Deep Qualitative Fundamental Analysis of US Economy
מעודכן
We are going to look the US Economical situation in order to understand what moves the markets.
There are few factors, that should be observed and based on historical behaviour a long or short bias can be made.
Most important factor for the economy is how GPD behaves, that is why a deep analysis of GDP is required.
Technical Recession is defined when Real GDP has 2 negative consecutive quarters.
ISM PMI, NMI
Basics:
The historical correlation between Real GDP Growth and ISM PMI/NMI is 85%. PMI/NMI are leading indicators and they are going to predict how GDP will move. It is short to long term prediction (within 12 Months)
If PMI/NMI is above 50 means that overall economy is growing and if it is below 50 – economy is slowing.
-----
Current: PMI 52.8, but slowing; NMI 56.7, but slowing
Score: 2 – Inflation
Prediction: slowing GDP
From chart a correlation between ISM PMI, NMI and GDP can be seen, and how GDP follow PMI and NMI.
Consumer Sentiment Index
Basics:
The level of confidence that consumers have about the stability and future prospects can be used to understand the overall trend of the economy.
If the Sentiment is low this will cause the economy to shrink, if it is high – expand.
----
Current: 51,5
Score: 10 – high Inflation
Prediction: very low GDP <-3%
Building Permits
Whether or not developers are bullish/ bearish on the prospects of the future home sales. More applications mean an expectation of future sales. This will increase the supply of loans.
Building permits gives an insight into liquidity and health of US and banking sector.
----
Current: 1674(very high), but slowing. It seems that Permits already peaked.
Score: 9 – high Inflation
Prediction: lower GDP
Money Supply M2
Basics:
The supply of money coming from central authorities being injected or withdrawn. More money causes more inflation.
M2 is most important measure of money supply and is used as injection and withdraw to control inflation, growth and value of the currency.
We can analyse the data by looking at the long term growth rate of M2, analyse the trends and when the trend is broken
----
Average rate of change – 6,71
M2 peaked at 2020 with, since 2022 growth rate is 1,71
Score: -4 – started to deflate
Prediction: lower GDP <-3%
In 2020 money supply growth peaked and since 2022 has started to slow down. It means that at the moment the monetary policy is tightening.
Interest rates
Basics:
The Fed decreases liquidity by selling Government bonds (withdraw). This rises the Fed Funds Rates, because banks have less liquidity to trade with other banks.
The Fed increases liquidity by buying Government bonds (injection). This lowers the Fed Funds Rates, because banks have more liquidity to trade with other banks.
In low Interest rates environment, money is cheaper and currency will lose value and vice versa.
When GDP is very high, the FED must decrease the Rates in order to slow GDP.
When GDP growth is contracting, FED must increase Interest Rates to bring it to the normal.
When inflation is above long term average trend the FED begin to increase the rates, usually at a slow pace then at faster pace if inflation is too high.
Long decreases in rates are associated with falls in GDP
----
Current: 2.33% (before - long time 0%)
Score: 9 – high Inflation
Prediction: increase Rates
GDP already have started to fall below 0%, this will make the FED to increase the rates until GDP is back to normal (average trend).
Since 02.2022 Interest rates are growing, but GDP is still falling, it means that the FED will continue to increase the rates next months even more aggressively, because of the magnitude of the GDP fall.
CPI / Core CPi
Basics:
It is normal to have average inflation between 0,5% and 1%. Increasing GDP growth and Inflation go hand in hand, because nominal growth causes prices to rise. Inflation must be kept under the target rates in order to obtain GDP growth.
This year the FED target was 2% , currently is 8,5% (last month 9%). The current inflation is much higher than the FED wanted. Interest rates were a bit increased last few months and this measure slowed down the inflation from 9% to 8,5%, but it is still to high.
If GDP falls a lot this will cause deflation. In this case very high Interest rates will be seen. Negatives are very rear and the FED will not allowed this to happen at any cost.
----
Current: 8,5%
Score: 10 – high Inflation
Prediction: increase Rates
PPI / Core PPi
Basics:
Business inflation is normal. The Business react strongly to Oil and Food prices. That’s why deflationary months are also normal.
GDP growth correlate with PPI.
----
Current: -0,5%
Score: -4
Prediction: increase Rates
NFP
Basics:
NFP can affect Consumer Sentiment.
