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Friday, April 17, 2015

Daily update 4/17 Very good article on debt and the economy


I guess people all of a sudden found things to worry about.  There are plenty out there.  Breadth was -78% so the selling was quite broad based.  New highs dropped down to 26.  I think that is a pretty good sign we are in pullback mode now.  SPX closed below the 18 and 50 SMAs.  Next key support is the 100 DMA.  With all the hits we have had on that MA this year it is probably time it breaks.  Selling appeared to be exhausted around 2 PM.  The dip buyers came in so we closed well off the lows.  That is probably because Mondays have been strong and many people know that now.  I don't find that type of action on a day like today very helpful for Monday.  Sometimes those buyers get rewarded with a gap up and somethings they get their heads handed to them.  TRIN was only 1.16 at the close.  With that low of a reading and all the technical damage we saw we are very likely to work lower in the days ahead even if it bounces on Monday.  We might make an attempt to fill that gap down from today, but there is no way to know at this point.  They might come out and slam a gap up on Monday.  This market has been suffering from lazy buyers.  We now have seen some real selling pressure.  I doubt this is going to be a one day wonder because of the weak technical picture.  This might be the opening of the flood gates, but we need to see follow through first.

The futures tested below the key 100 SMA, but closed above it.  This looks like the rally is over doesn't it?  It was weak to begin with so it will be surprising to me if we reverse back up and make new rally highs.  Since the March high we have made two slightly lower highs and one slightly higher low.  That is like a triangle, but the lows and highs were so close it looks more like a rectangle.  At any rate breaking that bottom line is likely to bring in a bunch of selling.

The news out of China seemed to be that the government told people to sell stocks just not exactly in those words.  The futures were down 5% after the close there.  Europe is starting to have a fit over Greece once again.  Those issues could be around for some time to come so that global markets are down on more days then we have seen this year.  That could get the U.S. off to a rocky start more often.  I don't have a clue what is going to happen on Monday.  We could bounce or keep tanking from what I can see.  Longer term the market looks set up for a bigger move down.

Today turned the short term trend to neutral in all indexes.  Had we closed down near the lows it would have turned them down.  That means the market does not have much room before they will be down.

This is a very good article on debt and the economy.  Hoisington Quarterly Review and Outlook – First Quarter 2015  Here are some interesting snippets.

Many assume that economies can only contract in response to cyclical pressures like rising interest rates and inflation, fiscal restraint, over-accumulation of inventories, or the stock of consumer and corporate capital goods. This idea is valid when debt levels are normal but becomes problematic when debt is excessively high.

Large parts of Europe contracted last year for the third time in the past four years as interest rates and inflation plummeted. The Japanese economy has turned down numerous times over the past twenty years while interest rates were low. Indeed, this has happened so often that nominal GDP in Japan is currently unchanged for the past twenty-three years. This is confirmation that after a prolonged period of taking on excessive debt additional debt becomes counterproductive.

Over the past four years, nonfarm productivity growth has slumped to its lowest levels since 1952, with the exception of the severe recession of 1981- 82. Such a pattern is abnormally weak. Interestingly, the Consumer Price Index was unchanged in the past twelve-month period (Chart 5). In an economy purely dominated by cyclical forces, as opposed to one that is highly leveraged, both productivity and inflation would not be depressed.

Monetary policy impacts the overall economy in two areas – price effects and quantity effects. Price effects, or changes in short-term interest rates, are no longer available because rates are near the zero bound. This is a result of repeated quantitative easing by central banks. It is an attempt to lift overly indebted economies by encouraging more borrowing via low interest rates, thus causing even greater indebtedness.

Quantity effects also don’t work when debt levels are excessive. In a non-debt constrained economy, central banks have the capacity, with lags, to exercise control over money and velocity. However, when the debt overhang is excessive, they lose control over both money and velocity. Central banks can expand the monetary base, but this has little or no impact on money growth. Further, central banks cannot control the velocity of money, which declines when there is too much unproductive debt. This happened in the1920s and again after 1997 and is continuing to decline today (Chart 6).

It seems to me that economists and politicians are the only people in the world that do not understand that too much debt is a bad thing.  This chart show it very clearly.

Since 1900 the velocity of money has only been this low during the great depression.  It is actually very near where it was in 1929.  The currency wars we see going on around the world are also very reminiscent of that time frame.  While the FED thinks they prevented another depression I am not so sure.  Maybe they just delayed it.

The market and sector status pages have been updated.  Have a great weekend all.


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