This post will sum up the current Economic status of most major Economies in the world, and will identify problems in emerging markets.
Thesis: America's improving Economy is causing problems for emerging markets who can't keep up with the security and rate of return of investments in America, which in turn can hurt America's economy a couple years down the road.
Update: The school year has started, and I don't have as much time as I would like to blog and research, so today I will publish this article on America's economy which I have been working on, and then I will publish one on the international economy in a couple of days.
America's Economy. America's economy has been improving steadily for the past four years under the direction of Ben Bernanke at the Federal Reserve.
The Unemployment rate is currently at 7.3%, the lowest since December of 2008.
(Image: Unemployment rate from Jan 2008 - Aug 2013, Bureau of Labor Statistics)
Unemployment reached a high of 10% towards the end of 2009, and since then has been dropping an average of 0.6 per year. This year, however, the Unemployment rate dropped the most, 0.6% in the first eight months. The decrease in unemployment has been attributed to a decrease in loan rates, and a decrease in jobs sent abroad (less outsourcing).
Loan Rates: A few years ago, the Federal Reserve started an $85 billion-per-month program of buying US Treasury and Mortgage Bonds in order to keep loan rates and mortgage rates low to help jump start the economy. Short term interest rates are currently at 0.15%, and Bernanke stated during the most recent Federal Open Market Committee meeting that he will continue to try to keep interest rates as close to 0% until 2014. In May of this year, the Federal Reserve announced that they might end the bond and treasury purchasing program by 2014. This caused a very negative reaction with investors as they felt it was too soon to end the program, and they feared higher interest rates would damage the fragile economy.
The next day, the markets tanked sharply, causing the Federal Reserve bank officials to state that they would only begin tapering off the $85 billion-per-month bond purchasing program, as the economy was improving significantly. That positive news brought the markets up, and the massive stock rally of 2013 raged on. The ISM Manufacturing Index reports came in, and the results were much higher then most analysts predicted. More and more people are spending money on buying new cars and trucks, and even houses, almost a direct result of lowered loan rates.
Stock Rally: It's only the 9th month of the year, and the S&P 500 and DJIA have both risen more then 20%. The DJIA had a record 17 consecutive day increase. The stock market growth has caused stocks to have a higher ROR (Rate of Return) then bonds, treasures, commodities, derivatives, and other financial instruments, causing more people to invest their money in the stock market, further increasing growth. A Citi analyst first noted that the stock market had been fueled by the Fed's aggressive quantitative easing, not because of companies beating Wall Street Earnings Estimates, which have been single digit gains at most, and the main reason for stock market growth. A Goldman Sachs analyst interviewed investors, and reported that they were currently more interested in monetary and fiscal policy risks to the stock market, and the move from bonds to stocks then corporate results. In other words, investors just cared about the Feds policy to keep interest rates low, which meant that the stock market would grow (inverse correlation).
Deutsche Bank recently released a bearish report; margin debt is sky rocketing. Margin debt (trading on margin) is when investors take out loans with their brokers/banks in order to pay for stocks they can not afford, thereby using the stock as collateral for their loan. The problem with margin trading is that when the markets go down, the investor then has to sell their stocks and other assets in order to pay off their debt. Deutsche's report observes the steady increase in margin debt, tracked by the New York Stock Exchange. Deutsche doesn't believe a sell-off is not around the corner, but they declare that the indicator shows that the underlying basis on which prices trade is growing more fragile.
Personally, I agree with Deutsche's report. For the past half year, I have been following the New York Stock Exchange's margin debt charts, and the charts have been steadily increasing. In terms of percentage growth per month, the Margin Debt charts are beginning to resemble the percentage growth per month at the end of 2008, when the stock market crashed, and the financial crisis began. I will have another article going more in-depth of my observations of the Margin Debt charts that indicate a stock sell off.
Thesis: America's improving Economy is causing problems for emerging markets who can't keep up with the security and rate of return of investments in America, which in turn can hurt America's economy a couple years down the road.
Update: The school year has started, and I don't have as much time as I would like to blog and research, so today I will publish this article on America's economy which I have been working on, and then I will publish one on the international economy in a couple of days.
America's Economy. America's economy has been improving steadily for the past four years under the direction of Ben Bernanke at the Federal Reserve.
The Unemployment rate is currently at 7.3%, the lowest since December of 2008.
(Image: Unemployment rate from Jan 2008 - Aug 2013, Bureau of Labor Statistics)Loan Rates: A few years ago, the Federal Reserve started an $85 billion-per-month program of buying US Treasury and Mortgage Bonds in order to keep loan rates and mortgage rates low to help jump start the economy. Short term interest rates are currently at 0.15%, and Bernanke stated during the most recent Federal Open Market Committee meeting that he will continue to try to keep interest rates as close to 0% until 2014. In May of this year, the Federal Reserve announced that they might end the bond and treasury purchasing program by 2014. This caused a very negative reaction with investors as they felt it was too soon to end the program, and they feared higher interest rates would damage the fragile economy.
The next day, the markets tanked sharply, causing the Federal Reserve bank officials to state that they would only begin tapering off the $85 billion-per-month bond purchasing program, as the economy was improving significantly. That positive news brought the markets up, and the massive stock rally of 2013 raged on. The ISM Manufacturing Index reports came in, and the results were much higher then most analysts predicted. More and more people are spending money on buying new cars and trucks, and even houses, almost a direct result of lowered loan rates.
Stock Rally: It's only the 9th month of the year, and the S&P 500 and DJIA have both risen more then 20%. The DJIA had a record 17 consecutive day increase. The stock market growth has caused stocks to have a higher ROR (Rate of Return) then bonds, treasures, commodities, derivatives, and other financial instruments, causing more people to invest their money in the stock market, further increasing growth. A Citi analyst first noted that the stock market had been fueled by the Fed's aggressive quantitative easing, not because of companies beating Wall Street Earnings Estimates, which have been single digit gains at most, and the main reason for stock market growth. A Goldman Sachs analyst interviewed investors, and reported that they were currently more interested in monetary and fiscal policy risks to the stock market, and the move from bonds to stocks then corporate results. In other words, investors just cared about the Feds policy to keep interest rates low, which meant that the stock market would grow (inverse correlation).
Deutsche Bank recently released a bearish report; margin debt is sky rocketing. Margin debt (trading on margin) is when investors take out loans with their brokers/banks in order to pay for stocks they can not afford, thereby using the stock as collateral for their loan. The problem with margin trading is that when the markets go down, the investor then has to sell their stocks and other assets in order to pay off their debt. Deutsche's report observes the steady increase in margin debt, tracked by the New York Stock Exchange. Deutsche doesn't believe a sell-off is not around the corner, but they declare that the indicator shows that the underlying basis on which prices trade is growing more fragile.
Personally, I agree with Deutsche's report. For the past half year, I have been following the New York Stock Exchange's margin debt charts, and the charts have been steadily increasing. In terms of percentage growth per month, the Margin Debt charts are beginning to resemble the percentage growth per month at the end of 2008, when the stock market crashed, and the financial crisis began. I will have another article going more in-depth of my observations of the Margin Debt charts that indicate a stock sell off.
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