Author: 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.
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The most expensive election in history

Lam Thuy Vo writes:

Today wraps up what is set to be the most expensive election in the history of the U.S. Total spending on federal campaigns will be about $6 billion, according to the Center for Responsive Politics. This includes both official campaign spending and spending by outside groups for the presidential, House, and Senate campaigns…..

Do you think that $6 billion buys a better election result? Or would restricting each candidate to $100 million worth of air time increase the competition and improve the outcome?

After all there are many good people out there with good ideas but without the financial backing. And restricting campaign spending would limit the influence of special interest groups.

via Here’s One Number That Makes $6 Billion In Campaign Spending Seem Low : Planet Money : NPR.

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A New Idea on How to Fix the Ratings Agencies – CNBC

John Carney comes up with an idea to fix the rating agencies:

Instead, we could restrict the access that ratings agencies have to non-public information, perhaps along the lines that we ban selective disclosure under Regulation FD. An issuer could be banned from disclosing to a ratings agency any information that it does not generally disclose to the public. All ratings would be based on public information.

That would increase transparency, encourage new entrants and promote competition.

via A New Idea on How to Fix the Ratings Agencies – CNBC.

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Is the Fed finally listening to Scott Sumner?

Brendan Greely writes of Scott Sumner.

Sumner who holds a Ph.D. from the University of Chicago, made a suggestion in the late 1980s to the New York Federal Reserve. He proposed that the Fed set a target for nominal GDP—real growth in GDP plus the rate of inflation. He felt that this would induce the correct level of business investment better than targeting either inflation or growth in real GDP by themselves. The response at the New York Fed, says Sumner, was, “Thanks, but no thanks.”

Targeting nominal GDP (NGDP) growth eliminates reliance on inexact measures of inflation which can mis-direct monetary policy. The advantage is that NGDP can be accurately measured. NGDP targeting would help to eliminate bubbles in the long term by restricting debt growth. And in the short-term would encourage the Fed to expand money supply in response to private sector deleveraging, avoiding deflationary pressure.

The announcement by the Fed’s rate-setting committee in mid-September doesn’t contain any mention of targeting nominal GDP. But its open-ended nature and clear goals—pump up the money supply until hiring rises strongly—resembles Sumner’s nominal GDP model, which would have a central bank do all in its power to achieve an agreed-upon nominal rate of growth.

It has taken Sumner almost 3 decades, but in the end he is likely to get there.

via The Blog That Got Bernanke to Go Big – Businessweek.

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Forex: Euro, Pound Sterling, Australian Dollar and Canadian Loonie

The Euro is testing support at $1.28. Breakout would respect the primary down-trend, warning of another test of primary support at the 2010 low at $1.19/1.20. Reversal of 63-day Twiggs Momentum below zero would strengthen the signal. Recovery above $1.32 is less likely but would indicate an advance to $1.35/$1.36*.

Euro/USD

Pound Sterling rallied off support at €1.225 against the Euro. Breakout above €1.26 would indicate an advance to €1.29. A 63-day Twiggs Momentum trough above zero — and respect of the rising trendline — would both indicate a healthy up-trend. Breach of support at €1.225, however, would signal a primary down-trend.

Pound Sterling/Euro

* Target calculation: 1.26 + ( 1.26 – 1.23 ) = 1.29

Canada’s Loonie is testing support at parity against the greenback. Respect would indicate an advance to $1.06*. Breach of resistance at $1.03 would strengthen the signal and a 63-day Twiggs Momentum trough above zero would confirm. Failure of support, however, would warn of another test of primary support at $0.96.

Canadian Loonie/Aussie Dollar

* Target calculation: 1.03 + ( 1.03 – 1.00 ) = 1.06

The Aussie Dollar broke resistance at $1.04 after the RBA announced that it would not cut interest rates, leaving them on hold until December. Expect an advance to $1.06*. 63-Day Twiggs Momentum oscillating above zero suggests a primary up-trend.

Aussie Dollar/USD

* Target calculation: 1.04 + ( 1.04 – 1.02 ) = 1.06

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Is China more legitimate than the West? | BBC

Economist Martin Jacques, author of When China Rules the World, sings the praises of China in BBC Point of View.

“Even though China is still a poor developing country, its state, I would argue, is the most competent in the world. Take infrastructure – the importance of which is belatedly now being recognised in the West. Here, China has no peers…….. we are in a new ball game. With the Western economies in a profound mess and with China’s startling rise, the competence of the state can no longer be ignored. Our model is in crisis. Theirs has been delivering the goods.”

Patrick Chovanec has a different assessment:

“China’s economic miracle was result of govt getting out of way and letting people improve their lives, not planning by all-seeing mandarins.”

