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Archive for the ‘Market Commentary’ Category

In debt we trust

Posted by Danny on December 10, 2019

On Twitter, Stocktwits and sites like Zerohedge you keep seeing messages contending that debt is getting too high and thus the US economy must be on its way to another collapse. Not rarely you will see this kind of “news” backed up with data and charts taken straight from the Fed’s FRED website (https://fred.stlouisfed.org/). The problem is that many people don’t know (or don’t want to know) when to use a semi-log scale on a chart. They also don’t know how to make better use of the FRED site. In this article I will give a few examples how to make better use of this resource.

Today I saw this chart on Twitter with the comment that consumer credit has started exploding since the gold standard was abandoned in 1971: https://fred.stlouisfed.org/series/TOTALSL

totalsl

Well, it sure looks like it started going up faster and faster around 1971. I wouldn’t blame any person to conclude that debt is exploding when they see this chart. But a nominal chart over a 70 year period cannot properly show whether debt is exploding or not. There are a few easy ways to fix that by using the orange “Edit Graph” button in the top right.

After clicking that button we see this. By changing the “units” to “Percent change from year ago” we get much more useful chart showing how quickly or slowly consumer credit went up (or down) since WW2:

TOTALSL_2

We can see that consumer credit was growing fast in the 50s, 60s and 70s, with a typical slowdown around recessions. The last 15 years we see relatively slow consumer credit growth on a YoY basis. The nominal chart we saw at the start of this article did not show us that kind of details.

Another way to get a more useful view is by changing the display to semi-log scale. Starting from the first nominal chart we again click the “Edit Graph” button and now we go to the “Format” tab where we can switch to log scale:

TOTALSL_3

What we see here is consistent with what we discovered in the second chart. Consumer credit showed steep growth after WW2 until the late 1950s. Then it changed to a slower growth rate, which stayed very constant until 2008, with the usual pauses around recessions. Since the financial crisis in 2009 consumer credit has resumed its upward trajectory, but the growth rate is still visibly slower than it was 1960-2007.

There is more we can do on the FRED site. Nominal increases in consumer credit could still be very problematic if consumer debt goes up faster than income or total assets. Dividing total consumer credit by the total households net worth will give us a better idea what’s going on. Again we use the “Edit Graph” button:

TOTALSL_vs_networth

There are two steps here. First we add the series for Households net worth, just start typing and it will appear. Then click “add” and it will appear as “b” under the consumer credit series we already have as “a”. As a second step we will then enter “a/b” as a formula and click “Apply”. If you try this you will get an empty screen. What’s the problem? Well, the Households net worth series only starts from late 1945, so we are trying to divide by zero in the first years of our consumer credit series. To fix this we have to change the date range before we do the two steps as described. This is the resulting chart (note the starting date was set to 1950 and then everything went fine):

TOTALSL_vs_networth2

We see that consumer credit as a percentage of total household net worth has been hovering around 3.5% since 1966, when it first climbed above 3.5%. So, there is no abnormal explosion in consumer credit, not in 1971 and not now.
But maybe consumers are still being crushed by mortgage debt and that’s why consumer credit looks normal? Well let’s check it:

MDOAH-vs_NW

I have added the total mortgage debt as series a, and the households net worth as series b. But we see something that you will encounter more often if you try to use FRED in more advanced ways. Series a is shown in “millions of dollars” while series b is in “billions of dollars”. I solve this by changing the formula:

MDOAH-vs_NW2

Using “a/(1000*b)” compensates for the factor 1000 difference in units used. We see that total mortgage debt has recently dropped below 14%, it’s lowest level since the mid 1970s. So, neither consumer credit nor total mortgage debt is at unusually high levels at the moment. Mortgage debt was clearly at abnormally high levels in 2009, when it reached a peak of 24% of net worth.

And what about corporate debt? With all the stock buybacks it must be very high, right? Well, we can find a number of stats about that. E.g. https://fred.stlouisfed.org/series/NCBCMDPMVCE

corp

Corporate debt as a percentage of market value. We can see it is rather low at the moment and as low as it was in the 50s and 60s. During the roaring 80s corporate debt was much higher than now, and the world didn’t end. One could say that stock prices are too high now (and maybe they are) and that causes corporate debt to be lower relative to “market value”, as was also the case in 1999. Well, the stock market could crash 50% tomorrow, halving the market value and this stat would jump to 70, which is where it also was in the 2009 financial crisis. Previous spikes to 70 or more were not the end of the world, so why would the next spike be?

