The US economy continues to show weakening conditions as new warning signs are flashing recession ahead. This is despite the best efforts of the FED and the US Government to ensure there is plenty of measures in place to continue to stimulate the economy.

Over the last few weeks we have received several economic announcements on the US economy, with a few positive or better than expected results. However the vast majority of announcements have been poor or woeful as the economic data continues to show further weakness within the economy.

US Q3 GDP - A Convenient Smokescreen

I know what your thinking, hang on a minute on Friday we had a first look at US Q3 GDP and the result was positive and even beat expectations. This is correct GDP came in at 2.9% beating expectations of 2.5% and smashing last quarter's result of 1.4%.

However I find the result convenient and timely considering there is an election in less than 2 weeks time. The second and third estimate for GDP could see considerable revisions lower after the election has ended.

The other interesting points about the GDP result was that a 1/3 of the GDP growth came from a one off exporting boost of Soybeans.  This is not a normal occurrence for the US however due to shortages in other countries due to crop damage, there was a surge in demand for soybeans  exports. The one off export surge contributed 0.61% of the GDP growth.

Another big factor for the surge in GDP was a large inventory buildup in the quarter contributing 1.17% of the GDP growth. The most likely reason for the surge in inventories is in anticipation of a big pickup in spending for Christmas. However as I'm about to show you below the US consumer is struggling to meet their living costs, as the consumer is no longer confident and struggling with price rises for everyday items.

In addition the majority of the job gains over the last 12 months have been in part time jobs and low paying services jobs like in restaurants and bars which typically bring in lower incomes. Therefore companies are going to find it difficult to clear all the inventory ordered in the Q3 for the coming quarter. This will lead itself to lower GDP result the following quarter as companies struggle to clear excess inventory over the holiday period.

Lastly GDP is measured after deducting inflation for the quarter. In the most recent quarter released last Friday the GDP price index / inflation was measured to be 1.4% compared to 2.3% last quarter. This means the Government is indicating that inflation has slowed considerably from the previous quarter. For everyday citizens in the US they know this doesn't make much sense as rent, food, fuel, electricity, healthcare and education continues to jump higher making it harder for average American's to pay for everyday items. If the GDP price index remained the same as the previous quarter at 2.3% the GDP would of been further reduced to reflect a more accurate measure of US economy.

Leading Indicator - Investment Swings To Contraction

Over the last 65 years you can see the steady decline in terms of investment as the US slowly began investing less into the economy with each economic cycle. More importantly each down turn in investment relative to GDP was a perfect leading indicator to a US recession, as corporate America cut back spending with each contraction within the economy.

The red marker's together with the red vertical lines on the chart represent  the start and ending of economic contractions (recessions) in US history since 1950.

Currently investment has again peaked within the new cycle and is now heading down indicating the US economy is about to head into a recession if the economy is not already in one unofficially. 

This short video below highlights the chances of a recession after an election is typically at 52%,  regardless of who wins the election. Over the alternative 2 year period of no election the chances of a recession drop to around 25%.

FED Chart Predicts Recession 71% Of The Time

This chart is one the FED monitors to determines the strength of the labor market. The vertical pink lines are previous recorded official recessions within the US since 1977. The circles are to illustrate each time the labor market conditions fall's below 0%. Since 1977 five out of the seven times or 71% of cases the index has fallen below zero the economy has fallen into a recession. Currently this Labor market conditions index has fallen below zero.

Consecutive Quarters Of Declining Earnings

Here is another chart showing US corporate profits going back to around 1950. The vertical red lines represents each time the US has had a recession since the 50's.

What you will notice is that each recession except one back in the late 80's resulted in corporate profits declining for consecutive quarters. Or the fact corporate profits fell consecutively leading to a recession most of the time.

Presently the US has had 5 consecutive quarters of corporate profits falling. The current quarter profit season is still in progress with high odds that we will make 6 consecutive quarters of declining profits. If this occurs this will the most quarters of profits declining without a recession officially occurring.

In this interesting video Wilbur Ross explains in a concise way the current state of the US economy. He describes the economy as weak and that market valuations are high. He also believes there  is no avenues for revenue growth for corporate America due to weakness currently in the economy, which most likely will lead to a recession. in the next 18 months.

No Revenue Growth = Business Cut Spending.

