ECONOMIC FORECAST (USA) - Is another Financial Crisis Imminent? - ANSWER: YES
Hi All,
Apologies it has been a while since I've posted, but that is because I have not placed any trades recently. The reason for this is that University has been ramping up with assignments and exams. My last exam will be mid November so (hopefully) there will be more updates after then since I will have more time.
Additionally, I was unsure of where the market was heading so decided to play it safe and take some time to do some reading and research on economic cycles. Based on this and the opinions I formed, I will be forecasting where I think the market is heading from here on (especially given the markets' absolutely horrendous performance the past few days).
Disclaimer: I am not a qualified financial advisor and the following should not be taken as recommendations or financial advice.
IS ANOTHER FINANCIAL CRISIS APPROACHING?
Update 24/10/18
Market failed to break through 100 EMA (daily) signifying bears are still in control of the market (I was wrong in my technical analysis but economical/ fundamental analysis still stands). Market went back down and broke through support at the 200 EMA. NO LONGER LOOKING FOR BUYING OPPORTUNITIES. Back onto the sidelines to wait whether this earning season can save the market or will a bear market begin - no confirmation that we have entered a bear market just yet.
Cheers,
Howard
Update 24/10/18
Very bearish candle. 2-day consecutive close below the 200-EMA. I would conclude we are in a bear market. Will be looking for short positions for now, but as mentioned in my fundamental analysis, I do not think we have entered a long term bear market (market crash) just yet.
Update 8/3/19
Market has broke above the 200 EMA and is retesting the 200EMA. If it finds support at this point and continues upwards, it will suggest the end of the downtrend and we will look once more for buying opportunities. However, as mentioned in my economic analysis, we are at the late stage of the economic cycle so I would be very cautious as a more major correction is on the horizon.
Update 12/3/19
Market found support and has bounced off the 200EMA. This suggests the downtrend has ended in the short term. However, as the economy is fundamentally weak and prices are overvalued at the moment I would not suggest looking for long term buys, but long trades in the short term only while this uptrend lasts.
The downtrend has ended, but we are still in a dangerous economic position, a more severe correction/ economic crisis is expected to occur in the near future.
No more updates will be posted in relation to this post.
Apologies it has been a while since I've posted, but that is because I have not placed any trades recently. The reason for this is that University has been ramping up with assignments and exams. My last exam will be mid November so (hopefully) there will be more updates after then since I will have more time.
Additionally, I was unsure of where the market was heading so decided to play it safe and take some time to do some reading and research on economic cycles. Based on this and the opinions I formed, I will be forecasting where I think the market is heading from here on (especially given the markets' absolutely horrendous performance the past few days).
Disclaimer: I am not a qualified financial advisor and the following should not be taken as recommendations or financial advice.
IS ANOTHER FINANCIAL CRISIS APPROACHING?
In the past couple of months economic cycles and downturns have been a hot topic and there has been a lot of commentary on this subject. This is just my 2 cents on it if you are not sick of reading about economic forecasts yet.
Economic/ Debt Cycles
At its core, the economy tends to move in a cyclical fashion.
When credit is readily available and interest rates are low, borrowing is easier and thus spending increases. This allows an economic boom - businesses borrow money and fast track growth, individuals borrow money etc. All this leads to more spending which is more income (since there is always a buyer and seller). More income = more spending. This drives up prices in assets, income, the stock markets etc. due to increased demand, and causes increased inflation.
The government does not want inflation to be too high therefore begins increasing interest rates. This means less borrowing sine the repayments are higher. Less borrowing = less spending = less income. This results in a recession. The government will then decrease interest rates (supposedly) and promote more borrowing and spending and the cycle repeats.
This manipulation of interest rates and subsequently credit creates what is known as the short term debt cycle or business cycle. This typically last 5-10 years.
