Sunday, November 25, 2018

OIL collapse could be connected to US-China trade war?

Oil collapses 34% in 1 month and 19 days. They are not common movements but the crude used to have sometimes this huge movements and rarely recovers from them. In 2007 and 2014 the barrel drop 54% and 64% and only partially recovers from those falls.

In 2007 we knew the financial collapse started. In 2014, summer time, China`s market started collapsing, yuan was devaluated and there was some US bonds selling from China (maybe to sustain the turmoil that was in August 2015)

*Click on the image to do it bigger

From October to nowadays falls, means someone big is moving lot of money. And my concerns are if  the same counterparty (China) is doing the same movement as he did in 2015

It can be that the economy is slowing down, but this speedy movements cannot be caused because normal markets participants change of mind. Some big whale did a movement for some reason weeks before the US-China meeting the 30th September

¿Is China selling bonds again (getting armed), to make public finally the war the 30th November meeting?. 

Sunday, November 18, 2018

Financial Crash in US, 2018 or 2019

Has been a while since I did not updated the blog.

Since beginning 2018 the world economy, started a downtrend pattern. Even though US market still was not in downtrend, the rest of the world indices were already half a year in downtrend. 

For example, EuroStoxx in a monthly chart, which is very informative chart, started to show a downtrend cause, first, the MACD line and signal histogram crosses zero line and becomes negative. Apart from that, in the same chart it can be seen a double top meanwhile the MACD graph does not joins

Because of this two technical reasons I was expecting at the beginning of the year a retracement in all financial market (but US still does not started).

Apart from that there are other factors, like the US debt cost is getting higher, interest rates in US are skyrocketing and sooner or later problems should appear. 

If we check the US debt interest rate (in 10 year T-Bonds which is the most common T-bond and is a reference for many credit). The 30 year T-bonds is similar to 10-year too.

In 2 years period, the interest rate were up, from 1,5% to 3% and the FED seems that will be increasing quarterly 0,25% the interest rate, so more increases are expected

In US index (SP500) for instance, on the monthly chart still cannot see any downtrend, but in the weekly chart something interesting appears.
Since high from January, the price went up (September was a higher high) but the MACD graph NOT. This is what concerns me more, maybe a BIG downtrend can be starting in US markets in order to equalize the rest of world markets or at least reduce the discrepancies in the world market indices

All this being said, there is political risk with the biggest GDP countries and the trade war, it will increase uncertainty and most probably inflation in US (forcing the FED increase pace). But playing the news is impossible, just have in mind this could happen.

If the world economy pace stops (and with the trade war between US and China could happen) the oil prices will go down a lot, cause stopping oil production will not be imminent, so same pace of oil production will persist meanwhile economy stops. The crude price for instance has fallen since September from 74$ approx the barrel to 56$ the barrel, a 25% down from September highs due to overproduction (or decreasing consumption in economy in my opinion).

So, play conscientiously in this greed market 

Wednesday, May 2, 2018

Stagflation 2018

After years of very low interest rates, it generate the perfect storm where very poor business/investments etc are likely to have profits. Why not getting a credit for your business that generates 2% ROI, if the interest is 0,25% (I`m exagerating though with this numbers in order to be more understandable). Now, how many "poor" business have been generated during the super easy money from 2008 period? Who knows

Not all the QE is a bad plan, cause they have generated full employment in U.S. at least (4% unemployment). And the hourly cost of employess are increasing month per month. To be very basic, more employees that earn a little bit more each month/year, means more money in "play" on the system (but is the money allocated into profitable businesses?). Then, houses as expected had increased a lot and the PCE deflator reaches the 2%.

Until here everything sounds perfect. Now let`s add some more variables into the ecuation. Trump administration has started a tax cut (the money which is not collected from taxes, will need to ask from the market, so more debt for U.S.). The interest rates already sky rocketed last year , doubling. The 10 year bond yield reach the 3% already and the 2 year bond yield reaches the 2,52%. I will not discuss in this post the yield flattening

If more money will need to collect from market, it is expected that the yield will go higher. Same buyers (if not less cause the FED already stopped buying and if trade war goes wrong, even China) buying a bigger amount of debt. And then another variable, the inflation is on track and it can only go higher (never down) after 10 year of easy money. So, the bond yield are supposed to increased

If the interest can only stay as today or go higher. All business with credits (most of them) will have their interest payments increased too. And the business that do not generate a big ROI will die. The example given at the beginning, a business with a ROI of 2% will not be able to survive. Why get 2% ROI if you need to pay 3% on interests. This been said, I suppose hard times in terms of unemploymenta are coming to U.S. (although Trump is trying to impose tariffs to repatriate all the work is done out of U.S. and allocate all this people that will lost their jobs into those jobs repatriated).

So, Unemployment can be increased in U.S. in my opinion. I`m not saying will go so bad as 2007 but could risea little bit. Meanwhile the inflation stays contanst or increases due to the big easy money. And here we have the stagflation afterwards.

Sunday, March 18, 2018

GDP difference between US and Euro Area countries (19 countries)

After doing some research at oecd.stat public webpage. I figure it out that there is a difference between both countries in how the GDP is divided.