Last Thursday the US released durable goods spending which represents capital expenditure by companies. The chart below is the capital goods orders that excludes defense and Aircraft spending. This chart is important as it's a proxy for business spending in general and gives you an indication of the strength of corporate America.

If you look over to the right side of the chart below you can see that capital goods spending has basically been declining nearly every quarter since 2014. If the economy was strong companies would be investing in more capital goods to grow production and revenue. This would be from an increase in demand for the goods and services they provide. However the opposite is present as demand continues to fall leading to companies cutting back expenditure to counter weak demand.

The chart below coincides with the lack of capital spending for companies in the US. Because more companies are facing tougher conditions to grow their business falling to levels seen in 2014, companies have had to rely on cost cutting and stock buybacks to lift earnings per share (EPS) rather than on actual revenues increases.

With rates so low in the US at 0.25% it's not a good indication that business conditions are declining.

Poor Christmas Sales Foretasted

Consumer confidence continues to fall with the latest results on last Friday showing confidence dropping again to levels last seen in 2014.

Like I mentioned above regarding the huge inventory build of companies for the lead up to Christmas. Companies will realize in the coming months that this was not a good idea, as the consumer does not feel confident with rising prices and lower spending power from their paychecks, leading to lower spending than the previous holiday season.

Bad Debts Spiking In 0% Environment.

This particular chart shows the delinquency rate on company loans made by banks since the late 80's. The last 2 recessions the US had in 2001 and 2008, both show delinquency rates spiking before each recession occurred.

In the current business cycle delinquency rates / bad debts have spiked from below 1% to the current level of 1.6%. Keep in mind interest rates are currently at 0.25% having been at zero for about 6 years. Therefore rates are extremely low compared to previous business cycles yet companies are having trouble paying their loans.

The other troubling fact for the banks is that debt level for companies are much higher than the last recession. This is due to record low rates enticing companies to borrow to  start or increase stock buybacks and increase dividends. So any fallout from an accelerated delinquencies within corporate lending, will have a much  deeper negative impact to bank's solvency than the 08 recession.

Leading Indicator Small Cap Index  - Breaking Down

Small companies are traditionally a leading indicator of strength and weakness within an economy. When an economy is set to expand out of contraction you will notice that smaller companies tend to lead higher in price before large cap and blue chip companies do.

On Friday the Russell 2000 index which is the US small cap index broke a key support level on both a weekly and daily chart.  Even though the S&P 500 is still within record highs, the small cap index has broke away from the larger index as it has ended its long term uptrend as well key support levels.

If you would like to check out my chart review of the Russell 2000  breaking down click on the following link: Russell 2000 review

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With one trading day left for the week, the US small cap index Russell 2000 is about to close below a key support level. After recently confirming a break of its long term uptrend 3 weeks ago, the Russell 2000 index looks likely to head significantly lower in the medium term as it meets its next support level of 1,110 on a weekly chart.

After climbing all of 2016 from the lows set in January and February this year, the index had been on a tear rising from a low of 943 in early February, to a high for 2016 of 1,263 in September for a gain of around 34% in the 7 month period.

Technicals Weakening

In the weekly chart below I have added the momentum indicator, which measures the strength of a trend. If momentum is rising whilst the chart price is rising it indicators conviction behind the trend. On the other hand if prices are falling and momentum is also falling and goes negative like the weekly chart currently is for the Russell 2000, this means there is no support for the index and the likely direction is to continue to head lower.

Since early September the momentum has been steadily falling as the strength in the trend has been weakening. I marked the recent fall for momentum into negative territory with the circle to show the bearish indicators supporting the weak index. 

An important note: With trading its important not to utilize any one indicator on its own to determine direction. Rather using a number of different indicators together is important to confirm a direction and trigger for a trade.

One more note before moving to the daily chart, another bearish indicator for the Russell 2000 index is that the weekly price has recently closed below 10 week simple moving average (pink line).

Taking a closer view of the Russell 2000 index, you will notice a few key things. Firstly the closing price of the index yesterday the 27th October 2016, was the same as the old resistance level set on the 8th June were it closed at the same price 1,189.95. The resistance has now become support.

Secondly the daily chart has also broken its uptrend recently (marked with a blue line) as well as support of 1,212 this week.

In addition the momentum indicator has been in the negative for about 2 to 3 weeks now confirming the break of trend and weakness within the index.