However, because human nature causes most people to spend more than they earn, each corresponding short-term debt cycle accumulates more debt repayments, and although income will generally grow along with debt, keeping it manageable, over time, debt repayments will outgrow income. This causes people to cut back on pending which equals lower income which equals even lesser spending etc. This causes a dramatic downturn and a depression since borrowers default under their debt, assets are sold which means increased supply and people are less likely be able to borrow and buy which creates a saturated market and assets lose their price, stock markets fall etc.
This is the long-term debt cycle.
Of course the economy does not work this perfectly otherwise we would have no economic crises. And it also does not work this simply, but if we were to do an in-depth analysis, it would easily span over 500 pages so this is the basic gist of it.
So now the question is: where are we in the debt cycle? Which will help us determine whether an economic downturn is imminent.
Debt to GDP
The Long term Debt Cycle
So we know that the growth of debt against income determines how long we are into the debt cycle so that is the starting point.
The long-term debt cycle lasts from approx. 75-100 years. The biggest depressions in USA's history effectively mark the end of a cycle where the debt burden should decrease. From this knowledge, we can observe that the Panic of 1837 which resulted in a major recession that lasted until the mid-1940s effectively decreased US private debt to GDP (the debt burden) of households by 40%.
The Great Depression which lasted from 1930-40 was the worst economic downturn in the industrialized world with an astonishing 140% debt to GDP. This was reduced by 100% to 40%.
Although not exact, we can see these major depressions are approximately 100 years apart and I believe they mark the end of the LT debt cycle (see similarity between the two graphs above). This brings into question whether the Global financial crisis signaled the end of the current LT debt cycle. Unfortunately I could not find more historical data to study, I do not believe a mere 20% decrease is Debt to GDP is sufficient to support another 75-100 years of economic prosperity. And looking at the bigger picture, the GFC is just a small bump and debt levels are still dangerously high.
Therefore, we are still in the later stages of a long term debt cycle and an even greater depression is due in my opinion.
The Short term debt cycle
Unlike the long-term debt cycle which is correlated with the debt burden, the shorter term business cycle is controlled by interest rates. As a hot topic in the news, interest rates have been rising recently.
Although we are at the late stage of the business cycle after 10 years since the GFC, as mentioned, the economy does not work like an oven timer.
However, we can observe the principles that interests rates are low in times of economic expansion to promote borrowing and spending, then begin increasing which eventually leads to a recession and interest rates are lowered again.
The recent rise in interest rates is signifying the end of the shorter term business cycle and we can also observe that interest rates are decreasing more and more (hit 0 in the GFC I believe). This also indicates that we are nearing the end of the LT debt cycle as lowering interest rates will no longer be able to save the economy since it has hit rock bottom.
Yield Curves
Another economic indicator I came across was the yield curve. A positive yield curve is a sign of economic health whereas a flat or inverting one is a sign of trouble. Below is a historic chart of the 10-year to 2-year treasury yield.
From the above a clear cyclical pattern can be seen. The 2-10 going negative is an indication of a recession.
A study also shows that a significant figure is the 3-month bill to the 10-year treasury yield, which indicates the probability of a recession occurring 4 quarters later.
The graph below uses data from the start of 2016 up until today (11/10/2018). The most recent figures show the 3 month to 10-year and the 2-year to 10 year to be on a downward trajectory from the start of 2017, a sign of an incoming recession (and possible major depression given the debt levels).
The most lowest figure for the 3-month to 10-year occurred recently at 0.73 which according to the study means a 10% chance of a recession in the next 4 quarters, not that concerning just yet. However, I am unsure of the accuracy of this study, especially given the price action of the stock market indices the past couple of days, so will stay out just in case.
Similarly the 2-10 has yet to hit 0 so in the VERY short-term, I do not expect there to be a stock market crash. However, I acknowledge that we are in a very dangerous position right now and predict the market may crash soon, given the data and reasons discussed. I would be very worried if the 2-10 cross the 0 mark.
