Big Data

August 15, 2022

One of the revolutions of the internet age is the accumulation of information. Since digital computers were brought into common usage (about 60 years ago), the move towards manipulating a LOT of data has progressed onward. In the field of finance it has unleashed a multitude of benefits, and more than a few detriments.

For instance Google probably knows exactly where you are (and have been) since you bought your iPhone, and maybe longer. Those voice assistants (Alexa, Siri and Google Home) turn every word you say within their microphone’s range into data and send it across the internet. And every time you perform a financial transaction with a credit card, that information tracks where and what you spend. You can decide whether those innovations are a benefit or a detriment.

To the benefit of finance, we now know a lot about the world around us, and all of that data gets rolled up into investor’s understanding of the markets. Market averages are the end result of all that ‘big data’. In essence, it represents investor sentiment. Millions of investors read the financial press, talk to investment professionals and look at their bank statements and decide what to do with their spare capital. Currently, there are a lot more buyers than sellers!

In early July, there were signs that the market was preparing to bounce, and so it happened. It is now mid-August, the S&P has crashed through three key ‘barriers’ and may march higher still. The downtrend around 3,900, the 50 day moving average around 3,900 and the ‘resistance’ line around 4,170. The market, currently at 4,280, is marching, racing really, towards the 200 day moving average at 4,328.

S&P 500 Index Bounding Higher

This is all despite the fact that plenty of really smart people are guiding against this. The Federal Reserve is warning that interest rates need to be much higher, big brokerage houses are just starting to warn of declining profitability, economic figures are starting to show that production and consumption are slowing, even mother earth appears to be saying ‘too much’ with extreme events such as drought, and crazy weather.

For the last forty years the Federal Reserve, in almost every instance, has stepped in to stop the financial system from undergoing any significant decline. If you remember the market crash of 1987, it may not seem like this is the case, but the Federal Reserve took four distinct actions to prevent a market collapse. The market took less than two years to regain all that it lost.

There have been similar incidents since then. The collapse of markets in 2000/2001 is often discussed because markets were so significantly out of sync with fundamentals. The markets fell about 50% over two-and-a-half years. The most recent events are easier to recall, the housing crisis and Great Recession of 2008-2009 and the COVID pandemic resulted in massive intervention by the Federal Reserve as well as policy responses from government.

All of those responses have trained almost everyone alive today that prices always recover and the government will save you. Unfortunately that isn’t true.

The big data driving equity markets in the US currently suggests that markets are going to be just fine, but the fundamental data suggests just the opposite and macro economics is sending very worrying signals.

On the fundamental side, rising prices and rising interest rates suggest that both individuals and corporations will have far less free cash flow for spending on some of the things that are most over priced. Think about any spending that is non-essential. Travel and leisure would be great examples, but our comfortable first world lives are also being squeezed too. In some parts of Europe, electricity and fuel are becoming unaffordable luxuries. Corporations have started cutting back on hiring, letting people go and reducing capital spending. It seems reasonable that this trend will continue and suppress demand for a while.

The situation in China is a harbinger of what could happen in the rest of the world. Chinese growth in retail sales (2.7%) was half of what the market was expecting, and industrial production (3.8%) was well below the 4.6% expected. It is notable that a few years ago, it was assumed that China needs to grow at 9% to maintain social order, and 7% growth was needed to support the world economy. Chinese real estate has been hit hard and will continue to be for the foreseeable future.

Meanwhile new countries are starting to show signs of sovereign default, (that is to say, the country will go bankrupt), including Sri Lanka and Ukraine. Many other countries are also increasingly likely to fail to repay debts including Laos, Mongolia, a variety of countries in Africa and perhaps, again, serial defaulter, Argentina.

With too much money sloshing about in the economy it makes sense that some of it is chasing the dream of higher equity prices and trying to capitalize on a bounce higher, but about 90% of the North American population has never seen a stagnant or declining market. There is little chance that it will continue to rise, certainly not in leaps and bounds. If you are trading, then it may be possible to take advantage of some of this excitement, but as a long term investor, the best course of action is to wait for lower prices and take comfort in having a lot of financial firepower in reserve (cash is not a bad choice).

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