RECESSION IMPENDING?(PART2)FED RATES SUPERCYCLE|PREMIUM ANALYSIS
FED INTEREST RATES( FRED )-Extension(PART 2) to the US (SPX) Sectors Technical Analysis Series - 18th of August 2019 (9-10 Minute Read)
Everyone complains about the FED rates. That's our only job, it seems. Judging by his tweets, no one has been more eager to express their dissatisfaction, than Pres. Trump(bit' of sarcasm).
This is Part 2- of an extremely complex(Premium) cycle analysis. The purpose of this chart is to showcase the historical relationship between FED Rates and economic cycles. In order to understand this analysis; in depth historical knowledge of the FED's Monetary Policy is necessary(besides my personal need, of my work actually being understood properly).
Now, let's start with a chronological setup(Blue #number labels) that will be used to analyse rates. The beginning of the Bullish Cone was the Impulsive Intermediate Wave 1(in the late 50's). By the early 70's and the occurrence of the OPEC crisis; a supercyclical Wave 1 and 2 were formed. Wave 2 gave the bottom support of the Bullish cone in FED interest rates. As it's labelled on the chart the importance of the bullish cone is that it signifies the Peak of Capitalism.
The implications of this peak were a consumption driven economy, combined with excessive cycle volatility. At the same time this was the Fixed Incomes' Golden Age; as practically every American individual was told that buying a house is the utmost important aim in life. Obviously at the time, this was quite logical, since home equity is an effective way to protect your wealth from inflation. The Fibonacci Circles used on the chart show the pattern of cycles that formed the Bullish Cone. Each end of a circle forms a trough and consequently a peak in a given cycle time span.
What Changed? -Our understanding of Monetary policy changed(Credit to Barro and Gordon,1983). The early 80's were extremely turbulent years with immensely high inflation . The end result was an exit out of the old equilibrium and a break-off from the Bullish Cone, into a new Equilibrium. The trend that formed the New Equilibrium in general economic terms is referred to as the "Great Moderation". This is why the chart is divided with a cross, centered around Q2,1984 that was the start of the "Great Moderation". The occurrence of this event can be observed in the clear difference with the synch of the sin-line with the different cycles between the 2 periods. The new equilibrium is extensively supported by the rise of Globalization. In effect this is the first part of this analysis.
Part 2 of this analysis is, what started this idea with the downward trending wedge ( Pitchfork ) in interest rates since the "Great Moderation". This was my primary sketch from a week ago.
Just so, I am not boring and do not repeat myself- I will not discuss the labels post 84' neither on the sketch or the chart. What is important in the current interest rate environment are the implications of the prolong duration of these extremely low rates. Hence, the chart is divided between 2% and below(RED) and above Green. The rationale behind this division, is that there are plenty of fundamental issues that appear if rates are lower than 2%(in addition to low growth/inflation). Unfortunately we've practically been in such environment for about 9 years now. Implications of this environment can be credited to James Bullards (2016) "Perma-Zero" paper.
One of the major issues is the trade-off between debt and equity. In the current environment stocks on average are trading 14-17 x(times) their earnings (x17 P/E). We have an enormous amount of laughable companies available to stay in business with continuously negative EPS. One example that I can think of is WeWork Ltd.(In order to spread awareness, I need your help on this one- comment as many companies that come on you mind that fit this description). This is a healthy and necessary discussion to have. Low rates do stimulate innovation, but the inevitable cost is that due to competition- the majority of these startups become unproductive and hardly ever profitable.The best description that I think it fits these worthless capital soaking "Business Ideas" is to classify them as Malinvestments.
Finally, what's the conclusion of this extensive FED rates analysis? -Borrowing Capital should have some baseline cost(2-4% would be quite an optimal range). As discussed in Link #1 and Part 1 of this series based on the VIX that analysed the probability and timing of the next recession; - It is nearing. Unfortunately, we will not have rate cuts as a tool to stimulate the markets. Whether it is obvious or not; we are quite overdue for a recession. This can also be observed from the sin-line at the bottom right corner; implying a bottom of the cycle in the next 2-3 years. Essentially, this is the reason- why I have dedicated much of my time to at least attempt to provide a series of ideas in my content, that include proper interpretation of the most crucial financial and economic factors.
This idea concludes the extension to the SPX Sector series. Hope you enjoyed it and found it useful.
|Step_Ahead_oftheMarket|
>>I do not share my ideas for the likes or the views. This channel is only dedicated to well informed research and other noteworthy and interesting market stories.>>
However, if you'd like to support me and get informed in the greatest of details, every thumbs up or follow is greatly appreciated!