Key Support Level - 1,189

The next few days will be important to see if the index can hold the support level of 1189 in the interim despite the weakness. If support fails at that level the next support is a fall to 1,146 which is another 3.6% away from the current closing price.

Provided it can hold support for the short term, if the index can have a short term rally higher the next resistance level is the previous support of 1,212.

Small Caps A Leading Indicator On Strength Of The Economy

Small cap stocks provide a good leading indicator on the strength or weakness of an economy. The reasoning behind this is that small cap stocks are inherently more riskier than big large cap stocks and blue chip stocks. Therefore they tend to move ahead of their large counter party stocks in either a bullish or bearish direction.

Considering the weakness of this index and break down of key support levels, it does not bode well for the general bigger index the S&P 500. If the Russell 2000 is an indication of the likely weakness of the US economy, eventually the S&P 500 will follow the Russell 2000 to the downside.

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Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

The Australian Banking sector is approaching a key resistance level for the 5th time and a break out above this congested area of resistance is key for the sector. We take a closer look at the sector and the key levels to watch out for confirmation of a breakout to higher levels.

The actual name of the stocks that make up the banking sector is called the ASX 200 Financial index excluding REIT's, which means the sector is predominately made up of the large and small banks and other financial intermediaries. If you would like to have a look at my review of the REIT sector last month you can by clicking REIT sector review. I excluded the REIT sector as the REIT sector continues to struggle from rising bond yields in October and the poor performance would skew the actual performance of the banks within the financials sector.

The Financial sector has been riding on a very long term uptrend that began after the considerable fall in 2008. Since making those lows the financials have been steadily climbing higher, on the back of rising profits from Australia's insatiable appetite for Real Estate. Thankfully for the bank's Australian's continue to increase their debt levels by taking out larger mortgages to participate in the Australian market that has been recently been described a bubble market. For more information on the Australian real estate bubble you can take a look by clicking: Debt Fueled Real Estate Bubble

ASX 200 Financials Ex REIT's Sector Review

After making all time record highs in March 2015 of 8419, the sector retreated back to the long term uptrend level over the next 18 months to around the 6060 level as it formed a down trend within its longer term uptrend. (See chart below)

Since bouncing off its uptrend line in February and March this year, the sector has been moving sideways in a tight range. However with only 5 trading days left in the month of October, the Financials index looks to have broken its downtrend pattern and has continued on its longer term trend (Labelled on the chart). In addition on a monthly basis the sector looks set to break out of its 6760 resistance level as it closed on Monday 24th October at 6750 only 10 points away from resistance.

On the weekly chart below the Financials ex REIT sector is slightly different. From the chart below you can see the resistance level is a little higher than the monthly chart at 6785. You can see that several times this year the sector attempted to close above the 6785 level and failed. However you will also notice that each time it failed to close higher, the retreat lower was shallower as it formed higher lows (shown with the blue up trending line), which is a bullish signal.

I have also circled the area on a weekly chart where it broke its downtrend pattern in July and August this year, which confirmed the end of the 18 month down trend within its large uptrend cycle.

If the sector can close above its 6785 level the next level of resistance is 7070, as shown in the chart. You will also notice for the sector to reach the previous record highs set in 2015, the sector has a number of resistance levels to clear along the way.

On a daily chart taking a much closer look at the sector, you will notice the resistance level is set a little higher again at 6815 compared to the monthly and weekly charts. I have marked with circle each attempt the sector made to close above this key area of 6815.

Considering the financials ex REIT sector has failed the close higher above 6815 level on 4 attempts, this resistance level is a very critical area for the sector to break in order to move to higher levels.

On a daily chart there are a number of technical indicators that provide a bullish case for breaking its resistance level of 6815 including but not limited to:

1. The chart has been forming higher lows indicated by the blue rising sloping line.
2. The closing price on the 24th October is above the 10 and 50 day moving average.
3. The sector has broken out of its down trend on a weekly and monthly basis.
4. The closing prices in 2016 has respected the longer term uptrend line.

The Market To Confirm If The Real Estate Bubble Will Continue

Since the Financials sector comprising mostly of the banks, if the market confirms a close above the key resistance levels mentioned above, this would indicate that the market believes the Australian Real Estate Bubble will continue in the medium term.

Alternatively failure to close above resistance, and break below its long term uptrend would indicate that the market believe both the bubble is coming to an end and that real estate prices are set to fall in Australia.