Yield Curves seem to be positive so far in October but are flattening (less than 1 percent spread):
CONCLUSION:
The recent market performance caused a lot of fear. And I believe we are at the end of the long term debt cycle AND the short term debt cycle thereby in a very dangerous position. Based on the considerations above, I do believe a market crash is going to happen soon, and we should all be prepared; although I do not think it will begin this year (but as the saying goes, it is not possible to pinpoint the beginning of a recession so I could be wrong).
Either way, now would not be a very stable time to be in the market and I will sit on the sidelines and observe.
Thanks!
Howard
Update 16/10/2018
The post above is based on a fundamental approach to analysing the markets and economy - where we are in the business cycle. I did not include technical analysis since I thought there was not enough data in the price action. To be honest I don't think there is enough price action today yet either, but best get started and then continue to track the changes as more confirmations come. So here it is;
TECHNICAL ANALYSIS OF THE SPY (S&P 500)
Monthly Chart
I came across an article re: the 12-month moving average and how it is a key technical level in indicating the start of bear markets - I think it was a statement from Merrill Lynch. Here is the chart of the monthly SPX with a 12-month EMA:
As you can see, historically the 12-month EMA has been pretty good at identifying bull and bear markets (which makes sense since I find EMAs really valuable indicators). From this, we can see that the SPX is finding support at the EMA but I would wait for some more confirmation (given the EMA is flattening) before concluding that we are not in a bear market yet.
Volume is also low so there seems to not be a lot of momentum for bears at the moment.
Weekly Chart
Moving on to the weekly chart, we can see that the SPX is starting to find some support at the 50 EMA and remains above the 100 EMA. It is also approaching oversold levels on the CCI and is flattening a little, indicating it may be time for a bounce back. Although, I still think it is too early to tell. I would wait for the CCI to actually begin heading up before saying the market is bouncing back.
Daily Chart
On the daily chart however, the picture is a little more grim. Currently the SPX is closed below the 200 EMA (a dubbed last line of defence). It is consolidating and the next few days will be crucial to see whether it finds support here or breaks through.
The CCI however is heading upwards from oversold levels, but it has not yet crossed -100. And once again I will wait until this happens before concluding that there is going to be a rebound.
CONCLUSION
Based on my previous fundamental analysis we are currently in a dangerous economic position - at the edge of the cliff. However, the charts show some positive signs of support combine with oversold levels. In saying that, it is a little early to conclude that this is the start of a bear market rather than a pullback, we will have to wait to see what the price action tells us in a couple of days. During this time I still would stay out.
I will be posting regular updates here regarding this.
Cheers,
Howard
Update 17 October 2018
Price action confirms support at the 200 EMA, CCI at -100 pointing up and MACD converging. Very bullish candle. As expected, the market is bouncing back, at least in the short-term.
I would be looking for long positions to capitalise on this rebound. However, keep in mind that we are nearing the end of a bull market, I would not hold for a long period during this time and would keep my eyes open.
I will be looking at the Australian market soon.
Thanks,
Howard.
At its core, the economy tends to move in a cyclical fashion.
When credit is readily available and interest rates are low, borrowing is easier and thus spending increases. This allows an economic boom - businesses borrow money and fast track growth, individuals borrow money etc. All this leads to more spending which is more income (since there is always a buyer and seller). More income = more spending. This drives up prices in assets, income, the stock markets etc. due to increased demand, and causes increased inflation.
The government does not want inflation to be too high therefore begins increasing interest rates. This means less borrowing sine the repayments are higher. Less borrowing = less spending = less income. This results in a recession. The government will then decrease interest rates (supposedly) and promote more borrowing and spending and the cycle repeats.
This manipulation of interest rates and subsequently credit creates what is known as the short term debt cycle or business cycle. This typically last 5-10 years.
However, because human nature causes most people to spend more than they earn, each corresponding short-term debt cycle accumulates more debt repayments, and although income will generally grow along with debt, keeping it manageable, over time, debt repayments will outgrow income. This causes people to cut back on pending which equals lower income which equals even lesser spending etc. This causes a dramatic downturn and a depression since borrowers default under their debt, assets are sold which means increased supply and people are less likely be able to borrow and buy which creates a saturated market and assets lose their price, stock markets fall etc.
