Are the averages a good forecaster of the economy ?
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Started by carlberky - Dec. 17, 2018, 12:53 p.m.

Currently in the Dow we are at the low for several months, and below the January 2,2018 close of 24824.

 We are told over and over how well the economy is doing. Is the down stream future about to set in ?

By pj - Dec. 17, 2018, 9 p.m.
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"The results suggest that the stock market does predict the economy. It is important, therefore, to review the theories that are consistent with the stock market as a leading economic indicator.

One possible explanation for why stock prices predict the economy is that stock prices actually cause what happens to the economy. This would be consistent with the wealth effect. According to this argument, fluctuations in stock prices raise and lower wealth, which in turn, raises and lowers aggregate consumption. As a result, economic activity is affected or "caused" by fluctuations in the stock market.

Another possible explanation for why stock prices "Granger cause" economic activity is that the stock market is forward-looking. If investors are truly forward-looking, then stock prices reflect expectations about future economic activity. If a recession is anticipated, for example, then stock prices reflect this by decreasing in value. Since the results indicate that the stock market improves the prediction of economic activity, and if we assume that the stock market is forward-looking, then investors’ expectations about the future economy are fairly accurate. "

By carlberky - Dec. 17, 2018, 10:11 p.m.
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Thanks for the reply and explanation, PJ. 

Another thing that puzzles me is the relatively poor performance by the precious metals. If hyperinflation is on the horizon due to over worked printing presses, why wouldn't there be a flight to gold and silver?  

By pj - Dec. 18, 2018, 3:45 p.m.
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The days of gold and silver responding to fears of inflation seem to have been gone for a generation. It seems they are caught in a perpetual "catch 22". If there's a fear of inflation interest rates go up (like they're doing now) and that's supposedly bad for PM prices, due to the their being an alternative (which pay no return) to holding bank deposits. Higher interest rates also tend to strengthen the $ which lowers PM in $ terms. 

Used to be a fear in the stock market would send people into PM. Now they tend to buy US treasuries. Same goes for any kind of crisis. And despite, as you say, the printing presses running at full tilt and wages rising faster than in a long while, commodity prices in general have been weak (oil, base metals, grains) so nobody (except maybe to a limited degree the Fed) seems worried  about inflation.

Will this all change at some point? Probably. Will I be above ground when it happens? Less probable. 

By carlberky - Dec. 18, 2018, 4:30 p.m.
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PJ, thanks for a couple of very educational posts. It's early in the week but I think your posts have a lock on Post of the week.

By pj - Dec. 18, 2018, 5:46 p.m.
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By metmike - Dec. 18, 2018, 10:46 p.m.
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What a wonderful idea Carl!

Thanks for your post of the week pj!

By wglassfo - Dec. 27, 2018, 3:35 p.m.
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Have you folks forgotten the fact that probably 1/3 to 1/2 of all equity traders have never experienced a bear market

Add to that probably 90% of equity traders have seen no reason to own gold silver etc. 

Do you remember Susan and her rants about gold

But, she cherry picked her examples

What she said was true so far as her/his example stated

However, the house market, mostly sent her examples into the crash and burn barrel

The housing market did not respect any lines on a chart

The housing market did not respect lines of resistance

The house market did not respect the opinion of a majority off investors

If self fulling was really true the house market would not have crashed and burned

 Todays market is different, just the same as the build up to the house market crash was different

IMHO the algo trading machines are different and not very well understood even by those that use the algos

But, some things remain the same

The market will not do what you want it to do

During the run up to the house market crash, the house market had a disproportionate share of all economic activity

This amount of economic activity did not stop a bear market

Debt did cause a market crash

IMHO the bond market is the best indicator of financial markets

IMHO not very many people understand the broad range of the bond market

I certainly do not but I am learning a lot from the principal cause of the Lehman crash and burn mortgage and bond market and the broader credit crisis

Can this lesson be applied to equities

I do not know but I think so

By wglassfo - Dec. 27, 2018, 5:49 p.m.
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Why my post may have changed

I have changed my reading topics

I used to read spy  thrillers, WW11 spy novels, the hero that saves the world as the personal envoy of the president, that kind of stuff. I posted personal opinions until I decided everybody has an opinion. I still have that bad habit

Today I read a lot of material about finance, Wall St and the credit crisis

Most of it is old [10 yrs] as the library does not have a lot of up to date new historical financials

Currently I am reading a little history about real life as a bond trader on Wall St. before the last market crash.

I have not ventured into anything outside NA economies, other than the same daily head lines.

I try and apply old lessons to our modern world

I will continue to make many mistakes

Tks for the kind words 

By Lacey - Dec. 27, 2018, 7:39 p.m.
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I think cryptos have taken some of the demand from precious metals.  We are heading towards an electronic wallet.  I can't believe that the CB's won't totally control it.  We are having a normal correction after  what about 10 years without one.  Bonds have rolled over.  It is such a big market, that some of the outflow will spill into the stock market, supporting it.  Trump is first president in 4 administrations that is trying to improve our deficit numbers by making our allies pay for their security, improving reciprocity in trade, fixing immigration.  We cannot take in all those who want a paycheck for life. Europe is such a clusterfu... Do you really want that in America.  Hopefully Trump continues to bring the troops home.  Shutting down half our military bases would save a hell of a lot of money.  Every 3 letter agency in America is corrupted and needs revamping.  And he has to stay alive while he is trying to bury the deep state.