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Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

The world has changed a great deal in the last 85 years in terms of how the markets and the economy functions as well as how we see them operating. Slowly over time we have added and implemented more and more policies, regulations, controls, mechanisms and various forms of stimulus in an attempt to smooth out business cycles booms and busts. Central Banks (CB's) and Governments have tried very hard to shorten the busts / recession cycle by lowering interest rates and extend the boom cycles in each and every business cycle over the last 85 years.

Now we fast forward to 2016 and the chief aim is to never experience a bust / recession / depression or deflation ever again. Central Banks (CB's) have taught us that they are all bad things and that we must avoid them at all costs.

These CB's have tried multiple policies and even some new experiments like negative interest rates in attempt to keep the global economy from experiencing a slow down or any amount of deflation. How bad is it really if the price of everyday items like food, rent and fuel becomes 1 or 2% cheaper each year. For the average income earner around the world their money will be allowed to go further if prices fall.

The more we have tried to control every aspect of the market, capitalism and the economy, the harder its becoming to not lose total control of these very things. However I believe we are already in the process of losing control of one of the most important things, the real economy. Presently all the Central Banks have done an excellent job at keeping the Financial assets Ie Stocks and Bonds markets up at or near record highs , while the actual economy has been unable to improve in real inflation adjusted terms over the last 10 years.

Real Assets At All Time Lows

If we take a look at the chart below, it illustrates perfectly the complete distortion of over 85+ years of controlling mechanisms, policies and Central Bank experiments have done to the relative value of real assets compared to financial assets.

This chart goes all the way back to 1925 and currently we are at an all time low, for real assets (Houses, commodities, fine art, jewellery etc) relative to financial assets of stocks and bonds. All the stimulus and attempts at controlling the markets and economy have only influenced the price of financial assets. Financial assets are more easily influenced and controlled through electronic exchanges, rather than real tangible assets which are much harder to manipulate on a global scale.

In the video below, Ray Dalio and company deliver a frank assessment on how we have reached the physically limits of the system. As we have artificially pushed markets and demand higher through debt accumulation, lowering interest rates to zero and by ballooning the derivatives market.

Increasing Volatility And Valuation Divergence

The chart below provides a good understanding on the ever increasing huge swings in volatility the financial markets have experienced. Central Banks began to introduce and try new stimulus and policy ideas in the early 2000's to reduce the busts / recessionary periods, causing large swings in the prices of the financial market as well as the valuations.

The most recent round of stimulus that began in 2009 with Zero Interest Rate Policy (ZIRP), followed by QE 1, 2, 3 and negative interest rates have stretched out the valuation of the S&P 500 relative to US productivity. Up to 1995 / 96 US productivity moved in sync with the S&P 500 stock market. This is clearly no longer the case as the chart indicates a strong divergence in valuation.

This week we received the latest monthly industrial production number in the US and showed that the year on year figure remains negative.

Since mid 2014 you will notice that industrial production data used to coincide with the value of the S&P 500 index very well. Now industrial production has been falling for 2 years and the stock market is near nominal all time record highs.

One of the policies that the Central Banks have utilized to try and control the economy, markets and financial assets values is to physically adjust interest rates up and down. Since the 1980's when Paul Volcker raised interest rate to around 18% to combat high inflation, we have been steadily lowering them all the way to zero.

Why Lower Interest Rates No Longer Work?

Presently the federal funds rate is at 0.25% as you can see from the chart, however lower interest rates are no longer having the desired effects to stimulate the real economy anymore. One of the reasons for this is the fact we have reached the limits of our debt bubble cycle. We can no longer leverage ourselves any higher despite having interest rates at close to zero .

Leveraging Corporate America

One of the many side effects of lowering the federal funds rate to close to zero, has been the leveraging of US companies to levels higher than the 2007 and 2008 peak before the GFC crisis. Debt to equity is approaching 60% for non-financial companies, as the incentive to load up on debt has never been so high. But is it really helping corporate America?

What Is The Debt Being Utilized For?

The accumulation of more debt relative to assets would be ideal in the short term if companies were utilizing the debt to fund new innovation, capital expenditure and additional capacity for future growth.

The reality is that a large majority of the debt accumulation has been utilized to fund buybacks of company stocks to artificially boost earnings per share (EPS) which in turn helps stock prices rise despite the company profit not actually growing from this strategy.