I do realize that my charts are quite hard to be understood, mostly because they are labelled to the smallest and extremest of details. If there are any poor understandings of the labels, I'd be able to answer any additional questions in the comments.
{Make sure to check out my previous ideas and my series on US( SPX ) Sector including 11 episodes of the major US sectors}
1. PART 1-VIX: Volatility Index tradingview.com/chart/VIX/JqftOGwh-RECESSION-IMPENDING-MEDIUM-TERM-VOLATILITY-VIX-PREMIUM-ANALYSIS/
2. Series Finale; Episode 11: US Utilities( XLU ) tradingview.com/chart/XLU/B0BlK6dE-US-SECTOR-SERIES-FINALE-11-11-UTILITIES-XLU-ESSENTIAL-TA-NOTES/
3. SPX: Elliott Wave Analysis of the current Cycle tradingview.com/chart/SPX500USD/HHdPeFOu-End-of-2019-Start-of-2020-SPX-crash/
Full Disclosure: This is just an opinion, you decide what to do with your own money. For any further references or use of my content for private or corporate purposes- contact me through any of my social media channels. Wish that tview had a copy-right option, but it is what it is.
Everyone complains about the FED rates. That's our only job, it seems. Judging by his tweets, no one has been more eager to express their dissatisfaction, than Pres. Trump(bit' of sarcasm).
This is Part 2- of an extremely complex(Premium) cycle analysis. The purpose of this chart is to showcase the historical relationship between FED Rates and economic cycles. In order to understand this analysis; in depth historical knowledge of the FED's Monetary Policy is necessary(besides my personal need, of my work actually being understood properly).
Now, let's start with a chronological setup(Blue #number labels) that will be used to analyse rates. The beginning of the Bullish Cone was the Impulsive Intermediate Wave 1(in the late 50's). By the early 70's and the occurrence of the OPEC crisis; a supercyclical Wave 1 and 2 were formed. Wave 2 gave the bottom support of the Bullish cone in FED interest rates. As it's labelled on the chart the importance of the bullish cone is that it signifies the Peak of Capitalism.
The implications of this peak were a consumption driven economy, combined with excessive cycle volatility. At the same time this was the Fixed Incomes' Golden Age; as practically every American individual was told that buying a house is the utmost important aim in life. Obviously at the time, this was quite logical, since home equity is an effective way to protect your wealth from inflation. The Fibonacci Circles used on the chart show the pattern of cycles that formed the Bullish Cone. Each end of a circle forms a trough and consequently a peak in a given cycle time span.
What Changed? -Our understanding of Monetary policy changed(Credit to Barro and Gordon,1983). The early 80's were extremely turbulent years with immensely high inflation . The end result was an exit out of the old equilibrium and a break-off from the Bullish Cone, into a new Equilibrium. The trend that formed the New Equilibrium in general economic terms is referred to as the "Great Moderation". This is why the chart is divided with a cross, centered around Q2,1984 that was the start of the "Great Moderation". The occurrence of this event can be observed in the clear difference with the synch of the sin-line with the different cycles between the 2 periods. The new equilibrium is extensively supported by the rise of Globalization. In effect this is the first part of this analysis.
Part 2 of this analysis is, what started this idea with the downward trending wedge ( Pitchfork ) in interest rates since the "Great Moderation". This was my primary sketch from a week ago.
One of the major issues is the trade-off between debt and equity. In the current environment stocks on average are trading 14-17 x(times) their earnings (x17 P/E). We have an enormous amount of laughable companies available to stay in business with continuously negative EPS. One example that I can think of is WeWork Ltd.(In order to spread awareness, I need your help on this one- comment as many companies that come on you mind that fit this description). This is a healthy and necessary discussion to have. Low rates do stimulate innovation, but the inevitable cost is that due to competition- the majority of these startups become unproductive and hardly ever profitable.The best description that I think it fits these worthless capital soaking "Business Ideas" is to classify them as Malinvestments.
Finally, what's the conclusion of this extensive FED rates analysis? -Borrowing Capital should have some baseline cost(2-4% would be quite an optimal range). As discussed in Link #1 and Part 1 of this series based on the VIX that analysed the probability and timing of the next recession; - It is nearing. Unfortunately, we will not have rate cuts as a tool to stimulate the markets. Whether it is obvious or not; we are quite overdue for a recession. This can also be observed from the sin-line at the bottom right corner; implying a bottom of the cycle in the next 2-3 years. Essentially, this is the reason- why I have dedicated much of my time to at least attempt to provide a series of ideas in my content, that include proper interpretation of the most crucial financial and economic factors.
