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Economics & Foreign Exchange

Economics Drive Markets

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Economics and Foreign Exchange Summary

The profits derived from investments are ultimately completely derived from the economic cycle. A booming economy encourages discretionary spending and profits for industries based on indulgence spending. Certain asset classes and certain businesses are better held during these cycles. Alternatively, a sluggish economy usually has low or little discretionary spending, and “safe haven” assets and industries humans cannot survive without performing better as investments.

The value of a currency is based on the demand for that currency relative to other currencies, or currency substitutes like bitcoin and gold, in the international market. This demand is directly affected by the economic strength of the underlying economy since fiat currency values are backed by the underlying economy relative to inflation or deflation incurred.

The economy gives a nation’s government the ability to pay its debts via earnings from taxed revenue, without relying solely on printing money or increasing the national debt in absolute terms or as a percentage of GDP.

Economics

Major Economic Analysis

Economic Summaries
Statistical Currency Projections
Large Speculator Sentiment
Technical Signals Lists

American Equity Markets

Economic Performance Index
US Dollar Projections
Market Sentiment Tracking
Sector Strength Tracking
Consensus Estimate Rankings
Fundamental Firm Analysis

Economic Cycles

GDP typically rises and falls in a pattern associated with the “economic cycle”, also called the “business cycle”. “Expansions” in the business cycle increase GDP, and it eventually tops out in a “Peak”. After the peak comes “Contractions” and GDP growth rates fall.

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Inflation/Deflation

Currency values are also affected by “Inflation” and “Deflation”, which affect the purchasing power of that currency. If a nation’s currency is “inflating” it is losing purchasing power. Each individual unit of currency can purchase less. If a nation’s currency is “deflating” it is gaining purchasing power, each unit of currency can purchase more.

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Real Gross Domestic Product

A nation’s economic strength is measured through output called gross domestic product. Focus on the inflation adjusted “Real Gross Domestic Product”. When Real Gross Domestic Product (Real GDP or RGDP) rises, the nation’s output has increased since the last time it was measured. When Real GDP falls the nation’s output has decreased.

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Central Bank Mandates

Central Banks try to keep their economy within a stable target range of economic growth. This is called a “mandate” and possibilities include Inflation, GDP growth, or Employment levels. One individual mandate prioritized over others by each Central Bank, but Inflation is most common.

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Central Bank Tools

Central banks have a set of tools that they can use to accomplish their mandates. The usage of these tools varies in suitability and preference by the central bank. Certain tools are more likely to be used in certain situations than others. The tools consist of roughly six options.

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Major Central Banks

Each of the world’s major central banks are different. Each currency has a central bank which manages and controls its currency. The job of the central bank is to stabilize the currency, while growing the economy for the people. Most focus on stabilizing inflation around a set range level.

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Economic Indicators

Economic indicators come in three different time categorizations. The first is “leading” indicators, which correlate to trends in GDP and inflation up to a year and a half in advance. the second is “coincident” indicators, which lag leading indicators and are typically used to show how the economy is performing now. The lagging indicators include GDP and Inflation.

When trying to predict economies, look at leading indicators. To determine which indicators are leading, look at their trends in expansion and contract months in advance of Real GDP expansions and contractions. If indicator expansions and contractions are strongly correlated to GDP and lead by a large time difference, the indicator is leading. If the indicator’s trend turns with GDP, the indicator is “coincident”.

GDP Growth

GDP Growth

Real GDP growth is the change in Real GDP on a quarterly or annual basis. The higher this number is, the greater the increase in Real GDP. The lower this number is, the greater the decrease in Real GDP.

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Manufacturing PMI

Manufacturing PMI

Manufacturing PMIs (or Manufacturing Purchasing Manager’s Indexes) are surveys sent each month to the largest manufacturing firms in the nation. It scores manufacturers outlooks on the economy. M-PMI’s lead GDP with a substantial time lag of between 8 months and 18 months depending on the nation.

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Services/Non-manufacturing PMI

Services/Non-manufacturing PMI

Service and Non-Manufacturing PMI reports are sent to the larger services providers in the nation every month. S-PMI reports cover the same areas as the Manufacturing PMI, with small changes to category names.