China is a developing country, with rapid growth fueled by massive infrastructure investment and strong exports. The country faces diminishing returns on infrastructure investment and dwindling exports — not only from an economic slow-down in the West but from rising wages as the country attempts to boost internal consumption as an antidote to the middle-income trap that is already threatening growth in its richer provinces.

China also faces push-back from the West against trade advantages maintained by suppressing their exchange rate through vendor financing —  balancing trade inflows on current account with outflows on capital account. Why else would a developing country hold more than $1 trillion of investment in US Treasuries at negative real interest rates?

Jacques claims that the Chinese state enjoys popular support:

“But does the Chinese state, you may well ask, really enjoy legitimacy in the eyes of its people? Take the findings of Tony Saich at Harvard’s Kennedy School of Government……… he found that between 80 and 95% of Chinese people were either relatively or extremely satisfied with central government.”

One of the most powerful tools of an oppressive state is fear: fear of the unknown. Many of their citizens would settle for the status quo rather than risk the turmoil that accompanies change. The same is true of many autocratic regimes. That does not make them a beacon of good government.

Western democracy has many problems but the solution does not lie with increasing the size of the state, nor with greater autocracy. Rather we should examine the most successful Western democracies and learn from them. Switzerland would be a good start. Their well-managed economy enjoys low unemployment, a skilled labor force, and GDP per capita among the highest in the world — 70% above the US. The stable democratic government runs with a strong tradition of consensus among political parties, while citizens hold a collective right of veto over government policy. The country boasts a pristine environment with minimal pollution, a strong human rights record — without oppression of its citizens or minorities — and no territorial disputes with its neighbors.

Which state would you say is the most competent?

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Bank of England should leave forecasting to Ladbrokes « The Market Monetarist

The Market Monetarist makes a novel suggestion as to how to avoid central banks from making biased forecasts:

“…..even better as I have suggested numerous times that the central bank simply set-up a prediction market. In Britain that would be extremely easy – I don’t think there is a country in the world with so many bookmakers. The Bank of England could simply ask a company like Ladbrokes or a similar company to set-up betting markets for key macro economic variables – such as inflation and nominal GDP. It would be extremely cheap and the forecast created from such prediction market would likely be at least as good as what is presently produced by the otherwise clever staff at the BoE.”

That could work …..until punters learn that the bets they place indirectly influence central bank monetary policy. It might pay market participants to place large bets on low or high inflation if they stand to benefit from the central bank response.

via Bank of England should leave forecasting to Ladbrokes « The Market Monetarist.

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Explain the disease to help US citizens – FT.com

This must-read opinion by Richard Koo explains the impact US private sector saving — a staggering 8 per cent of gross domestic product — has on the US economy.

“….. if left unattended, the economy will continuously lose aggregate demand equivalent to the unborrowed savings. In other words, even though repairing balance sheets is the right and responsible thing to do, if everyone tries to do it at the same time a deflationary spiral will result. It was such a deflationary spiral that cost the US 46 per cent of its GDP from 1929 to 1933.”

via Explain the disease to help US citizens – FT.com.

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The Output Gap: A “Potentially” Unreliable Measure of Economic Health?

Excerpt from a newsletter by Elise A. Marifian, Research Analyst at the St. Louis Fed, describing problems with calculation of the hypothetical output gap and how this can lead to incorrect monetary policy:

Some economists question the reliability of potential output and, therefore, output gap measures. For instance, as James Bullard noted in 2009, if calculations had considered the housing boom and bust, then potential GDP and output gap measurements would have been smaller than they appeared…….. Gavin (2012) shows that the output gap calculations for 2003-12 are reduced significantly when 2011 estimates of potential GDP are used in place of 2007 estimates. If our economy is improving faster than current output gap measurements suggest, then monetary policy intended to boost the economy could produce too much stimulation, thereby fueling inflation once the economy begins to pick up steam.

via Page One Economics – St. Louis Fed.

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Conservatives dominate latest line-up for new Communist Party leadership | South China Morning Post

The Politburo Standing Committee is likely to be packed with conservatives, omitting two reform-minded protégés of party general secretary Hu Jintao. A conservative line-up will dash hopes for bold political reforms.

via Conservatives dominate latest line-up for new Communist Party leadership | Shi Jiangtao | South China Morning Post.

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Australian court finds S&P liable for ratings opinion | Bloomberg

An Australian judge has found S&P [MHP] liable for its opinion in assigning AAA ratings to two ABN Amro structured debt issues in 2006, which lost over 90% of value during the GFC — the first time a ratings agency has been held liable for such an opinion.

S&P was “misleading and deceptive” in its rating of two structured debt issues in 2006, Federal Court Justice Jayne Jagot said in her ruling released today in Sydney.

via McGraw-Hill Plummets After Australian Court Ruling – Bloomberg.

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