Author: Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients. Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter. Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit. 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.
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Euro and Aussie Dollar meet resistance

The Euro respected resistance at $1.28 and another test of medium-term support at $1.265 is likely. Breach of support would indicate a correction to $1.23.

Euro/USD

The Aussie Dollar likewise respected resistance, at $1.04. Follow-through below $1.03 would test primary support at $1.02/$1.015. Recovery above $1.04 is unlikely but would test $1.06*. Reversal of of 63-day Twiggs Momentum below zero would suggest a primary down-trend.

Aussie Dollar/USD

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

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Asia: India & China weaken

India’s Sensex broke support at 18500, warning of another correction. Troughs above zero on 13-week Twiggs Money Flow indicate long-term buying pressure; so the correction is likely to be mild. Respect of 18000 would suggest a strong primary up-trend, with an initial target of 20000*.

Sensex Index

* Target calculation: 19 + ( 19 – 18 ) = 20

Singapore’s Straits Times Index broke support at 3000, warning of a correction. Expect support at the lower trend channel. Oscillation of 63-day Twiggs Momentum around zero would reflect a ranging market.

Singapore Straits Times Index

* Target calculation: 3000 + ( 3000 – 2700 ) = 3300

China’s Shanghai Composite Index is testing primary support at 2000. Breakout would offer a target of 1850*. Reversal of 13-week Twiggs Money Flow below zero warns of selling pressure. Recovery above 2150 is unlikely but would complete a double bottom reversal.

Shanghai Composite Index

* Target calculation: 2000 – ( 2150 – 2000 ) = 1850

The Hang Seng Index is undergoing a correction. Breach of 21000 would indicate a test of 20000 and the rising trendline. Falling 13-week Twiggs Money Flow indicates medium-term selling pressure but the long-term picture remains bullish with, most likely, another trough above zero. Breakout above 22000 is unlikely at present but would signal an advance to 24000*.

Hang Seng Index

* Target calculation: 22 + ( 22 – 20 ) = 24

Japan’s Nikkei 225 rallied to test resistance at 9200/9300. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Breakout above 9300 would test 10200. Respect of resistance is unlikely but would suggest another test of primary support at 8200.

Nikkei 225 Index

* Target calculation: 9200 + ( 9200 – 8200 ) = 10200

South Korea’s Seoul Composite Index found support at 1860; recovery above 1900 would suggest another test of 2000. A 13-week Twiggs Money Flow trough above zero would indicate long-term buying pressure. Recovery above 2000 would signal another primary advance.

Seoul Composite Index

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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).
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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

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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.

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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.

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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.

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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.

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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.

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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.

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