The chart below shows that share buybacks have more than doubled since 2012 to $161 Billion in the 1st quarter of 2016, as more companies engaged in artificial growth strategies rather than invest in their own business models.

IBM a large technology company that has been an consistent innovator issuing several thousand new patents each year. However even though IBM still continues to issue several thousand patents, the company has been steadily increasing its debt levels (See chart below) to allow it to participate in stock buybacks.

IBM Increasing Debt & No Growth

These higher debt levels has allowed IBM to engaged in stock buybacks with the additional funds at their disposal. Unfortunately for IBM the stock buybacks have not helped the actual company as  it has struggled to grow over the last few years.

The chart below is a perfect example how a large company has tried to control its EPS through artificial boosting its profits with stock purchases funded through debt. However the actual result is that IBM's revenue (which can't be artificially adjusted through stock buybacks) has been falling since 2012 as the company continues to struggle to grow its top line and bottom line numbers.

Netflix, which is relatively young technology company that provide online streaming of TV content, is a company that has been investing large amounts of money into the companyto deliver new and original TV content, as it differentiates itself and reduces its reliance on licensing content from other media companies.

On the 18th October Netflix announced its latest quarterly result, which was above estimates for EPS and subscriber growth. However the interesting thing that investors didn't seem care about is that Netflix free cash flow is going the wrong way and accelerating. It burned through $506 million in a single quarter and just over $1 billion over 3 quarters. (See chart below) The stock ended up jumping around 19% after reporting its results.

Because of the huge drain of cash despite reporting a profit, Netflix did mention it will be tapping the markets for an increase in debt soon. Because interest rates are so low the market does not care that Netflix is essentially, borrowing more money to make new TV shows to attract more members. The current business model is simply not sustainable, especially when the company spends $142 to add one new subscriber.

If Interest rates were set by the market and were not manipulated by Central Banks the actual interest rate would be significantly higher to encourage savers to part with the capital. In this scenario Netflix business model would not survive in its current form.

The last chart summaries very simply, how "we have lost control of the real economy by trying to control everything". Global GDP estimates continues to decline as global stocks continue to increase, as Central Bank balance sheets fund global stocks higher.

Lastly this MUST WATCH video Rick Santelli makes a simple request to Central Banks.

Sources:

Forbes.com
Fred.stlouisfed.org
Zerohedge.com
Wsj.com

Netflix (NFLX) reported its quarterly earnings with strong subscriber numbers, which was posted after the US markets closed. Because it reported strong than expected subscriber growth of 370k in the US and 3.2mil internationally the stock is up close to 20% at $199.25 in pre-market trading at the time of writing this.

Can The Bull Run Restart For Netflix?

Today we take a closer look at Netflix after it reported strong earnings and subscriber growth, propelling the stock (in pre-market) within its all time high prices around the $130 mark.

Since 2012 Netflix has enjoyed a spectacular run in price climbing from around $7.50 - 8.00 level back in 2012, all the way up to $130.93 closing high price last December. In a short 3+ year period Netflix has climbed over 1500%.

After the huge run in price the up trend ended and the price fell back to around the $85 level on 3 occasions marked with the 3 black circles on the support line. (See chart below)

The pre - market trading price is shown with the horizontal line inside the circle, to give you an indication on where its likely to trade when the market reopens based on the price at that the time of writing.

Since the price has confirmed the break out of the mini downtrend and is now approaching the resistance level of $129.25 it has a good chance to break out to new record highs and restart its bullish uptrend that ended last December.

Viewing the Netflix chart on a shorter time frame with a daily chart, we can see that the price had been struggling to break out of the range in price. In fact the range of prices was being squeezed as the market tried to determine the new direction. (See chart below)

On a daily chart the next level of resistance is around the $111.50 as noted in the chart. However based on the pre - market price it looks to open comfortable above resistance. This puts it in contention to reach the next level of resistance of $129.25.

If Netflix can close on a daily chart above resistance level of $129.25 and hold above it for the weekly close as well, than Netflix can recommence its uptrend to new record highs.

Source:

zerohedge.com

Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

The S&P 500 broke its 8 month uptrend yesterday, as US 10 year Government bond yields have continued to move higher, signalling potentially more pain ahead for the S&P 500 stock index.

