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Category: Chart of the Week

Unintended Consequences of Quantitative Tightening

In 2008, to stave off the worst financial crisis since the Great Depression, the Fed began a program of “quantitative easing” to save the economy, eventually buying trillions of dollars of government bonds and mortgage-backed securities to keep interest rates low. Now amidst strong economic growth the Fed has initiated a program of “quantitative tightening,” selling off the assets it had accumulated, which by itself means higher interest rates. However, as the government allows supply to expire. The market place has to basically refi that debt. The added supply to the market place could also drive interest rates even higher than anticipated.

Unintended Consequences of Quantitative Tightening

Why We Should Worry A Lot about Today’s High Debt Levels

The dot com and housing bubbles of the recent past were marked by big increases in debt for those sectors, followed by sharp economic and market declines.  Today, debt is spread across many areas (See chart below). And that is extremely worrisome for the economy and the markets from a historical point of view.  For more about big debt crises, their causes, solutions and how investors can protect themselves here’s a link to get a free pdf copy of the highly regarded   “A Template for Understanding Big Debt Crises” by Ray Dalio, founder of Bridgewater, one of the world’s largest hedge fund.

Major Bank Indicators Signal Bear Market Trouble Ahead

This indicator, designed by Goldman Sachs to signal bear market risk, is at its highest levels from the last 50 years. It is based on measures of equity valuation, growth momentum, unemployment rates, inflation and the yield curve. It attained peaks towards the end of the internet bubble and near the end of the housing bubble. The gauge often precedes a bear market but is sometimes indicative of a prolonged period of low index returns.

Raging Bull Chart

Another metric on investor behavior is the Haver Analytics/Citi Research Panic/Euphoria model. The model relies on their Market Sentiment Composite. It is intended to track the mood of the investor base and is used as a contrary signal. Note below that forward returns based on euphoric readings, are low, meaning that the market tends to fall or tread water after the indicator breaches the upper threshold.

 Investors have returned to favoring growth stocks.

Investors have returned to favoring growth stocks. July appears to have been an aberration in that growth characteristics lagged. Through August and into the first week of September, companies with high forecast growths are leading the market again.

Do World markets matter?

It’s rare to see such a wide divergence between world and U.S. markets. Many Asian and European banks are hitting 52-week lows, which is suggestive of a deteriorating world- wide environment. While the U.S. may weather the storm better than emerging markets, it does appear that many economies are suffering. Examples of countries with economies in danger of toppling include Brazil, Turkey, India and South Africa.

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