Colin Twiggs, Author at the patient investor

November 20, 2012

Australia: Leading indicator surprise

The annualised growth rate of the Westpac–Melbourne Institute Leading Index jumped from –0.4% in April to 4.1% in September this year — above its long-term average of 2.8%. According to Westpac, main contributors to the growth improvement were:

manufacturing materials prices (1.2 ppt’s);
overtime worked (1.0 ppt’s);
productivity (1.2 ppt’s);
corporate operating surplus (1.1 ppt’s);
dwelling approvals (1.0 ppt’s); and
All Ordinaries index (0.2 ppt’s).

Negative influences were:

U.S industrial production (–0.9 ppt’s); and
real money supply (–0.2 ppt’s).

Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.

November 19, 2012

Australia: ASX 200 and Shanghai find support

The ASX 200 found short-term support at 4350. Expect a rally to test the declining trendline at 4450 but this does not indicate the end of the correction. The 21-day Twiggs Money Flow peak below zero reflects medium-term selling pressure. Respect of resistance at 4450 would signal another decline.

ASX 200 Index

* Target calculation: 4450 + ( 4450 – 4000 ) = 4900

Dow Jones Shanghai Index broke its September low of 249 but rallied strongly towards the close. Bullish divergence on 21-day Twiggs Money Flow indicates medium-term buying pressure. Follow-through above 250 would indicate a rally to the October high of 266.
DJ Shanghai Index

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

November 18, 2012

Australia: Housing market sentiment

Houses & Holes writes:

The Westpac Red Book for October is out and paints a picture of housing market sentiment turning strongly upwards: One of the highlights in last month’s survey was a big 9.6% jump in the sub-index tracking views on ‘time to buy a dwelling’ to the highest level since Sep 2009…….

I am as skeptical as he is of the conclusion that the housing market is about to recover: “Unemployment is not done with us yet.” If you took a survey of the major banks I would be surprised to find, with lending margins squeezed and the end of the mining investment boom approaching, that any of them are planning to aggressively expand mortgage lending in the current climate.

via Red book paints housing sentiment breakout | MacroBusiness.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

November 18, 2012

French fury at Economist’s ‘time-bomb’ warning | FRANCE 24

Katharyn Gillam at France24 writes:

In its edition set to hit news stands on Friday, the highly-respected British weekly [The Economist] warned that France’s high taxes on businesses were eroding the country’s competitiveness and that France was a bigger danger to Europe’s single currency than the debt-stricken countries of Italy, Spain and Portugal………The right-leaning magazine highlighted [France’s] strategic position in the Eurozone and its massive public sector that accounts for 57% of gross domestic product…….

via French fury at Economist’s ‘time-bomb’ warning – FRANCE – FRANCE 24.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

November 18, 2012

Shadow Banking Grows to $67 Trillion Industry, Regulators Say – Bloomberg

Ben Moshinsky and Jim Brunsden write:

The size [$67 trillion] of the shadow banking system, which includes the activities of money market funds, monoline insurers and off- balance sheet investment vehicles, “can create systemic risks” and “amplify market reactions when market liquidity is scarce,” the Financial Stability Board said in a report, which utilized more data than last year’s probe into the sector……

via Shadow Banking Grows to $67 Trillion Industry, Regulators Say – Bloomberg.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

November 18, 2012

The Foolproof Way

In his 2003 paper Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others Lars E.O. Svensson describes his Foolproof Way of escaping from a liquidity trap — experienced by countries such as Japan, and lately the US, when central bank interest rates are close to zero.

The Foolproof Way consequently consists of announcing and implementing three measures: 1) an upward-sloping price-level target path, starting above the current price level by a price gap to undo; 2) a depreciation and a crawling peg of the currency; and 3) an exit strategy in the form of the abandonment of the peg in favor of inflation or price-level targeting when the price-level target path has been reached.
As discussed in the previous subsection, a currency depreciation and a crawling peg is unique in providing the central bank with a concrete action that demonstrates the central bank’s commitment to a higher future price level, establishes credibility for the peg, induces private-sector expectations of a higher future price level, and stimulates the economy by reducing the real interest rate. As argued, via a depreciation and a crawling peg with a rate of appreciation approximately equal to the average foreign interest rate, the central bank can actually implement approximately the optimal way to escape from a liquidity trap and strike the optimal balance between current stimulus of the economy and the future price level. Furthermore, as discussed, the exchange rate is unique in providing a relatively direct measure of the private-sector expectations of the future price level.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

November 18, 2012

The Liquidity Trap

In his 2003 paper Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others Lars E.O. Svensson describes the liquidity trap experienced by countries such as Japan and lately the US, when central bank interest rates are close to zero percent.

