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NOTABLE! The Coming Recession (2019-2020?)

MJ DeMarco

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I'm actually quite surprised the market still responds positvely to any positive trade comments from Pres Trump... 100% of the time they've been head fakes thus far, like the boy who cried wolf and it still works to herd the crowd into action.
 
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JScott

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For anyone interested, I wrote this post on FB today, as a follow-up to my post from last week (which is above)...

NEGATIVE INTEREST RATES

I received a lot of great feedback for my economic post last week, but it generated a lot of questions related to negative interest rates, as that concept has been all over the news the past few weeks. So today, I’m going to tackle the basics of negative interest rates, why they might happen, and why they are very likely to be bad for our economy long-term…

In order to make things simple, this post is going to be a bit long. Sorry about that, but people seem to appreciate when I start with the basics (that's how I like to learn as well!).

So, let’s start with a quick primer on interest rates:

The US Federal Reserve (the Fed) controls interest rates, and they raise/lower rates in order to impact people’s spending and saving. When the economy is struggling, the Fed will lower interest rates – this means that you get less benefit from saving money, more benefit from borrowing money (since interest rates are lower), and encourages Americans to SPEND MORE. This helps our economy. On the other side of things, when the economy is too strong, we start to see inflation (a rise in prices) based on all the spending Americans are doing. So, the Fed increases rates – this encourages savings (savings accounts pay more interest), discourage borrowing (rates are higher), and Americans start to SPEND LESS.

Long story short, lower rates spur the economy; higher rates slow the economy. When entering a recession, the Fed will lower rates to get us out of it.

One important historical economic data point is that during a typical recession, the Fed will have to lower rates by an average of about 5 points to spur the economy out of the recession. But, what happens when rates are lower than 5% when the economic downturn starts? This is the issue that many countries are facing today – rates are under 5%, economies are softening, and governments are forced to lower rates even past the 0% mark in order to try to spur economic growth.

In the US, rates are currently at around 2%. What happens if -- when the downturn comes -- the Fed has to lower rates below 0% to get us out of it? I’m not saying that this will definitely happen in the US, but it certainly could.

So, what does a negative interest rate mean and how could it affect our economy?

I'm assuming we all inherently understand how rates work – when you borrow money, you pay back the amount you borrow plus a little more. That “little more” is based on the interest rate – the lower the rate, the less the “little more” is that you need to pay back. When the interest rate is 0%, you pay back $1 for every $1 you borrow, and there is no “little more” that you have to pay back (no interest!).
But, with negative interest rates, not only does the borrower not have to pay back a “little more,” but the borrower actually pays back LESS than what they borrowed (ignoring fees and such). For example, if I borrow $100 at a negative interest rate, I may only have to pay back the lender $98 or $99 instead of the full $100!

You might be asking, why would a lender loan money in a situation where they aren’t even going to get the full amount back??? The answer is that the lender may not have a better option. If they put that money in the bank, and the bank is paying negative interest, that means that the bank isn’t going to return the full amount of the deposit (instead of paying interest on your savings, negative rates means you’re paying the bank to hold your money). Likewsie with bonds and other "safe" investments.

So, a lender may be happier loaning money at negative .5% than putting that money in a bank account or bonds earning negative .75%. They lose less money that way!

So far, that doesn’t sound too bad… Negative rates helps us as investors because not only do we borrow money cheaply, but we don’t even have to pay back the full amount! But, in reality, it’s not all good. Successful investors tend to have a lot of cash, and they need some place to put that cash. As real estate investors, if we want to take advantage of borrowing at negative interest rates, we need to put our cash somewhere other than the houses we’re buying. But, just like we’re getting negative interest on the money we’re borrowing, many investments are paying negative interest as well. It costs money to keep our cash in the bank, it costs money to put that cash in government or corporate bonds, it costs money to lend, etc.

And while there will still be investments that pay returns above 0%, we may start to see returns that are lower than the risk profile of those investments suggest they should be. In other words, we're not getting the returns we need on those investments to cover the risk of those investments. Meaning that overall, on average, we're losing money on those other investments. Just like with safer negative interest investments

For poorer people, negative rates are even worse. They are seeing their savings eroded away, and the small negative interest they are paying to the bank could be enough to drive them to insolvency. One big effect of very low or negative interest rates is that it drives the inequality gap, hurting poorer people more than it hurts wealthier people. Low rates have already exacerbated the wealth gap over the past decade – that would get much, much worse with negative rates.

Next, think about how negative rates would affect big companies in the US? Berkshire Hathaway has over $100B in cash, Apple has over $200B and Facebook has about $50B – how do you think their balance sheets will look when they are losing money on those cash reserves quarter over quarter. And when corporate balance sheets get ugly, our equities markets (i.e., the stock market) starts to get ugly. Negative interest rates could have a massive impact on equity/stock prices.

In addition, negative interest rates run the risk of destroying bank profits. Sure, they get to pay back less than you deposit, but people are much less likely to deposit money at negative interest rates, and more likely to stash it under their mattress or in a hole in their back yard. Negative interest rates are typically very bad for banks, which can cause issues that then trickle into the broader economy. For anyone who understands the idea of “time value of money,” where a dollar today is worth more than a dollar tomorrow, this entire monetary concept will be flipped – a dollar tomorrow will be worth more than a dollar today!

Next, negative interest rates in one country encourages citizens of that country to ship their money to another country or another currency that might be paying a bit more (or is less negative). That hurts the local currency and the local economy. This is part of the reason why the US dollar is so strong right now – lots of foreign investors bringing money into the US and investing in our currency, as our rates are higher than some other places in the world. Without getting too complicated, this is part of the reason why we’ve seen an inversion in the yield curve recently – when a lot of money is flowing into bonds, the “yield” on those bonds will drop (with bonds, more demand means a lower return). With many other countries dropping rates, and in some cases already in negative rate territory, a lot of foreign money is flowing into US government bonds, pushing yields down.

