I usually over complicate things. Certainly have with trading. I feel understanding multiple methodologies are helpful as market conditions change. For example, implied volatility is lower now than it has been in a long time, yet each of the last three trading days of last week had fairly decent realized volatility with very smooth price action. There have been recent legislative proposals that while economically sound, might give pause to certain classes of investors. There is “Glaring” gap, now three weeks old in SPY, but historically, low implied volatility environments can last a while. The superstitious might note that VXX has been repriced from $10 to $40. On longer term charts, current prices are very far from their central tendencies. Not a record by any means, but in an area where at least brief, significant corrections have taken place. So while I have reversion worries, the bulls have a very strong case:
Understanding of the science of economics and monetary policy has reached new heights and is being applied masterfully through sound legislation. Yes, I used the word “Science” in a sentence with “Economics”. A key metric, in my mind, to quantify our current economic potential, is the aggregate spending on wages in proportion of all business spending relative to historical levels. Other the last few decades, employer spending on wages dropped from over 50% of expenses to about 30% of expenses relatively recently. Then, and now, each industry has its own relative levels of wage expenses. To stay competitive, businesses had increasingly relied on outsourcing, automation, and implementing more efficient processes. Smart management on the micro scale, but it created a economic bottleneck in the US on the macro scale because consumers had to rely on other ways to keep up spending. Consumer savings declined, borrowing increased, capital spending, such as on cars, was deferred, as shown by increasing average fleet age in the US. The sharing economy arose out of consumers needing to become more efficient themselves as wages did not keep up spending habits and needs. The velocity of money declined as well as the “Multiplying effect” of stimulus, although part of that was related to consumer and business confidence issues after the 2008 Great Recession. This in turn, started to adversely effect demand on goods and services that required increasingly decisive government intervention to avoid a negative economic feedback loop. I believe money put into consumer hands, preferably through plentiful, decent paying jobs for cultural stability reasons, has the greatest economic multiplicative effect, ultimately benefitting all, including employers paying higher wages and wealthy investors paying a higher capital gains tax. Higher wages can create a positive feedback in our economy, in my opinion, and I believe the current Administration fully realizes this. Quantifying the potential of wage levels returning to just the median of historical norms leads to breathtaking conclusions of our current economic potential. There is always “A fly in the ointment”, of any optimistic situation, so to speak. It is human nature. Many people tend to become complacent after a period of success or easy going. This can manifest itself with excessive risk taking and reduced productivity, creating a systemic bottleneck and or instability, that will eventually affect our economy, causing negative growth. Effective answers to delay these manifestations, especially during high debt levels, requires sniper-like, micro-policies, that directly address over speculation, etc., but nothing beyond that, such as appropriate regulations being put on certain asset classes. Dealing with complacency related lower productivity is more problematic, but it involves society embracing a common cause. This is why we need to reduce political divisiveness in the United States sooner, rather than later.
In conclusion, I believe the equities market will continue to grind higher for at least the next five years with corrections along the way providing great buying opportunities.
I’m going to play the above scenario, starting the beginning of next week, by putting on trades that benefit from a “Grinding higher” market environment, but am willing to decisively play a correction by buying puts in quantity when identifying potential areas of “Polarization”.
Edit: The above on wages increasing assumes either a more “Closed” economic system as in less trade, or similar policies among like minded countries.
