About

Rajveer Rawlin received his MBA in finance from the Cardiff Metropolitan University, Wales, UK. He is an avid market watcher having followed capital markets in the US and India since 1993. His research interests includes areas of Capital Markets, Banking, Investment Analysis and Portfolio Management and has over 20 years of experience in the above areas covering the US and Indian Markets. He has several publications in the above areas. The views expressed here are his own and should not be construed as advice to buy or sell securities.

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Tuesday, 26 April 2016

Is a Recession Imminent?

Definition of a Recession:
The textbook definition of a recession is two quarters of negative GDP growth. Some examples of recessions include the great depression of the 1930’s, the dotcom crash of 2000 and the great recession of 2008.
Causes of a Recession:
Recessions are caused by several factors. These include:
Hyper Inflation
Deflation
Prolonged Fall in Exchange Rates
Credit Crunches
Collapsing Consumer Confidence
Collapsing Asset Prices
Collapsing Global Trade
Bust following Excessive Speculation – e.g., Property Market in Japan -1989
Evidence so far:
1) Collapsing Commodity Prices:
Recessions caused by deflation see massive collapses in asset prices. There has been a well over 50% plunge in the prices of industrial commodities such as copper and oil:
            
copper chart

              
crude oil chart


            2) Collapse in Global Trade:
Freight rates as measured by the Baltic dry index have collapsed over 95% from their highs set in 2008. While temporary dislocations can cause the index to fluctuate quite a bit, the well over 95% collapse in the index is an indication that all is not well with the global economy as far as trading activity is concerned.
baltic dry index
                                                        source: INVESTMENTTOOLS
            3) Collapsing Stock Markets:
Stock Markets across the world have been collapsing despite record low interest rates globally.
Emerging markets are down significantly from their recent highs:
            China Stock Market - Shanghai Composite Index
         
shanghai stock market index
             The US S&P 500 is all set to break down from a massive multi year megaphone top:
           Macrotrends
         
s and p 500 long term chart

         4) Dollar Strength:The Dollar  strengthened against virtually every other currency during the             recession of 2008 and is about to do it yet again post the termination of QE from the FED:
dollar index chart

5) Excessive Speculation & Risk Taking:
We are all familiar with the excessive speculation in the housing market that led to the great recession of 2008 following the collapse of Bear Sterns and Lehman Brothers. Fast forward to 2016 and the risk exposures at some big banks are reaching alarming levels as is the case with Deutsche Bank:Is Deutsche Bank AG (USA) The Next Lehman?
deutsche bank collapse
Additionally speculation has erupted in alternate asset classes like bitcoin which are commanding ridiculous valuations much like other asset bubbles that occurred prior to earlier recessions in 2000 and 2008 :
speculative bubbles
6) The velocity of Money is below Great depression levels:
As forecaster Martin Armstrong points out the velocity of money is currently below that observed in the great depression of the 1930’s. This implies that despite multiple rounds of quantitative easing by global central banks the attempt to circulate money throughout the global economy has failed and money has reached only a few pockets. The velocity of money typically declines during recessions and is probably forecasting one ahead:
velocity of money
7) Kondratieff Winter Wave Suggests a Collapse Ahead:
Finally looking at long term economic cycles we are entering a traditionally weak period for risk assets which tend to make lows every 8 years or so marked by economic troughs. We recently had major economic downswings in 1992, 2000 and 2008 and are due one in 2016. Other than this we have entered a kondratieff winter wave in 2000 and are set to emerge out of it only in 2020. The last few years of the winter wave could produced the most pronounced down swing in economic activity much like the last winter wave that was characterized by the Great Depression of the 1930’s:
kondratieff wave
Conclusion:
In conclusion several hall marks of a recession such as collapsing commodities, stock markets and collapsing currencies have already started to play out as we enter 2016 and deflationary forces seem to be taking control. Flight to quality in safe haven assets such as the Dollar and Yen suggest risk appetite is rapidly declining. The massive fall in shipping activity is also providing evidence that a massive slow down is at hand. Excessive speculation as evidenced by the risk exposures of prominent global financial institutions is also a major concern. Additionally the velocity of money has collapsed suggesting that the circulation of money through the economy is simply not occurring despite record low interest rates. Last but not least long term economic cycles also are suggesting that the upcoming recession could last at least till 2020 and the final effects of this major down cycle are yet to be felt. 