Speaking of other countries, we’re already seeing negative rates in several places. Japan went negative on their rates in 2016, and their economy has been sluggish since (and well before). Part of Europe and Denmark are also in negative territory on their rates. Even closer to home, companies like Apple, McDonalds and Pepsi are already issuing bonds/debt at negative rates, meaning that if you loan these companies money by buying their bonds, you’ll get less back than you invested when the bond expires! But, investors are still happy to put their money there, as they consider it safer than other investments that might pay a little more (or cost a little less).

To put things into perspective, there are a total of about $115 trillion in bonds around the world, both companies and governments. As of right now, $15 trillion of those bonds are paying negative yields! That’s a huge percentage. If the US decides to go negative, that total could skyrocket (about 45% of all non-US bonds are negative yielding right now).

As for how negative interest rates would ultimately affect the economy long-term, the answer is that nobody has any idea. Most economists speculate that things won’t end well, but considering it’s uncharted territory, who knows.
 

Kevin88660

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I'm actually quite surprised the market still responds positvely to any positive trade comments from Pres Trump... 100% of the time they've been head fakes thus far, like the boy who cried wolf and it still works to herd the crowd into action.
Very good trading opportunities. Keep playing until it stops. Buy pessimism and sell hope. :)
 

MJ DeMarco

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For anyone interested, I wrote this post on FB today, as a follow-up to my post from last week (which is above)...

NEGATIVE INTEREST RATES

I received a lot of great feedback for my economic post last week, but it generated a lot of questions related to negative interest rates, as that concept has been all over the news the past few weeks. So today, I’m going to tackle the basics of negative interest rates, why they might happen, and why they are very likely to be bad for our economy long-term…

In order to make things simple, this post is going to be a bit long. Sorry about that, but people seem to appreciate when I start with the basics (that's how I like to learn as well!).

So, let’s start with a quick primer on interest rates:

The US Federal Reserve (the Fed) controls interest rates, and they raise/lower rates in order to impact people’s spending and saving. When the economy is struggling, the Fed will lower interest rates – this means that you get less benefit from saving money, more benefit from borrowing money (since interest rates are lower), and encourages Americans to SPEND MORE. This helps our economy. On the other side of things, when the economy is too strong, we start to see inflation (a rise in prices) based on all the spending Americans are doing. So, the Fed increases rates – this encourages savings (savings accounts pay more interest), discourage borrowing (rates are higher), and Americans start to SPEND LESS.

Long story short, lower rates spur the economy; higher rates slow the economy. When entering a recession, the Fed will lower rates to get us out of it.

One important historical economic data point is that during a typical recession, the Fed will have to lower rates by an average of about 5 points to spur the economy out of the recession. But, what happens when rates are lower than 5% when the economic downturn starts? This is the issue that many countries are facing today – rates are under 5%, economies are softening, and governments are forced to lower rates even past the 0% mark in order to try to spur economic growth.

In the US, rates are currently at around 2%. What happens if -- when the downturn comes -- the Fed has to lower rates below 0% to get us out of it? I’m not saying that this will definitely happen in the US, but it certainly could.

So, what does a negative interest rate mean and how could it affect our economy?

I'm assuming we all inherently understand how rates work – when you borrow money, you pay back the amount you borrow plus a little more. That “little more” is based on the interest rate – the lower the rate, the less the “little more” is that you need to pay back. When the interest rate is 0%, you pay back $1 for every $1 you borrow, and there is no “little more” that you have to pay back (no interest!).
But, with negative interest rates, not only does the borrower not have to pay back a “little more,” but the borrower actually pays back LESS than what they borrowed (ignoring fees and such). For example, if I borrow $100 at a negative interest rate, I may only have to pay back the lender $98 or $99 instead of the full $100!

You might be asking, why would a lender loan money in a situation where they aren’t even going to get the full amount back??? The answer is that the lender may not have a better option. If they put that money in the bank, and the bank is paying negative interest, that means that the bank isn’t going to return the full amount of the deposit (instead of paying interest on your savings, negative rates means you’re paying the bank to hold your money). Likewsie with bonds and other "safe" investments.

So, a lender may be happier loaning money at negative .5% than putting that money in a bank account or bonds earning negative .75%. They lose less money that way!

So far, that doesn’t sound too bad… Negative rates helps us as investors because not only do we borrow money cheaply, but we don’t even have to pay back the full amount! But, in reality, it’s not all good. Successful investors tend to have a lot of cash, and they need some place to put that cash. As real estate investors, if we want to take advantage of borrowing at negative interest rates, we need to put our cash somewhere other than the houses we’re buying. But, just like we’re getting negative interest on the money we’re borrowing, many investments are paying negative interest as well. It costs money to keep our cash in the bank, it costs money to put that cash in government or corporate bonds, it costs money to lend, etc.

And while there will still be investments that pay returns above 0%, we may start to see returns that are lower than the risk profile of those investments suggest they should be. In other words, we're not getting the returns we need on those investments to cover the risk of those investments. Meaning that overall, on average, we're losing money on those other investments. Just like with safer negative interest investments

For poorer people, negative rates are even worse. They are seeing their savings eroded away, and the small negative interest they are paying to the bank could be enough to drive them to insolvency. One big effect of very low or negative interest rates is that it drives the inequality gap, hurting poorer people more than it hurts wealthier people. Low rates have already exacerbated the wealth gap over the past decade – that would get much, much worse with negative rates.

Next, think about how negative rates would affect big companies in the US? Berkshire Hathaway has over $100B in cash, Apple has over $200B and Facebook has about $50B – how do you think their balance sheets will look when they are losing money on those cash reserves quarter over quarter. And when corporate balance sheets get ugly, our equities markets (i.e., the stock market) starts to get ugly. Negative interest rates could have a massive impact on equity/stock prices.