It is not money creation itself that causes hyperinflation and/or depression. What is the money used for? If it is used for war or war repayments (Germany 1930s) then high inflation becomes inevitable because it is not used for new productive capacity and war worsens shortages. If money is used for new ideas or new capacity then it can actually cause deflation through overcapacity. That’s what developed countries have experienced for 10+ years now. It is capacity utilization that needs to be watched for signs of future inflation. That stat is here: https://fred.stlouisfed.org/series/TCU

capU

Capacity utilization went very high in the 60s and 70s and those bottlenecks/shortages eventually caused inflation. Since the financial crisis capacity utilization has consistently stayed below 80%, despite QE programs. There is no shortage of anything, so no upward pressure on most prices. CapU is now dropping again, so I wouldn’t look for higher inflation and/or higher interest rates as long as that’s the case. A possible drop below 75% would probably revive fears of deflation. This remains an important stat to watch for the coming years.

You will probably keep seeing claims about unsustainable debt, inevitable inflation or impending collapse of the economy… The FRED site will not give you all the answers. And there can be valid reasons to doubt some (if not all) of the numbers our bureaucrats crank out. But verifying some claims on the FRED site is usually better than nothing. And how the data gets collected and calculated is normally also public information. There is no good substitute for doing your own homework.

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Outlook for December 9

Posted by Danny on December 9, 2019

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

How to become a better trader

Posted by Danny on December 6, 2019

There are a lot of things to learn, and unlearn, if you are to become a successful self-directed trader and stay in that category. Yes, staying there can be harder than getting there… It’s a never ending journey because companies, technologies, the economy, and even markets as a whole keep changing and it is not always clear how they are changing. Never mind that the more things change the more they stay the same, as the saying goes…

Here is a little list on what typically separates beginners from more experienced traders. This is not meant to poke fun on newcomers in the “game”. Everyone was a total beginner at some point in his investing career. And most traders (including self) will occasionally keep doing some of the “awful” things in the left hand column.
It is useful as a kind of checklist where you can score yourself from time to time. It’s a way to figure out what to work on more in the coming months or years. Scoring oneself from time to time is important if you want to get better.

Good luck.

novice

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LT wave for December 2019

Posted by Danny on December 2, 2019

The LT wave has not worked all that well in recent months. That pattern continued in November. In a one way market there is of course not much room for short term cycles to show up.

Here is what happened in November and the LT wave projection for December:

ltwaveDec2019

November started with a few unexpected strong up days and then stayed rather flat until the middle of the month. Expected weakness didn’t really show up. In the subsequent strong period the S&P pushed above the 3100 barrier and went on to reach 3150 in the final trading days.

For December the wave projects some mild weakness in the first days, followed by a rather neutral period until the 14th. The second half looks stronger again but a quick dip is projected around the 23rd. Whether that will mean something in the usually thin trading around xmas remains to be seen.

Good luck.

Posted in Market Commentary | Tagged: | 2 Comments »

Outlook for December 2

Posted by Danny on December 1, 2019

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | 2 Comments »

Outlook for November 25

Posted by Danny on November 24, 2019

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | 2 Comments »

Outlook for November 18

Posted by Danny on November 17, 2019

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

Outlook for November 11

Posted by Danny on November 10, 2019

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | 2 Comments »

LT wave for November 2019

Posted by Danny on November 4, 2019

October was an interesting month and here is the LT wave for November:

ltwaveNov2019

Expected weakness until the 23rd proved to be more short-lived than expected. By the 20th the S&P was regaining the 3000 level already, and the subsequent strong period in the final week took the index to new record highs.

The pattern for November suggests another slow start with the second half of the month looking much stronger.

Reminder for new readers: the LT wave is experimental and relies no market data whatsoever. So don’t bet the bank on it.

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Outlook for November 4

Posted by Danny on November 3, 2019

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

 
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