Great macro slides by David Rosenberg

I wanted to highlight these great macro slides by David Rosenberg of Gluskin Sheff via Business Insider

This presentation was posted a month ago but I am highlighting some very long term trends/processes.

The private household sector is in a deleveraging cycle that is likely to persist for many more years until debts return to pre-bubble era levels and the result is a tremendous drag on growth. A generational process of increasing risk-taking and debt-accumulation has come to an end for at least a decade. Below you can see the collapse in housing prices and also the lack of credit creation.

delev1

 

A good way to figure out where we are in this deleveraging cycle is to normalize the household debt levels to put them in context. In the slide below you can see debt compared to assets and income. Both comparisons are relevant because assets reflect a ‘stocks’ type comparison and income a ‘flow’ type comparison to debt, which is itself a ‘stock’ (ie stocks to flow ratio).

 

delev1

Demographics are unfavourable for asset prices in general as baby boomers transition from their asset accumulation to asset liquidation stages of their life to fund their (underfunded) retirement. While the trend will almost certainly dampen asset prices in general, there will be themes that are winners (income and dividend related plays come to mind) and losers.

demographics1

In a private sector deleveraging cycle, economic cycles are shaped in a large part due to fiscal stimulus, monetary intervention and exogenous events/announcements because the government sector is attempting to make up for a lack of demand from the private sector deleveraging and policymakers are trying to influence market expectations.

qe1

The timing of the most recent intervention announcing ‘unlimited’ Quantitative Easing is very ill-timed. Rosenberg mentions that this is done at a time when inflation expectations are high, and he is correct. Inflation expectations also follow the business cycle, so Bernanke effectively made this announcement while the business cycle was underway and maturing vs earlier announcements that were made nearing the trough of the business cycle, supporting asset prices when it was needed. My guess is the Fed is worried about unemployment levels and had to act to try ameliorate the situation. Will the ‘unlimited QE’ announcement mark the high in this equity cycle? Only time will tell….

qe2

This slide is not from the David Rosenberg presentation but I thought I would turn the discussion to home. Canada is the last remaining developed country to start private household deleveraging. Is this time different? Or are we just 3-4 years behind the deleveraging process of other developed nations set to go through the same process. Hopefully the rest of the world recovers and we can use our exports to make up the gap between potential and actual growth instead of levearging up our public sector to counteract the loss of growth, like Japan did for much of its period of stagnation until recently. Unfortunately I think even this optimistic scenario would be several years away.

canadadebt

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Visualizing DeMark indicators in Matlab

The intrigue of a friend and the MTA article of James Brodie led me to a closer examination of the profitablility of DeMark counts

I can’t believe how easy it has gotten to load data from yahoo into matlab and run tests. Choosing from daily, weekly or monthly data sources allows for a multiple time frame look at the profitability of DeMark. I won’t reveal any secrets (stats) in this post, but simply post the visualizations I was able to create and some thoughts on further testing. Below you can see TDST (Tom DeMark Setup Trend) initiation point (for a buy this would be C[] > C[-4] AND C[-1] C[-4]. It certainly marks some interesting points in the market.

Here we can picture the full TD sequential setup with its countup:

demark

Source: Impressive Signals from DeMark

In my own analysis you can visually see where the initiation and profit taking points are for the Weekly and Monthly time frames:

Weekly DeMark:
Weeklies

Monthly DeMark:
Monthlies

Some additional thoughts:
– How sensitive is the whole system to the bar count in the TD Price Flip?
– Should we store all counts and use PercentRank to optimize the target profit taking level instead of relying on 9’s and 13’s?
– Test different thresholds for Close > CLose[-4] rule for the count. Why 4 bars? Why not greater than previous lows or lower than previous highs?
– Instead of Daily/Weekly/Monthly multiple time frame analysis why not use Kase Synthetic Rolling bars to test various loopbacks?

Unfortunately we only have so much time to test, but it would be interesting to see the results from tests likes these

4 more years….

Barack Obama was elected to his second term last night. I was a bit relieved just because I thought Romney’s pro-austerity stance puts the whole country at risk since the private household sector is in an ongoing deleveraging, and both the government and households can’t cut back at the same time without a serious reduction in growth. Who knows what promises he would have followed through on…

ObamaProbably a far more important leadership change that currently not as followed in the media is the change in China. Watch closely as there could many repercussions to this change…..

China1China’s political process 1

China’s political process 2

On the Brink of Global Recession?

Interesting post and graphics by Dwaine Van Vuuren over at FinancialSense:

Global Recession?

“The Global Economy is on the brink of a recession with 58% of 29 OECD countries experiencing business cycle contractions. The chart below shows OECD defined global contractions (grey shaded areas) together with the percentage of 29 OECD member countries experiencing slowdowns. It is evident that whenever 50% or more of countries enter contraction (red dotted line) that the odds of global recession are very high.

…..

The conclusion is that the world economies are in a precarious state but many are making soft landings and the % of countries in recession seems to have peaked. There is cause for concern for contagion to the U.S which means we must watch world economy status and the U.S recession models from our Recession Forecast Ensemble even closer for faintest signs of weakness. A fall into recession in the U.S is likely to be a very rapid one if it occurs against the current world backdrop. Getting out the stock market too soon can be very costly, as has been the case over the last 13 months since ECRI’s first recession call. For this reason we are not hitting any panic buttons on our side just yet.”

The big question is whether or not the world economies are bottoming out or if this is only the beginning. The best phase of the business cycle to invest is when leading indicators are bottoming out, as pictured in the framework below by Wolfe Trahan. Will a shock derail this bottom? Or will we experience a global recovery finally? Only time will tell, but I would be watching cues from the Shanghai Composite, Emerging market relative strength and base metals.

lei framework

Source: Wolfe Trahan

Pierre Poilievre – Economic Freedom Speech

Pierre Poilievre – Economic Freedom Speech

Interesting speech from a Canadian MP. While it is true that the Canadian government has its finances in order, relatively speaking, it will be interesting to see how they step in once the private household sector begins the much anticipated de-leveraging process. Who will step in to offset the previous demand created through the debt-financed spending spree? The government? The corporate sector? We shall see….more on this to come….