, Byers has, here, already touched upon the key hidden assumption in his stress modelling, which is not the banks themselves but the Lender’s Mortgage Insurers (LMIs). These are the two firms – QLMI and Genworth – that insure the highest risk and highest LVR loans on the bank’s books, to the tune of more than half a trillion dollars. What did APRA tell the banks to assume would happen to them in their stress test? I’d be willing to bet that it was assumed that they would pay out on the premiums without interruption. A point I will return to. Back to APRA:

APRA is, of course, not alone in conducting industry stress tests. The European and US authorities have also conducted banking stress tests this year. In those cases, there has been extensive disclosure of the outcomes for individual banks. In Europe, the disclosures have reflected a need to put an end to the lingering doubts that have hung over the quality of European bank balance sheets since the financial crisis – where necessary by insisting on capital raisings. In the US, the regulators effectively determine banks’ dividend payouts and capital management strategies each year based on the stress test results. In both cases, transparency is therefore an essential element in explaining supervisory intervention.

APRA has traditionally not followed this approach. While we have disclosed the aggregate results, the purpose of our testing has been different to those of our colleagues on either side of the North Atlantic. We are wary about stress testing results becoming the primary assessment of capital adequacy, given the results can be quite scenario-specific. Rather, we see stress testing as helpfully informing our supervisory assessment of capital, but not determining it.

Unsurprisingly, our stress test this year has targeted at risks in the housing market.7 The low risk nature of Australian housing portfolios has traditionally provided ballast for Australian banks – a steady income stream and low loss rates from housing loan books have helped keep the banks on a reasonably even keel, even when they are navigating otherwise stormy seas. But that does not mean that will always be the case. Leaving aside the current discussion of the state of the housing market, I want to highlight some key trends that demonstrate why housing risks and the capital strength of Australian banks are inextricably and increasingly intertwined.

I have endeavoured to summarise this in six charts (and seven lines) below. The key trends are pretty important drivers of where we are today.

Over the past ten years, the assets of Australian ADIs have grown from $1.5 trillion to $3.7 trillion (Chart 1). Over the same period, the paid-up capital and retained earnings have grown from $84 billion to $203 billion (Chart 2). Both have increased by almost identical amounts – close enough to 140 per cent each. This similarity in growth rates over the decade hides some divergent trends in individual years, but today the ratio of shareholders’ funds to the balance sheet assets of the Australian banking system – a simple measure of resilience – is virtually unchanged from a decade ago (Chart 3). Much of the recent build up in capital has simply reversed a decline in core equity in the pre-crisis period – as a result, on the whole we’re not that far from where we started from.

So how have regulatory capital ratios risen? Largely through changes in the composition of the asset side of the balance sheet. While the ratio of loans to assets has barely budged (Chart 4), the proportion of lending attributable to housing has increased from roughly 55 per cent to around 65 per cent today (Chart 5). Because housing loans are regarded as lower risk, the ratio of risk-weighted assets to total (unweighted) assets has fallen quite noticeably – from

(Put simply, much of the strengthening of capital ratios relative to a decade ago is less the product of substantial growth in capital and more the product of the increasing proportion of housing loans within loan portfolios. In short, banks have de-risked rather than deleveraged.

This is the risk-based framework in action: housing has tended to be a relatively low risk asset for Australian banks, and banks with safer balance sheets are allowed to operate with lower levels of capital per dollar of assets. However, given housing loans have become such a high concentration on the system’s balance sheet and require, particularly for the most sophisticated banks, very limited levels of capital, assessing potential losses within the housing book are critical to judging the adequacy of the capital of Australian banks. It therefore makes sense that APRA keeps the health of housing portfolios, and the appropriateness of the capital required to support them, under considerable scrutiny.)

As I said Friday, a better way to put this is to say the banks have de-weighted their capital owing to the rising proportion of mortgages on the bank’s books. The problem is similar to that of the US banking system, the mortgage glut has been so persistent and huge that it has transformed the underlying economy in a vast virtuous cycle. If banks are using potential loss assumptions based upon that period in their capital reservation policies then they are being inherently pro-cyclical. If the accident does come then those assumptions will be blown away as the losses scream higher because the economic model itself will hit the wall, usually because of a sudden adjustment to an external imbalance. Back to APRA:

Stress test scenarios and results
The 2014 stress test involved 13 large, locally-incorporated banks – together, these banks account for around 90 per cent of total industry assets. Participating banks were provided with two stress scenarios, which were developed in collaboration with the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ).