For the calendar year the S&P 500 is still up after falling in January and February this year, as the S&P 500  has not looked back since touching the lows for the year around the 1820 level. However the index has closed below its long term uptrend where it's current resting on a support level. (See chart below)

Moving forward the key to the direction of the S&P 500 is whether the break in trend is confirmed and it closes on a daily chart within or below the rectangle box shown in the chart below.

Break In Trend - Head Fake

An important note to make is that earlier this year on June 27th the index broke its uptrend after the Brexit vote shocked the international markets. However it quickly rallied back within the uptrend as coordinated efforts by the Central Banks, to artificially lift the stock markets with more stimulus worked. This allowed the index to move significantly higher over the next few months. Therefore it can't be ruled out that the break in trend is only a head fake by the markets and the Central Banks once again panic and step in to save the markets.

If the break of the uptrend is confirmed and is able to close below 2128 level on a daily basis the next level of support is around 2035 / 45 level.

Catalyst For The Break In Trend

Since making the highs in August this year the S&P 500 has been going sideways to slightly sloping down. One of the main catalysts for this is the rise in US 10 year Government bond yields, which have been steadily rising since making lows in July this year. (See chart below)

The chart below of the US 10 year Government bond yields is of a weekly chart, which allows you to see a better indication of the bigger longer term trend that is taking place.

From the chart you will notice that the weekly downtrend broke in the first week of September, where I have circled the chart. After it closed above its downtrend it fell briefly to the 1.59% level, which is now its new support level. After resting on support it started climbing again in the first week of October.

The fact that weekly downtrend that has been in place since 2015 broke last month, indicates a big shift is taking place for the S&P 500 index as well as global stocks in general.

Why Higher Rates Are Not Good For Stocks?

Stocks traditionally move in opposite direction to bond rates / yields, as stock indexes are priced / valued according bond yields. If bond yields move higher stock dividend yields need to move higher as well, to compete with higher returns from bonds. To get higher dividend yields stocks need to either, generate higher dividends or the price of stocks falls or both.

The other reason higher bond yields are not good for stocks is that the higher the yields go the more expensive it is to take on debt for consumers and companies.

Higher debt payments for consumers reduces demand for products and services effecting companies revenues and profits, which ultimately ends with stocks falling.

Since corporations in the US have record debt levels to fund massive buybacks and dividend payments. Rates climbing and breaking its downtrend is also bad news for stocks.

To see a recent article where I discuss the shifts in bond yields and the negative impact on global stocks you can click Is the bull market in stocks ending?

Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

One by one real estate markets across the globe have begun to pop as the record real estate bubble has turned to a slow down in prices and growth. Multiple regions and real estate markets have begun to cool despite record low interest rates and Quantitative Easing (QE) stimulus.

Until recently the global real estate markets had been one of the best performing asset classes over the last 7 years, as Central Banks coordinated efforts to stimulate the economy in 2009 and further in 2012 - 2016 brought interest rates around the globe to record lows. Some countries even went negative with the objective to ensure GDP growth continues.

The Tipping Point Of Stimulus - Too Much Of A Good Thing

Eventually though any market will reach the limits of what artificial stimulus can do to prices and demand. Whether its auto / car market, think of the cash for clunkers stimulus and the more recent auto subprime loans bubble in the US, or  whats happening right now with real estate prices in different countries. Eventually demand begins to wane even when stimulus remains or increases. This happens when too much of a good things begins to take hold and stimulus actually becomes a negative to demand.

Pizza Eating Example:

If your hungry and you love pizza you decide go to a pizza restaurant. The demand for eating pizza is high, however eventually the demand or desire for more pizza will start to fall until you reach the point of when you don't want no more pizza. Your desire or demand will not change even if the pizza price falls by 50% making it easier to buy more. Why because you reach the limits of your own consumption and demand eventually disappears.

This simplified example works in a similar way to economic stimulus in asset markets as it does for the rise and fall in demand for pizza. Everything has a limit where extra stimulus stops being effective.

Luxury Manhattan Real Estate - Latest Market To Correct

The luxury real estate market in Manhattan is one of the latest markets to cool as it pop its real estate bubble. In the chart below you can see the declining trend in growth in prices in Manhattan. Since January 2015 where growth was around 8% pa, the level of growth has continued to fall each month to February 2016. Where the data shows that it has gone negative to close to a 1% fall in prices.

San Francisco area has been another hot real estate market that has started to cool down, despite being a trendy place to live and close to employment opportunities. With several big Technology companies headquarters located in the area.

