$60 Trillion of World Debt

I saw this chart posted by visualcapitalist.com and had to forward it along. While it has little to do with investing, it is an obsession of mine. I am a firm believer that one day we will have to face the piper and have our day of reckoning.  While debt isn’t evil, the level of debt we (the US) have almost fits that description. But the interesting thing is, and maybe provides some solace, is looking across the global landscape it appears as if there are a few countries/regions that may have to face the piper before we do. Ultimately though, our day will come.

As you can see the chart breaks down $59.7 trillion of world debt by country, as well as highlights each country’s debt-to-GDP ratio using color. The data comes from the IMF and only covers public government debt. It excludes the debt of country’s citizens and businesses, as well as unfunded liabilities which are not yet technically incurred yet. All figures are based in USDollars.

The numbers that stand out the most, especially when comparing to the previous world economy graphic:

• The United States constitutes 23.3% of the world economy but 29.1% of world debt. It’s debt-to-GDP ratio is 103.4% using IMF figures.
• Japan makes up only 6.18% of total economic production, but has amounted 19.99% of global debt.
• China, the world’s second largest economy (and largest by other measures), accounts for 13.9% of production. They only have 6.25% of world debt and a debt-to-GDP ratio of 39.4%.
• 7 of the 15 countries with the most total debt are European. Together, excluding Russia, the European continent holds over 26% of total world debt.
• Combining the debt of the United States, Japan, and Europe together accounts for 75% of total global debt.  Yet, combining their population they account for less than 25% of the world’s total humans

Junk Bonds Pointing to Further Stock Upside

The latest from one of the best technical analysts out there, Tom McClellan.

Junk bonds are the canaries in the stock market’s coal mine. 

If you want to know ahead of time that trouble is coming for the stock market, then one of the best places to look is the high-yield (or junk) bond market.  The movements of prices among these bonds correlates much more closely to the stock market than to T-Bonds.  More importantly, when liquidity gets tight, the junk bonds are the first to be sold by traders wanting to lessen their portfolio risk. 

We can see the importance of this message in this week’s chart, which features A-D data from FINRA TRACE.  For those who like the full spelling of acronyms, that means “Financial INdustry Regulatory Authority Trade Reporting and Compliance Engine”.  FINRA tracks the price changes on a total of 7876 individual bonds, and breaks down the Advance-Decline statistics into categories of Investment Grade, High Yield, and Convertible bonds.  The chart above features the A-D data for the High Yield bonds.

This A-D Line arguably does a better job than the composite NYSE A-D Line at doing what we want an A-D Line to do, which is to show us divergences at important times.  That is the whole reason behind ever looking at breadth data of any type.  We want it to give us an answer which is different from what prices are saying, but only at the right moments. 

A lot of analysts mistakenly assert that if one is interested in the stock market, then one should only look at A-D data from the stock market.  And to take that point further, they assert that one should filter out all of the contaminants such as preferred stocks, rights, warrants, bond closed end funds, and other detritus which together are making the stock market less pure.  I debunked that point in a March 24, 2017 article. 

Just recently, the overall NYSE A-D Line moved to a new all-time high, saying that liquidity is plentiful and it should lift the overall stock market.  The same message comes from this High Yield Bond A-D Line, which has also pushed ahead to a new all-time high.  The message is that liquidity is so plentiful that even junk bonds can go higher.  And history shows that such plentiful liquidity is also beneficial for the overall stock market.

A Retest or Bear Trap?

The 10 year Treasury bond yield found a bottom last July and rose almost 100% in 5 short months. Since topping and forming negative momentum divergence in mid-December, the yield chopped around in a sideways consolidation until mid-April where the 2.34% critical support eventually level failed. 

As we know, frequently when price (in this case yield) breaks below a critical support level, it will often back-test that same level immediately after the break. If that back-test holds, it will typically give the bulls a chance to exit their positions and then see the bears take complete control pushing it lower. Of course, nothing is that easy otherwise we would all be gazillionaires. In addition, there are times when the back-test slices right through the support line like it wasn’t there and climbs higher. This is a classic “bear trap” as investors who shorted at the breakdown are now holding a losing trade (“trapped short”).

As you can see, yields are currently back-testing the underside of critical support as it sits within a cats whisker of it. I pointed out the break down in a past blog post and called an “all clear” to get back into bonds expecting the market to normalize rates lower. We are within a week or less before we find out whether the market is going to prove me wrong and trap yield bear or reverse course and restart the fall in rates (or increase in bond prices since they move inversely)

An All Clear (intermediate term) Signal for Bonds?

The US 30 year long bond peaked in July of last year and the combination of FED threats of multiple (4) interest rate increases and the Trump pro-growth election agenda had the effect of a proverbial “rug pull” out from under US bond prices. In 9 months the T-bond lost 17% (a huge amount for a so called “safe” investment) and shocked many investors as losses piled up.

It seems like political reality has finally set in, and the expectations for a FED rate increase next month is now down to just above 4%. Combine that with the fact that smart money (commercial interest) piled into bonds and are now at multi-year highs in their Treasury bond holdings provides all the reasons why we see bond prices bottoming, reversing course and moving higher. Price broke out of a double bottom pattern earlier this week and was precluded by an oversold divergent low, a high probability “buy-me” signal.  The pattern will be confirmed by a hold above the red horizontal breakout level.

If this pattern plays out, it projects to a rally up to the very important support/resistance zone marked T1. Coincidently (and should not come as a surprise) it comes at a time that retail bond investors turned overly bearish (a theme we see repeated over and over in investing – retail investors being on the wrong side of the trade).  As always after a major correction, investors patience will be tested as only time will tell if this reversal goes on to eventually form a lower high or instead on to make new highs. Until that is determined, it appears as if the market is giving the “all clear” signal to be long US T-bonds and because the institutions are buying again, at the same time their appetite for equities is weakening

March 2017 Charts on the Move Video

The quarter went in like a lion and out like a lamb.  A quick look back at Q1 market action and a deeper look at momentum divergences and how they can help your investing can be viewed in my latest video at the link below

https://youtu.be/reXa5MLO1Hk