Colin Twiggs, Author at the patient investor

December 12, 2012

Fed’s numerical thresholds are a bad idea

The Fed effectively tied its monetary policy to a balloon bobbing in the wind. Pedro da Costa writes on Reuters:

The Federal Reserve on Wednesday took the unprecedented step of tying its low rate policy directly to unemployment, saying it will keep rates near rock bottom until the jobless rate falls to 6.5 percent. That’s as long as inflation, the other key parameter of policy, does not exceed 2.5 percent.

Both unemployment and inflation are moving targets. Unemployment primarily because results are highly dependent on the participation rate: disheartened job seekers who give up looking for work are excluded from unemployment figures. Likewise, inflation measures are highly subjective. Weightings require constant adjustment because of advances in technology and changes in consumption patterns, while cost of housing estimates, which make up 39 percent of core CPI, seem to have little connection with reality. Scott Sumner points out:

The problem seems to be that, according to the Bureau of Labor Statistics, housing prices did not fall. On the contrary, their data shows housing prices actually rising between mid-2008 and mid-2009, despite one of the greatest housing market crashes in history. And prices did not rise only in nominal terms; they rose in relative terms as well, that is, faster than the overall core CPI. If we take the longer view, the Bureau of Labor Statistics finds that house prices have risen about 8 percent over the past six years, whereas the famous Case-Shiller house price index shows them falling by nearly 35 percent…..

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 12, 2012

Ray Dalio Explains The Rare Set Of Circumstances That's Making Him Bearish On Markets | Business Insider

Joe Weisenthal reports on hedge fund guru Ray Dalio’s outlook:

His novel set of circumstances he sees is an economy that faces austerity (due to the Fiscal Cliff, etc.) coupled with a Fed that’s mostly blown its bazooka, and can’t get much more juice out of QE.

Yields can’t go down anymore.

Austerity is coming.

Economy is running out of steam.

QE is losing its efficacy.

Rate turn probably finally coming late in 2013.

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

Dangers of quantiative easing may be political more than technical

Glenn Stevens, governor of the Reserve Bank of Australia, in an address to the Bank of Thailand today commented on the dangers facing central bank monetary policy:

For the major countries a further dimension to what is happening is the blurring of the distinction between monetary and fiscal policy. Granted, central banks are not directly purchasing government debt at issue. But the size of secondary market purchases, and the share of the debt stock held by some central banks, are sufficiently large that it can only be concluded that central bank purchases are materially alleviating the market constraint on government borrowing. At the very least this is lowering debt service costs, and it may also condition how quickly fiscal deficits need to be reduced. There is nothing necessarily wrong with that in circumstances of deficient private demand with low inflation or the threat of deflation. In fact it could be argued that fiscal and monetary policies might actually be jointly more effective in raising both short and long-term growth in those countries if central bank funding could be made to lead directly to actual public final spending – say directed towards infrastructure with a positive and long-lasting social return – as opposed to relying on indirect effects on private spending.

The problem will be the exit from these policies, and the restoration of the distinction between fiscal and monetary policy with the appropriate disciplines. The problem isn’t a technical one: the central banks will be able to design appropriate technical modalities for reversing quantitative easing when needed. The real issue is more likely to be that ending a lengthy period of guaranteed cheap funding for governments may prove politically difficult. There is history to suggest so. It is no surprise that some worry that we are heading some way back towards the world of the 1920s to 1960s where central banks were ‘captured’ by the Government of the day.

via RBA: Speech-Challenges for Central Banking.

Hat tip to Walter Kurtz at Business Insider.

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

Carney broaches dumping inflation target | FT.com

Claire Jones reports that Mark Carney says central banks should consider scrapping inflation targets and target nominal GDP instead — allowing more aggressive measures during a down-turn.

[Mark Carney, next governor of the Bank of England] suggested that a nominal GDP target, where a central bank sets monetary policy based on both inflation and growth, would do more to boost economic output. “For example, adopting a nominal GDP-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting,” he said.

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 11, 2012

Australia: ASX 200 breakout

The ASX 200 is testing resistance at 4600. Breakout is likely — following bullishness in Europe and Asia — and would signal an advance to 4900*. The 63-day Twiggs Momentum trough above zero suggests a strong primary up-trend. Respect of resistance is not expected but would retrace to test the rising trendline at 4450.

ASX 200 Index

* Target calculation: 4600 + ( 4600 – 4300 ) = 4900

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 11, 2012

China: Shanghai resurgence

China’s Shanghai Composite Index threatens a bear trap on the weekly chart, reversing above former primary support at 2000, headed for a test of resistance at 2150. Bullish divergence on 63-day Twiggs Momentum suggests that a bottom is forming. Penetration of the descending trendline would strengthen the signal.