Unemployment rates rises but there are no extremes. So, the numbers will not affect the economic so far. NFP is interesting only if there is extremes in % change.
Lower GDP levels can cause stronger unemployment rates.
Debt to GDP Ratio
Basics:
If the Government spend more than it is receiving in Tax Revenues this will continually add more debt.
As the debt to GDP ratio increases, Economic growth becomes more depend on public spending. The public spending needs to be cut in order to reduce the debt.
Higher debt to GDP ratio means more pressure to inflate. The only choices are to deflate, default on debt or inflate further.
If Levels are above 100%, Government have very little choices - to inflate further. Central bank must keep the interest rates low and/or increase the money supply in order to print higher levels or GDP.
----
Current: 122%
Score: 10 – high Inflation
Prediction:
The debt was above 100% in past few years, that is why the FED kept low rates and printed a lot money. This brought the enormous inflation.
Surplus/Deficit
Basics:
If debt rise, deficit will rise too. The Government must continue to inflate or risk deflation or/and default.
----
Current: -12%
Score: 10 – high Inflation
Prediction:
Interest bill
Basics:
If there is no debt there will be no interest bill. The bills are always deflationary, important is how much.
If the interest rates rise, the bills will rise too – this will be very deflationary for the country.
----
Current: 1,53%
Score: -6
Prediction: increase of the bills, because of the Interest rates. This will be causing deflation in 6-12 months.
Liquidity Cover
Basics:
Liquidity cover is the Government’s ability to pay the interest bills. It calculates how many Taxes Revenues will cover the interest bills.
Higher level means that the Government can pay the interest bill and continue current levels of public spending. The low Interest rates helps Government to stay liquid, means to service the debt and maintain public level of public spending – to inflate more
----
Current: 11,5%
Score: 2
Prediction: increase of the bills, because of the Interest rates. This will be causing deflation in 6-12 months.
Balance sheet
Basics:
When officials want to stimulate the economy, they buy more assets and expand their asset portfolio. When they want to restrict growth, they let assets roll off and shrink their balance sheet.
If Interest rates goes higher, the balance sheet goes lower. The FED sells government assets (Bons).
During economic crises, the Fed can expand its balance sheet by buying more assets under LSAPs, a policy also known as quantitative easing (QE).
----
Current:
Score: 9
Prediction: Increasing the Interest rates, will shrink more the Balance Sheet.
10 years Yields
Basics:
If Yields goes lower this creates lower interest bill on outstanding debt and this is inflationary, because it allows more room for spending (injections). Low levels of Yields increases the ability of the Government to create more inflation.
----
Current: around 6%
Score: 0
Prediction: goes higher
Summery:
Because of the high levels of debt ( over 100% ), the FED had no choice, but inflate further. That’s why they kept extremely low the interest rates in order to expand the Real GDP Growth, Balance Sheet and printed big amount of money.
These actions brought the enormous inflation over 8% (target 2%).
Because of high GDP levels and high inflation, the FED must increase the Interest rates. They already began few months ago with small pace, but this is only the beginning.
The leading economic indicators are showing that GDP will continue to fall and this will cause hiking the rates more aggressively.
The FED already have announced on Jackson Hall meeting, that they will fight with the inflation with more aggressive moves.
High increasing the FED Fund Rates, cause the Treasury Yields go rise, that’s why every investor will invest in US Securities and not in other currency.
The higher interest rates also will make the economy to deflate. There is a high risk of Recession.
High Scale 160
Low Scale -150
Full Scale 310
SCORE 57
Bias: Long against the other currencies, commodities, metals at least to the end of 2023, then further analysis will be required. The future deflation/recession probably change the bias to Short.
There are few factors, that should be observed and based on historical behaviour a long or short bias can be made.
Most important factor for the economy is how GPD behaves, that is why a deep analysis of GDP is required.
Technical Recession is defined when Real GDP has 2 negative consecutive quarters.
ISM PMI, NMI
Basics:
The historical correlation between Real GDP Growth and ISM PMI/NMI is 85%. PMI/NMI are leading indicators and they are going to predict how GDP will move. It is short to long term prediction (within 12 Months)
If PMI/NMI is above 50 means that overall economy is growing and if it is below 50 – economy is slowing.