In addition, negative interest rates run the risk of destroying bank profits. Sure, they get to pay back less than you deposit, but people are much less likely to deposit money at negative interest rates, and more likely to stash it under their mattress or in a hole in their back yard. Negative interest rates are typically very bad for banks, which can cause issues that then trickle into the broader economy. For anyone who understands the idea of “time value of money,” where a dollar today is worth more than a dollar tomorrow, this entire monetary concept will be flipped – a dollar tomorrow will be worth more than a dollar today!

Next, negative interest rates in one country encourages citizens of that country to ship their money to another country or another currency that might be paying a bit more (or is less negative). That hurts the local currency and the local economy. This is part of the reason why the US dollar is so strong right now – lots of foreign investors bringing money into the US and investing in our currency, as our rates are higher than some other places in the world. Without getting too complicated, this is part of the reason why we’ve seen an inversion in the yield curve recently – when a lot of money is flowing into bonds, the “yield” on those bonds will drop (with bonds, more demand means a lower return). With many other countries dropping rates, and in some cases already in negative rate territory, a lot of foreign money is flowing into US government bonds, pushing yields down.

Speaking of other countries, we’re already seeing negative rates in several places. Japan went negative on their rates in 2016, and their economy has been sluggish since (and well before). Part of Europe and Denmark are also in negative territory on their rates. Even closer to home, companies like Apple, McDonalds and Pepsi are already issuing bonds/debt at negative rates, meaning that if you loan these companies money by buying their bonds, you’ll get less back than you invested when the bond expires! But, investors are still happy to put their money there, as they consider it safer than other investments that might pay a little more (or cost a little less).

To put things into perspective, there are a total of about $115 trillion in bonds around the world, both companies and governments. As of right now, $15 trillion of those bonds are paying negative yields! That’s a huge percentage. If the US decides to go negative, that total could skyrocket (about 45% of all non-US bonds are negative yielding right now).

As for how negative interest rates would ultimately affect the economy long-term, the answer is that nobody has any idea. Most economists speculate that things won’t end well, but considering it’s uncharted territory, who knows.
Nice write up, a must read for anyone and everyone, the kind of stuff they don’t teach you in school.
 

Leigh Farrell

Contributor
Nov 27, 2017
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For anyone interested, I wrote this post on FB today, as a follow-up to my post from last week (which is above)...

NEGATIVE INTEREST RATES

I received a lot of great feedback for my economic post last week, but it generated a lot of questions related to negative interest rates, as that concept has been all over the news the past few weeks. So today, I’m going to tackle the basics of negative interest rates, why they might happen, and why they are very likely to be bad for our economy long-term…

In order to make things simple, this post is going to be a bit long. Sorry about that, but people seem to appreciate when I start with the basics (that's how I like to learn as well!).

So, let’s start with a quick primer on interest rates:

The US Federal Reserve (the Fed) controls interest rates, and they raise/lower rates in order to impact people’s spending and saving. When the economy is struggling, the Fed will lower interest rates – this means that you get less benefit from saving money, more benefit from borrowing money (since interest rates are lower), and encourages Americans to SPEND MORE. This helps our economy. On the other side of things, when the economy is too strong, we start to see inflation (a rise in prices) based on all the spending Americans are doing. So, the Fed increases rates – this encourages savings (savings accounts pay more interest), discourage borrowing (rates are higher), and Americans start to SPEND LESS.

Long story short, lower rates spur the economy; higher rates slow the economy. When entering a recession, the Fed will lower rates to get us out of it.

One important historical economic data point is that during a typical recession, the Fed will have to lower rates by an average of about 5 points to spur the economy out of the recession. But, what happens when rates are lower than 5% when the economic downturn starts? This is the issue that many countries are facing today – rates are under 5%, economies are softening, and governments are forced to lower rates even past the 0% mark in order to try to spur economic growth.

In the US, rates are currently at around 2%. What happens if -- when the downturn comes -- the Fed has to lower rates below 0% to get us out of it? I’m not saying that this will definitely happen in the US, but it certainly could.

So, what does a negative interest rate mean and how could it affect our economy?

I'm assuming we all inherently understand how rates work – when you borrow money, you pay back the amount you borrow plus a little more. That “little more” is based on the interest rate – the lower the rate, the less the “little more” is that you need to pay back. When the interest rate is 0%, you pay back $1 for every $1 you borrow, and there is no “little more” that you have to pay back (no interest!).
But, with negative interest rates, not only does the borrower not have to pay back a “little more,” but the borrower actually pays back LESS than what they borrowed (ignoring fees and such). For example, if I borrow $100 at a negative interest rate, I may only have to pay back the lender $98 or $99 instead of the full $100!

You might be asking, why would a lender loan money in a situation where they aren’t even going to get the full amount back??? The answer is that the lender may not have a better option. If they put that money in the bank, and the bank is paying negative interest, that means that the bank isn’t going to return the full amount of the deposit (instead of paying interest on your savings, negative rates means you’re paying the bank to hold your money). Likewsie with bonds and other "safe" investments.

So, a lender may be happier loaning money at negative .5% than putting that money in a bank account or bonds earning negative .75%. They lose less money that way!

So far, that doesn’t sound too bad… Negative rates helps us as investors because not only do we borrow money cheaply, but we don’t even have to pay back the full amount! But, in reality, it’s not all good. Successful investors tend to have a lot of cash, and they need some place to put that cash. As real estate investors, if we want to take advantage of borrowing at negative interest rates, we need to put our cash somewhere other than the houses we’re buying. But, just like we’re getting negative interest on the money we’re borrowing, many investments are paying negative interest as well. It costs money to keep our cash in the bank, it costs money to put that cash in government or corporate bonds, it costs money to lend, etc.

And while there will still be investments that pay returns above 0%, we may start to see returns that are lower than the risk profile of those investments suggest they should be. In other words, we're not getting the returns we need on those investments to cover the risk of those investments. Meaning that overall, on average, we're losing money on those other investments. Just like with safer negative interest investments

For poorer people, negative rates are even worse. They are seeing their savings eroded away, and the small negative interest they are paying to the bank could be enough to drive them to insolvency. One big effect of very low or negative interest rates is that it drives the inequality gap, hurting poorer people more than it hurts wealthier people. Low rates have already exacerbated the wealth gap over the past decade – that would get much, much worse with negative rates.