Central to both scenarios was a severe downturn in the housing market. Scenario A was a housing market double-dip, prompted by a sharp slowdown in China. In this scenario, Australian GDP growth declines to -4 per cent and then struggles to return to positive territory for a couple of years, unemployment increases to over 13 per cent and house prices fall by almost 40 per cent. Scenario B was a higher interest rate scenario. In the face of strong growth and emerging inflation, the RBA lifts the cash rate significantly. However, global growth subsequently weakens and a sharp drop in commodity prices leads to increased uncertainty and volatility in financial markets. In Australia, higher unemployment and higher borrowing costs drive a significant fall in house prices.

thyrett3

Let me stress (with no pun intended) that these are not APRA’s official forecasts! Nor would we even say they are the most likely scenarios to emerge. But they are very deliberately designed, specifically targeting key vulnerabilities currently front of mind for prudential supervisors.

The results of the stress test were generated in two phases. In the first phase, results are based on bank’s own modelling, within the confines of the common scenarios and certain instructions. The second phase replaces the banks’ individual estimates of loss impacts with APRA’s own estimates, developed using a combination of models, internal research and external benchmarks. The phased approach is a necessary part of understanding the respective drivers of the results, given the variability in banks’ modelling in phase 1.

Let me share with you our key findings from each phase.

Phase 1
In the first phase, banks projected a significant impact on profitability and marked declines in capital ratios in both scenarios, consistent with the deterioration in economic conditions. The stress impact on capital was driven by three principal forces: an increase in banks’ funding costs which reduced net interest income, growth in risk weighted assets as credit quality deteriorated, and of course, a substantial increase in credit losses as borrowers defaulted.

In aggregate, the level of credit losses projected by banks was comparable with the early 1990s recession in Australia, but unlike that experience, there were material losses on residential mortgages. This reflects the housing market epicentre of the scenarios, and also the increasing concentration of bank loan books on that single asset class. In each scenario, losses on residential mortgages totalled around $45 billion over a 5 year period, and accounted for a little under one-third of total credit losses. By international standards, this would be broadly in line with the 3 per cent loss rate for mortgages experienced in the UK in the early 1990s, but lower than in Ireland (5 per cent) and the United States (7 per cent) in recent years. In other words, banks’ modelling predicts housing losses would certainly be material, but not of the scale seen overseas.

rfqe

Stress testing on this core portfolio is an imprecise art, given the lack of domestic stress data to model losses on. Beneath the aggregate results, there was a wide range of loss estimates produced by banks’ internal models. This variation applies both to the projections for the number of loans that would default, and the losses that would emerge if they did. Our view was that there seemed to be a greater range than differences in underlying risk are likely to imply.

(For example, the average annual loss on housing loans that defaulted in the Scenario A varied from 6 per cent at one bank to over 21 per cent at another, despite a common house price fall. Another example was net interest income, where estimates ranged from being 35 per cent lower to 3 per cent higher than the current year.)

Another key area where there were counter-intuitive results was from the modelling of the impact of higher interest rates on borrowers’ ability to meet mortgage repayments. Banks typically projected little differentiation in borrower default rates between the two scenarios, despite the very different paths of interest rates and implied borrowing costs. This raises the question whether banks

Phase 2
The results in the second phase of the stress test, based on APRA estimates of stress loss, produced a similar message on overall capital loss – although the distribution across banks differed from Phase 1 as more consistent loss estimates were applied. Aggregate losses over the five years totalled around $170 billion under each scenario. Housing losses under Scenario A were $49 billion; they were $57 billion under Scenario B.10

These aggregate losses produced a material decline in the capital ratio of the banking system. The key outcomes were:

 Starting the scenario at 8.9 per cent, the aggregate Common Equity Tier 1 (CET1) ratio of the participant banks fell under Scenario A to a trough of 5.8 per cent in the second year of the crisis (that is, there was a decline of 3.1 percentage points), before slowly recovering after the peak of the losses had passed.
 From the same starting point, under Scenario B the trough was 6.3 per cent, and experienced in the third year.
 The ratios for Tier 1 and Total Capital followed a similar pattern as CET1 under both scenarios.
 At an individual bank level there was a degree of variation in the peak-to-trough fall in capital ratios, but importantly all remained above the minimum CET1 capital requirement of 4.5 per cent.

