Fed’s Balance Sheet Increases This Week

Houses Too Expensive?

This sentiment indicator for housing is interesting because it isn’t a contrarian indicator. Usually when you see investors euphoric about stocks, you want to sell. In this poll, the slightly over heated market is being met with skepticism. People in the housing market are much more rational than stock speculators. Although the housing market crashed in 2008 partially because of house flippers and speculators, that was an unusual situation. In the current market, you wouldn’t be able to get a mortgage on a home that was too expensive. When housing gets too expensive, people get priced out of the market. Housing is more like a retail good than a stock or bond investment. With all of that being said, it looks like housing is getting expensive as more people think it’s a good time to sell than think it’s a good time to buy. This might be because shelter inflation has exceeded wage inflation, making it tough for many people to afford homes.

Italian Bad Debt

The chart below aims to show the amount of Italian bad debt is declining, but I find it remarkable to see how much it has been increasing for the past few years. Throughout the entire recovery until the past few months, this bad debt has been increasing. It’s now at about 10% of nominal GDP. I doubt it will decline back to what it was before the recession before another recession occurs. With the improvement, the ECB will have an easier time formulating a plan to recapitalize the banks and get the bad loans off their balance sheets. There probably needs to be more improvement to get the ball rolling. The other aspect in play is the March elections in Italy.

New Analysis Based On News Flow

The charts below are another example of new a type of analysis. These look much better than the Citi Surprise index which doesn’t have any correlation to how good the economy is doing. As you can see, the first chart shows the news flow about the global economy. When good headlines are prevalent, this index goes up. It seems to do a great job of showing how strong the economy is because its historic rating is in tune with other metrics we’ve looked at like the IFO world economic climate index. The second chart shows the net stock upgrades compared to the news flow about how earnings are doing. As you can see, both are correlated which also signals this is a good study. The earnings situation is the best since 2011. These charts aren’t forward looking, but I think they do a good job of explaining how the news flow represents the environment. You only see how good the economy and earnings are doing in the past when you read articles. They shouldn’t color your investing because you make money based on how the good or bad the future is.