Next, think about how negative rates would affect big companies in the US? Berkshire Hathaway has over $100B in cash, Apple has over $200B and Facebook has about $50B – how do you think their balance sheets will look when they are losing money on those cash reserves quarter over quarter. And when corporate balance sheets get ugly, our equities markets (i.e., the stock market) starts to get ugly. Negative interest rates could have a massive impact on equity/stock prices.

In addition, negative interest rates run the risk of destroying bank profits. Sure, they get to pay back less than you deposit, but people are much less likely to deposit money at negative interest rates, and more likely to stash it under their mattress or in a hole in their back yard. Negative interest rates are typically very bad for banks, which can cause issues that then trickle into the broader economy. For anyone who understands the idea of “time value of money,” where a dollar today is worth more than a dollar tomorrow, this entire monetary concept will be flipped – a dollar tomorrow will be worth more than a dollar today!

Next, negative interest rates in one country encourages citizens of that country to ship their money to another country or another currency that might be paying a bit more (or is less negative). That hurts the local currency and the local economy. This is part of the reason why the US dollar is so strong right now – lots of foreign investors bringing money into the US and investing in our currency, as our rates are higher than some other places in the world. Without getting too complicated, this is part of the reason why we’ve seen an inversion in the yield curve recently – when a lot of money is flowing into bonds, the “yield” on those bonds will drop (with bonds, more demand means a lower return). With many other countries dropping rates, and in some cases already in negative rate territory, a lot of foreign money is flowing into US government bonds, pushing yields down.

Speaking of other countries, we’re already seeing negative rates in several places. Japan went negative on their rates in 2016, and their economy has been sluggish since (and well before). Part of Europe and Denmark are also in negative territory on their rates. Even closer to home, companies like Apple, McDonalds and Pepsi are already issuing bonds/debt at negative rates, meaning that if you loan these companies money by buying their bonds, you’ll get less back than you invested when the bond expires! But, investors are still happy to put their money there, as they consider it safer than other investments that might pay a little more (or cost a little less).

To put things into perspective, there are a total of about $115 trillion in bonds around the world, both companies and governments. As of right now, $15 trillion of those bonds are paying negative yields! That’s a huge percentage. If the US decides to go negative, that total could skyrocket (about 45% of all non-US bonds are negative yielding right now).

As for how negative interest rates would ultimately affect the economy long-term, the answer is that nobody has any idea. Most economists speculate that things won’t end well, but considering it’s uncharted territory, who knows.
Good write up.
An alternative option that I believe some governments will deploy is to take a leaf out of the US playbook.... Quantitative easing.
The Australian fed reserve has dropped interest rates by .25% for 2 consecutive months, and the notes from the meeting indicate they'd prefer to use quant. easing rather than go with negative interest rates.
Do you think it'll be enough to pull Australia out of the per-capita recession we're in, and do you think the US will do it again to avoid recession? And most importantly, do you think it'll work if they do?
 
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JScott

JScott

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Good write up.
An alternative option that I believe some governments will deploy is to take a leaf out of the US playbook.... Quantitative easing.
The Australian fed reserve has dropped interest rates by .25% for 2 consecutive months, and the notes from the meeting indicate they'd prefer to use quant. easing rather than go with negative interest rates.
Do you think it'll be enough to pull Australia out of the per-capita recession we're in, and do you think the US will do it again to avoid recession? And most importantly, do you think it'll work if they do?
Just to start with background for those who may not be well versed in this:

When it comes to monetary policy (monetary policy being the stuff controlled by central banks), there are really only two things the central bank (this is the Fed in the US) has the ability to do:

1. Manipulate interest rates; and
2. Control the money supply.

We've talked about #1 above -- higher interest rates discourages spending and slows the economy, lower rates encourages spending and spurs the economy.

As for #2, the Fed can increase the amount of money that's injected into the system, or pull out money that's currently in the system. Putting money in the system spurs the economy, as there is more money out there to spend. Specifically, the goal is to get banks to lend more money, encouraging consumers to spend more (just like low interest rates).

The term for the Fed injecting money into the economy by buying bonds and other assets is Quantitative Easing (QE). This is the other alternative (that @Leigh Farrell was talking about above) to lowering interest rates.

This is what was done back in the 2008-2011 timeframe, when interest rates were pretty close to 0%. Now, at that point, we had lowered rates about 6% already, so there was already some stimulation going on. But, it wasn't enough, so the Fed starting flooding the market with about $3.5T. This got us out of the recession, but I think it's safe to say that our economy hasn't quite been the same since (some would argue that has nothing to do with QE, but it's likely a factor).

So, would more QE be a good alternative to negative rates?

Maybe.

Typically, QE doesn't have the same power as lowering rates, as the money is not spread across the economy as efficiently as an interest rate reduction. So, it would take a considerable amount of QE to get the same impact as an interest rate drop. That's the first thing to consider.

The other thing to consider is that QE can cause a ripple effect in other areas of the economy:

1. A flood of money into the system can cause over-spending, which drives up prices (inflation);

2. QE runs the risk of pissing off our trade partners, as it's basically just a manipulation of our currency (this is what we are -- rightfully -- upset about China doing over the past two decades). QE devalues currency (there is more of it), and when our trading partners start getting devalued currency in exchange for their exports, they don't want to export anymore. This causes a cycle that reduces the strength of our currency, and in a worst-case scenario could threaten the stability of our economy;

3. It drives up both consumer and corporate debt. With all the new, cheap money, it's easy to borrow and people/companies get themselves into more debt.

In the current economic cycle in the US, I'd be most worried about #3. Right now, our consumer and corporate debt are both at an all time high:



Personally, I think the next recession is going to be driven by -- or at least exacerbated by -- debt. And QE could backfire and create a debt bubble that creates a recession much worse than it otherwise would be.