This broad set of results should not really be a surprise. It reflects the strengthening in capital ratios at an industry level over the past five years. But nor should it lead to complacency. Almost all banks projected that they would fall well into the capital conservation buffer range and would therefore be severely constrained on paying dividends and/or bonuses in both scenarios. For some banks, the conversion of Additional Tier 1 instruments would have been triggered as losses mounted. More generally, and even though CET1 requirements were not breached, it is unlikely that Australia would have the fully-functioning banking system it would like in such an environment. Banks with substantially reduced capital ratios would be severely constrained in their ability to raise funding (both in availability and pricing), and hence in their ability to advance credit. In short, we would have survived the stress, but the aftermath might not be entirely comfortable.

I can hear the groans and guffaws of incredulity of readers from here. And I empathise. It is very unlikely that in either stress scenario that capital levels at the banks would remain so comfortable (even if that is still uncomfortable). Contagion in funding costs and the potential failure of any one institution would alone be enough to drive losses much higher, especially given the system’s major over-exposure to the same asset class. But I submit to you that the results are credible enough if we accept one simple assumption.

So long as the LMIs were to fully and promptly pay out on every premium then the above scenario results are plausible.

The problem is that is one wild assumption. The LMIs themselves are likely to be swiftly ruined in both APRA scenarios. As losses mounted it’s very likely that the LMIs would exhaust their slim capital and find markets were closed to them for replenishment of such. There is also likely to be mass disputation of claims, clogged courts and general legal mayhem.

That is exactly what happened in the US housing crash when the keystone insurers of the mortgage system – the monolines and then AIG’s financial products division – fell prey to contagion.

In short, the only way that I can see that APRA’s scenarios would result in the kind of bank losses cited is that the LMIs have been nationalised and the Australian tax-payer is channeling billions of dollars to all banks in a back door bailout.

Needless to say, that is not exactly a fair “stress test”!

Back to APRA:

Recovery planning
The aggregate results I have just referred to assume limited management action to avert or mitigate the worst aspects of the scenario. This is, of course, unrealistic: management would not just sit on their hands and watch the scenario unfold. As part of Phase 2, APRA also asked participating banks to provide results that included mitigating actions they envisaged taking in response to the stress. The scale of capital losses in the scenarios highlights the importance of these actions, to rebuild and maintain investor and depositor confidence if stressed conditions were to emerge.

This was an area of the stress test that was not completed, in our view, with entirely convincing answers. In many cases, there was clear evidence of optimism in banks’ estimates of the beneficial impact of some mitigating actions, including for example on cost-cutting or the implications of repricing loans.

(The feedback loops from these steps, such as a drop in income commensurate with a reduction in costs, or increase in bad debts as loans become more expensive for borrowers, were rarely appropriately considered.)

Despite the commonality of actions assumed by banks, there was variation in the speed and level of capital rebuild targeted. Some banks projected quick and material rebuilds in their capital positions, after only a small “dip” into the capital conservation range. Other banks assumed that they would remain within the range for a long period of time. It is far from clear that a bank could reasonably operate in such an impaired state for such a length of time and still maintain market confidence.

Disappointingly, there was only a very light linkage between the mitigating actions proposed by banks in the stress test and their recovery plans (or “living wills”), with loose references rather than comprehensive use. Recovery plans should have provided banks with ready-made responses with which to answer this aspect of the stress test. APRA will be engaging with banks following the stress test to review and improve this area of crisis preparedness.

Most importantly, the exercise also raised questions around the combined impact of banks’ responses. For example, proposed equity raisings, a cornerstone action in most plans, appeared reasonable in isolation – but may start to test the brink of market capacity when viewed in combination and context. (For example, some banks assumed as much as a 10 percentage point fall in their cost-to-income ratios as a result of cost-cutting, a measure of unprecedented efficiency even in good times.) The tightening of underwriting standards, another common feature, could have the potential to lead to a simultaneous contraction in lending and reduction in collateral values, complicating and delaying the economic recovery as we have seen in recent years in other jurisdictions. In other words, banks may well survive the stress, but that is not to say the system could sail through it with ease.

