What’s going to happen to stock market prices? If we knew that, we could be very rich! Nevertheless, financial analysts constantly try to predict the movements of shares in order to decide when to buy and when to sell. One thing they do is to look at charts of price movements and look for patterns. These ‘chartists’, as they are sometimes called, refer to something known as the ‘death cross’ or ‘dark cross’.
So what is the death cross? Imagine a chart of the movements of share prices, such as the FTSE 100 in the UK or the Dow Jones Industrial Average and S&P 500 in the USA. These movements can be shown as a moving average. In other words, for each day you plot the average of the past so many days. Typically, 200-day (sometimes 100-day) and 50-day moving averages are plotted. The 200-day (or 100-day) is taken as the long-term moving average and the 50-day as the short-term moving average. In a falling market, if the short-term moving average crosses below the long-term moving average, this is called the ‘death cross‘ as it signifies growing downward pressure in the market. The fall in the long-term average in these circumstances will indeed lag behind the fall in the short-term moving average.
Markets around the world are experiencing the death cross. So should be be worried? Or is this like looking for patterns in tea leaves, or the stars, and using them to make bogus predictions? So: science or mumbo jumbo?
First the science: the death cross indicates a fall in confidence. And at present, there is much for investors to worry about. Burgeoning debts, austerity measures and fears of a double-dip recession are spooking markets.
Now the mumbo jumbo. Just because markets are falling at the moment, this does not prove that they will go on falling. Markets are often spooked, only to recover when ‘sanity’ returns. People may soon start to believe that a second credit crunch will not return, given all the regulatory and support measures put in place, the huge amount of liquidity waiting to be invested and the support packages from the ECB and IMF for Greece and, potentially, for other eurozone countries having difficulties servicing their debts. In other words, patterns may repeat themselves, but not necessarily. It depends on circumstances.
Articles
Market’s Swoon Prompts Fears Of the Dreaded ‘Death Cross’ CNBC, Jeff Cox (1/7/10)
Death Cross in S&P 500 May Not Lead to Rout: Technical Analysis Bloomberg Businessweek, Alexis Xydias (30/6/10)
Are the markets about to encounter the”Death Cross”? BBC News, Jamie Robertson (1/7/10)
MarketBeat Q&A: Debunking the ‘Death Cross’ Wall Street Journal blogs, Matt Phillips (30/6/10)
Technical analysis and market data
Moving Average Crossovers TradingDay.com, Alan Farley
Death Cross Investopedia
FTSE 100 historical prices Yahoo Finance
S&P 500 historical prices Yahoo Finance
Dow Jones historical prices Yahoo Finance
Questions
- Explain what is meant by the death cross and use a diagram to illustrate it. What is menat by the golden cross. Again, use a diagram to illustrate it.
- Under what circumstances would speculation against stock market price movements be (a) stabilising and (b) destabilising?
- What is the implication for stock market prices of a ‘wall of money’?
- How much faith should be put in chartist explanations of stock market prices? Do criticisms of chartism apply to all time-series analysis that is used for forecasting?
- Look back at newspaper articles from a year ago and see what they were predicting about stock market prices. Have their preductions been borne out? If so, why? If not, why not?
In October 2004, the USA lodged a complaint with the WTO. The claim was that the EU was paying illegal subsidies to Airbus to develop new aircraft, such as the superjumbo, the A380. This provoked a counter-complaint by Airbus, claiming unfair subsidies for Boeing by the US government since 1992. In July 2005, two panels were set up to deal with the two sets of allegations.
A ruling on the US claim was published on 30 June 2010. The WTO found Airbus guilty of using some illegal subsidies to win contracts through predatory pricing. For example, some of the ‘launch aid’ (LA) for research and development was given at below market rates and hence violated WTO rules. Also the provision of infrastructure and infrastructure grants for runways, factories, etc. also violated the rules. However, the WTO dismissed some of Boeing’s claims, as many of the subsidies were reimbursable at commercial rates of interest.
We still await a ruling on the EU’s complaint against US support for Boeing. This is due later in July.