To the OP, I don't know anything about the Australia economy, but these are some of the things I'd consider when asking whether QE would be better than negative interest rates.

Long story short, I think we're in uncharted territory for both negative rates and more QE -- both seem pretty bad, but I have no idea which one would be worse or if one would actually help us. I don't think anyone knows, but I imagine there are people much smarter than I am who could give a better answer... :)
 

andviv

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Another interesting indicator:

Insiders are cashing out big time.

 

James Fend

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From a fundamental psy perspective (as me always lol).. the public interest in 'recession' hit a DRASTIC reduction. This follows in line with everything else..

I do suspect and expect a run up and bull market to continue for at least 8+ months easily.
 
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JScott

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I do suspect and expect a run up and bull market to continue for at least 8+ months easily.
When you say "bull market," are you strictly referring to the stock market?

Because outside of equities market, there is little reason to believe we're still in bull market. At best, we've plateaued, but it more likely the slow-down has already started. GDP is down 40% in the past 18 months, manufacturing is in a recession, job creation is slowing, rates are being dropped to spur growth, the trade gap is widening, the deficit is expanding, etc.

As for the equities market, things have been pretty flat for the past year...big drops interspersed with big gains gives the illusion of trajectory, but in reality, things are pretty flat.
 

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Kid

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From a fundamental psy perspective (as me always lol).. the public interest in 'recession' hit a DRASTIC reduction. This follows in line with everything else..

I do suspect and expect a run up and bull market to continue for at least 8+ months easily.
If there are some good news or moves hidden somewhere, then Trump will do his best to play them before next election.

If there aren't any... well... then we will have election with recession-recovery as main topic.
 

Kevin88660

Bronze Contributor
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Feb 8, 2019
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My Economics professor during university days has taught me ways of investing that I still use today. I added in trading aspects of it and has enhanced the game ever since.

Everyone has their own opinion of what a cheap or expensive equity/etf is. PE, Dividend yield, price to book or whatever. On a scale of 1-10 if let us say level 6 is fair value, the trick is to buy when it is depressed, or cheap when it is at 4.5. Keep stacking in stages as it goes lower. Don’t go all in at one price and do not “wait for a lower price” because no one knows the bottom. When market begins to recover you can take partial profit because A “V” shaped recovery is rare. There is usually a complicated bottoming process for equities where you can take advantage of the rise and fall-to make trading profit. When price fell to level 2 (very cheap) it can fluctuate from level 2-4 at a high frequency for a long time. Your ROI from trading this range is likely to be higher than waiting price to go from level 2-6 which is likely to take a much longer time.

I have cashed out successfully multiple times this year and last year on FXI and TUR. I ignore U.S. market as a whole as they are insanely overpriced in my opinion and hence my method cannot work (requires limited downside potential).

Now my focus is on ARGT-Argentina ETF. My macroeconomic thesis is that Trump’s financial strategy is to create havoc in the world so that money flee to dollar denominated “safe assets”, this gives him greater room of flexibility of having his trade war without worrying too much about bursting asset bubbles at home. This will create a lot of bargain hunting investment and trading opportunity in emerging market.
 

PizzaOnTheRoof

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I just don’t see us hitting a recession by the next election unless some “event” changes the landscape.

Consumer confidence and spending is still very high and a drop in spending is the main factor in the early stages of recessions.
 

G. Wellthy

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That's a terribly simplistic (and just plain wrong) way of thinking.

Business owners run trade deficits with pretty much every vendor they do business with. Does that mean that in a business relationship the vendor has full leverage and the business owner has everything to lose?

If my supplier is selling me $100K of raw material per year and I'm not selling him anything, then I'm running a $100K trade deficit with that supplier. Are you telling me that my supplier has full leverage over me and I have everything to lose in that situation? That's ridiculous.

Remember, a trade deficit is still an equilibrium where each side is getting what it needs.

In a trade war, the country with the trade deficit is just as much at risk -- they face tariffs, inflation and embargo.

Don't believe me? Ask American farmers...

Also, keep in mind that for the past three years, China has been shoring up its bilateral trade agreements with all its other trading partners. You do realize that the US accounts for less than 15% of all of China's international trade, right?

Additionally, consider the fact that if China decided to dump all their US treasury bond holdings, they'd skyrocket rates and destroy us in one fell swoop... There's nothing we could do to hurt them as badly as they could hurt us (though they'd be hurting themselves as well, of course).

Finally, consider that China controls an obscene percentage of the world's rare earth elements. If they decided to put an embargo on the export of those elements, they'd destroy our quality of life very quickly.

Long story short, if you think the US has all the leverage, you don't have a good grasp on the nuances of our relationship with China and our dependence on them for many things economic and physical.



Except that China has (so far) had no issue securitizing that debt and selling it (or swapping it for equity) to European fund managers who are bullish on the future of China. Trump has no purview over those bad debt markets, and as long as China continues to have buyers, their banks will continue to offload bad debt to other countries.

Not to mention, China creates and controls all credit within their borders, so bad debt on their bank's balance sheets isn't going to have much internal effect short-term.



So, it's possible that he has absolutely no plan whatsoever and is just making things up day-by-day? This is what a number of his (ex-)advisors have suggested, and they would know better than anyone...



Since you've offered to make assessments, how about if you assess why we're already seeing the impact of the trade war:

If our economy is so strong, why is Trump demanding rate cuts from the Fed, with rates already hovering near 0%?

Additionally, perhaps you can assess the following:

- Despite massive tax cuts in early 2018, US GDP still came in below 3% for the year;
- GDP continues to drop, and is hovering around 2%, with 3Q19 forecasts below 2%;
- US manufacturing is in recession;
- Government is paying nearly $20B in welfare to farmers hurt by the trade war
- The deficit is likely to exceed $1T in the next fiscal year;
Rare earth miners in NA seem like really good bets these days. Like the stable oil producers that were critical to the US in the past.