Concluding comments
To sum up, the Australian banking industry appears reasonably resilient to the immediate impacts of a severe downturn impacting the housing market. That is good news. But a note of caution is also needed – this comes with a potentially significant capital cost and with question marks over the ease of the recovery. The latter aspect is just as important as the former: if the system doesn’t have sufficient resilience to quickly bounce back from shocks, it risks compounding the shocks being experienced. Our conclusion is, therefore, that there is scope to further improve the resilience of the system.

There are three mutually-reinforcing ways in which to work towards that goal:

 Firstly, making sure we have a solid starting point through strong capital management and a focus on prudent capital buffers, allowing a margin that can be utilised in stress as the Basel framework intends, but without sailing too close to the wind by trimming these buffers to the lowest possible level of sufficiency.
 Secondly, by limiting the potential exposure to stress, with appropriate lending standards and risk settings to ensure that the risk that is taken on is well understood and appropriately managed.
 And finally, by ensuring recovery plans are credible, with a realistic and continuously reviewed menu of actions that can be practically implemented even in stressed operating conditions, bearing in mind that others may well be seeking to undertake the same actions at the same time.

APRA has been focusing on all of these areas in recent years, and dialling up the intensity of its supervision on each. If we draw one conclusion from the stress test this year, it’s that there remains more to do to be able to confidently deliver strength in adversity.

The above criticisms I make of the process are meant as a reality check for how big the problem of the Australian housing bubble has become rather than a fundamental attack on what APRA has done. In fact, stripping back the diplomatic language, this is the harshest result from any APRA stress test that I can recall. Making the results public tells you something as well.

What Wayne Byers has done is very clearly to draw a line in the sand for the politico-housing complex. By doing so he has explicitly made the case for redress.

The entire core of Australia’s financial system architecture is now on the move towards greater conservatism. The Murray Inquiry will likely recommend higher capital ratios – probably 2% over time – and place floors on risk-weighting for mortgage capital – that will will be mild versus what is required. That’s APRA conclusion number one.

Its second conclusion indicates that macroprudential tools requiring more specific capital buffers for high risk mortgage (read investors) and greater lending caution in lending calculators are also imminent. Put the two together and we have a sea-change underway in the mechanisms at the core of Australia’s mortgage machine.

Its third conclusion shows the behind-the-scenes work will go on and with Byers at the helm hope for more is kindled.

Also over the weekend, Treasurer Joe Hockey made the government’s position clear, at the AFR:

Treasurer Joe Hockey has told Australia’s big banks he stands ready to raise their capital levels and warned them to back down from mounting a public campaign against the change even though it will lower their profits.

AFR Weekend has learned that Mr Hockey has rejected the banks’ ­campaign, saying that the decision had been made for him. Instead, Mr Hockey wants the banks to engage with the Murray review on how best to boost their capital buffers.

…Mr Hockey wants the banks to resolve with the inquiry the dispute as to where Australian banks rank internationally by agreeing to the appropriate definitions. And the Treasurer is understood to argue that higher capital requirements being imposed on so-called systemically important global banks will effectively provide a new benchmark that will inevitably flow to Australia because our banks raise 30 per cent or so of their funds offshore.

The Treasurer’s warning to the banks not to campaign against the issue comes as the ABA seeks a louder policy voice in Canberra.

That is a Treasurer offering political protection to his regulatory charges.

It’s not the end of the fight by a long stretch and the greatest changes lie ahead, in crisis, but for the first time in many years, a material leash is being thrown around the neck of the Australian mortgage monster.

In Praise of Global Imbalances by Sanjeev Sanyal – Project Syndicate

Sanjeev Sanyal, Deutsche Bank’s Global Strategist, writes:

….according to International Monetary Fund data, the current overall global investment rate, at 24.5% of world GDP, is near the top of its long-term range. The issue is not a lack of overall investment, but the fact that a disproportionate share of it comes from China. China’s share of world investment has soared from 4.3% in 1995 to an estimated 25.8% this year. By contrast, the United States’ share, which peaked at 36% in 1985, has fallen to less than 18%. The decline in Japan’s share has been more dramatic, from a peak of 22% in 1993 to just 5.7% in 2013…

Read more at In Praise of Global Imbalances by Sanjeev Sanyal – Project Syndicate.

