As I've written ad nauseum in previous blogs, we here at Privada Wealth Management believe that technical indicators provide a useful, albeit imperfect, discipline to help manage your portfolio. Using mathematics to help us with our decisions also free us up to notice and digest anecdotal indicators. Today I'd like to discuss the "Easy Money Indicator."
First of all, don't get too excited this indicator doesn't necessarily show you how and where to make easy money in the stock market. Second, don't google "Easy Money Indicator" just yet, since I just invented it 10 minutes ago. So now that you know what the "Easy Money Indicator" is not, let me tell you what it is. It's when financial institutions make it "easy" for you to borrow "money."
Low interest rates are certainly helpful at inflating asset prices. But that's just one wing to the economic bubble jet plane. The other wing is low standards for lending. Using the Federal Reserve printing press as a fuselage you simply bolt on both wings and we, like Icarus, are good to go.
For the main street investor, this means junk mail offering credit cards with 0% interest for a limited time. Do you get these in the mail? How many do you get per month? I'm sorry that was a typo: How many credit card offers do you get per day? Anecdotally, I get at least one a day. Probably 22 every two weeks. How many of your neighbors are opening accounts? I don't know either but if it didn't work the credit card companies wouldn't be carpet bombing your neighborhood with these mass mailers that are addressed to "Rey Descalso or Current Resident (we don't really care)".
For the real estate investor, this means easy access to funds for flipping houses or buying rentals. And inventory gets snapped up by hedge funds with access to even more money than mom and pop real estate investor. This raises demand which raises prices. I have clients who want to move. Their house is worth millions, but so is the house they have to find and can't.
For the business owner, this means offers for ridiculous amounts of money with a few mouse clicks. Through the PPP program a business owner can get a lot of money for free. If he or she complies with the conditions, there's no need to pay it back. The conditions are run your business successfully without firing anybody. Pretty much what every business owner was already planning to do. Free money is the highest form of easy money. But now, lending institutions are in on it. I get 3 emails a day and 3 text messages a week. How in the world did they get my cell?
Finally, the retail stock market investor has unfettered access to margin. What's that? It's money you borrow to buy stocks. Here's the chart our Chartered Market Technician, Jared Coffin emailed me earlier this morning that inspired me on this rant I call a blog:
If you don't understand this chart, that's okay, neither do I. But notice the bottom part and specifically the three dates that peaked above the red-dotted line. March of 2000, June of 2007 and March of this year.
What happened to the stock market in late 2001? What happened to the stock market in late 2008? What could happen in late 2022?
If you’d like to know, click here.