I don’t know any great rare earth bets offhand. I know one geologist combing Canada for some decent bets in rare earths. Apparently rare earth metals are major gambles to find; they just show up in concentration without a whole lot of correlation to commonly available data (seismic, core samples, etc)
 

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I just don’t see us hitting a recession by the next election unless some “event” changes the landscape.

Consumer confidence and spending is still very high and a drop in spending is the main factor in the early stages of recessions.
Speaking on financial markets only, I do not worry about a recession at all because they no longer really matter since 2009 and QE.

It is more about monetary policy and market expectation on rate changes. Trump tweets and his headlines on trade wars is a close second. Third then I look at technical indicators.

The market has been screaming at us that these are the things matter.
 

G. Wellthy

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I believe in micro thinking and base setting before macro applications with "Certainty" as a priority concept. Real Estate is the base and its cash flow is based on the physical world (space). Conquering time and scale come later. This is long term thinking. One can start with an optimum investment in RE and power down the debt even in a non-cash flow environment till it does cash flow. We are all builders and searchers so this is the first productive base which can naturally be repeated. Secondly you can do the same thing in the stock market in buying only dividend stocks again prioritizing cash flow. Both can be held for infinity. If you start a business that cash flows only 2K/month it will add to the base. The synergy in all 3 (RE, Stocks, Bus.) combined with certainty in cash flow in building a long term efficient base allows speculative investment from excess cash flows. The paradox is that speculation is necessarily minimized as you grow because you move toward 100% production and learning. You also pay no tax so efficiency (output over input) is moving toward mastery. You know real work and courage when you see it.

On the maco level you are attempting to balance all the technical indicators offset by the human behavior that distort it. Speculating on timing is the game. If you can spot real value you can trade equities (capital gains). If you can spot real motivations you can use derivatives. If the overall trend is up the biggest returns are riding the wave. The macro can give you clues on how to scale more dramatically but if you miss the real learning along the way developed from the micro priority and certainty, you will inevitably crash and burn. Or in the alternative never giving back what was given in a balanced life.

Best guess today is that human behavior magnified both ways (good & bad) as the world is smaller, technical skill is toward minimizing government and increasing innovation against scarcities. Conceptually money will not buy you anything more on the micro level that you need as small will become big in influence. Macro money used to buy, control, and abuse time will collapse at an accelerating rate as real work and production cannot be bought with debased money. Leverage reverses against bad behavior. A zero based spender with real certainty and productivity in a network of reality has the best quality asset. You are conquering Time and Space.
Thanks for the time put into this answer @unicon

My company’s portfolio manager looks at real estate very similarly and it is a critical component of long term, recession resistant portfolios.

This would be more of a defensive comment than offensive strategy (which is moreso what people look for) but another way to “profit” from recessions is to be diversified out of “economic growth” as the primary driver of your portfolio.

Risk factor investing is getting hot so there should be plenty of resources available that can explain it better than me... Theres a handy introductory video on BlackRock’s risk factor fund page.

 
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JScott

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Consumer confidence and spending is still very high and a drop in spending is the main factor in the early stages of recessions.
Consumer confidence has taken a major dip as of this past month:


And consumer spending isn't the main factor in the early stages of a recession -- business investment and spending is. Historically, consumer spending is a coincident indicator; business spending is a leading indicator. And business spending has dropped off considerably the past two quarters:


3Q19 will be very telling -- in my opinion, we're unlikely to see flat numbers quarter-over-quarter; we're likely to either see a continued slow down in GDP and business investment or we'll find things picked up again over the summer.

Will also be interesting to see where the jobs numbers go from here. Unemployment is still very strong and wage growth is good, but hiring has slowed, and the 130,000 jobs created is a bit misleading given that 25,000 of those are temporary government jobs focused on census data gathering.

I think we'll have a much clearer picture of where things are headed short-term in about 6 weeks, when 3Q19 numbers are released.
 

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Do you think there is an objective way of measuring how "recession-proof" a business is? I am curious if there are any historical patterns for what industries and types of businesses do well, and which don't.

I would guess that "essentials" survive and ultra-luxury brands are not heavily impacted, but curious to see if there is any deeper analysis that you could point me towards.
 
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JScott

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Do you think there is an objective way of measuring how "recession-proof" a business is? I am curious if there are any historical patterns for what industries and types of businesses do well, and which don't.

I would guess that "essentials" survive and ultra-luxury brands are not heavily impacted, but curious to see if there is any deeper analysis that you could point me towards.
I don't know of quantitative metrics, but there are certainly some industries that are more recession-proof than others. In general, think of necessities (food, clothing, medicine, health care, senior services, etc) and vices (gambling, alcohol, unhealthy food, etc). And in the necessities category, think of the bargains (low-end housing/mobile homes, low-end grocery, etc).

Also, industries that cater to economy, such as repair businesses, tend to thrive.
 

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I can't really spend too much time into specifics as I would love to.. But

Reports and Data are LAGGING indicators. They only tell you what happened and not what is going to happen.

If you punch in a lagging indicators with the recents, it will show a "trend", but you actually cannot verify a "trend" until hindsight. Until then; any chart or any technical will float 50/50 outcome... it's all a guess.

This is the ONLY way to read a market's future with any high probability.

READING MASS EMOTIONS.
Point. Blank. Period.

The chain of events goes:
1. Emotions drive human behavior.
2. Human behaviors drives economy, markets, etc.

Throwing out numbers and data and this and that only shows the last event in that chain.

With that said; couple things here:

The Wealth Effect is very much very very very high. Consumer confidence is very high.

To say consumer confidence is lower because of what was shown in data 3 months ago tells me nothing of what is happening presently and will happen.

Q3 will show lower. This is a given. Inverted yield. Everyone is highly aware of 'recession' since its blasted in main stream news. Confidence will clearly show what happened during the last months.

But heading into Q4? Likely a different story.. By January; it will come out "better than expected", people forget very fast especially in today's times, and bull market continues.

I am not into all the terms of this and that.. In fact, I make myself not too deep into financial terms and theories and have not read a single book on trading/markets/economy/etc and economics and have absolutely no idea of any names of influencers in the space and this and that. WHY?

