This is the third part to the ‘cheap money’ crisis.
I talked about what cheap money is here.
I gave couple ideas of how to take advantage of cheap money here.
And now, I’m going to show you several indicators we can look for to help us determine when this whole thing is going to unravel.
If we break up the three categories of people, companies and governments, we can look at indicators for each.
So… first… people. What indicator will show us that consumer debt is in trouble?
Ultimately, we’ll begin to see loan delinquencies. Whether it’s auto loans, student loans or just regular credit card payments – people will stop paying back their debts. This is a somewhat hard statistic to track because the Fed usually reports this quarterly and private institutions often only report their specific industry.
However, we can look at consumer credit and where it is heading.It’s heading up. Way up. People are borrowing more and more money to purchase all sorts of things. You might be thinking, “Great, the economy is working!” In reality, all this means is that money is easier to borrow for cheaper prices, so people can buy more expensive stuff. This is obviously not an economic policy that has a long life.
There are many delinquency statistics that the Fed reports on here. There are currently no specific areas that make me alarmed, but there are several that raise my eyebrow.
Second is corporations. What indicator will show us that corporate debt is in trouble?
The easiest indicator is to look at the stock $HYG. This is an ETF of high yield bonds – better known as junk bonds.We can look at the previous link of loan delinquencies to see when/what corporations are paying back, but the true result in the market will reflect through $HYG. (There are other similar stocks out there, but I’m picking $HYG as it’s the most popular.)
If we see $HYG start to waver, or decline significantly, we know what is happening. Corporations are not paying back their loans. These are high risk loans (junk bonds), so they will be the first to fall – and will serve as a good indicator for the wider market.
Third is governments. What indicator will show us that government debt is in trouble?
This one is tough. Really tough.
The problem here is that governments can manipulate policies. Basically governments can change the rules of the game – consumers and corporations cannot.
BUT, there is one glaring indicator that I am waiting to see…
When governments start to buy equities on the stock market, then I will become extremely concerned.
Japan is already doing this. Europe is talking about doing this.
Basically, this means that governments are taking stakes in private companies. It’d be like the US Government buying shares of Apple. Conflict of interest, anyone?!
Japan is currently doing this in their country, but may start to buy US equities.
Any government buying equities on a stock exchange is essentially nationalizing the market. It would mean that the government owns a portion of the companies they are investing in.
Ok… I understand that a lot of this sounds like ‘doom and gloom.’ Honestly, it’s because there is a lot of really negative stuff going on out there.
We just have to keep in mind that the more conflict and volatility there is, the more ways we can do well. Additionally, even if you and I don’t act upon any of these issues, we can simply avoid exposure to these problems, which is almost the same as profiting.
Im a 13 year old boy and I like the stock market and find it interesting, and I was wondering if you could teach me, or recommend to me what I can do. By the way, I came to this website from your quora page.
I don’t even know how I stumbled upon your newsletter but I’m glad I did. I really like your take on everything. I’ve had a gut feeling for awhile that the economy is in serious trouble and a crash is looming but I don’t know enough to know what to look out for or how best to position myself to profit from it….or at least not lose my ass on it. Thanks for the insight and for not trying to push some get rich stock picking scheme like so many others. I enjoy your postings.
I find it counter intuitive that you have put “goverment buying equity on stock market” in category of negative signals. Corporations pay taxes, so goverments have share of corporations anyway in a way. And there are already conflicts of interests such as case “EU antitrust charges against google” and consequent threats to respond in kind from US senat. So i dont see what’s wrong with conflicts of interests
Perhaps we have a fundamental disagreement?
You are proposing that nationalizing companies is perfectly sensible?
If a government owns a stake in a company (let’s use Apple for example), then the government will treat Apple differently than other companies – that’s because in order for the government position in the company to prosper, the government needs to set policy to allow Apple to succeed. This is a total conflict.
Now, if you are in favor of this… then you should look what nationalization of companies has done. Check out Argentina, Venezuela. Cuba, and various other economic failures.
I may in the future recommend some stock ideas… but the bottom line is that everyone will have a different ‘gut feeling.’ Usually these feelings are right, so I hope if you find anything you agree with, it’ll benefit you.
No, we dont have fundamental disagreement. I understand that nationalization of companies is bad. What I dont understand is why you have mentioned only nationalization and not inflation or dept-to-GDP ration or something. What’s so special about nationalization?
Inflation and debt-to-GDP versus nationalization are completely different issues. The first two are statistics that are somewhat controlled by a government. The second (nationalization) is a process in which a government takes over a company (and tries to run it their way, which means they drive it into the ground).
Cody, I’m non-American. How do I buy US stocks or ETF’s or commodities like gold, silver, oil etc? I’ve actually downloaded the Plus 500 portal which seemingly allows me to invest in what I mentioned but I’m hearing negative stuff about this company and am doubting if I could even withdraw any money with them (I’ve yet to invest any real money to date). Can you recommend any trading/investment portals or brokers I can use?