Radio Show Notes: The Economic Clock explains markets

Thursday, July 20, 2017 // Written by Enzio von Pfeil

Readers know that we have run the framework of The Economic Clock® for years.  Robustly, it continues explaining market trends.

My overall observations re the Economic Clock®

  1. The Economic Time® is characterized by an
    1. Excess supply of money, and an
    2. Excess demand for goods.
    3. Excess supply of money.  What we are seeing in markets is totally logical according to the framework of our common-sense Economic Clock®: the pronounced excess supply of money by definition must go into assets – into stocks, bonds, property, jewelry, art, etc….
    4. Herd effect.  Wise investors caught the logic of this excess supply of money early on – about four years ago; now the stragglers are coming to the party.
    5. Excess demand for goods. These latecomers partially can justify their ebullience because there is still a little room for profits to rise: this is what happens where there is an excess demand for goods, as we are witnessing primarily a rise in turnover, with selective increases in margins, too.


Global stocks at record highs. US tech stocks today have now exceeded their last peak reached in March 2000 at the peak of the dotcom bubble. MSCI Asia ex Japan and emerging markets at highest since April 2015. But there are concerns;

  1. High Valuations
    1. Relevance. Not so sure that valuations as we know them are so relevant.
    2. PE ratios. Take the popular price to earnings ratio. It is based on history: however, earnings growth has been disturbed violently by Schumpeter’s “creative destruction” whereby the old has to make way for the new.  
    3. Compass with a broken needle: Therefore, how can past earnings any guide to future ones when we are in the midst of an industrial revolution characterised by creative destruction?

  1. Low volatility
    1. Obviously this dents banks’ trading profits: no volatility no trading!

  1. Its been 30 years since major indices in US, Europe and Asia together haven’t seen a correction of 5% in  a calendar year
    1. Correction looming. I think that the pullback will occur sometime between the fourth quarter of this year and the first of next year.
    2. Fed policy overshoot. The reason is that there is a distinct risk of Fed “overshoot”: relative to America’s brittle recovery/ shakey Economic Time®, real rates will be so high that they choke growth.
    3. Other correction  motors. Rising real rates, along with an ineffectual Kaiser Trump when it comes to coaxing Congress to cut taxes or increase infrastructure spending, will knock the market six month ahead of the actual event: actual slowdown in quarters 2 or 3, 2018!

  1. The valuation risk in US equities is rising following delays in Trump’s legislative agenda and US-China trade tensions – both US and China cancelled today’s press conference following trade talks in Washington
    1. What agenda? Wasn’t aware that Kaiser Trump has any “legislative agenda”: he lives of dubious Executive Orders, at whose signings he insists on being adulated
    2. Stalled agenda.  Now that his health care plans have crashed, it is unknown if he can muster the mojo to rally the troops – most of whom he has antagonised on both sides of the aisle.  My guess is that he won’t get his infrastructure spending nor tax cuts through Congress, al the more with that debt ceiling hiatus rearing its ugly head.
    3. US-China trade tensions. In my years of working with Capitol Hill, I learned that “foreigners are for free”. Step in Kaiser Trump, beating-up on the Chinese very much for what ultimately are failings of the U.S. educational system…


  1. US financial conditions loosest in 3 years
    1. Economic Time®.  Yes, this is exactly what our Economic Clock® suggests – namely, an excess supply of money.
    2. Logic. By definition, this excess supply of liquidity simply MUST go into asset markets!.
    3. .Expensive long bonds.  But whether expensive  long bonds are the right place to be in a period of rocky interest rates is questionable.

  1. Yields on short dated treasuries spiking on fears over debt ceiling
    1. Italian analogy.  Congress is like Italy: both populations make things up as they go along.
    2. Non-resolution.  Don’t expect this debt ceiling business to be resolved any time soon: like Kaiser Trump, Congress cannot get its act together.
    3. Long end of the curve. This is the most intriguing financial story around: will yields rise or fall? My guess is that they will fall, leading to a flattening yield curve

                                                   i.     Investment implication: if the yield curve does flatten, then sell banks! How can they make money off their loan books when there is no margin to be had?


  1. Prices at new highs and new home transactions hit a record in first half
    1. Economic Time®.  This is what happens when there is an excess supply of money: asset inflation hits.
    2. 300,000 empty flats.  Anecdotally, I heard that we host 300,000 empty flats – courtesy of mainland speculation
    3. Surge in applications to take property agent exam!
      1. Compliance boom. Sounds analogous to the financial sector’s crying need for more compliance officers.

[1] The radio moderator’s thoughts are emboldened. Mine are italicized

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