-----
Current: PMI 52.8, but slowing; NMI 56.7, but slowing
Score: 2 – Inflation
Prediction: slowing GDP
From chart a correlation between ISM PMI, NMI and GDP can be seen, and how GDP follow PMI and NMI.
Consumer Sentiment Index
Basics:
The level of confidence that consumers have about the stability and future prospects can be used to understand the overall trend of the economy.
If the Sentiment is low this will cause the economy to shrink, if it is high – expand.
----
Current: 51,5
Score: 10 – high Inflation
Prediction: very low GDP <-3%
Building Permits
Whether or not developers are bullish/ bearish on the prospects of the future home sales. More applications mean an expectation of future sales. This will increase the supply of loans.
Building permits gives an insight into liquidity and health of US and banking sector.
----
Current: 1674(very high), but slowing. It seems that Permits already peaked.
Score: 9 – high Inflation
Prediction: lower GDP
Money Supply M2
Basics:
The supply of money coming from central authorities being injected or withdrawn. More money causes more inflation.
M2 is most important measure of money supply and is used as injection and withdraw to control inflation, growth and value of the currency.
We can analyse the data by looking at the long term growth rate of M2, analyse the trends and when the trend is broken
----
Average rate of change – 6,71
M2 peaked at 2020 with, since 2022 growth rate is 1,71
Score: -4 – started to deflate
Prediction: lower GDP <-3%
In 2020 money supply growth peaked and since 2022 has started to slow down. It means that at the moment the monetary policy is tightening.
Interest rates
Basics:
The Fed decreases liquidity by selling Government bonds (withdraw). This rises the Fed Funds Rates, because banks have less liquidity to trade with other banks.
The Fed increases liquidity by buying Government bonds (injection). This lowers the Fed Funds Rates, because banks have more liquidity to trade with other banks.
In low Interest rates environment, money is cheaper and currency will lose value and vice versa.
When GDP is very high, the FED must decrease the Rates in order to slow GDP.
When GDP growth is contracting, FED must increase Interest Rates to bring it to the normal.
When inflation is above long term average trend the FED begin to increase the rates, usually at a slow pace then at faster pace if inflation is too high.
Long decreases in rates are associated with falls in GDP
----
Current: 2.33% (before - long time 0%)
Score: 9 – high Inflation
Prediction: increase Rates
GDP already have started to fall below 0%, this will make the FED to increase the rates until GDP is back to normal (average trend).
Since 02.2022 Interest rates are growing, but GDP is still falling, it means that the FED will continue to increase the rates next months even more aggressively, because of the magnitude of the GDP fall.
CPI / Core CPi
Basics:
It is normal to have average inflation between 0,5% and 1%. Increasing GDP growth and Inflation go hand in hand, because nominal growth causes prices to rise. Inflation must be kept under the target rates in order to obtain GDP growth.
This year the FED target was 2% , currently is 8,5% (last month 9%). The current inflation is much higher than the FED wanted. Interest rates were a bit increased last few months and this measure slowed down the inflation from 9% to 8,5%, but it is still to high.
If GDP falls a lot this will cause deflation. In this case very high Interest rates will be seen. Negatives are very rear and the FED will not allowed this to happen at any cost.
----
Current: 8,5%
Score: 10 – high Inflation
Prediction: increase Rates
PPI / Core PPi
Basics:
Business inflation is normal. The Business react strongly to Oil and Food prices. That’s why deflationary months are also normal.
GDP growth correlate with PPI.
----
Current: -0,5%
Score: -4
Prediction: increase Rates
NFP
Basics:
NFP can affect Consumer Sentiment.
Unemployment rates rises but there are no extremes. So, the numbers will not affect the economic so far. NFP is interesting only if there is extremes in % change.
Lower GDP levels can cause stronger unemployment rates.
Debt to GDP Ratio
Basics:
If the Government spend more than it is receiving in Tax Revenues this will continually add more debt.
As the debt to GDP ratio increases, Economic growth becomes more depend on public spending. The public spending needs to be cut in order to reduce the debt.
Higher debt to GDP ratio means more pressure to inflate. The only choices are to deflate, default on debt or inflate further.
If Levels are above 100%, Government have very little choices - to inflate further. Central bank must keep the interest rates low and/or increase the money supply in order to print higher levels or GDP.
