Six Charts Worth Remembering

third wave finance - reminder

1) Total Private and Public Debt as a % of GDP

Why? – Extremely high debt burdens indicate GDP growth is constrained in these economies until debt levels are reduced.

2) Velocity of Money

Why? — Falling velocity of money indicates high debt levels include a significant amount of unproductive and/or counterproductive debt (defined by the post-Keynesian economist Hyman Minsky, as debt that does not create an income stream to repay the principal and interest of the debt).

3) History of Fed Influence on Interest Rates

https://www.mises.ca/wp-content/uploads/2011/12/O4.png?38f567

Why? — As short-term interest rates are near zero, the primary and most effective monetary policy tool (Fed influence on interest rates), which has been used to temporarily boost economic growth, can now only be used to restrict growth (i.e. Fed influence to move rates higher).  Currently, the primary and most effective monetary policy tool available can not be used to temporarily boost economic growth, as short-term interest rates are near zero.  

Interest rates are also trapped near zero until unproductive and counterproductive debt levels are reduced.  Any significant attempt to move interest rates up forces a larger percentage of household income to be spent on interest repayment causing a downforce on the broader economy.

4) 7-Year Asset Class Return Outlook

http://www.cmgwealth.com/wp-content/uploads/2016/07/7.8.14.png

Why? — High equity valuations indicate reduced long-term return expectation for stocks. Low interest rates indicate reduced long-term return expectation for bonds.

5) 10-Year S&P 500 Return Outlook and Accurate Valuation Methods

wmc140210a(Chart from John Hussman’s Weekly Market Comment on February 10, 2014 entitled Double Trouble: http://www.hussmanfunds.com/wmc/wmc140210.htm)

Why? — High equity market valuations indicate that the long-term return potential for U.S. stocks is significantly reduced (based on several valuation methods that correlate well with actual returns).

6) 12-Year Return Outlook for a Traditional Stock and Bond Portfolio

conventional stock, bond, treasury bill portfolio valuation - 5-23-2016(Chart from John Hussman’s Weekly Market Comment on May 23, 2016 entitled The Coming Fed-Induced Pension Bust: http://www.hussmanfunds.com/wmc/wmc140210.htm)

Why? — High equity market valuations combined with low bond yields indicate that the long-term return potential for a traditional stock and bond portfolio (60% S&P 500, 30% Treasury Bonds, 10% Treasury Bills) is significantly reduced.



 

Remember: Traditional stock and bond investments, although they are much more commonly seen, are not the only options available to investors.  Some other strategies include absolute return currency, duration-oriented unconstrained bond, managed futures, long/short equity, hedged equity, and market neutral, among many others.

 




 

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