Sunday, 24 April 2016

Market Signals for the US stock market S and P 500 Index and Indian Stock Market Nifty Index for the Week beginning April 25

Indicator
Weekly Level / Change
Implication for
S & P 500
Implication for Nifty*
S & P 500
2092, 0.52%
Bullish
Bullish
Nifty
7899, 0.62%
Neutral**
Bullish
China Shanghai Index
2959, -3.86%
Bearish
Bearish
Gold
1234, -0.17%
Neutral
Neutral
WTIC Crude
43.75, 4.79%
Bullish
Bullish
Copper
2.27, 5.34%
Bullish
Bullish
Baltic Dry Index
659, 8.35%
Bullish
Bullish
Euro
1.129, 0.07%
Neutral
Neutral
Dollar/Yen
111.71, 2.70%
Bullish
Bullish
Dow Transports
8086, 1.35%
Bullish
Bullish
High Yield (ETF)
35.04, 1.39%
Bullish
Bullish
US 10 year Bond Yield
1.88%, 7.76%
Bearish
Bearish
Nyse Summation Index
1168, 14.48%
Bullish
Neutral
US Vix
13.22, -2.94%
Bullish
Bullish
20 DMA, S and P 500
2069, Above
Bullish
Neutral
50 DMA, S and P 500
2013, Above
Bullish
Neutral
200 DMA, S and P 500
2015, Above
Bullish
Neutral
20 DMA, Nifty
7724, Above
Neutral
Bullish
50 DMA, Nifty
7462, Above
Neutral
Bullish
200 DMA, Nifty
7864, Above
Neutral
Bullish
India Vix
16.38, 2.15%
Neutral
Bearish
Dollar/Rupee
66.66, 0.08%
Neutral
Neutral


Overall


S & P 500


Nifty

Bullish Indications
13

12
Bearish Indications
2
3
Outlook
Bullish
Bullish
Observation
The Sand P 500 and the Nifty rallied slightly last week. Indicators are bullish.
Markets are back at resistance. Time to tighten those stops as downside may resume any moment.
On the Horizon
Australia - CPI, New Zealand – Rate decision, Japan - Rate decision, CPI, China – PMI, Euro Zone – German employment data, CPI, Euro zone CPI, GDP, U.K – GDP, Canada – GDP, U.S – Durable goods, Consumer confidence, FOMC rate decision, Personal consumption data, GDP
*Nifty
India’s Benchmark Stock Market Index
Raw Data
Courtesy Google finance, Stock charts, FXCM
**Neutral
Changes less than 0.5% are considered neutral

The US market and the Nifty rallied last week. Signals are bullish for the upcoming week. The Vix is suggesting complacency. The markets are back at resistance and are likely to continue major breakdowns in 2016 as the recent rally is about to conclude. A big move is imminent.  The critical levels to watch are 2100 (up) and 2080 (down) on the S & P and 7950 (up) and 7850 (down) on the Nifty. A significant breach of the above levels could trigger the next big move in the above markets. You can check out last week’s report for a comparison. You can also check out snapshots of the S and P 500 and Nifty Indices. Love your thoughts and feedback.



