Colin Twiggs, Author at the patient investor

December 16, 2012

S&P 500 retraces

The S&P 500 is retracing to test medium-term support at 1400 on the daily chart. Respect would signal an advance to 1475, while failure would indicate a test of primary support at 1350. Reversal of 21-day Twiggs Money Flow below zero would warn of selling pressure, but a higher trough (above/below zero) would suggest continuation of the advance to 1475.

S&P 500 Index

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.

December 15, 2012

Australia: Negative gearing and its impact on the housing market | RP Data Research Blog

Cameron Kusher extends the following argument in favor of negative gearing:

Many in favour of removing negative gearing from property say that it should occur due to the fact that housing is an unproductive asset class. My argument is that given that housing provides shelter, if investors don’t purchase these assets, it would then be the responsibility of the Government to provide this shelter. Ultimately, that would mean that anyone that pays taxes would be funding housing for those who can’t afford it themselves.

What happened to individuals being responsible for their own housing? A large part of rental demand is due to poor housing affordability. If we made housing more affordable, the rental market would shrink.

Kusher highlights that in September 1985 the government quarantined negative gearing interest expenses on new transactions.

The reason why negative gearing was reinstated in September 1987 was that it was proclaimed that rents rose sharply on the back of a fall in housing market investment.

The following chart shows that rental growth accelerated between September 1985 and September 1987:

But no explanation is given for the earlier peak in rental growth rates — 13% in 1982 — prior to restrictions on negative gearing.

And what is not mentioned is that interest rates were rising. Standard variable bank mortgage rates peaked at 15.5% in 1986/1987. That would account for any decline in new housing investment, even though this is not evident from investor finance commitments.

via Negative gearing and its impact on the housing market | RP Data Research Blog.

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.

December 14, 2012

The Alarming Corruption of the Think Tanks

Bruce Bartlett writes:

Rather than being institutions for scholarship and research, often employing people with advanced degrees in specialized fields, think tanks are becoming more like lobbying and public relations companies. Increasingly, their output involves advertising and grassroots political operations rather than books and studies. They are also becoming more closely allied with political parties and members of Congress, to whom they have become virtual adjuncts.

Historically, think tanks like the Brookings Institution were universities without teaching. Indeed, Brookings was originally established as a university and it still has a dot-edu web address. Its goal was to bridge the gap between academia and the policymaking establishment.

In the 1970s, this model began to change with the founding of the Heritage Foundation. Unlike Brookings, Heritage was not especially interested in research; its goal was to directly influence policy, especially on Capitol Hill……

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.

December 14, 2012March 22, 2021

Productivity: Ireland leads the way

Ireland now leads the United States in labor productivity as measured by GDP (converted to USD after adjusting for purchasing power parity) to hours worked by the workforce. Mark Cassidy writes on Ireland’s strong productivity growth during the 1990s:

Strong productivity growth during this period was largely driven by substantial foreign direct investment inflows from the United States and sectoral change in industry — i.e. a continuing shift of capital and labour from agriculture and relatively low productivity manufacturing towards high-technology sectors including chemicals and ICT sectors — and was facilitated by macro and micro-economic reforms implemented since the late 1980s, favourable exchange rate and international economic developments, increased European integration and the availability of a young, relatively well-educated workforce.

Two factors stand out:

Ireland joined the euro-zone on its official launch in January 1999;
The Irish government is committed to a 12.5% corporate tax regime, among the lowest in Europe.

Removal of trade barriers and favorable tax rates attracted large investment in high-tech manufacturing, primarily from the United States.

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.

December 14, 2012March 22, 2021

Belgium ranked as the 3rd most productive country in the world?

Belgium scores highly on international productivity rankings, which compare GDP (converted to USD after adjusting for purchasing power parity) to hours worked by the workforce. But results can be deceiving. Amcham Belgium writes:

Although Belgium has a high productivity score, it might not be all good news. Firstly, the results could be influenced by the fact that only 34.5% of its employable population aged 55 to 65 are actually working ……… Secondly, Belgian salaries are on average 11% higher than those of neighboring countries (the Netherlands, Germany and France)…..

Belgium may rank high on GDP per hour worked but slips down the rankings when measured on GDP per capita because of its low labor participation rate which imposes a high social cost on the country. That is why it is important not to use just one measure when assessing productivity.
Read more at Belgium ranked as the 3rd most productive country in the world.

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.

December 14, 2012

Labor productivity can be misleading

We are frequently bombarded with labor productivity statistics such as output per hour worked and unit labor costs — normally accompanied by political hand-wringing exhorting us to improve productivity — but how accurate are these statistics and what do they mean?

First let’s look at GDP per capita. This should tell us how well we are doing compared to our neighbors. Norway and Singapore lead the pack, ahead of the US, while Australia is comfortably in the middle.

Measuring in Purchasing Power Parity (PPP) adjusts for comparative price levels in different countries. Australia and Norway are most expensive, with relative price indices (PPP/exchange rate) of 1.61 and 1.58 respectively; while Singapore (0.83), Czech Republic (0.80) and South Korea (0.74) are cheapest.