If the nominal interest rate is initially low, which it is when inflation and expected future inflation are low, the central bank does not have much room to lower the interest rate further. But with deflation and expectations of deflation, even a nominal interest rate of zero percent can result in a substantially positive real interest rate that is higher than the level required to stimulate the economy out of recession and deflation. Nominal interest rates cannot fall below zero, since potential lenders would then hold cash rather than lend at negative interest rates. This is the socalled “zero lower bound for interest rates.”
In particular, conventional monetary policy seems unable to provide sufficient stimulus to the economy and address recession and deflation once the zero lower bound for interest rates has been reached. The problem is that the economy is then satiated with liquidity and the private sector is effectively indifferent between holding zero-interest-rate Treasury bills and money. In this situation, standard open-market operations by the central bank to expand the monetary base by buying Treasury bills lead the private sector to hold fewer Treasury bills and more money – but this has no effect on prices and quantities in the economy. When this “liquidity trap” occurs, expanding liquidity (the monetary base) beyond the satiation point has no effect. If a combination of a liquidity trap and deflation causes the real interest rate to remain too high, the economy may sink further into a prolonged recession and deflation.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

November 16, 2012

How Mitt Romney lost the unlosable election

William Bennett writes that President Obama won the 2012 election by winning 93% of the African-American vote and 71% of Latino votes, while Mitt Romney won white voters 59% to 39%, according to exit polls. If the GOP believe they lost the election because of race, they are destined to repeat the same mistakes over and over again. The key to their loss is that Obama won 60% to 38% among those who make less than $50,000 a year and among 18- to 29-year-olds he won 60% to 37%.

Capitalism is failing these two sectors of the population: low income earners and the youth. Poverty rates are highest among Black and Hispanic voters but young voters are also becoming disaffected, with almost half recent college graduates unemployed or under-employed. The seriousness of the situation is illustrated by the following statistic:

According to a Pew Research poll taken last year, 49% of Americans age 18-29 have a positive view of socialism while just 46% have a positive view of capitalism.

Mitt Romney might have sold his message to the middle-class and small business owners but he alienated the very people who suffered most from the economic downturn. He failed to define his campaign as a war against poverty and unemployment. Instead of looking the disaffected in the eye and telling them what he could do to get them a job, he spent his time preaching to the choir.

via Republicans lost the culture war – CNN.com.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

November 16, 2012

US: Poverty rates

From the US Department of Health & Human Services:

US Poverty Rates

I suspect that most US voters are concerned about poverty (don’t believe everything you are told during an election) but where they differ is on how to address the issue. The view from the left is to raise taxes on the rich in order to increase welfare benefits to the poor. The right believe the solution is to get the economy back on track. That would create more jobs and increase tax revenues — which could enable more welfare spending. It is important to avoid the trap of long-term welfare dependency, but the solution is always going to be a compromise between the two extremes.

If Republicans want to be taken seriously by Black and Hispanic voters they need to pay more than lip service to fighting poverty.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

November 16, 2012

The Gold-Euro-Dollar conundrum Part II

Last week we discussed conflicting signals from the euro and US dollar. The Dollar Index and the euro are normally plotted inversely to each other. I have reversed this on the chart below. As expected, with the euro the largest component (57.6 percent) of the dollar index weighted basket of currencies, there is a strong correlation. Divergences between the two seldom last as traders “arbitrage” the differences.

The rising Dollar Index is testing resistance at 81.50. Respect of resistance would threaten a head-and-shoulders reversal — with a target of 74* — following a breakout below primary support at 78.50. Falling 63-day Twiggs Momentum, below zero, already suggests a primary down-trend. But recovery above 81.50/82.00 would negate this, indicating another primary advance.

US Dollar Index

* Target calculation: 79 – ( 84 – 79 ) = 74

Spot gold (daily chart) is testing short-term support at $1700 per ounce. Respect of support would reinforce the earlier trendline break, suggesting another test of $1800. But a stronger dollar and failure of support at $1675 would indicate a more severe correction.

Spot Gold

* Target calculation: 1800 + ( 1800 – 1700 ) = 1900

The DJ-UBS Commodity Index (weekly chart) continues to test support at 140. A 63-day Twiggs Momentum trough above zero would indicate a primary up-trend. Recovery above 152 would confirm. A stronger dollar and breach of 140, however, would test primary support at 126.

DJ-UBS Commodity Index

Nymex WTI Light Crude and ICE Brent Crude are both headed for a test of primary support: WTI at $76/$78 per barrel and Brent Crude at $90. The 63-day Twiggs Momentum peak below zero warns of a primary down-trend.

Nymex WTI Light Crude

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.