Articles
WTO backs Boeing in Airbus dispute Financial Times, Joshua Chaffin and Jeremy Lemer (30/6/10)
FACTBOX-Subsidies and the WTO – issue at heart of Airbus case Reuters (30/6/10)
Q&A-What next in the Airbus dispute? Reuters (30/6/10)
TIMELINE-Key dates in Airbus subsidy dispute Reuters (30/6/10)
EU Airbus subsidies illegal, says WTO BBC News (30/6/10)
Boeing and Airbus row ruling to be made public BBC News, Richard Scott (30/6/10)
European loan rates to Airbus illegally low, says WTO Europolitics, Chiade O’Shea (30/6/10)
Airbus Subsidies From Europe Are Ruled Improper New York Times, Christopher Drew (30/6/10)
Airbus-Boeing Rivals May Benefit From Spat Aviation Week, Madhu Unnikrishnan (28/6/10)
WTO ruling
WTO issues panel report on Airbus dispute WTO (30/6/10)
Data on orders and deliveries
Competition between Airbus and Boeing (orders and deliveries) Wikipedia
Questions
- What is meant by ‘predatory pricing’?
- Which subsidies were found to be illegal by the WTO? What was it about them that violated WTO rules?
- What is Airbus’s complaint against Boeing?
- How might strategic trade theory be used to justify subsidies given to Airbus?
- In what ways might the disputes between Boeing and Airbus benefit other aircraft manufacturers?
Keynes referred to the ‘paradox of thrift’ (see, for example, Box 17.5 on page 492 of Sloman and Wride, Economics, 7th edition). The paradox goes something like this: if individuals save more, they will increase their consumption possibilities in the future. If society saves more, however, this may reduce its future income and consumption. Why should this be so? Well, as people in general save more, they will spend less. Firms will thus produce less. What is more, the lower consumption will discourage firms from investing. Thus, through both the multiplier and the accelerator, GDP will fall.
What we have in the paradox of thrift is an example of the ‘fallacy of composition’ (see Sloman and Wride, Box 3.7 on page 84). What applies at the individual level will not necessarily apply at the aggregate level. The paradox of thrift applied in the Great Depression of the 1930s. People cutting back on consumption drove the world economy further into depression.
Turn the clock forward some 80 years. On 26/27 June 2010, leaders of the G20 countries met in Canada to consider, amongst other things, how to protect the global economic recovery while tackling the large public-sector deficits. These deficits have soared as a result of two things: (a) the recession of 2008/9, which reduced tax revenues and resulted in more people claiming benefits, (b) the expansionary fiscal policies adopted to bring countries out of recession.
But the leaders were divided on how much to cut now. Some, such as the new Coalition government in the UK, want to cut the deficit quickly in order to appease markets and avert a Greek-style crisis and a lack of confidence in the government’s ability to service the debt. Others, such as the Obama Administration in the USA, want to cut more slowly so as not to put the recovery in jeopardy. Nevertheless, cuts were generally agreed, although agreement about the timing was more vague.
So where is the fallacy of composition? If one country cuts, then it is possible that increased demand from other countries could drive recovery. If all countries cut, however, the world may go back into recession. What applies to one country, therefore, may not apply to the world as a whole.
Let’s look at this in a bit more detail and consider the individual elements of aggregate demand. If there are to be cuts in government expenditure, then there has to be a corresponding increase in aggregate demand elsewhere, if growth is to be maintained. This could come from increased consumption. But, with higher taxes and many people saving more (or reducing their borrowing) for fear of being made redundant or, at least, of having a cut in their incomes, there seems to be little sign that consumption will be the driver of growth.
Then there is investment. But, fearing a ‘double-dip recession’, business confidence is plummeting (see) and firms are likely to be increasingly reluctant to invest. Indeed, after the G20 summit, stock markets around the world fell. On 29 June, the FTSE 100 fell by 3.10% and the main German and French stock market indices, the Dax and the Cac 40, fell by 3.33% and 4.01% respectively. This was partly because of worries about re-financing the debts of various European countries, but it was partly because of fears about recovery stalling.
The problem is that cuts in government expenditure and rises in taxes directly affect the private sector. If government capital expenditure is cut, this will directly affect the construction industry. Even if the government makes simple efficiency savings, such as reducing the consumption of paper clips or paper, this will directly affect the private stationery industry. If taxes are raised, consumers are likely to buy less. Under these circumstances, no wonder many industries are reluctant to invest.
