How long until we might see a trigger that could tip the global economy over the edge? Not long at all. Looking at other comments from Xie, the trigger could come from Japan (if not elsewhere first): The yenâs looming day of reckoning As Japan looks set to weaken yen, China must brace for impact Japan is on an unsustainable path of a strong yen and deflation. The unprofitability of Japanâs major exporters and emerging trade deficits suggest that the end of this path is in sight. The transition from a strong to weak yen will likely be abrupt, involving a sudden and big devaluation of 30% to 40%. It will be a big shock to Japanâs neighbors and its distant competitors like Germany. The yenâs devaluation in 1996 was a main factor in triggering the Asian Financial Crisis. Japanâs neighbors must have a strong banking system to withstand a bigger devaluation of the yen. No bubble is sustainable. While the Japanese can always take care of business within, they cannot control the outside world. The countryâs Achilles heel is losing trade competitiveness due to the destructive impact of deflation on business confidence and the strong currency itself. When a trade deficit emerges, it signals the beginning of the end. Japanâs trade balance may swing into surplus from time to time, but the negative trend is irreversible. Japan will face rising trade deficits. That makes foreignersâ views important because Japan would need foreign money to fund its deficit. When foreigners change their views, which they surely will, the yen will crash. Yen devaluation is likely to unfold quickly. A financial bubble doesnât burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days. Only a large and sudden devaluation can keep the JGB yield low. Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. The resulting worries over the governmentâs solvency could lead to a collapse of the JGB market. Of course, the government will collapse with the JGB market. The day of reckoning for the yen is not distant. Japanese companies are struggling with profitability. It only gets worse from here. When a major company goes bankrupt, this may change the prevailing psychology. A weak yen consensus will emerge then. Implications or rather, serious repercussions on other neighboring countries: A yen collapse will impact China and South Korea most, just like in 1998. It will trigger substantial weakness in their industries. If a banking system succumbs, the shock can bring down an entire economy, as South Koreaâs experience in 1998 demonstrates. Both China and South Korea have weak banking systems. South Koreaâs banking system is one of the most leveraged in the world due to high level of household loans. In 1998, a similar shock sank its banking system that was overleveraged with industrial loans. Now it is overleveraged with household loans. A shock could sink it again. Overinvestment and a property bubble make Chinaâs banking system very vulnerable to such a shock. Unless China substantially increases the capital in its banking system, a big yen devaluation could cause Chinaâs banking system to sink. China suffers from overinvestment and a property bubble, as Southeast Asia and South Korea did in 1997. In terms of the magnitude of leverage, Chinaâs situation is much worse. Hence, a yen devaluation could wreak havoc to Chinaâs economy. http://www.marketwatch.com/story/the...ry_latest_news Together with a weakening global economy and jittery European debt crisis, if something of this magnitude could unfold, itâs probably pretty safe to say that the entire global economy will collapse in spectacular fashion much worse than it did in 2008. It would be rendered completely beyond repair with far fewer monetary funds and policy tools remaining in the toolbox. (My thanks to Steve for introducing me to Andy)
Serious looking Dax weekly triangle with Spain looming large and Italy bringing up the rear in the crash n' burn race.
The sideways Dow move continued with great reversal opportunities. Trading opportunities to follow...
I have been warning of a major top forming that is the most important since the lows. Gann said to watch for major trend reversals after holiday periods. Is this it? I expected the FTSE to give a clearer picture than the Dow which was stuck in a sideways move, and I was looking for the FTSE to give a good push up in the daily into one of two resistance zones and it did as expected. As the Dow moved sideways it clearly abandoned the daily wedge which is red flag. The FTSE as already moving down and the Nikkei has a potent weekly reversal. The Dax is on support but the the pattern is ominous if support is broken. The attached shows the Dow S&R and I am looking for the key bottom (gold) support to be taken out to answer the question on the importance of this top. This move down could be minor Wave 1 as the weekly charts are coming into early signs of strength and this pattern usually has a pull back before the killer attack. The central banks are having liquidity problems so the manipulation of the markets may run into severe difficulties at a time when Spain is threatening to throw a leg out of bed. All interesting stuff. What caught my eye was the 2 day chart weakness and I have seen occasions when it rips through weekly supports and drags everything with it. As we enter earnings season this will be interesting indeed. Smart Money was seeing the move up as fake and selling out to the Dumb Money at the top. So far the shorts are in control.
When we were in seemingly free fall into the lows I was looking for a 3-wave ABC pull back and this is what we have now. This coincides with a 2 day cycle top that looks very dangerous so several red flags are waving. I have attached the Dax and Dow weekly closing charts and the FTSE looks similar. Note the high on the Dow is not confirmed by the Dax.