S&P 500 bullish but Europe and China encounter resistance

Retracement of the S&P 500 respected its new support level at 2000, confirming a primary advance with a target of 2150*. Recovery of 13-week Twiggs Money Flow above the declining trendline indicates buyers are back in control. Reversal below 2000 and the rising trendline is unlikely, but would signal another correction.

S&P 500 Index

* Target calculation: 2000 + ( 2000 – 1850 ) = 2150

CBOE Volatility Index (VIX) at 13 indicates low risk typical of a bull market.

S&P 500 VIX

Germany’s DAX found resistance at 9400 and retracement to test support at 9000 is likely. Failure of the former primary support level at 8900/9000 would confirm a primary down-trend. Reversal of 13-week Twiggs Money Flow below zero would also indicate that sellers dominate.

DAX

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

The Footsie also encountered resistance, at 6500/6560. Respect of this level would warn of a primary down-trend, but rising 13-week Twiggs Money Flow suggests medium-term buying pressure.

FTSE 100

China’s Shanghai Composite Index is testing its 2013 high of 2440. Declining 13-week Twiggs Money Flow warns of (medium-term) resistance.

Shanghai Composite Index

* Target calculation: 2400 + ( 2400 – 2300 ) = 2500

Hong Kong’s Hang Seng Index also found resistance, at 24000. Reversal below 23000 would confirm a primary down-trend. Reversal of 13-week Twiggs Money Flow below zero would strengthen the bear signal.

Hang Seng Index

The ASX 200, influenced by both the US and China, is testing resistance at 5550. Rising 13-week Twiggs Money Flow (above zero) indicates medium-term buying pressure. Expect a test of 5650/5660. Reversal below 5380/5400 is less likely, but would warn that sellers have resumed control. I have lowered the target to 6000* because of constant back-filling in recent months.

ASX 200

* Target calculation: 5650 + ( 5650 – 5300 ) = 6000

A Growth Pact for America by Glenn Hubbard | Project Syndicate

Glenn Hubbard, former Chairman of the Council of Economic Advisers under President George W. Bush, and Dean of Columbia Business School proposes:

….two policies are particularly promising for such a “Pact for America”: federal infrastructure spending and corporate-tax reform. Enactment of these reforms would generate a win for each side – and for both.

But such a bipartisan consensus requires removing both the left and the right’s ideological blinders, at least temporarily. On the left, a preoccupation with Keynesian stimulus reflects a misunderstanding of both the availability of measures shovel-ready projects and their desirability whether they will meaningfully change the expectations of households and businesses. Indeed, to counteract the mindset forged in the recent financial crisis, spending measures will need to be longer-lasting if they are to raise expectations of future growth and thus stimulate current investment and hiring.

The right, for its part, must rethink its obsession with temporary tax cuts for households or businesses. The impact of such cuts on aggregate demand is almost always modest, and they are poorly suited for shifting expectations for recovery and growth in the post-financial-crisis downturn….

Read more at A Growth Pact for America by Glenn Hubbard – Project Syndicate.

The Menace of Unreality: Combatting Russian Disinformation in the 21st Century

Hosted in cooperation with the Atlantic Council and the US Department of State, this panel discussion examined the extent of Russia’s disinformation campaign and its impact on Ukraine and Europe. In particular it looked at why this effort has been a success, how it is undermining European democracy and what possible solutions may exist. Speakers included: Geoffrey Pyatt, US Ambassador to Ukraine; Oleksander Scherba, Ambassador at Large, Ministry of Foreign Affairs, Ukraine; Michael Weiss, Editor-in-Chief, The Interpreter and Peter Pomerantsev, Journalist and Documentary Producer. LI’s Anne Applebaum served as moderator. #RussiaVsReality

This is Vladimir Putin’s response to the wave of democracy movements that spread through the Arab world and Eastern Europe. Totalitarian states are particularly vulnerable to these movements. Their response is to attack the vector on which the “virus” is borne — mainstream and social media — in order to destroy its effectiveness.