Shanghai Composite Index

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

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 11, 2012

S&P 500 hesitancy continues

The US remains hesitant under the uncertainty of fiscal cliff negotiations. The S&P 500 broke medium-term resistance at 1425 but a tall shadow on today’s candle indicates short-term selling pressure. Expect a test of the new support level before further advances signaled by medium-term buying pressure on 21-day Twiggs Money Flow (holding above zero). Respect of 1425 would signal an advance to the September/October high of 1475.

S&P 500 Index

* Target calculation: 1475 + ( 1475 – 1350 ) = 1600

The Nasdaq 100 weekly chart is testing medium-term resistance at 2700. Breakout would signal an advance to 2800/2900. Falling 63-day Twiggs Momentum, however, warns of a primary down-trend; strengthened if the indicator reverses below zero. Profit-taking on stocks like AAPL, to recognize capital gains ahead of fiscal cliff measures, may be adding to selling pressure.

Nasdaq 100 Index

* Target calculation: 2450 – ( 2900 – 2450 ) = 2000

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 11, 2012

Europe leads the way

Revival of European markets, with breakouts on the DAX and CAC-40, sparked a broad resurgence in global markets. Dow Jones Europe Index broke long-term resistance at 265 on the weekly chart, signaling a primary advance to 285*. A 63-day Twiggs Momentum trough above zero confirms the primary up-trend.

Dow Jones Europe Index

* Target calculation: 265 + ( 265 – 245 ) = 285

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 11, 2012

Republicans Send Fiscal Cliff Counteroffer To Obama – Business Insider

Brett LoGiurato reports that House Speaker John Boehner made a counter-offer in fiscal cliff negotiations. His spokesman Michael Steel issued a brief statement:

“We sent the White House a counter-offer that would achieve tax and entitlement reform to solve our looming debt crisis and create more American jobs. As the Speaker said today, we’re still waiting for the White House to identify what spending cuts the president is willing to make as part of the ‘balanced approach’ he promised the American people. The longer the White House slow-walks this process, the closer our economy gets to the fiscal cliff.”

via Republicans Send Fiscal Cliff Counteroffer To Obama – Business Insider.

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 11, 2012

The Fed's interest rate policies are damaging rather than restoring confidence and should be reversed

Vince Foster at The Fiscal Times writes about this Wednesday’s FOMC meeting:

With Operation Twist due to expire at the end of the year and because the Fed is essentially out of short-term bonds with which to finance purchases, it is virtually assured that they will opt for outright purchases financed with printed money……….Now, said Ned Davis Research in a report last week, the Fed is likely to replace Operation Twist with purchases of Treasuries, perhaps in the $45 billion a month range, bringing its total monthly purchases to $85 billion.

Outright purchases of long-term Treasuries are far more expansionary than Operation Twist purchases which are off-set by the sale of shorter-term maturities.

Foster discusses Fed motives, considering that previous QE failed to lower interest rates or lift stock market values.

It has been my contention that the main objective is not to reflate asset prices but rather to stimulate credit creation and the velocity of money. According the Fed’s H.8 Release banks are holding over $2.6 trillion in cash that’s sitting idle on their balance sheet in securities portfolios. Bernanke is trying to flush the banking system out of these bloated securities positions and into extending credit by lowering bond yields to levels where banks can no longer afford to hold them.

Foster points out that negative real interest rates may be discouraging banks from lending, inhibiting the recovery. Also that bank balance sheets — bloated with Treasuries and MBS ($2.6 trillion) purchased as an alternative to lending — are vulnerable to capital losses should interest rates rise.

The Fed’s low-interest-rate policies have created a powder keg while being largely ineffectual in stimulating credit creation and consumption. The safest approach would be to reverse these policies and raise interest rates. Raising long-term rates to sustainable levels would reduce uncertainty and help restore confidence. House prices and stocks may initially fall but this would flush any excess inventory out of the system, giving purchasers and banks confidence that the market really has bottomed. With higher rates and stable collateral, banks will be more willing to lend.

At present we are all sheltering under the shadow of the Fed’s low-interest-rate umbrella, but with a nagging fear as to what will happen when the Fed takes the umbrella away. Fed policies are no longer adding confidence but increasing uncertainty. The sooner the umbrella is removed, the sooner the system will return to normality.

QE is likely to continue — Treasury needs to print money in order to fund the fiscal deficit — but this can still occur at higher rates. The fiscal deficit unfortunately will remain with us for some time — until confidence is completely restored and deflationary effects of private sector deleveraging are consigned to the history books.

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.