This idea concludes the extension to the SPX Sector series. Hope you enjoyed it and found it useful.
|Step_Ahead_oftheMarket|
>>I do not share my ideas for the likes or the views. This channel is only dedicated to well informed research and other noteworthy and interesting market stories.>>
However, if you'd like to support me and get informed in the greatest of details, every thumbs up or follow is greatly appreciated!
I do realize that my charts are quite hard to be understood, mostly because they are labelled to the smallest and extremest of details. If there are any poor understandings of the labels, I'd be able to answer any additional questions in the comments.
{Make sure to check out my previous ideas and my series on US( SPX ) Sector including 11 episodes of the major US sectors}
1. PART 1-VIX: Volatility Index tradingview.com/chart/VIX/JqftOGwh-RECESSION-IMPENDING-MEDIUM-TERM-VOLATILITY-VIX-PREMIUM-ANALYSIS/
2. Series Finale; Episode 11: US Utilities( XLU ) tradingview.com/chart/XLU/B0BlK6dE-US-SECTOR-SERIES-FINALE-11-11-UTILITIES-XLU-ESSENTIAL-TA-NOTES/
3. SPX: Elliott Wave Analysis of the current Cycle tradingview.com/chart/SPX500USD/HHdPeFOu-End-of-2019-Start-of-2020-SPX-crash/
Full Disclosure: This is just an opinion, you decide what to do with your own money. For any further references or use of my content for private or corporate purposes- contact me through any of my social media channels. Wish that tview had a copy-right option, but it is what it is.
Comment:
Just a brief clarification on some of the terms mentioned in the(since I do not have an editor cleaning up my mess before posting).
1. Death of Fixed Income, implies the drop in yields and the reinvestment ROR. Price return is obviously a separate factor based on convexity, maturity date, etc etc.
2. Savings(Equities), means that generally equities are the dominant asset when savings are invested based on the continuous uptrend in the PE ratio.
3. "US inflation was mostly Domestic"- Implies that the industrial supply chain wasn't as global as it currently is, implying that trade and exchange rates weren't such a major factor in inflation. This can be observed by the rate of growth in the global trade volume since the 80's.
4. Automation can be mentioned as an additional factor, but I think it's more accurate to phrase it as rate of Automation. Here's the chain of factors:
low rates- stimulate innovations(especially in a service based economies)= typically implies a growing rate of Automation.
That's about it for now.
1. Death of Fixed Income, implies the drop in yields and the reinvestment ROR. Price return is obviously a separate factor based on convexity, maturity date, etc etc.
2. Savings(Equities), means that generally equities are the dominant asset when savings are invested based on the continuous uptrend in the PE ratio.
3. "US inflation was mostly Domestic"- Implies that the industrial supply chain wasn't as global as it currently is, implying that trade and exchange rates weren't such a major factor in inflation. This can be observed by the rate of growth in the global trade volume since the 80's.
4. Automation can be mentioned as an additional factor, but I think it's more accurate to phrase it as rate of Automation. Here's the chain of factors:
low rates- stimulate innovations(especially in a service based economies)= typically implies a growing rate of Automation.
That's about it for now.
Comment:
Just a thought provoking update:
Question is, what's the absolute potential upside for the SPX in 2020. Best scenario, a deal gets done phase 1 and even if we have 2 more rate cuts to 1%, it would be +10-15%, to ¬3500ish. Even this is a stretch. But there are not sellers either, because the downside is limited mostly by QE. Meaning, expectations should be that market will be sluggish for the next 1-1.5 years before something major occurs.
-Step_ahead_ofthemarket-
Question is, what's the absolute potential upside for the SPX in 2020. Best scenario, a deal gets done phase 1 and even if we have 2 more rate cuts to 1%, it would be +10-15%, to ¬3500ish. Even this is a stretch. But there are not sellers either, because the downside is limited mostly by QE. Meaning, expectations should be that market will be sluggish for the next 1-1.5 years before something major occurs.
-Step_ahead_ofthemarket-
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Credit to The Economist. Actually being funny for the first time ever.
We'll see what the winter of 2019 and the spring of 2020, shall bring.