High RS Diffusion Index

September 19, 2012

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 9/18/12.

The 10-day moving average of this indicator is 87% and the one-day reading is 88%.

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The Real Effects of Debt

September 19, 2012

From the Bank of International Settlements, research that confirms what Ken Rogoff has been telling us all along.  Here’s the abstract:

At moderate levels, debt improves welfare and enhances growth. But high levels can be damaging. When does debt go from good to bad? We address this question using a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010. Our results support the view that, beyond a certain level, debt is a drag on growth. For government debt, the threshold is around 85% of GDP. The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds. Our examination of other types of debt yields similar conclusions. When corporate debt goes beyond 90% of GDP, it becomes a drag on growth. And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated.

You can read the whole paper here.

Households really aren’t any different.  High levels of debt can impact their solvency also, and  threats should be addressed quickly and decisively.  Likewise, it’s a good idea to have a fiscal buffer for emergencies.

I’m not sure how quickly and decisively Congress is dealing with national fiscal issues, but you have control of your own response at the household level.

It’s pretty clear that there will be significant investment implications from high levels of debt, whether at the sovereign or corporate level.  It’s not clear exactly what those implications will be.  In fact, there is still a lot of disagreement about whether taking on more debt in QE3 will help the economy or hurt it.  While we have a chance to see if Mr. Rogoff’s theory works in the real world, investors might do well to heed the message sent by relative strength.  Theory is interesting, but it may be more profitable to see which asset classes get stronger as a result of continued easing.

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