1550 Here We Come...
Right Back Where We Started From
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Al Jolson might have made a great stock market analyst if he wasn't such a great singer and performer. As the title suggests, it's 2000 and 2007 all over again. While the S&P 500 Index once again reaches the all-time high level of the mid-1500s, I'm sure we're all asking ourselves what's going to happen this time. After all, it was cliff-time the last two times. What about this time?
In 2000 stock valuations were overextended, and in 2007 home mortgages were. One can certainly claim this time sovereign debt and deficits are overextended. But of the three, it would seem that from a perspective that considers the potential duration of over extendedness; sovereign debt and deficits might win the gold. For instance, consider Japan, who I believe is one of the canaries in the coal mine on this issue. Over the course of two decades, Japan has combatted its persistent deflation by steadily increasing its sovereign debt load until it now has a 230% debt/GDP ratio, far exceeding the roughly 100% debt/GDP of the U.S. (One might argue that the ratio for the U.S. is much higher if you factor in all of its unfunded liabilities, but much of those liabilities are future promises. Actual sovereign debt, on the other hand, is here and now.)
Much of the money Japan now borrows is needed to service its debt. That's obviously problematic, and as that percentage increases, Japan moves closer to its endpoint in regard to debt sustainability. In addition, Rogoff and Reinhart have shown that any debt/GDP ratio above 90% begins to stymie growth. So any developing growth potential for Japan is hindered by the debt committed to stimulate the growth. This is certainly an ominous conundrum for Japan. But even as we consider Japan's precarious position, Japan continues to avoid any major fall-out in its bond market; and just recently when Prime Minister Shinzo Abe announced limitless money creation as a means to combat low growth, the Nikkei Index surged.
Please allow me to pause briefly and make a point – I am not condoning what I believe to be reckless borrowing by nations, and am in no way suggesting there will not be negative fall-out. I am instead suggesting that we do not know how long this practice can continue without repercussions and that perhaps it may do so longer than any of us can imagine. On the other hand, global bond markets could erupt tomorrow. Only time will tell. As you will see, I recommend looking at charts for answers.
One thing is certain. There will be negative spillover effects if Japan finally hits the wall, since Japan's economy is so large. There were negative effects when Greece had its problems, and Japan's economy dwarfs Greece's. But since no one can guarantee when Japan's time will run out, or when the U.S. may hit its wall, I recommend relying on charts to confirm negative developments. That's the key point I'm making.
Right now charts remain bullish. I realize that divergences are present. I've covered many of them in the past. I also know about a rising wedge interpretation for the S&P and Dow Industrials charts. But divergences have been ground up like chuck meat for three years now, and the rising wedge will be erased if there's another significant push upward. Meanwhile, trend channel support remains, and unlike the supposition offered from divergences or potential rising wedges, the trend channel support levels appear confirmed and have definitive parameters. The chart below is a daily bar chart of the S&P 500 Index. All-time highs are depicted by the thick green horizontal line that rests just above the market in the mid-1500 area. The rising red perpendicular lines are the bullish trend channels of varying degree that remain intact.
If Japan is any indication, maybe U.S. stocks can continue higher if debts and deficits are the major concern. Granted, there are other considerations in determining acceptable stock valuations, such as corporate earnings, manufacturing data, etc…; and I don't mean to diminish their significance in shorter term analysis. But from a secular perspective, there is no issue right now that has equal significance to global debt levels. Everything else pales in comparison. In other words, the major trend for markets is being set by global levels of debt, the responses to that debt by global central banks, and by the public's perceptions and reactions to all of this.
I'd like to finish by offering one of my current themes: The fundamental data for markets are now so complex and unprecedented, that it's extremely difficult to gauge the market through the inferences rendered by their suggestions. On the other hand, chart observations can be both objective in nature and very telling. For instance, I believe trend channel support levels are now clearly delineated. I'll watch for any breaches of those support levels and become concerned about any future confirmed support failures. But if support levels remain intact, this stock market rally may continue in spite of the world's enormous debt, particularly if we continue to see improvement in economic readings.
In summary, I believe there will eventually be a day of reckoning for this tremendous amount of global debt; but when considering stock market levels, I'm looking at charts to assess that day's arrival since economic data is shrouded by a cloud of unprecedented economic conditions and unprecedented global policy responses.
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