Thursday, 21 April 2016

Chart of the Day - Velocity of Money

The chart of the day shows the velocity of money (data courtesy the St. Louis Fed) since 1959. It shows that the velocity of money is below levels observed in 1959. The velocity of money typically rises during periods of growth and falls during recessionary periods. So the recent plunge to new lows suggests that QE's from global central banks have really not worked and a major recession may just be lurking around the corner.
velocity of money

Monday, 18 April 2016

Chart of the Day - Investor Credit

The chart of the day is from Advisorperspectives and it shows that Margin debt in investor accounts continues to be at alarming levels and has eclipsed levels seen prior to market melt downs in 2000 and 2008. Is history about to repeat itself again?
margin debt

Sunday, 17 April 2016

Market Signals for the US stock market S and P 500 Index and Indian Stock Market Nifty Index for the Week beginning April 18

Indicator
Weekly Level / Change
Implication for
S & P 500
Implication for Nifty*
S & P 500
2081, 1.62%
Bullish
Bullish
Nifty
7850, 3.91%
Neutral**
Bullish
China Shanghai Index
3078, 3.12%
Bullish
Bullish
Gold
1236, -0.35%
Neutral
Neutral
WTIC Crude
41.75, 5.27%
Bullish
Bullish
Copper
2.15, 3.26%
Bullish
Bullish
Baltic Dry Index
635, 17.81%
Bullish
Bullish
Euro
1.126, -1.15%
Bearish
Bearish
Dollar/Yen
108.66, 0.55%
Bullish
Bullish
Dow Transports
7978, 3.13%
Bullish
Bullish
High Yield (ETF)
34.56, 1.23%
Bullish
Bullish
US 10 year Bond Yield
1.75%, 1.86%
Bearish
Bearish
Nyse Summation Index
1020, 8.46%
Bullish
Neutral
US Vix
13.62, -11.33%
Bullish
Bullish
20 DMA, S and P 500
2056, Above
Bullish
Neutral
50 DMA, S and P 500
1990, Above
Bullish
Neutral
200 DMA, S and P 500
2014, Above
Bullish
Neutral
20 DMA, Nifty
7646, Above
Neutral
Bullish
50 DMA, Nifty
7424, Above
Neutral
Bullish
200 DMA, Nifty
7873, Below
Neutral
Bearish
India Vix
16.03, -2.42%
Neutral
Bullish
Dollar/Rupee
66.61, 0.10%
Neutral
Neutral


Overall


S & P 500


Nifty

Bullish Indications
14

13
Bearish Indications
2
3
Outlook
Bullish
Bullish
Observation
The Sand P 500 and the Nifty rallied last week. Indicators are bullish.
Markets are back at resistance. Time to tighten those stops as downside may resume any moment.
On the Horizon
New Zealand – CPI, Euro Zone – ZEW Survey, Rate decision, Canada – CPI
*Nifty
India’s Benchmark Stock Market Index
Raw Data
Courtesy Google finance, Stock charts, FXCM
**Neutral
Changes less than 0.5% are considered neutral


The US market and the Nifty rallied last week. Signals are bullish for the upcoming week. The Vix is suggesting complacency. The Yen is suggesting that global risk appetite is waning significantly. The markets are back at resistance and are likely to continue major breakdowns in 2016 as the recent rally is about to conclude. A big move is imminent.  The critical levels to watch are 2090 (up) and 2070 (down) on the S & P and 7900 (up) and 7800 (down) on the Nifty. A significant breach of the above levels could trigger the next big move in the above markets. You can check out last week’s report for a comparison. You can also check out snapshots of the S and P 500 and Nifty Indices. Love your thoughts and feedback.

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My Asset Allocation Strategy (Indian Market)

Cash - 40%
Bonds - 20%
Fixed deposit - 20%
Gold - 5%
Stocks - 10% ( Majority of this in dividend funds)
Other Asset Classes - 5%

My belief is that stocks are relatively overvalued compared to bonds and attractive buying opportunities can come along after 1-2 years. In a deflationary scenario no asset class does well other than U.S bonds, the U.S dollar and the Japanese yen, so better to be safe than sorry with high quality government bonds and fixed deposits. Cash is the king always. Of course this varies with the person's age.