If we look at the "Gross domestic product (expenditure approach)" for both.

EURO AREA (19 countries)
Gross domestic product (expenditure approach
Final consumption expenditure
Households and Non-profit institutions serving households
Final consumption expenditure of general government
External balance of goods and services
Gross capital formation

It`s interesting to check that meanhwile euro area household consumption represents 54% of the GDP , for US, this is almost a 70%. Huge difference in my opinion.

In order to equalize a little bit the final consumption expenditure, Euro are governments needs to "expend" money and introduce consumption on the equation. 20% of GDP in euro area is due to governments while in US only 14%

Saturday, March 17, 2018

GDP Output Gap by 2017 November

If before 2015 almost all countries (from the countries listes in our analysis, in the image below) were in a negative GDP gap between the potential GDP and actual GDP. Actually some of them are already in positive GDP gap and the rest are almost at full GDP capacity. The estimation for next year (2019) is that almost all of them will reach and overpassed the potential GDP.

This is what concerns more. ¿Is it possible to maintain years on this pace before any recession pops up?

Economic Outlook No 102 - November 2017   : Output gaps: deviations of actual GDP from potential GDP as % of potential GDP

If we check the OECD countries, this year is pretended to reach our potential GDP and even pass it. The question here will be, how much years could we keep this pace?. Bets are open :)

I was thinking US was even higher that OECD, but seems they are "running" at similar pace. The stock market at leats jumps much more in US that in Europe. That`s weird.

Germany figures are very surprising. Germany remains since 2014 over the potential GDP and no recession yet started.

Spain seems that has recovered at a speedy pace

Nothing else to say :) :)

Saturday, March 10, 2018

2018 recession is coming, big drops can happen

I will move the language of this blog to english from spanish. So from now on, all my post will be posted in English, sorry for the inconvenience.

Let`s start with what most concern us. After the february 2018 sell-off and volatility rise, the stock market comes back to reality: It is risky to "dance" in it. There were plenty of years where there were no risk at all playing in the stock market casino. Everybody was capable of gaining money, just betting that the market will spike. Those year have come to an end and with it the doubts if this means that the "music" has stop at all.

Since the lowest of the SP500, it has increased an aproximatelly 400%. US tappering has ended years ago, and now the concerns are on the inflation. After pumping so much money in the system, who knows what can happen, maybe in a quarter the inflation can rise and the interest will need to increased a more lot than expected. This was the reason of the february 2018 sell off, due to a very good increase or employee hourly earnings that can bring on inflation into the system.

Apart from that, bonds were forced to stay in a superlow interest, due to the countries that were buying like a crazy, bonds of all kind. Having such big buyer, the countries did not need to pay much interest for the debt, however, who knows what can happen when the BIG buyer stops buying it (US stops buying bonds end of 2014). Less buyers in bonds, means that the countries will need to pay more to sell same quantity of bonds. Apart from that, in order to fulfill the tax cut in US, the government most probably will need to ask for more funds (so more bond selling). More bond selling and less buyer means, increasing the interest of 10Y Note or 30Y Note.

Increasing the 10Y and 30Y Note, will affect directly to consumer on their mortgages, and in order to pay for the higger monthly payments , consumer will need to reduce consumer spending. Until nowadays, the earning company figures were increasing quarter to quarter. But this bond increase hits doble side to companies, cause the companies will need to pay more for their debt (as the interest rates spikes) and the consumer spending will be reduced.

Before analizing the SP500 graphs or stoxx50. I would like to check the bond interest rate historical chart.

Since june 2017, the interest of 10Y note bond has spike from 1,4% to 2,8%. If it crosses the 3%, it will pass the 2013 figures.

Apart from that, a 3% interest on super save products (US bonds) might move the money from stock market to bonds, creating big sell in stock market and buying a lot of bonds (which will push donw the interest rate). More or less in both (stock market and bond market) the capitalization aprox. to 100 trillion $. Meanwhile the bond interest rates hikes, all system shakes.

Let look at stoxx50, monthly chart. Today I will not dig into weekly, daily or even smaller timeframes. Let`s have a look to global market trend

Each time, the macd histogram crosses from positive to negative, big events used to happen. On september 1999, I don´t remember if something special happens. But that month, the histograms crosses to negative, just before rumping up the stock market for 6 months and before the huge sell off that drops the stock market 66%. The monthly chart was again negative on september 2000

Then next time it crosses from positive to negative, was november 2007 before the big crash of 60%.

Then we have another red histogram on august 2011, in this case it was too late the monthly chart. That august the stoxx50 has already drop 13%.

The market was prepared for another sell of on december 2015, but the next month, the QE in europe was published and stock market rump up, till july 2015. We had another 30% drop.

And here we are again, the histogram was sliding down, and this february 2018 went red. So here we have our doubts. What will happen?. If I look to history, seems to be a very reliable indicator, that the market can go down.

Apart from that, there will be no QE in a short period of time, most probably interest rates will go higher in US (and europe will start tappering). The tensions on US tariffs for steel and alumium can speed up the crash too.

So if we mix all in one cage, I would say the recession, at least on stock market is close by. Maybe not next month, but very soon.

Be prepared :(