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Consumer Confidence/Sentiment Reports

Consumer Confidence/Sentiment Reports

Consumer sentiment and consumer confidence reports measure the confidence consumers have in the economy, which directly impacts their willingness to spend. If confidence is low they will spend less and save more, and the economy will shrink.

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Business Confidence/Sentiment Reports

Business Confidence/Sentiment Reports

Business sentiment and Business Confidence reports measure the confidence businesses have in the local economy, which directly affects their production levels and employment levels. Higher confidence is usually higher production and employment levels.

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Unemployment Rate

Unemployment Rate

The employment rate is the amount of working age persons who currently have jobs. The unemployment rate is the amount of working age persons without jobs. Employment rates may have other requirements and restrictions such as the last time people looked for a job. Employment rates have a mixed leading and lagging element.

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Interest Rate

Interest Rate

The interest rate is a lagging indicator targeted by Central Banks to control inflation and deflation levels. The interest rate controls the rates that banks lend money to each other overnight. Central banks can set a “Reserve Limit”, a required percentage of capital to have on hand. Banks lend if above reserves, borrow if below reserves.

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Consumer Price Index Finished Goods & Core CPI

Consumer Price Index Finished Goods & Core CPI

Consumer Price Indexes measure price changes in consumer goods. CPI Finished Goods is a survey of the current price of all finished goods for sale available in the economy. This includes food and energy, which are affected by global price changes.

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Producer Price Index Finished Goods & Core PPI

Producer Price Index Finished Goods & Core PPI

Producer Price Indexes measure inflation by asking producers (businesses) about their costs. Like CPI Finished Goods, it includes goods impacted by global prices (Food and Energy). It is read the same way as CPI finished goods: increases hint at more inflation, especially above expectations.

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Debt to GDP

Debt to GDP

The ratio of Debt to GDP is controlled by the government’s tax revenue versus its spending. The difference between Government Tax Revenue and Government Expenses must be paid for in some way, typically one of two ways.

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M2 Money Supply

M2 Money Supply

The ratio of Debt to GDP is controlled by the government’s tax revenue versus its spending. The difference between Government Tax Revenue and Government Expenses must be paid for in some way, typically one of two ways.

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Trade Balance

Trade Balance

A nation’s “Exports” are the goods sold to foreign nations. A nation’s “Imports” are the goods bought from foreign nations. A nation’s Exports minus its Imports equals its “Trade Balance”. If the Trade Balance is positive, exports are earning the nation more capital than imports. Wealth flows into the nation from sales. If the Trade Balance is negative, imports cost the nation more capital than exports. Wealth flows out of the nation from purchases.

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Stock Market Returns

Stock Market Returns

Public equity markets exist to provide investors with investment options. Ultimately, everyone utilizing them is seeking the same thing: Returns on investment. An equity market providing substantial returns on investment will be desirable to foreign investors. They must buy the currency to enter the equity market. An equity market that is stagnating or suffering losses will be avoided by foreign investors, or they will flee the market entirely.

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Intermarket Analysis

In the financial world no market acts by itself. Every single market acts in relation to every other market. They all are dependent on the same economic situation, but they react in slightly different ways. This allows a method of analysis called “Intermarket Analysis”, which uses the movement of markets to confirm biases for other markets and increase confidence in estimated trends.
There are effectively six core asset classes in the financial markets: Bonds, Commodities, Currencies, Stocks/Equities, Real Estate, and Mortgages. All derivatives are based on these asset classes.

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Economics

International Economic Analysis:

  • Major Currency Economic Summaries
  • Performance of Major Imports and Exports
  • Mandates of Central Banks versus Expectations
  • Performance Indexes of Major Economies
  • Economically Correlated Currency Projections
  • Large Funds Currency Sentiment Readings
  • List of Technical Indicators to Look For
  • Occasional: Foregin Exchange Technicals Markups
Economics

American Markets Analysis:

  • Summaries of American Economic Structure
  • Performance of Major
  • Imports/Exports
  • Federal Reserve Mandate versus Expectations
  • Performance Indexes of U.S Economy
  • Economically Correlated U.S Dollar Projections
  • Large Trading Fund Index Sentiment Readings
  • Market Wide Earnings Versus Valuations
  • Fundamental Ranking of U.S Business Sectors
  • Best and Worst Future Consensus Estimates
  • Occasional: Firm Fundamental Strength Report
  • List of Technicals to Look for While Trading

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