In this short video below its give you a good understanding how the bullishness of the real estate market has tapered off, as the real estate sales and prices have soften and the time taken to sell has increased compared to a year ago.

One of the reasons why the San Francisco real estate market has started to cool despite low interest rates and stimulus is due to the fact the employment levels in the area has peaked, and has been stagnating since September last year with no growth recorded in employment in the area. This has effected rental demand and rental prices have begin to come down also weighing on the San Francisco real estate market.

Based on the indicators and the employment data the trend for this real estate market is not looking good going forward.

Across over to Vancouver real estate market in Canada, has experienced a spectacular fall in prices in a very short period of time. (See chart below)

Similar to San Francisco real estate market, Vancouver had experienced sharp rises in prices over the last few years as foreign buyers and local demand drove up prices. This was due to record low interest rates forcing investors to find a destination to earn a return on their capital, as cash and bonds income continued to fall. However recent tax increases for foreign buyers in Canada has effected demand dramatically in the area, with prices falling sharply since July this year.

The video below gives you a snapshot of the current Vancouver real estate market and the fallout from a sharp drop in home sales in the region. On a bright note they expect the market to remain relatively stable moving forward. Given the global backdrop in real estate trends this assumption may change.

In the UK commercial real estate has been experiencing a slowdown since the beginning of the year and was in the process of cooling before the Brexit vote dampened confidence for this asset class further causing further pain for the sector.

The graph below shows the trend in property deals value falling compared to the same month year ago. The trend is clearly falling faster as February through to May show steeper falls than January.

The falls in property deal values is most likely the consequence of income and capital growth returns continuing to fall each month since reaching the peak in October 2014 of 12.95% return, to the current return of 5.91% in March 2016. (See chart below)

Australia's real estate bubble has continued to remain red hot in bubble territory despite warnings from BIS and other groups on debt levels. To see the article click here Australia's debt addiction fuels bubble.

Despite the residential real estate market continuing to perform strongly in Australia, the Australian real estate investment trust (REIT) sector which predominately focuses on commercial real estate, has experienced sharp falls in prices since August. The REIT sector current price has fallen back to the levels set in April this year despite setting a yearly high back in July this year.

Why It Feels Like Everything Is OK

This chart below shows exactly why it appear that everything seems to be OK even though each month another real estate market across the globe starts to cool as their bubble pops and deflates.

The chart below shows global GDP expectations for 2016 overlapping the global stock market and global central bank balance sheet levels.

The chart shows the blue line which represents global central bank balance sheet continuing to increase, and the global stock market following this trend up with it since the start of this year.

What this indicates is that the global stock market is being held up by artificial stimulus as the stock market no longer reflects global GDP movements to the downside.

I'm aware that not every real estate market around the globe has started to pop. In fact some markets like China and Australia residential market are continuing to go higher.

The signs however are getting stronger as more and more real estate bubbles popping are emerging each month. Eventually more real estate markets will be effected, as the stimulus effect on demand starts to fade. Coupled with the fact global GDP continues to fall and the effect it will have on employment levels will cause real estate markets to fall in more regions.

Sources:

bloomberg.com - 1
bloomberg.com - 2
zerohedge.com - 1
zerohedge.com - 2
zerohedge.com - 3
theaustralian.com.au

Gold fell heavily overnight as it fell over $40 and broke its $1,309 support level and its 10 month uptrend in the process. So its fitting to take a look at where Gold will be heading next.

I recently discussed Gold Click here where I talked about the jump higher on Yellen's hold decision on rates 2 weeks ago. In the article I highlighted the imminent breakout potential higher, as its strong uptrend and bullish indicators pointed to higher prices in the future.

So to see a sudden plunge in price and reversal of its 10 month uptrend in such a short period is interesting.

Starting with the monthly chart below, I have circled in black the break of trend which you can notice has fallen considerably even though its only a few days into the new month.

Based on the monthly chart the first level of support to reach is around $1,205 an ounce or another $62 away from the current price (shown on the chart). Failure to hold that support level there is another initial support level at $1,170.

If the break of the uptrend to the downside is a false breakout, Gold would have to close above $1,350 resistance level to resume its uptrend. So we will have to wait for another 3 weeks or so to confirm the uptrend is broken on monthly chart.

Looking at the daily chart below the magnitude of the fall is relatively large compared to the average daily moves in price.