This leaves net exports (exports minus imports). Countries generally are hoping for a rise in exports as a way of maintaining aggregate demand. But here we have the fallacy of composition in its starkest form. If one country exports more, then this can boost its aggregate demand. But if all countries in total are to export more, this can only be achieved if there is an equivalent increase in global imports: after all, someone has to buy the exports! And again, with growth faltering, the global demand for imports is likely to fall, or at best slow down.
The following articles consider the compatibility of cuts and growth. Is there a ‘paradox of cuts’ equivalent to the paradox of thrift?
Articles
Osborne’s first Budget? It’s wrong, wrong, wrong! Independent on Sunday, Joseph Stiglitz (27/6/10)
Strategy: Focus switches from exit to growth Financial Times, Chris Giles (25/6/10)
Once again we must ask: ‘Who governs?’ Financial Times, Robert Skidelsky (16/6/10)
Europe’s next top bailout… MoneyWeb, Guy Monson and Subitha Subramaniam (9/6/10)
Hawks hovering over G20 summit Financial Times (25/6/10)
G20 applauds fiscal austerity but allows for national discretion Independent, Andrew Grice and David Usborne (28/6/10)
To stimulate or not to stimulate? That is the question Independent, Stephen King (28/6/10)
Now even the US catches the deficit reduction habit Telegraph, Jeremy Warner (28/6/10)
George Osborne claims G20 success Guardian, Larry Elliott and Patrick Wintour (28/6/10)
G20 accord: you go your way, I’ll go mine Guardian, Larry Elliott (28/6/10)
G20 summit agrees on deficit cuts by 2013 BBC News (28/6/10)
IMF says G20 could do better BBC News blogs: Stephanomics, Stephanie Flanders (27/6/10)
Are G20 summits worth having? What should the G20’s top priority be? (Economics by invitation): see in particular The G20 is heading for a “public sector paradox of thrift”, John Makin The Economist (25/6/10)
Why it is right for central banks to keep printing Financial Times, Martin Wolf (22/6/10)
In graphics: Eurozone in crisis: Recovery Measures BBC News (24/6/10)
A prophet in his own house The Economist (1/7/10)
The long and the short of fiscal policy Financial Times, Clive Crook (4/7/10)
G20 Communiqué
The G20 Toronto Summit Declaration (27/6/10) (see particularly paragraph 10)
Questions
- Consider the arguments that economic growth and cutting deficits are (a) complementary aims (b) contradictory aims.
- Is there necessarily a ‘paradox of cuts’? Explain.
- How is game theory relevant in explaining the outcome of international negotiations, such as those at the G20 summit?
- Would it be wise for further quantitative easing to accompany fiscal tightening?
- What is the best way for governments to avoid a ‘double-dip recession’?
The annual Agricultural Outlook for the next ten years has just been published jointly by the OECD and the UN Food and Agriculture Organization (FAO). Click here and here for audio presentations of the report by the FAO’s Jacques Diouf and the OECD’s Angel Gurría.
The report argues that world recovery will raise agricultural prices. This will be partly the direct result of higher demand and partly the result of higher prices of agricultural inputs, such as fertilisers and fuel. But prices will not rise back to the peak levels of 2007/8. These higher prices, however, would have a positive effect on world food output, especially in the BRICs (Brazil, Russia, India and China). This, in turn, would limit the price rises.
So is this good news for food producers and consumers? The following articles look at the issues
Articles
Economic upturn, energy to lift farm prices-FAO/OECD Reuters, Gus Trompiz (15/6/10)
Higher average farm prices expected, food security concerns persist, say OECD and FAO FAO Media Centre (15/6/10)
Food commodity prices to rise Financial Times, Javier Blas (15/6/10)
Price increases fuel fears of food ‘crises’ Financial Times, Javier Blas (15/6/10)
Emerging economies ‘to enjoy food production boom’ BBC News (15/6/10)
Rising crop prices can be ‘good news’ for farmers: UN/OECD MSN News, Malaysia (15/6/10)
Food prices to rise by up to 40% over next decade, UN report warns Guardian (15/6/10)
Wheat, oils and dairy prices to stay up 40% for next decade, FAO BakeryAndSnacks.com, Jess Halliday (15/6/10)
Food prices could soar up by 40 per cent in next decade, UN report warns UN News Centre (15/6/10)
Report and data
OECD-FAO Agricultural Outlook 2010-2019: portal page OECD and FAO
OECD-FAO Agricultural Outlook 2010-2019: Highlights OECD and FAO
OECD-FAO Agricultural Outlook 2010-2019: Database OECD and FAO
Commodity prices Index Mundi
Questions
- Explain what is likely to happen to food prices. What are the explanations given in the report?
