Best of the Week
Most Popular
1. Crude Oil and Water: How Climate Change is Threatening our Two Most Precious Commodities - Richard_Mills
2.The Potential $54 Trillion Cost Of The Fed's Planned Interest Rate Increases - Dan_Amerman
3.Best Cash ISA Savings for Rising UK Interest Rates and High Inflation - March 2018 - Nadeem_Walayat
4.Fed Interest Hikes, US Dollar, and Gold - Zeal_LLC
5.What Happens Next after February’s Stock Market Selloff - Troy_Bombardia
6.The 'Beast from the East' UK Extreme Snow Weather - Sheffield Day 2 - N_Walayat
7.Currencies Will Be ‘Flushed Down the Toilet’ Triggering a ‘Mad Rush into Gold’ - MoneyMetals
8.Significant Decline In Stocks On The Cards! -Enda_Glynn
9.Land Rover Discovery Sport Extreme Driving "Beast from the East" Snow Weather Test - N_Walayat
10.SILVER Large Specualtors Net Short Position 15 Year Anniversary - Clive_Maund
Last 7 days
Stock Market Bulls Last Stand? - 18th Mar 18
Putin Flip-Flops Like A Drunken Whore On Bitcoin Cryptocurrency Legalization - 18th Mar 18
How to Legally Manipulate Interest Rates - 18th Mar 18
Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - 18th Mar 18
Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - 17th Mar 18
Strong Earnings Growth is Bullish for Stocks - 17th Mar 18
The War on the Post Office - 17th Mar 18
GDX Gold Mining Stocks Fundamentals - 16th Mar 18
Nationalism, Not the Russians, got Trump Elected - 16th Mar 18
Has Bitcoin Bought It? - 16th Mar 18
Crude Oil Price – Who Wants the Triangle? - 16th Mar 18
PayPal Cease Trading Crypto Currency Bitcoin Warning Email Sophisticated Fake Scam? - 16th Mar 18
EUR/USD – Something Old, Something New and… Something Blue - 16th Mar 18
DasCoin: A 5-Minute Guide to How It Works - 15th Mar 18
Stock Market Downward Pressure Mounting - 15th Mar 18
The Stock Market Trend is Your Friend ’til the Very End - 15th Mar 18
6 Easy Ways to Get What Women Want, for Less! - 15th Mar 18
This Isn’t Your Grandfather’s (1960s) Inflation Scare - 15th Mar 18
Eye Opening Stock Market Index, Volatility, Charts and Predictions - 15th Mar 18
Gold Cup At Cheltenham – Gold Is For Winners, Not For Gamblers - 15th Mar 18
Upcoming Turnaround in Gold - 14th Mar 18
Will the Stock Market Make Another Correction this Year? - 14th Mar 18
4 Ways To Writing An Interesting Education Research Paper - 14th Mar 18
China Toward Sustainable Economic Growth - 14th Mar 18
Stock Market Direction Is No Longer Important - 14th Mar 18
Trade Tariffs Defeat Globalists and Return Prosperity - 14th Mar 18
Stock Market Crash is Underway and Cannot be Stopped! - 14th Mar 18
Are Energy Sector Stocks Bottoming? - 14th Mar 18
Nasdaq Stocks Soars to New Record High After Strong Job Reports - 14th Mar 18
Bitcoin BTCUSD Elliott Wave View Calling for Rally toward $15,000 - 13th Mar 18
Hungary’s Gold Repatriation Adds To Growing Protest Against US Dollar Hegemony - 13th Mar 18
Record Low Volatility in Precious Metals and What it Means - 13th Mar 18
Tips for Writing and Assembling the Classification Essay - 13th Mar 18
Gerald Celente "If Rates go up too High, the Economy goes Down, End of Story" - 13th Mar 18
Stock Market Selloff Showed Gold Can Reduce Portfolio Risk  - 13th Mar 18
Silver Does it Again! Severe Consequences - 12th Mar 18
Has the Stock Market Rally Run Out of Steam? - 12th Mar 18
S&P 500 at 2,800 Again, Stock Market Breakout or Fakeout? - 12th Mar 18
The No.1 Energy Stock To Buy Right Now - 12th Mar 18
What Happens Next When Stock Market Investor Sentiment is Neutral - 12th Mar 18
Economic Pressures To Driving Gold and Silver Prices Higher Long-Term - 12th Mar 18
Labour Sheffield City Councils Secret Plan to Fell 50% of Street Trees Exposed! - 12th Mar 18
Stock Market Uptrend Resuming? - 11th Mar 18
Bond Market Interest Rate Yields Are Rising Again… Stocks Are on Thin Ice - 11th Mar 18
Death of Europe's Greenest City, Police State Sheffield Labour Council to Fell 50% of Street Trees - 11th Mar 18
Do All Bull Stocks Markets Need to Have a Bearish Divergence? - 11th Mar 18
An Inflation Indicator to Watch, Part 3 - 11th Mar 18
Online Stock Trading Tips - Tips about Online Trading & Day Trading - 11th Mar 18
NDX makes a new high. What does that mean? - 10th Mar 18
Blue Chip Companies on Track for $800 billion Buyback Record in 2018 - 10th Mar 18
Cheap Gold Stocks Basing - 10th Mar 18
An Introduction to Online Forex Trading - 10th Mar 18

