Today, is my last day of vacation. Later this afternoon, my family and I board a flight that will leave this tropical paradise behind and return us back home to Houston, Texas. Since I have a few hours of flight time ahead of me, I have prepared a reading list to pass the time.
The last week of being detached from my daily routine has given me a good opportunity to recenter my views on the economy, the markets and overall investor psychology. While the markets have improved since the “resolution” of the Greek crisis, in my opinion I would have expected substantially more given the overall “angst” that the situation was generating. Yet, as of Thursday’s close, as shown in the chart below, the market remains in a bearish consolidation pattern. Furthermore, relative strength, momentum and volume remain a detraction from the “bullishness” of this week’s “crisis resolution rally.”
As I noted earlier this week:
“To re-establish the longer-term bullish trend, the market will need to move to new highs. Any failure to do so will simply keep the markets trapped in the ongoing topping process that began earlier this year.
While the rally on Monday certainly gave a relief to the “bull” camp, it has not been enough to completely shake the “bearish” grasp on the markets currently.”
“Also, notice the correlation between peaks in the Shanghai Index and the S&P 500. According to a recent Bloomberg article, margin debt in China reached $264 Billion in April of this year. After adjusting for the size of the two markets, is about double that of the roughly $500 billion in margin debt in the U.S.
This difference in relative size was given as a prime example about how margin debt is not a problem for the U.S. However, the relative size of margin debt in the past has not been a “safety net” that investors should rely on. As shown, the level of real (inflation adjusted) margin debt as a percentage of real GDP has reached levels only witnessed at the peaks of the last two financial bubble peaks in the U.S.”
It is worth reminding readers that nothing has been resolved in Greece other than the passage of a bill that will impose harsh austerity measures for the country in exchange for a “loan to pay principal and interest payments” back to the people who loaned them money in the first place. This is the equivalent of “paying a credit card with another credit card.” It keeps the bankers happy but keeps the individual broke.
We are not done with the Greek “crisis” as of yet and the country, and their inherent problems, will be back in the headlines soon. The problem with China’s economy, real estate and markets have also not been resolved and the fallout there will likely be more significant than most currently attribute to it.
In the meantime, here is my “beach reading” for the long plane ride back home to reality.
1) Is The NYSE Relevant Anymore? by Jonathon Trugman via NY Post
“Today, the NYSE has morphed into a TV studio and a historical museum. Still, there are few places on Earth more patriotic than the exchange.
The people on the floor — the few who remain — are a special breed of New Yorker, financier and American.
But on Wednesday, the NYSE management embarrassed its floor traders and the country, weakened the already depleted public confidence in markets and cost itself millions in commissions — all supposedly because of a software update gone wrong.
It also taught its customers that it has become largely irrelevant to market trading — the markets functioned just fine without it.“
Read Also: Why Investing Is Very Complicated by Sendhil Mullainathan via NY Times
2) Is The Global Economy Headed For Another Crash? by Peter Spence via The Telegraph
“The growth outlook for the rest of the year looks positively rosy. But economists aren’t always the best bunch at spotting a coming crash.
A sell-off in bonds – a place where you want to put your money when you’re not confident about growth – suggests that investors are becoming more optimistic.
But if history is a useful guide, then the US may already be due another recession. The average post-war growth streak has lasted less than five years.
And the Bank for International Settlements, the so-called central bank of central banks, has warned that policymakers may not have room to fight the next financial crisis.“
Read Also: Earth’s Economy Continues Recessionary Cooling by IronMan via Political Calculations
3) Cracks In The Markets Facade by Joe Calhoun via Alhambra Partners
“If the US economy doesn’t start to improve measurably in short order the Fed might find itself in the same predicament as the PBOC. The S&P 500 appears to have peaked in any case. As I wrote a couple of months ago, the long term momentum indicator I use is putting out sell signals not seen since late 2007 (and in 2000 before that). All we’re waiting on now is a catalyst to push the market into a full blown, honest to goodness correction. Would a loss of confidence in the abilities of the world’s central bankers be sufficient to the task? I don’t know but I’m certain the PBOC, the Fed and the ECB don’t want to find out. I suspect in the end they’ll have little say on the matter.”
Read Also: One Lesson To Learn Before A Correction by John Hussman via Hussman Funds
Read Also: Can You Forecast Better Than A Dart Throwing Chimp by Timmar via Psy-Fi Blog
4) If The Fed Hikes, It’s One And Done by Paul Kasriel via Financial Sense
“So, current inflationary pressures are quite mild here in the U.S. The current rate of growth in U.S. thin-air credit is below its “normal” rate, suggesting that credit creation is not fostering a future surge in U.S. inflation. And the global inflationary environment appears equally tranquil, if not more so. The Chinese economy, which already had experienced a growth slowdown, will now be negatively affected by its recent stock market swoon. And Europe is not exactly booming, Greece aside. Given all this, it is not clear what is motivating the Fed’s desire to raise its policy interest rates sometime later this year. Whatever the motivation, if the Fed does pull the interest-rate tightening trigger in 2015, it will not likely do so again for many months thereafter. In other words, for Fed interest rate hikes in 2015, it’s one and done.“
Read Also: The Mirage Of The Financial Singularity by Dr. Robert Shiller via Project Syndicate
5) The Why Of Weak Wages by Michelle Lazette via Cleveland Federal Reserve
“Technological advances. Lower productivity. Fewer full-time workers. Depending on whom one asks, the reasons vary for why we’ve experienced more than a decade of low wage growth. Observers agree, though: Stubbornly low wages impact society and the US economy.”
Read Also: The Psychology Of Risk by Victor Ricciardi via Kentuck State University
Other Interesting Reads
The Future Of Politically Correct Cultism by Brandon Smith via ZeroHedge
The Real Risk Of The China Market Crash by Evan Osnos via The New Yorker
Knowing When To Sell Real Estate Investments by Keith Jurow via Advisor Perspectives
On Europe: “A clueless political personnel, in denial of the systemic nature of the crisis, is pursuing policies akin to carpet-bombing the economy of proud European nations in order to save them.“ – Yanis Varoufakis
Have a great weekend.