One of the great challenges of trading and investing is recognizing the economic environment that you are in and preparing accordingly. For the past few years, my thesis is the United States is caught in a debt trap.
The national debt is $27.8 trillion. A $27.8 trillion debt has to be viewed in relation to the overall size of the economy. The problem as I see it is that pre-pandemic we had a 21 trillion dollar economy. This simply means that the debt is larger than our economy. The debt to GDP ratio is around 130%. It was 105% pre-pandemic.
Harvard economists Kenneth Rogoff and Carmen Reinhart did intense research going back 800 years, looking at debt levels of countries that went broke or defaulted. Rogoff and Reinhart concluded that the danger zone is a debt to GDP ratio of 90%. Their conclusion is that once the debt to GDP ratio reaches 90% debt inhibits growth from occurring. With the United States Debt to GDP ratio at 130% we are heading for a sovereign debt crisis.
Not trying to dramatic here, but just consider the following U.S. Treasury news event from just a few weeks ago, where incoming Treasury Secretary Janet Yellen said the following:
“Neither the president-elect, nor I, propose this relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is ACT BIG…I believe the benefits will far outweigh the costs, especially if we care about helping people who have been struggling for a very long time.”
What do you think “ACT BIG” means? We have 40% more money created in just the last year according to the M2 money supply figures.
You now have a new President, and Treasury Secretary, pushing for the second largest monetary stimulus package in history. These two individuals are explicitly saying that unless we PRINT there will be severe consequences.
Have you noticed all Wall Street has to do is scream more stimulus over the last year and the market rallies? When did a market correction become something to be feared?
The problem with a debt trap is that the Fed is caught between a rock and a hard place. Debt is growing while economic growth is slowing. The result is bubbles as far as the eye can see.
The U.S. Treasury Market which is the price of interest rates has been in a 40-year bull market. Interest rates are being artificially pushed down to close to the zero level. What happens if all of this money printing forces inflation to return? Where do those trillions of dollars run for safety? The 40-year tailwind of declining interest rates that has lifted the price of all assets is at an end.
Tax cuts can’t bring us out of this slumber, neither can structural changes to the economy. Debt is growing while growth is slowing. The explosion will come in the form of asset bubbles bursting and valuations forced to recalibrate at levels more common with historical norms.
Sounds gloomy doesn’t it? Not necessarily…
Let’s look at the charts.
One of the best valuation yardsticks that is monitored by the Federal Reserve Bank is the Warren Buffett indicator. You can find a previous article about this indicator here.
The Buffett Indicator is the ratio of total US stock market valuation to GDP.
- Aggregate US Market Value: $49.5T
- Curent Quarter Annualized GDP (Estimate): $21.7T
- Buffett Indicator: $48.7T ÷ $21.7T = 228%
When we look at this number historically its paints a chart worthy of caution for any trader who has ever experienced a bear market. That rules out most of the Robinhood traders and the Wall Street Bets Reddit crowd.
The Buffet Indicator is 35% higher than the peak made during the dotcom bubble of 2000. When that bubble burst the stock market quickly sold off 40%+ very quickly. Today if we were to sell off 40% we would simply have the Buffet Inidicator reach parity with its 2000 valuation! In 1999, former Fed Chair Paul Volcker told an audience, “The fate of the world economy is now totally dependent on the growth of the U.S. economy, which is dependent on the stock market, whose growth is dependent on about 50 stocks, half of which have never reported any earnings.” Volcker saw the bubble.
In 1955 William McChesney Martin, as Fed Chairman said to the financiers of his time who were not keen on him raising interest rates and reducing economic stimulus. “The Federal Reserve, as one writer put it, after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was warming up.”
Todays Federal Reserve continues to wait hand and foot on Wall Street delivering more and more stimulus to the punch bowl in the hopes that judgment day will never arrive, and the party will never end.
For those of you who are more statistically inclined we are currently 2.9 standard deviations away from the historical norm as measured by Wall Street Legend Warren Buffett. As far as historical valuations are concerned, we are clearly in the OZONE NO MAN’s LAND. With 40% more money having been created in the last year all valuation metrics have been massively distorted.
Might this explain why Mr. Buffett is now looking to purchase multinational companies outside of the United States?
The Buffett indicator is probably the best all around indicator for monitoring bubbles. The challenge for traders is that bubbles can increase several hundred percent before they actually burst.
Typically, a bubble is created by a surge in asset prices that is driven by exuberant market behavior. During a bubble, assets typically trade at a price, or within a price range, that greatly exceeds the asset’s intrinsic value (the price does not align with the fundamentals of the asset). Simply put, economic bubbles often occur when too much money is chasing too few assets, causing both good assets and bad assets to appreciate excessively beyond their fundamentals to an unsustainable level. Trading legend George Soros, defined bubbles as asset valuations based upon beliefs that are rooted in misconceptions.
This economic environment is a godsend for traders and an absolute nightmare for long term investors. As long as the Fed and U.S. Treasury continues to fill up the stimulus punch bowl the stock market party rages forward. How long can it last? Weeks? Months? Years?
The above is the fundamental case for asset valuation. It is also known as the “Wall of Worry” that every bull market must climb. If new stimulus is being added, traders celebrate higher prices with glee, euphoria, and optimism. The problem with this approach is that the most basic economic question is being ignored.
That being, is the stock market becoming more valuable or is the currency being debased?
I will put my chips on the perspective that we are witnessing currency debasement at levels that were unimaginable just a few years ago. The Bubbles and Bubbleonians are everywhere!
So, what’s a trader to do?
The best advice that I can provide is to learn to trust the predictive blue line in the VantagePoint Software for trend forecast for the assets that you are trading and investing in.
Here is why this is so powerful…..
Here is a plain chart of the S&P 500. Any investor/trader can find a chart like this on any of the free numerous charting services online.
Now compare what Vantagepoint Power Traders saw during this exact same time frame.
These charts are from January through March 2020 before the economic lockdowns were announced. Observe how the predictive blue line in the Vantagepoint software forewarned of the coming 1300-point selloff in the S&P 500 Index.
Here are some more Vantagepoint charts of the stock Indexes that have kept traders on the right side of the trend every step of the way.
This is the power of artificial intelligence in action.
This bubble will burst. It may take months, years, or decades. Until it does there will be plenty of short-term swing trading opportunity for traders armed with the right information at the right time.
As you know, the real education in trading always lies in learning from the losers. Most humans have a really hard time learning from bad experiences.
The ego gets in the way each and every time.
This is what makes Artificial Intelligence so powerful and unique.
Machine Learning is designed to learn from experience and make the best statistically relevant decision moving forward. A.I. outperforms humanoid analysis hands down every time.
We live in very exciting times.
What hurts can instruct us.
Mistakes are financially costly but for machine learning, it is the pathway to mastery and excellence. The real education in trading always lies in learning from the losers.
Most humans have a really hard time learning from bad experiences. The ego gets in the way, each and every time.
Since artificial intelligence has beaten humans in Poker, Chess, Jeopardy and Go! do you really think trading is any different?
Why should trading be any different?
I invite you to learn how to forecast Bitcoin at our Next Live Training.
It’s not magic. It’s machine learning.
Make it count.
DISCLAIMER: STOCKS, FUTURES, OPTIONS, ETFs AND CURRENCY TRADING ALL HAVE LARGE POTENTIAL REWARDS, BUT THEY ALSO HAVE LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THESE MARKETS. DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS ARTICLE AND WEBSITE IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES, OPTIONS, STOCKS, OR CURRENCIES. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED ON THIS ARTICLE OR WEBSITE. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.