- Represent the analysis on a supply and demand diagram (or diagrams).
- What is the relevance of (a) income elasticity of demand, (b) price elasticity of demand, (c) cross-price elasticity of demand, (d) price elasticity of supply, in explaining the likely future movements of food prices and why some food prices are likely to rise faster than others?
- What factors are likely to impact on the production of food in developing countries?
As one of his first acts, the new UK Coalition government’s Chancellor, George Osborne, set up an independent Office for Budget Responsibility (OBR) (see Nipping it in the Budd: Enhancing fiscal credibility?. The role of the OBR is to provide forecasts of the economy and the data on which to base fiscal policy.
On 14 June, the OBR produced its first forecast in time for the Budget scheduled for 22 June. It has some bad news and some good news. First the bad news: it forecasts that growth for 2011 will be 2.6% – down from the 3–3.5% forecast by Labour in its last Budget in March. But now the good: it forecasts that the public-sector deficit in 2010/11 will be 10.5% of GDP – down from the 11.1% forecast by Labour; and that public-sector debt will be 62.2%, not the 63.6% forecast by Labour. These forecasts are before any policy changes announced in the Budget on 22 June.
Meanwhile, the accountants BDO have published a survey of business confidence. This shows the largest drop since the survey began. Talk by the government of cuts and worries that this will impact directly on the private sector have caused many businesses to cut investment plans. The worries are compounded by fears of a decline in export demand as countries abroad also make cuts.
So what does the future hold? Should we put any faith in forecasts? And should we be more worried about a double-dip recession or by failure to make sufficient inroads to deficits to calm markets?
Articles
Growth forecast is cut but borrowing improves Guardian, Phillip Inman and Hélène Mulholland (14/6/10)
UK watchdog slashes growth forecasts Financial Times, Chris Giles (14/6/10)
Fiscal watchdog downgrades UK growth forecast BBC News (14/6/10)
OBR UK growth forecast downgraded BBC News blogs: Stephanomics, Stephanie Flanders (14/6/10)
‘Sorry it is so complicated’ BBC Daily Politics, Stephanie Flanders (14/6/10)
Britain’s new economic forecasts: what the analysts say Guardian (14/6/10)
Spending cuts under fire amid new borrowing forecasts Independent, Russell Lynch (14/6/10)
The self-fulfilling deficit spiral Guardian, Adam Lent (14/6/10)
UK business confidence sees ‘record drop’ BBC News (13/6/10)
Britain to avoid double dip but recovery will be weak, CBI warns Independent, David Prosser (14/6/10)
A winding path to inflation The Economist (3/6/10)
Is inflation or deflation a greater threat to the world economy? The Economist: debate (1/6/10)
A question for chancellor Osborne Financial Times, Martin Wolf (11/6/10)
Fiscal conservatism may be good for one nation, but threatens collective disaster Independent, Joseph Stiglitz (15/6/10)
Hawks v doves: economists square up over Osborne’s cuts Guardian, Phillip Inman (14/6/10)
Data and forecasts
Pre-Budget forecast Office for Budget Responsibility (14/6/10)
Pre-Budget Report data Google docs (14/6/10)
Forecast for the UK economy: a comparison of independent forecasts HM Treasury (May 2010)
Questions
- How reliable is the OBR’s forecast likely to be? What factors could cause the forecast for economic growth to be (a) an overestimate; (b) an underestimate?
- What is likely to happen to aggregate demand over the coming months? Explain.
- What is meant by the ‘structural deficit’. Why might the structural deficit fall as the economy recovers? Would you explain this in terms of a shift or a movement along the short-term aggregate supply curve?
- Which is the greatest threat over the long term: inflation or deflation?
- Do you agree that the debate about cutting the deficit is merely a question of timing, not of the amount to cut?
- Why may policies of fiscal tightening, if carried out generally around the world, involve the fallacy of composition?
- Is there any common ground between the fiscal ‘hawks’ and fiscal ‘doves’ (see the last Guardian article above)?