Demographics such as an aging population or high birth rates, however, may distort per capita figures.

Index

Norway also leads when it comes to GDP per hour worked — which should alert us that productivity of resource-rich economies such as Norway and Australia may be inflated by profits earned from extraction (mining, oil and gas). Ireland surprisingly beats the US, while Singapore slips to near bottom of the table when measured by hours worked.

Index

Workers in Singapore and South Korea work far longer hours than most other OECD countries, while those in powerhouse Germany work even less than their counterparts in France.

Index

But hours worked can also give a distorted view of employee welfare. Compare the 3 or 4 hours that workers in Sydney, London or New York may spend commuting to and from work each day to a Korean assembly worker who lives in a housing estate adjacent to the assembly plant. If we compare GDP (adjusted for PPP) to employed persons, rather than hours worked, we get a slightly different picture. The real surprise is again Ireland, ranking third behind Norway and the US — and well ahead of Australia, Germany and the UK.

Index

What do we learn from this? It pays to live in a resource-rich country such as Norway (or Australia). It also pays to work clever — high-tech manufacturing like Germany and Ireland — rather than hard. Combine this with a low-tax jurisdiction — such as Singapore or Ireland — and you can become a world-beater.

Labor productivity

Labor productivity is measured as Output / Input

Where Output is the total of goods and services produced, normally measured by GDP.

And Input is the time, effort and skills of the workforce, measured either as:

total hours worked by the workforce; or

total number of employees.

Via OECD: Labour Productivity Indicators | Rebecca Freeman

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.

December 13, 2012

EU Deal Reached on Bank Supervisor | WSJ.com

GABRIELE STEINHAUSER And LAURENCE NORMAN at WSJ write:

European Union finance ministers reached a landmark deal early Thursday that would bring many of the continent’s banks under a single supervisor, in what governments hope will be a major step toward resolving their three-year-old debt crisis. Ministers said the European Central Bank would start policing the most important and vulnerable banks in the euro zone and other countries that choose to join the new supervisory regime next year. Once it takes over, the ECB will be able to force banks to raise their capital buffers and even shut down unsafe lenders.

This is an important step, centralizing banking control in Brussels. Though there is bound to be dissent amongst member states as to capital buffers and unsafe lending practices.
Read more at EU Deal Reached on Bank Supervisor – WSJ.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.

December 12, 2012

WPR Article | Strategic Horizons: U.S. Must Change Its Thinking on Conflict in Asia

Steven Metz writes on China’s growing air-sea battle capability (or “high-intensity, regional military operations, including anti-access and area denial (A2AD) operations” in defense-analyst-speak):

Military capability is only part of the equation: China also has the motivation to use its growing military power. It has long-standing and unresolved territorial disputes with a number of Asia-Pacific nations. It remains dependent on imported energy and has shown a willingness to flex its muscle to protect access to its sources. And most of all, China seems determined to replace the United States as the dominant power in the Asia-Pacific region. To do this, it must negate U.S. military power and fill the ensuing vacuum with its own.

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.

December 12, 2012

Risk Seen in Fed Bond Buying | WSJ.com

KRISTINA PETERSON at WSJ writes:

The Federal Reserve should stop buying bonds, even as the central bank is poised to purchase more, according to a narrow majority of economists in a new survey by The Wall Street Journal……”It’s distorting market prices and creating problems in the future,” said John Silvia, chief economist at Wells Fargo Securities, who said the Fed’s bond-buying was making long-term Treasurys too expensive without significantly easing problems in the labor market. “The Fed needs to back away and let interest rates rise just a little bit,” he said.

If past performance is anything to go by, Fed quantitative easing (or bond buying) is ineffectual in lifting the employment rate. And the lower that they drive bond yields, the greater the backlash when yields eventually rise. Yields are likely to spike up rapidly as bond-holders attempt to offload positions in order to avoid massive capital losses.

via Risk Seen in Fed Bond Buying – WSJ.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.

December 12, 2012

New Research from Finland’s Central Bank Confirms that Government Spending Is Causing Stagnation in Europe | International Liberty

Dan Mitchell reports on new research from the Bank of Finland:

Europe suffers from a growth slowdown. The GDP growth in Europe has lagged behind the GDP growth in the US and has been far worse than the GDP growth in the NIC countries, particularly China… However, what is the reason for slow or rapid economic growth? …In many respects, the labour market plays the key role in the economy because it determines both the use of the labour input and the level of overall competitiveness of a nation. Obviously, the functioning of the labour market is not independent of the public sector. A large government is almost inevitably associated with a large tax wedge, and the functioning of the labour market appears to be critically dependent on the size of the tax wedge. It may be fair to say that the harmful consequences of a high tax wedge are exceptionally well and unambiguously documented in the literature. …On the basis of the estimates derived in this study, the following guide for growth policies appears to be warranted: …Do not over-expand the welfare state. Larger governments are associated with slower growth rates.

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.