Market Oracle FREE Newsletter

Urgent Stock Market Message

What Financial Conditions Tell Us (Two Charts and a Prediction)

Stock-Markets / Stock Market 2017 Aug 25, 2017 - 11:47 AM GMT

By: F_F_Wiley


It seems every bank, including central banks, publishes a financial conditions index these days. And because financial conditions typically lead the economy, it makes sense to track them. In fact, they might contain even more information than they get credit for. They might offer the elusive “crystal ball” that foretells our economic fortunes.

Sound far-fetched? Spend a few minutes with this week’s pictures and talk, and you’ll be well equipped to judge for yourself. We start with seven of our favorite indicators, shown in the table below:

With one exception, all of the indicators measure a separate piece of the economy’s financial side. We add business earnings (the exception) because they interact closely with financial conditions. When earnings are healthy, stock prices and business credit conditions are usually healthy, too, whereas weak earnings usually weigh on stocks and credit.

Instead of melding the indicators into a single index, though, we think it’s more revealing to treat them individually. The chart below shows each indicator in the quarter before and the quarter of the last nine business cycle (BC) peaks, although with less data for lending standards, which the Fed began surveying for the first time in mid-1990.

The chart gives us a dashboard-like screenshot of the circumstances that led us into past recessions:

  • The left side shows either stock or house prices or both declining in real terms at the last nine BC peaks.
  • The middle shows lending standards tightening before each of the last three BC peaks.
  • The right side shows the last nine BC peaks coinciding with either weak earnings growth or an inverted yield curve or both.

With that history as our background (in charcoal gray), the next chart highlights the most recent data:

The above chart is, in our view, the best way to judge financial conditions—with a strong reminder of how current conditions compare to the conditions that shaped past recessions. As of today, that comparison looks favorable. If a recession was imminent, it would be first time in at least six decades that the economy tipped over with

  • both stock and house prices having outpaced inflation over the previous four quarters,
  • all but the smallest loan category (CRE) standing on the “easier credit” side of zero, and
  • earnings growing strongly (in this instance, rebounding from a recent swoon) while the yield curve remains upwardly sloped.

Or, another way to look at it is to crisscross all of the indicators with all of the BC peaks, which shows only one instance (house price growth in 2001) of an indicator being clearly more expansionary at a peak than as of right now. Any statistician using only our seven indicators would conclude that further expansion is more likely now than at any of the past peaks.

And that’s not all. Financial conditions seem even more important than before, thanks to a private-sector balance sheet that over the last six decades has approximately doubled relative to GDP. As assets and liabilities grow bigger relative to GDP, financial volatility should be more impactful. Even mainstream economists—long held back by pathologies in economic theory—may be catching on, although that’s a topic for another day.

Of course, you may say our second chart has a limited shelf life, and we would agree. Any of our indicators could change over the coming weeks and months. They seem far enough from recession territory, though, to expect continued expansion through the rest of the year.

The outlook’s main blemish, in our view, is that the poobahs at the Fed would like financial conditions to tighten. The past year’s loosening in conditions—even as the Fed nudged policy rates higher—seems a happy coincidence. Eventually, policymakers should get their wish. Financial conditions, like many things in life, don’t remain winsome, warm and welcoming forever. And as the eventual tightening comes into view, we suggest using the “dashboard” charts to weigh the consequences. You might decide that they form the crystal ball that predicts the next BC peak. And that wouldn’t be surprising—in fact, it would make ten consecutive business cycles foretold by changing financial conditions.

F.F. Wiley

F.F. Wiley is a professional name for an experienced asset manager whose work has been included in the CFA program and featured in academic journals and other industry publications.  He has advised and managed money for large institutions, sovereigns, wealthy individuals and financial advisors.

© 2017 Copyright F.F. Wiley - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules