Colin Twiggs, Author at the patient investor

November 7, 2012

Markets Worry About Fiscal Cliff

Michael S. Derby writes about the looming fiscal cliff:

The central problem is the lack of change. President Barack Obama was reelected. Democrats retained control of the Senate, while Republicans held on to the House of Representatives. The fiscal cliff can only be resolved if lawmakers work together. “Returning to status quo likely means all sides see the voters as supporting their views, which means reaching compromise is not likely to get any easier,” economists at Bank of America Merrill Lynch warned clients.

Speaker of the House John Boehner (R-Ohio) says “the Republican majority in the House stands ready to work with [the President] to do what’s best for our country.” Republicans appear willing to accept additional tax revenues but their emphasis is on reforming entitlement programs and curbing “special interest loopholes and deductions”.

The Congressional Budget Office summarizes the fiscal cliff as:

Among the policy changes that are due to occur in January under current law, the following will have the largest impact on the budget and the economy:

A host of significant provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Public Law 111-312) are set to expire, including provisions that extended reductions in tax rates and expansions of tax credits and deductions originally enacted in 2001, 2003, or 2009. (Provisions designed to limit the reach of the alternative minimum tax, or AMT, expired on December 31, 2011.)

Sharp reductions in Medicare’s payment rates for physicians’ services are scheduled to take effect.

Automatic enforcement procedures established by the Budget Control Act of 2011 to restrain discretionary and mandatory spending are set to go into effect.

Extensions of emergency unemployment benefits and a reduction of 2 percentage points in the payroll tax for Social Security are scheduled to expire.

The CBO estimates that increases in federal taxes and reductions in federal spending, totaling almost
$500 billion, will cause a 0.5 percent drop in GDP in 2013.

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 7, 2012

Tesla electric car beats BMW M5

Tesla Model S v. BMW M5 in drag race.

Hat tip to car nut Barry Ritholz

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 6, 2012

Australia: Hard or soft landing?

Browsing the latest charts from the RBA.

Despite record low 10-year bond yields…..

Housing Finances

Credit growth is subdued and likely to remain so for some time.

Credit Growth by Sector

After a massive credit bubble lasting more than a decade.

Housing Finances

Households are saving close to 10 percent of Disposable Income in anticipation of a contraction.

Housing Finances

While banks are reluctant to lend when their margins are being squeezed.

Housing Finances

Borrowing offshore is not an option. That is how we got into such a fix in the first place.

Housing Finances

Makes me believe we are unlikely to see another housing boom for some time.

There are two possible outcomes: a soft landing and a hard landing.

It all depends on whether Wayne Swan and the RBA know their jobs.

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 6, 2012

Gold correction slows

Spot gold recovered above support at $1700 per ounce. Frequent penetrations of the declining trendline indicate the correction is slowing. Note how the metal tends to move in increments of $25. Breakout above $1725 would indicate an advance to $1900*. Breach of resistance at $1800 would confirm. A 63-day Twiggs Momentum trough above zero is likely — and would signal a primary up-trend, while reversal below zero is unlikely and would warn of a down-trend.

Spot Gold

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

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 6, 2012

The other candidate

Scott Sumner writes on Libertarian candidate Gary Johnson:

When he ran for governor as a Republican in heavily Democratic New Mexico. He had no prior political experience. He won by a 10-point margin. (By poetic coincidence, he beat a competitor for the GOP nomination named Dick Cheney.) Johnson spent his first term slashing taxes and reining in the growth of the state budget. Then he won a second term, and spent that crusading for school vouchers and marijuana legalization. He set a record for vetoing bills—750 of them, more than all other 49 governors combined during the same period—and left a budget surplus in his wake…..

via TheMoneyIllusion.

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 6, 2012

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.

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 6, 2012

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.

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 6, 2012

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.

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 6, 2012

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

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 6, 2012

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?

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.