This is the long-term debt cycle.
Of course the economy does not work this perfectly otherwise we would have no economic crises. And it also does not work this simply, but if we were to do an in-depth analysis, it would easily span over 500 pages so this is the basic gist of it.
So now the question is: where are we in the debt cycle? Which will help us determine whether an economic downturn is imminent.
Debt to GDP
The Long term Debt Cycle
So we know that the growth of debt against income determines how long we are into the debt cycle so that is the starting point.The long-term debt cycle lasts from approx. 75-100 years. The biggest depressions in USA's history effectively mark the end of a cycle where the debt burden should decrease. From this knowledge, we can observe that the Panic of 1837 which resulted in a major recession that lasted until the mid-1940s effectively decreased US private debt to GDP (the debt burden) of households by 40%.
The Great Depression which lasted from 1930-40 was the worst economic downturn in the industrialized world with an astonishing 140% debt to GDP. This was reduced by 100% to 40%.
Although not exact, we can see these major depressions are approximately 100 years apart and I believe they mark the end of the LT debt cycle (see similarity between the two graphs above). This brings into question whether the Global financial crisis signaled the end of the current LT debt cycle. Unfortunately I could not find more historical data to study, I do not believe a mere 20% decrease is Debt to GDP is sufficient to support another 75-100 years of economic prosperity. And looking at the bigger picture, the GFC is just a small bump and debt levels are still dangerously high.
Therefore, we are still in the later stages of a long term debt cycle and an even greater depression is due in my opinion.
The Short term debt cycle
Unlike the long-term debt cycle which is correlated with the debt burden, the shorter term business cycle is controlled by interest rates. As a hot topic in the news, interest rates have been rising recently.Although we are at the late stage of the business cycle after 10 years since the GFC, as mentioned, the economy does not work like an oven timer.
However, we can observe the principles that interests rates are low in times of economic expansion to promote borrowing and spending, then begin increasing which eventually leads to a recession and interest rates are lowered again.
The recent rise in interest rates is signifying the end of the shorter term business cycle and we can also observe that interest rates are decreasing more and more (hit 0 in the GFC I believe). This also indicates that we are nearing the end of the LT debt cycle as lowering interest rates will no longer be able to save the economy since it has hit rock bottom.
Yield Curves
Another economic indicator I came across was the yield curve. A positive yield curve is a sign of economic health whereas a flat or inverting one is a sign of trouble. Below is a historic chart of the 10-year to 2-year treasury yield.
From the above a clear cyclical pattern can be seen. The 2-10 going negative is an indication of a recession.A study also shows that a significant figure is the 3-month bill to the 10-year treasury yield, which indicates the probability of a recession occurring 4 quarters later.
The graph below uses data from the start of 2016 up until today (11/10/2018). The most recent figures show the 3 month to 10-year and the 2-year to 10 year to be on a downward trajectory from the start of 2017, a sign of an incoming recession (and possible major depression given the debt levels).
The most lowest figure for the 3-month to 10-year occurred recently at 0.73 which according to the study means a 10% chance of a recession in the next 4 quarters, not that concerning just yet. However, I am unsure of the accuracy of this study, especially given the price action of the stock market indices the past couple of days, so will stay out just in case.
Similarly the 2-10 has yet to hit 0 so in the VERY short-term, I do not expect there to be a stock market crash. However, I acknowledge that we are in a very dangerous position right now and predict the market may crash soon, given the data and reasons discussed. I would be very worried if the 2-10 cross the 0 mark.
CONCLUSION:
The recent market performance caused a lot of fear. And I believe we are at the end of the long term debt cycle AND the short term debt cycle thereby in a very dangerous position. Based on the considerations above, I do believe a market crash is going to happen soon, and we should all be prepared; although I do not think it will begin this year (but as the saying goes, it is not possible to pinpoint the beginning of a recession so I could be wrong).