Because my fresh eyes see a shit ton more than anybody that's been in there and conformed within those invisible walls. Book smarts can't teach me shit about street smarts and reading people and seeing the truth in the ways things/systems actually work. Sound familiar, eh?

There are a dozen other Emotional based fundamental points I have, but again, I don't have time to write. (example: What is the general emotion of people now? Fear or Enthusiasm? It's clearly Fear, everybody and their grandmas and shoeshiner on the street has it about the economy and what happens when people fear?)

My analysis from a few posts again still stands... markets will continue to flourish, break all time highs, and continue to run up for at least the next 8+ months..

Also to note; as much as I am NOT by any means a fan of Trump, I acknowledge he plays EQ chess, while everyone else plays checkers. I would NOT under-estimate this guy.
 

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Reports and Data are LAGGING indicators. They only tell you what happened and not what is going to happen.
....
any chart or any technical will float 50/50 outcome... it's all a guess.
This is absolutely, positively 100% incorrect.

There are plenty of economic data trends that are statistically significant as a predictor or future economic health. You can do a regression analysis on any number of independent data (yield curve, GDP trends, unemployment numbers, interest rates, consumer confidence, etc) and they each have a greater than 50/50 chance of predicting future economic health.

There are plenty of academic papers out there that have done regression analysis on these economic indicators proving a correlation to economic health, so unless you want to try to argue that statistics doesn't work, there is simply no support for your statement above.

EDIT: The most obvious example here is the yield curve inversion. Do you believe that there is no predictive power (positive correlation) between a yield curve inversion and a future economic downturn? After a yield curve inversion, do you believe the chance of recession within 18 months is statistically 50/50? If so, the data most certainly disagrees.
 
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James Fend

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This is absolutely, positively 100% incorrect.

There are plenty of economic data trends that are statistically significant as a predictor or future economic health. You can do a regression analysis on any number of independent data (yield curve, GDP trends, unemployment numbers, interest rates, consumer confidence, etc) and they each have a greater than 50/50 chance of predicting future economic health.

There are plenty of academic papers out there that have done regression analysis on these economic indicators proving a correlation to economic health, so unless you want to try to argue that statistics doesn't work, there is simply no support for your statement above.

EDIT: The most obvious example here is the yield curve inversion. Do you believe that there is no predictive power (positive correlation) between a yield curve inversion and a future economic downturn? After a yield curve inversion, do you believe the chance of recession within 18 months is statistically 50/50? If so, the data most certainly disagrees.
- - - EDIT 9/17/19 - - -
I edited my post here. Yes, although I want to be transparent and stand behind my posts, both bad and good.. Looking back at this, I cringe at myself at how my opinions challenge the fine line of theory vs. personal.. a bit too close to and usually uncharacteristic of me.

Some history here; me and @JScott have always bumped heads lol. But we've always showed tremendous respect and in some ways admiration for each other's passions albeit different sides of argument. Our intentions always come from a place of good meaning.

With that said; after watching some videos of @JScott interviews - first and foremost, my gut feeling (which I place foremost and highest with people) is that he is a genuine, good dude. To me and many; I can just sense when good people are good people, and their souls carry good energy.. he is one.

Although we will likely bump heads again and many times in the future lol, we are in no way in any shape or form enemies...

With all that said; @JScott you are WRONG ABOUT EVERYTHING, and I am obviously Correct and my great record remains polished!...... jk jk... or am I? Muhahahaha....
- - - EDIT 9/17/19 - - -
 
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JScott

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Too deep in the sauce man. Too technical and too stiff.

The fact your argument is to zero in on my 50/50 statement and miss the complete big picture of what I said tells me I'm bowing out of this argument. I'll just leave this tidbit on the way out..

The problem with being a robot analyst using past data is that you CAN'T TELL WHEN.

I can say based upon trend data: humans will use virtual reality to grocery shop, electric cars will dominant the roads, earthquake will occur from San Andreas fault, a recession will occur, etc.

The problem is WHEN. The Timing.


By using past, you are two steps behind when it comes to putting any finger on a time frame other than a 50/50 guess. Evidence of this; you give super great analysis but have weak confidence in stating any predicted time frame or even a ballpark followed by a ton of disclaimers to cover.

Analogy wise, it's like giving great counter arguments, but never suggesting a solution.. yelling great business ideas, but no action plan... a sci-fi movie with impossible tech, but dates are wrong.

I say the markets will run up for another 8+ months, you easily say "I'm wrong" but what are you saying? All that deep mumbo jumbo stuff and criticism but, WHAT ARE YOU SAYING, WHAT ARE YOUR THOUGHTS & DATE & TIMEFRAMES? Are you saying the economy is in a recession now, are you saying the economy will be in a recession before 8 months?

Because again, your methodology is a ultimately a 50/50 guess on Timing.. that's why I don't know what you're saying, because essentially you aren't saying anything.

Again, economy, markets, the world, life, etc, etc. is all driven by human behavior which is ultimately driven by Emotions. Your robotic methods gets A's in Calculus, my fresh Contrarian ways says "I don't need Calculus in the first place".

<James has left the chat.>
James -

Before this post, I had a lot of respect for your thoughts and viewpoints. But, the fact that you just spent all those words trying to avoid just saying, "Okay, maybe I was wrong..." is pretty sad.

You basically just said that you believe your opinions are superior to facts, which we both know is ridiculous...
 
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Literally 50 seconds into this video he starts throwing out lies.

At 50 seconds, he says, "...consumer confidence remains at an all time high."

Given that this video was published yesterday, I would think this data from last week would be worth incorporating:


He may make some awesome points after the 50 second mark, but I stopped watching after the first obvious lie.

Good rule of thumb -- if you have to lie to support your argument, it's probably not a great argument.
 

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@JScott

Sure man,.. let me get deeper in clarity:

1. We will always butt heads when it comes to this topic and crypto. I am 80% fundamentals, 20% technical.. and you are the opposite 80% technical, 20% fundamentals. We are both polar in that regard, so it's inevitable..

