Today I’m going to give you some indicators that we can look for to determine when the entire thing with “cheap money” is coming apart at the seams.
If we split up the three categories of private consumers, businesses, and governments, we can take a look at indicators for each category.
What indicator shows us that consumer debt is in trouble?
We will ultimately look at loan delinquencies. Whether it’s car loans, student loans, or just regular credit card payments. Not all private borrowers will be able to repay their debts.
We can take a look at consumer credits at this point and see where they are going.
It goes up. A long way up. Private consumers are borrowing more and more money to buy all kinds of things. You may be thinking, “Great, the economy is doing really well!” In reality, it just means it’s easier to borrow money at cheaper rates, so private consumers can purchase more costly things. This, of course, is not a sustainable economic policy that will last.
What indicator shows us that corporate debt is in trouble?
The simplest indicator is to look at the price performance of $HYG. This is an ETF for high-yield bonds – more commonly known as junk bonds.
We can take a look at the previous chart on consumer credit to infer how high the default risk of consumer credit might be for businesses, but the clearer result on business finance is reflected in the market by the ETF $HYG.
When we see $HYG start to fluctuate or drop significantly, we know what’s going on. The companies can’t pay back their loans. Since these are high risk bonds, they will be the first to plummet. Therefore, High Yield Corporate Bond ETFs like $HYG serve as a good indicator for the broader corporate debt market.
What indicator shows us that government debt is in trouble?
This one is difficult. Very though indeed.
But there is one clear indicator that I am keeping an eye on….
When governments start buying shares on the stock market. Then I become extremely attentive.
This essentially means that governments are taking stakes in private companies. Just as the German government had part-nationalized the Commerzbank, a private bank, in January 2009. At that time, the government acquired 25 percent plus one share in the financial institution.
We just have to keep in mind that the more differences of interest and volatility there are, the more opportunities we have to do well. Look at options trading for this, but don’t forget to make sure you have enough liquidity in your trades.