Forum on trading, automated trading systems and testing trading strategies
Sergey Golubev, 2013.07.21 08:29
Here’s what your stockbroker and the media aren’t telling you: the world
is more indebted now than it was at the height of the financial bubble
in 2007. That’s right. Despite the extraordinary government intervention
of the past six years. Despite continuing optimism of a recovery.
Despite the reassuring words of central bankers. We’re worse off in debt
From this, there are several inevitable conclusions that will be discussed in depth in this piece:
Lashing central bankers
It’s been surreal to watch news of Detroit’s bankruptcy this week. Once
the bastion of a thriving American automobile industry, the city is
now on its knees. Meanwhile, U.S. stock market indices are hitting
all-time highs. Compare and contrast…
But it’s also been fascinating to see the commentary around the
bankruptcy. Much of this commentary blamed a sharply declining
population for the crisis and a host of other reasons. Less mentioned
though was the real reason for the bankruptcy: Detroit simply spent far
more than earned. And it went deeper into debt to finance the
spending, until it could no more.
It’s not entirely surprising that this has been largely overlooked and
that Detroit is being treated as an isolated case. That’s what
politicians in the U.S. and across the developed world want you to
believe. That debt isn’t a big deal and that they can help their cities
and countries grow their way out of indebtedness, but they just need a
bit more time to achieve this
However, a recent report by the Bank Of International Settlements (BIS)
– often referred to as the central banks’ bank – shows how difficult
this task will be. The BIS annual report outlines, in a clear and often
confronting way, the realities of the world’s indebtedness and how
current money printing and low interest policies won’t fix the problems
emanating from 2008. The BIS has credibility as it was one of the very
few institutions to warn of excesses in the lead up to the financial
crisis. I can’t recommend the report highly enough.
Let’s have a look at some of the report’s key passages. First, the BIS
details the extent of the world’s debt problem. It says total debt in
large developed market and emerging market countries is now 20% higher
as a percentage of GDP than in 2007. In total, the debt in these
countries is US$33 trillion higher than back then. Almost none of the
countries that it monitors are better off than 2007 in debt to GDP
The BIS describes the level of debt as clearly unsustainable. The
primary reason is that studies have repeatedly shown that once debt to
GDP rises above 80%, it retards economic growth. Obviously, if money is
being spent on servicing debt, then there’s less to spend on
investment etc. Most developed market economies now have debt to GDP
levels exceeding 100%.
The BIS says governments need to quickly get their balance sheets in
order and does some math to prove why. It says current long-term bond
yields for major advanced economies are around 2%, well below the
average of the two decades leading up to the crisis of 6%.
If yields were to rise just 300 basis points across the maturity
spectrum (and still be below average), the losses would be enormous.
Under this scenario, holders of U.S. Treasury securities would lose
more than US$1 trillion dollars, or almost 8% of U.S. GDP. The losses for holders of debt in France, Italy, Japan and the U.K. would range from 15% to 35% of GDP.
Being the primary holders of this debt, banks would be the biggest
losers and ultimately such losses would pose risks for the entire
The BIS doesn’t let emerging countries off the hook either. It suggests
that while debt may be lower in these countries, they’ve benefited
from rising asset and commodity prices, which are unlikely to be
sustainable. And therefore caution is warranted here too.
But now we get to the juicy bit where the BIS calls the extraordinary
policies of developed market central banks into question. For a
conservative institution such as the BIS, the language is nothing short
“What central bank accommodation has done during the recovery is to
borrow time – time for balance sheet repair, time for fiscal
consolidation, and time for reforms to restore productivity growth. But
the time has not been well used, as continued low interest rates and
unconventional policies have made it easy for the private sector to
postpone deleveraging, easy for the government to finance deficits, and
easy for the authorities to delay needed reforms in the real economy
and in the financial system. After all, cheap money makes it easier to
borrow than to save, easier to spend than to tax, easier to remain the
same than to change.”
And then this:
“Governments hope that if they wait, the economy will grow, driving
down the ratio of debt to GDP. And politicians hope that if they wait,
incomes and profits will start to grow again, making the reform of
labour and product markets less urgent. But waiting will not make
things any easier, particularly as public support and patience erode.”
The BIS recommends urgent, broad-based reforms which principally
involve cutting back on regulation to allow high-productivity sectors
to flourish and for growth to return. It also says households need to
makes further cuts to their debts while governments also need to get
their balance sheets in order. And regulators need to make sure banks
have the capital to absorb any risk of potential losses of the type
The math of debt
It’s worth elaborating on why the current path appears unsustainable,
as the BIS alludes too. Put simply, debt is a promise to deliver money.
If debt rises faster than money and income, it can do this for a while
but there comes a cut-off point when you can’t service the debt. When
that happens, you have to cut back on the debt, or deleverage in
There are four ways to deleverage:
USD/CNH Ahead of US 3Q GDP (based on the article)
Daily price is on primary bullish market cndition located above 100 SMA/200 SMA: the price broke 6.7757 level to above on clos daily bar for 6.7969 resistance level to be broken for the bullish trend to be continuing.
