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Has The Market Trend Shifted From Bull To Bear?
Has The Market Trend Shifted From Bull To Bear?
Emotions are running high for the investment community in the wake of recent market volatility. Up until August, we had been in the third longest period in market history without a 10% correction. Since then, stock indices sold off hard, only to bounce once again over the past two weeks of trading.
As you’d guess, the generic punditry has been out in full force. A good number of very well respected technicians are not mincing words: We’ve entered a bear market. No equivocation.
On the other side of the equation are plenty proclaiming a successful retest of the lows has been made, and now away we go. Earnings will be better next year. No recession in sight. Just another dip to be bought, right?
And certainly the truth is….No one knows. Especially in today’s world where global central banks can concoct further QE/monetary schemes at the drop of a hat. Let’s face it, at this point the global central banks are all in. In fact, beyond all in. Without question, the US Fed knows that if equities fall, they lose the high end consumer. (Wal-Mart shoppers have already long been lost)
I thought in this discussion I’d run through a number of indicators I’ve been watching that will hopefully help answer the key question – was the recent market turbulence a sign of a short-term correction, or something larger? We know there’s no single Holy Grail metric in this wonderful world, but I tend to think of indicators as mosaic pieces. If we can get enough pieces in the right place, we have a good shot at actually deciphering the “picture” of what is to come. And for that, we can only really rely on historical experience.
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As Goes The Credit Market, So Goes The World
As Goes The Credit Market, So Goes The World
During the prior economic cycle of 2003-2007, one question I asked again and again was: Is the US running on a business cycle or a credit cycle?
That question was prompted by a series of data I have tracked for decades; data that tells a very important story about the character of the US economy. Specifically, that data series is the relationship of total US Credit Market Debt relative to US GDP.
Let’s put this in simple English. What is total US Credit Market Debt? It’s an approximation for total debt in the US economy at any point in time. It’s the sum total of US Government debt, corporate debt, household debt, state and local municipal debt, financial sector and non-corporate business debt outstanding. It’s a good representation of the dollar amount of leverage in the economy.
GDP is simply the sum total of the goods and services we produce as a nation.
So the relationship I like to look at is how financial leverage in the economy changes over time relative to the growth of the actual economy itself. Doing so reveals an important long-term trend. From the official inception of this series in the early 1950’s until the early 1980’s, growth in this representation of systemic leverage in the US grew at a moderate pace point to point. But things blasted off in the early 1980’s as the baby boom generation came of age. I find two important demographic developments help explain this change.
First, there’s an old saying on Wall Street: People don’t repeat the mistakes of their parents. Instead, they repeat the mistakes of their grandparents. From the early 1950’s through the early 1980’s, the generation that lived through the Great Depression was largely alive and well, and able to “tell” their stories.
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