On the daily chart I have highlighted the first support level at $1,250 an ounce. If Gold is unable to hold the next support level the following support level is around $1,206.

Since Gold fell over $40 in one day it broke below 2 support levels of $1,309 and $1,293 closing at $1,267. So the previous support level of $1,293 is now its first resistance level. Based on the large fall in price, Gold would most likely test its resistance level of $1,293 over the next few trading days.

For Gold to resume its uptrend on daily basis, it would need to close above the $1,340/45 level to signal it a false breakout to the downside. Given the fact that the probability of a rate rise in the US for November and December is rising, Gold will most likely confirm the reversal of its uptrend and head lower.

Finally I have a video from Peter Schiff, who believes the drop in Gold due to the probability of rates rising isn't warranted. He believes rates wont be going higher and if the FED was to raise rates it would be bullish for Gold, just like the rate rise in December 15 was for the precious metal.

Rounding up the video Peter also outlines the end game for the markets from the FED's actions going forward.

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Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

China's remarkable growth in GDP has provided a large boost to global growth over the years. As the global economy and trade recovered from the GFC in 2009 and 2010, China was major contributor in reversing the global down turn and lifting GDP higher.

China Growth Fueled By Record Debt Levels

Its no secret anymore that the real reason, China has been able to rebound so strongly in the last 7 years, was because China has accumulated a record amount of debt to fuel its own GDP growth and keep demand for global trade strong.

Now that total debt to GDP is approaching 300% (see chart below) in China, its starting to become a drag on the largest economy in the world. As the economy continues to slow due to its debt bubble impacting growth, it increases the risk that China will actually threaten global growth as it deals with its own debt crisis.

If you take a look at the chart below from 2004 to 2008 period, you will notice that the debt to GDP ratio was stable and moving sideways at around 175% debt to GDP. This indicated that the economy was growing in sync with the level of debt growth within China's economy, which is a healthy sign of a growing stable economy despite at the time debt to GDP was high.

However when you look at the chart from 2008 to 2016, the debt to GDP starts to increase for the first few years and then accelerates as it approaches 2012 over the next 4 years to 2016. This trend is not a healthy sign for China's economy, as this indicates that the GDP growth has been unable to keep up with the level of debt taken on within the economy.

If debt is growing faster than GDP the debt stops becoming a contributor to growth and instead starts to drag on growth especially as debt to GDP ratio accelerates.

China To Drag Global Economy Down

Now that the debt has become a major problem in China, there have been a number of people and international groups including the BIS, Bank of England (BOE) and NAB Bank among others, who have raised concerns over the growing risks that China's debt bubble poses on the global economy.

The video below is from a former chief economist of the IMF Ken Rogoff discussing the key issues he believes China's slowdown poses on the global economy.

Debts Start To Pile Up

The chart below is from 2014 and shows the EBIT debt coverage of 780 bond issuers in China, and the level of interest payments to operating profits.

You can see that back in 2014 a number of debt issuers had a level of 100% or higher EBIT debt coverage. Meaning that the interest payments were higher than operating profits to pay for the loan. Leaving the only options of defaulting on the debts or borrowing more money to pay the interest. Borrowing money to pay existing interest and debt is the definition of a ponzi scheme.

The chart is very interesting even though its from 2014, as it layed the foundation for the problems companies in China are facing in 2016.

According to Reuters.com  25% of Chinese companies profits in the first half were not higher enough to service their debts and make their interest payments.

China's Debt Crisis Too Big For Government Stimulus To Be Effective.

Professor Steve Keen highlights in this video below, his agreement with BIS assessment of China's debt crisis, the subsequent slowdown in growth and how China grapples with its high debt levels.

Steve also suggest that the China's Government will attempt to stimulate the country to allow it to grow out of its debt problems, however he believes the problem is too big even for the Government to handle without experiencing a downturn in the economy.

Global Growth Slowdown To Continue

China's debt crisis and its subsequent slowdown within its own economy, is coming at an inconvenient time for the global economy. Many countries including the US economy are starting to experience a slow down as recent economic indicators highlight the slowdown in global growth.

Within the US it's becoming more apparent that the US economy is about to experience a recession or may already be in a recession unofficially.

To see the recent post on the slowingUS economy click on the link . Is the US in a recession?

Sources:
Reuters.com
zerohedge.com
rt.com
abc.net.au