----
Current: 122%
Score: 10 – high Inflation
Prediction:
The debt was above 100% in past few years, that is why the FED kept low rates and printed a lot money. This brought the enormous inflation.
Surplus/Deficit
Basics:
If debt rise, deficit will rise too. The Government must continue to inflate or risk deflation or/and default.
----
Current: -12%
Score: 10 – high Inflation
Prediction:
Interest bill
Basics:
If there is no debt there will be no interest bill. The bills are always deflationary, important is how much.
If the interest rates rise, the bills will rise too – this will be very deflationary for the country.
----
Current: 1,53%
Score: -6
Prediction: increase of the bills, because of the Interest rates. This will be causing deflation in 6-12 months.
Liquidity Cover
Basics:
Liquidity cover is the Government’s ability to pay the interest bills. It calculates how many Taxes Revenues will cover the interest bills.
Higher level means that the Government can pay the interest bill and continue current levels of public spending. The low Interest rates helps Government to stay liquid, means to service the debt and maintain public level of public spending – to inflate more
----
Current: 11,5%
Score: 2
Prediction: increase of the bills, because of the Interest rates. This will be causing deflation in 6-12 months.
Balance sheet
Basics:
When officials want to stimulate the economy, they buy more assets and expand their asset portfolio. When they want to restrict growth, they let assets roll off and shrink their balance sheet.
If Interest rates goes higher, the balance sheet goes lower. The FED sells government assets (Bons).
During economic crises, the Fed can expand its balance sheet by buying more assets under LSAPs, a policy also known as quantitative easing (QE).
----
Current:
Score: 9
Prediction: Increasing the Interest rates, will shrink more the Balance Sheet.
10 years Yields
Basics:
If Yields goes lower this creates lower interest bill on outstanding debt and this is inflationary, because it allows more room for spending (injections). Low levels of Yields increases the ability of the Government to create more inflation.
----
Current: around 6%
Score: 0
Prediction: goes higher
Summery:
Because of the high levels of debt ( over 100% ), the FED had no choice, but inflate further. That’s why they kept extremely low the interest rates in order to expand the Real GDP Growth, Balance Sheet and printed big amount of money.
These actions brought the enormous inflation over 8% (target 2%).
Because of high GDP levels and high inflation, the FED must increase the Interest rates. They already began few months ago with small pace, but this is only the beginning.
The leading economic indicators are showing that GDP will continue to fall and this will cause hiking the rates more aggressively.
The FED already have announced on Jackson Hall meeting, that they will fight with the inflation with more aggressive moves.
High increasing the FED Fund Rates, cause the Treasury Yields go rise, that’s why every investor will invest in US Securities and not in other currency.
The higher interest rates also will make the economy to deflate. There is a high risk of Recession.
High Scale 160
Low Scale -150
Full Scale 310
SCORE 57
Bias: Long against the other currencies, commodities, metals at least to the end of 2023, then further analysis will be required. The future deflation/recession probably change the bias to Short.
עסקה פעילה
I just realised that there is a mistake. If GDP and Inflation are high, the FED should increase the rates in order to bring them back ( to lower levels) and not not the opposite. Here is the right paragraph about Interest rates
Interest rates
Basics:
The Fed decreases liquidity by selling Government bonds (withdraw). This rises the Fed Funds Rates, because banks have less liquidity to trade with other banks.
The Fed increases liquidity by buying Government bonds (injection). This lowers the Fed Funds Rates, because banks have more liquidity to trade with other banks.
In low Interest rates environment, money is cheaper and currency will lose value and vice versa.
When GDP is very high, the FED must increase the Rates in order to slow GDP.
When GDP growth is contracting, FED must decrease Interest Rates to bring it to the normal. When GDP is < -2%, large decreases of rates are expected.
When inflation and GDP are above long term average trend the FED begin to increase the rates, usually at a slow pace then at faster pace if inflation is too high.
----
Current: 2.33% (before - long time 0%)
Score: 9 – high Inflation
Prediction: increase Rates
GDP already have started to fall below 0%, this will make the FED to increase the rates until GDP is back to normal (average trend).
Since 02.2022 Interest rates are growing, but GDP is still falling, it means that the FED will continue to increase the rates next months even more aggressively, because of the magnitude of the GDP fall.
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