In this article I'd like to discuss one issue that I think is especially relevant in our current times: debt, and the role it plays in our global economy.
I believe the most important simple idea is that debt impacts confidence.
This might be easiest to understand using a simple example.
Suppose you have a friend that is $1,000,000 in debt.
Suppose this friend just got a pay cut from $100,000 per year to $50,000 per year.
How confident would you be in getting repaid if you loaned your friend money now? If you had a loan outstanding, how confident would you be in getting repaid in a timely fashion? To put it simply, traders may benefit from considering what parts of the global economy have an excessive debt burden.
If the debt burden is excessive, there will be reduced in confidence in those parts of the economy until the debt issue is dealt with.
Traders may thus find opportunities in short selling elements of the global economy with excessive debt levels relative to safe haven assets and assets not encumbered by debt problems.
Here is a list of questions traders may find useful in assessing whether or not debt levels will impact confidence in an economy: 1.
Is a nation dependent upon borrowing to finance its operations? 2.
What is domestic savings like? 3.
If a nation is dependent upon borrowing, is there sufficient demand, internally or externally, for its debt? 4.
Are individuals and corporations in the economy willing to take on more debt, and are lenders willing to lend to them? 5.
Are specific industries in an economy particularly burdened by debt? There are a few general principles we can extrapolate from this: 1.
If a nation-state government does not have a debt problem but the individuals and corporations in that economy do, we may see a deflationary spiral: decrease in money supply, decrease in stocks, increase in the value of currency, and increase in prices of government-issued bonds.
In other words, we would see reduced confidence in individuals and corporations, but greater confidence in government.
Sectors that may be particularly exposed to greater debt levels may see a greater decrease in price than other sectors in the economy in question.
2.
If the nation-state has the debt problem, we may see decreased confidence in the currency and government-issued bonds.
This would result in higher prices for stocks and commodities.
3.
If both the nation-state and corporations residing in it have a debt problem, we may see attributes of both of the aforementioned -- a situation often referred to as "stagflation.
" Stagflation is characterized by higher prices for cost of living, high unemployment, and decreased consumer confidence.
Stock prices might be especially difficult to forecast in a meaningful manner without additional knowledge or the use of technical analysis.
Debt is an extremely important issue; I regard it as the most important issue outside of monetary policy (and in fact debt is deeply connected to monetary policy).
I mention this because fundamental analysis is often overwhelming and can leave traders feel frustrated.
I recommend placing a focus on understanding debt issues, as debt's impact on confidence can greatly impact financial markets.