12 trillion reasons (and counting) to be mindful of your investments
Over the past year the money machine has gone a bit awry. All told, the global money supply (that is newly printed money) has increased by a whopping $12 trillion dollars. That’s a lot of fiat money floating around creating significant pressure on inflation. But probably the most disturbing thing is we haven’t really solved any of the difficult problems with all that new found money.
Looking at the markets, we seem to have come a long way since the crash of 2008. At that time, the TSX was at it’s low of 7,480, the DOW was 6,470 and the S&P 500 was at 667. Two weeks ago the DOW peaked at it’s post crash high of 13,289. Last week the S&P 500 was at it’s post crash high of 1,422. The TSX peaked back on February 29th at 14,817. The market appears to be heavily overbought and sentiment is certainly high. We need to watch the change in daily highs and if volume is declining.
The Trillion Dollar Question – Where do we go from here?
With the recent start of a downward trend in both the US and Canada, we need to pay particular attention to where we might be headed. Yesterday the DOW broke through its 50 day moving average for the first time since mid-December. The S&P 500 is touching it’s 50 day moving average right now and the TSX has been below it’s 50 day and 200 day moving average for a couple of weeks now. Are we stuck in this current downward trend and if so, what are the causes for that and what can change. Read the article.
Europe for all intents and purposes is in a recession. We have all heard and read about the problems in Greece. The solutions of dumping money onto a problem that has no ability to get better isn’t really an answer. Over the past 12 months the ECB expanded its balance sheet by 54 percent. At around 30 percent of GDP that balance sheet is now the biggest among the major central banks. The ECB’s printing press is providing an ‘unlimited’ backstop for all those financial ‘assets’ that nobody in their right mind would buy with their own savings, and providing ‘unlimited’ funding for the European banks, which are now permanently in intensive care. Read the article
From there we have Spain and Italy, the next two big economies in Europe that are in trouble, both with negative GDPs. That means they are spending more than they are making. Bad situation all around. In Spain the unemployment is almost 23%, the highest in the 17-nation eurozone and when you have that many people, especially young people, out of work, it is a huge indicator of imminent problems mostly because of social unrest.
China is going through massive change both economically and politically. A good article that looks into the challenges facing the country highlights the need for deep reforms without causing serious issues in the global economy can be found here .
During the last 3 years, China has been ratcheting down its growth which of course is a direct result of a couple of things. As an export-based economy, when the biggest buyers of your products (the US and Europe) are going through the struggles they are, the effects on GDP growth are significant. In the most recent Purchasing Managers Index, China was sitting at a 48.1. Read the article Any result less than 50 represents a contraction and if that number falls below 42, a recession is typically around the corner. According to Qu Hongbin, HSBC chief economist for China, the “Growth momentum could slow down further amid a combination of sluggish export, new orders and softening domestic demand, and this calls for further easing steps,” Further easing means China’s central bank will put more money to work in the “system”.
In addition, China is on a path to a property bubble and is greatly in need of curbing that bubble. China has racked up loan growth of 87% of GDP over the last 5 years according to Fitch. This compares to less than 50% in Japan leading up to the Nikkei bubble and the US before the subprime disaster.
In the US, troubles are far from over. Certainly the recent climb in both the DOW and the S&P 500 are positive items but at what point does the economy stop growing. Unemployment in the US, although improving, is still at significant levels. The housing market remains flat and some would say even prone to further downward trends. With interest rates at near zero, any money that people are trying to save for the future is not growing at all and the risk of inflation is huge given all the money that is already printed and in circulation.
On top of that we are just heading into first quarter earnings season. Alcoa kicks off that season after markets close today. Attention should not only be paid to current results but future guidance as well. If the US economy is stalling out, future earnings are going to be impacted and subsequently there may be significant profit-taking in the short term. Read the article
For the self-directed investor
If we look back at last year, we were in a very similar position. The markets topped out in March and then double-topped in April. From there it was a steady downward trend until mid-October. Are we about to experience the same scenario this year? The chart below certainly seems to indicate that we may.
In our April newsletter, we focused on market trend analysis and why markets move up or down rather drastically at points in time. (You can get the newsletter for as little as $250 per year).
The main point is to be mindful of where your money is invested. If the markets are heading into a correction, it is certainly better to wait on the sidelines perhaps missing out on a few dollars in profit but protect and preserving your capital. If the companies you are tracking have been high, don’t go looking for something else especially if you don’t know anything about that stock or the sector it is in. Patience is one of the hardest things for an investor to practice. Waiting out the earnings season at least for the these first few weeks may save you weeks of saying “if only”.
This entry was posted on Tuesday, April 10th, 2012 at 3:54 pm and is filed under Self Directed Investing, Stock Market News, Wealth Management . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.