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Tuesday, September 19, 2017

Daily update 9/19 "This Is Where The Next Financial Crisis Will Come From"


SPX had a 4.5 point intraday range.  I don't think it can get any smaller.  Narrow ranges are usually indicative of a short term top.  Breadth was barely positive.  New highs were 160.  New lows the last couple of days have crept up a bit to 18.  I like to see the lows under 10 when at the highs in the indexes. 

The futures closed inside the upper channel line this morning signaling they should be in consolidation mode now. 

The green count dropped below 50.  That is a big loss of momentum. 

Today looked like the typical slow creep up type of day.  The big drop in the green count combined with the very narrow range indicates a short term top is likely close in time.  I am still watching for a close below 2490 as an early warning of a possible short term pullback.

I saw a survey done by CNBC that said 68% of respondents expect the FED to begin balance sheet reduction in Oct.  The FED appears to have a green light to announce that action tomorrow.  Will it be a non event?  That is impossible to know.  Most investors I have seen interviewed seem to expect it to be a non event.  Sometimes the market does the unexpected just to keep us on our toes.  I have seen the FED do exactly what they were expected to do and volatility break out anyway.  Other times there is little to no reaction to the announcement.  The only thing I know for sure is the money the FED created out of thin air is going to start disappearing month after month.  At some point there could be considerable market and economic affects.  I don't believe the economy is nearly as strong as many people seem to believe.  There seems to be a belief the current tick up in inflation is an indication of that strength.  With the dollar dropping somewhere around 12% this year I believe that accounts totally and completely for what little bit of inflation we are seeing.  I am very interested in seeing how the dollar reacts to the balance sheet reduction.  There is always the possibility it reacts positively to dollars disappearing.  If that turns out to be the case that would act as additional tightening.  I think there is the possibility the economy might slow faster then most economists expect.  One problem we are going to have is the two devastating hurricanes are definitely going to be negative for the economy in the short term.  I don't have any idea how much the economy will be hurt and for how long.  The Fla. losses were largely from wind and much of the damage will be insured.  The Fla. economy will pick up considerably once the insurance money starts to flow.  With much of the damage in Texas from floods there is going to be a lot of uninsured losses.  How that works out is unknowable.  If the economy does slow over the next 2-3 months I think it will be very hard for me to tell if it is just short term or something longer lasting and important.  This is going to be a tough situation to analyze for a while.

Interesting article.  "This Is Where The Next Financial Crisis Will Come From"   The article does not answer the question where the next financial crisis will come from or when it will happen.  However, it does have some interesting info.

We think the final break with precious metal currency systems from the early 1970s (after centuries of adhering to such regimes) and to a fiat currency world has encouraged budget deficits, rising debts, huge credit creation, ultra loose monetary policy, global build-up of imbalances, financial deregulation and more unstable markets.

It sure looks that way to me.  Government debt has run up like crazy all around the world.

We see China’s credit growth post GFC as also an area of great concern. As an example, in a recent IMF report they analysed 43 global cases of credit booms in which the credit to GDP ratio increased by more than 30 percentage points over a 5-year period. Only 5 cases ended without a major growth slowdown or financial crisis immediately afterwards.

The rapid debt expansion makes a financial crisis possible in China.  However, the Chinese government has a big pile of reserves.  I don't know if that will be enough to avoid a crisis over there or not.  It is something I have been watching, but so far the little files they have had have not gotten out of hand.  When the next global recession hits it may be a different situation.


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