The most likely scenario for the daily price movement is the following: the price breaks 6.8 resistance level to above for the bullish trend to be resumed, otherwise - ranging bullish.
Trading the News: U.S. Gross Domestic Product (GDP) (adapted from the article)
Bullish USD Trade: U.S. Expands Annualized 2.5% or Greater
Daily price is located below 100-day SMA (100 SMA) and 200-day SMA (200 SMA) for the bearish area of the chart for the ranging within the narrow support/resistance levels: the price is testing 1.0859 support level to below for the bearish trend to be continuing with 1.0814 nearest daily target to re-enter. Descending triangle pattern was formed by the price with 1.0859 support level to be crossed for the bearish trend to be resumed.
Intra-Day Fundamentals - EUR/USD and USD/CAD : U.S. Gross Domestic Product (GDP)2016-10-28 12:30 GMT | [USD - GDP]
if actual > forecast (or previous one) = good for currency (for USD in our case)
[USD - GDP] = Annualized change in the inflation-adjusted value of all goods and services produced by the economy.
From official report:
EUR/USD M5: 24 pips range price movement by U.S. Gross Domestic Product news events
USD/CAD M5: 39 pips range price movement by U.S. Gross Domestic Product news events
Eur/Usd in expectancy of a US interest rate hike in December.
Thomas Lawson, 2016.10.29 01:04
Eur/Usd Fibonacci technical levels 23% 1.09328. 38% 1.09844 50% 1.10259. Take Profit targets 1.08161 1.06860. The Forex pair is currently in a downtrend.
Weekly EUR/USD Outlook: 2016, October 30 - October 06 (based on the article)
EUR/USD struggled to recover, but it also did not extend its falls. A mix of PMIs, inflation figures and also GDP stand out at the turn of the month. Here is an outlook for the highlights of this week.
Week Ahead: FX Markets Into RBA, BoJ, FOMC, And BoE - Credit Agricole (based on the article)
FOMC: "We believe that any taper tantrum angst is premature, however. Next week’s Fed meeting should make an explicit reference to a rate move in December but there seems to be less scope for aggressive tightening of US financial conditions given that the implied probability of a hike is already close to 75%. We doubt that there will be a sustained risk selloff either, especially if the non-farm payrolls and ISM data underpins the constructive outlook for the US economy and adds to the recent stream of positive economic surprises from around the world. Next to the Fed and US data, more evidence of growing demand for USD-funding, reflected in widening of EUR-USD and JPY-USD cross currency swap rates, and elevated USD/CNH rates, should keep USD supported."
BoE: "The BoE’s inflation report should attract some attention next week, not the least given that some analysts are still calling for a rate cut. We expect the MPC to keep policy unchanged and link any prospects of further easing to the path of the GBP, which according to Governor Carney has depreciated ‘substantially’ more recently. Data releases as well as indications that the UK government would pursue a somewhat ‘softer’ version of Brexit could also help GBP consolidate more broadly in the coming days."
RBA: "The RBA could revise up its inflation outlook and dash hopes for further easing from here, helping AUD regain more ground. Demand for carry trades could continue to support the AUD in the absence of sustained tightening of global financial conditions."
BoJ: "The former should alleviate recent market concerns about an imminent taper that was fuelled by a drop in the 10Y JGB yields to below zero. This together with the persistent steepness of the JGB yield curve should keep Japanese stocks and USD/JPY generally supported."
Dollar Index - "Though there are a lot of direct fundamental sparks to move the Dollar in the week ahead, we should still keep sight of the crosswinds. Much of the Greenback’s movements these past weeks have come on the basis of weakening counterparts. Motivated counter currencies can keep the pressure – bullish or bearish – on the Dollar moving forward. Themes of Brexit, China devaluation, faltering Eurozone stability and BoJ capitulation stand ready to move the needle."
USD/JPY Index - "At the same time, the BoJ may also stick to the sidelines as Governor Haruhiko Kurodaand Co. anticipate the non-standard measures (negative-interest rate policy & the quantitative/qualitative-easing program with ‘yield-curve control’) to help achieve the 2% target for inflation, but a material adjustment in the central bank’s forecast may further weaken the Japanese Yen should the committee push out its pledge in delivering price stability. In fact, the BoJ may have little choice but to look beyond the second-half of fiscal-year 2017 in reaching its inflation goal as the core-core Consumer Price Index (CPI) slipped to an annualized 0.0% from 0.2% in August, and the fresh batch of central bank rhetoric may drag on the local currency should the BoJ show a greater willingness to preserve the highly accommodative policy stance for longer. However, the recent depreciation in the Japanese Yen may largely unravel if the BoJ retains the status quo largely endorse a wait-and-see approach for monetary policy."
AUD/USD Index - "The RBA monetary policy announcement is in the spotlighton the domestic front. The central bank is widely expected to keep the benchmark cash rate unchanged at 1.5 percent, with the priced-in probability of a decrease at just 5 percent. This puts the onus on any forward guidance to be offered in the policy statement released following the sit-down."