2. I appreciate opposite thinking and viewpoints. A lot. I respect and have high regard for your technicals and analysis, it's thought provoking and eye opening, and many times I will chime in and give my praises. This stands regardless of our disagreements...

3. Looking back, I can see my posts lack tact and can be perceived as attacks on character. Which is far from the truth or intention. My counters to yours are directed at your methodology and reliance on technicals and what my thoughts are on the flaws on that; most definitely not directed at your character in any way. In fact, I think you're one of the smartest dudes on this forum..

4. Now let's get into the nitty gritty on our viewpoints and how/why you are right and I am wrong but at the same time, I am right and you are wrong. Imo; I think it comes down to perspective:

If we speak in straight up black and white, technically I would be wrong in stating it's a 50/50 outcome judging upon any past data, reports, etc.

However, that leaves out the factor of Time. Let me first say that yes, I don't dismiss the yield curve inversion at all and am in agreeance with that statistical technical point. BUT, from my viewpoint; I see this...

Short term. Mid term. Long term.

Short term within 6 months: Leans towards Not Happening (statistically)

Mid term within 1 year'ish: 50/50 chance. Who knows what will happen.

Long term within 3-5 years: Very high chance it will happen.

So... from my perspective; we are both right and wrong at the same time.

5. My argument to your technicals is that I believe that: You can't quantify human confidence. Meaning, no matter how many data points you can gather and calculate, it will never be able to read between the lines of emotion as a high human driven EQ can.

6. Again, I am not deep into stats and financial stuff, but I believe historically the GOATS all possessed a highly Contrarian belief system whether they knew it or not. Speaking of myself; it's an after effect of my core.. so I don't go against the grain just to do it; after looking at any and everything neutrally, my conclusions are often 80% against the mass popular belief...

And again, I don't have the stats but I find myself and my Contrarian perspectives and predictions to be in a very small minority in the financial world, as I believe the large majority are all leaned on technicals.

7. So tying all this back in a clarified way to my very initial thought was:

In the mid-term within 8 months, I believe due to fear of recession by the general public from my own observations on the world; that what will actually take place is the opposite (a percentage higher than 50/50). That stock markets will continue running up and pass all time highs, that the economy will not be in a technical recession.

In long term of within 2-4 years, I believe a recession will technically happen (mainly centered around the general public forgetting and losing that sense of fear into a more passive cataloged state). Although, my initial feelings are it will be a case of "two recessions back to back".. meaning a smaller one followed by another in a shorter typical time frame afterwards.

8. Do I have any data and statistics to prove "fear of recession by the general public"; I don't. But I also don't have any data or statistics to prove "there is no fear of recession by the general public" either. So is this all going purely by my "opinion"... Technically in black and white, yes. But in grey, factually in some weird way, the "trading edge my EQ has given me" has historically proven a winning percentage rate thus far. In grey, eventually, even without "facts", one has to acknowledge and take into consideration that a winning percentage might have more to it than just an "opinion".

Sometimes things don't work in black and white..

Prosecutor to Innocent Defendant: "Did you feel relieved when you killed Timothy? Yes or No."
 
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If we speak in straight up black and white, technically I would be wrong in stating it's a 50/50 outcome judging upon any past data, reports, etc.

However, that leaves out the factor of Time.
Except that it doesn't. Any regression analysis on any economic data used to forecast a recession *must* be time bounded.

It makes no sense to ask the question, "Is there a correlation between a yield curve inversion and a recession?" without specifying a time frame. Without a time frame, there's a 100% correlation, as a recession is 100% likely to occur at some point after a yield curve inversion.

Any regression analysis on economic data relating to future economic health *must* include a time factor. In fact, from a purely empirical standpoint, all but two yield curve inversions over the past 60 years have resulted in a recession within 24 months. So, it's not surprising that a statistical analysis will find a correlation somewhere in that time frame (or shorter).

Short term within 6 months: Leans towards Not Happening (statistically)

Mid term within 1 year'ish: 50/50 chance. Who knows what will happen.

Long term within 3-5 years: Very high chance it will happen.
I'm so confused... In your previous post, you wrote:

>> The problem with being a robot analyst using past data is that you CAN'T TELL WHEN.

But right here, you're posting timeframes, the likelihood of it happening in those timeframes, and you're even using the word "statistically."

So, when I say it can be correlated statistically, you disagree with me and say it can't. And then you go and claim statistical assertions of your own???

Are you sure you know what you're arguing here? Because you're contradicting yourself a bunch.


So... from my perspective; we are both right and wrong at the same time.
I'm always open to the possibility of being wrong. But, I haven't seen where I'm wrong here?

What exactly did I say that was wrong?

5. My argument to your technicals is that I believe that: You can't quantify human confidence.
History disagrees with you. You can perform a regression analysis on consumer confidence numbers measured by polling data and find very strong correlations between that data and future economic health. In fact, this is one of the best methods economists have for forecasting economic health.

In the mid-term within 8 months, I believe...
If you're basing your predictions on your "beliefs," I'm most certainly not going to argue with you. I've had enough religious debates to know that arguing with someone's beliefs isn't going to be productive...

Always happy to debate data and facts...but I won't debate beliefs...
 
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Tossek

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I am doubting a bit right now as well, whether things will turn. Technically, some of the main ingredients of former recessions are in and there are countries (mainly in EU) that already seem to have recessions. But there is some kind of a upward trends right now showing up. USA is 70% riven by internal demand which is apparantly still quite high.

Today, reported consumer credit level have risen again but this is just a mild indicator. Car sells are still high but the loans with 90 + days delays skyrocketed in the last few months. It is really right now turning to be a 50/50 thing and the indicator to watch for is the US unemployment rate. I think that will show and predict the futher internal demand most accurately. However, this value tends to fluctuate a bit. This is why most economists take a 4 week average...

Still interesting situation. I turned from short to long positions with one hand on the red emergency switch.
 

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