Either way, now would not be a very stable time to be in the market and I will sit on the sidelines and observe.
Thanks!
Howard
Update 16/10/2018
The post above is based on a fundamental approach to analysing the markets and economy - where we are in the business cycle. I did not include technical analysis since I thought there was not enough data in the price action. To be honest I don't think there is enough price action today yet either, but best get started and then continue to track the changes as more confirmations come. So here it is;
TECHNICAL ANALYSIS OF THE SPY (S&P 500)
Monthly Chart
I came across an article re: the 12-month moving average and how it is a key technical level in indicating the start of bear markets - I think it was a statement from Merrill Lynch. Here is the chart of the monthly SPX with a 12-month EMA:
As you can see, historically the 12-month EMA has been pretty good at identifying bull and bear markets (which makes sense since I find EMAs really valuable indicators). From this, we can see that the SPX is finding support at the EMA but I would wait for some more confirmation (given the EMA is flattening) before concluding that we are not in a bear market yet.
Volume is also low so there seems to not be a lot of momentum for bears at the moment.
Weekly Chart
Moving on to the weekly chart, we can see that the SPX is starting to find some support at the 50 EMA and remains above the 100 EMA. It is also approaching oversold levels on the CCI and is flattening a little, indicating it may be time for a bounce back. Although, I still think it is too early to tell. I would wait for the CCI to actually begin heading up before saying the market is bouncing back.
Daily Chart
On the daily chart however, the picture is a little more grim. Currently the SPX is closed below the 200 EMA (a dubbed last line of defence). It is consolidating and the next few days will be crucial to see whether it finds support here or breaks through.
The CCI however is heading upwards from oversold levels, but it has not yet crossed -100. And once again I will wait until this happens before concluding that there is going to be a rebound.
CONCLUSION
Based on my previous fundamental analysis we are currently in a dangerous economic position - at the edge of the cliff. However, the charts show some positive signs of support combine with oversold levels. In saying that, it is a little early to conclude that this is the start of a bear market rather than a pullback, we will have to wait to see what the price action tells us in a couple of days. During this time I still would stay out.
I will be posting regular updates here regarding this.
Cheers,
Howard
Update 17 October 2018
Price action confirms support at the 200 EMA, CCI at -100 pointing up and MACD converging. Very bullish candle. As expected, the market is bouncing back, at least in the short-term.
I would be looking for long positions to capitalise on this rebound. However, keep in mind that we are nearing the end of a bull market, I would not hold for a long period during this time and would keep my eyes open.
I will be looking at the Australian market soon.
Thanks,
Howard.
Update 24/10/18
Market failed to break through 100 EMA (daily) signifying bears are still in control of the market (I was wrong in my technical analysis but economical/ fundamental analysis still stands). Market went back down and broke through support at the 200 EMA. NO LONGER LOOKING FOR BUYING OPPORTUNITIES. Back onto the sidelines to wait whether this earning season can save the market or will a bear market begin - no confirmation that we have entered a bear market just yet.
Cheers,
Howard
Update 24/10/18
Very bearish candle. 2-day consecutive close below the 200-EMA. I would conclude we are in a bear market. Will be looking for short positions for now, but as mentioned in my fundamental analysis, I do not think we have entered a long term bear market (market crash) just yet.
Update 8/3/19
Market has broke above the 200 EMA and is retesting the 200EMA. If it finds support at this point and continues upwards, it will suggest the end of the downtrend and we will look once more for buying opportunities. However, as mentioned in my economic analysis, we are at the late stage of the economic cycle so I would be very cautious as a more major correction is on the horizon.
Update 12/3/19
Market found support and has bounced off the 200EMA. This suggests the downtrend has ended in the short term. However, as the economy is fundamentally weak and prices are overvalued at the moment I would not suggest looking for long term buys, but long trades in the short term only while this uptrend lasts.
The downtrend has ended, but we are still in a dangerous economic position, a more severe correction/ economic crisis is expected to occur in the near future.
No more updates will be posted in relation to this post.
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