While the economy is a vastly complex and difficult thing to grasp, you can simplify the many moving parts by boiling it down to three basic elements, or touch points, which give you a brief understanding of the health and general direction of where and how things are going. Those three touch points are as follows:
…Having a general economic awareness — meaning a general sense of what’s happening in your economic environment — can make the world of difference in your financial standing…Knowing what’s happening in the news or knowing what’s trending on Twitter…can help you but won’t always give you an accurate or fair read on what’s really going on. Markets, however, can fill the gaps of false information with some objective truth, some numerical proof…
The 3 basic elements are as follows:
1. Fear Awareness
Pay attention to the general sentiment and energy of society and the overall marketplace…
- Volatility Index (VIX or /VX) measures how volatile stock prices are currently.
- When the VIX is high, overall stock prices are all over the place, moving further from their historical norm. High VIX = high fear and uncertainty for the future of the economy.
- When the VIX is low, prices are steady and relatively close to where they’ve been. Low VIX = a calm and easy going market with not much political or economic uncertainty among investors.
- Social Sentiment…measures the economic climate…by noticing and experiencing first hand what’s happening in your physical economic environment.
- Are there more for lease signs than busy shops and restaurants? If so, we may be falling on hard times.
- Are people out and about, spending money, eating at restaurants and going to movies? Then the social sentiment is positive and people will be likely to spend more money, stimulating the economy; perhaps even save more…
2. Sector Awareness
a) Pay attention to the major U.S. indexes that track the overall general direction of major U.S. equities.
- the S&P 500: (SPY or /ES) is an average of stock prices for America’s top 500 most valuable companies at a given moment in time…
- the NASDAQ: (QQQ or /NQ) is an average of stock prices for the U.S. tech sector
- the DOW: (DIA or /YM) is an average for what are considered America’s top 30 most prominent and important companies.
b) …Look at currency exchange rates [because an] increasing price for a currency shows an increasing underlying value of that currency when compared with the underlying value of the U.S. Dollar. For example:
- BTC/USD (BITCOMP): Bitcoin to USD
- EUR/USD (FXE): Euro to USD
- JPY/USD (FXY): Japanese Yen to USD
- CAD/USD (FXC): Canadian Dollar to USD
c) …Be aware of U.S. interest rates…[because] when the Federal Reserve (the U.S. Central Bank) changes interest rates, that effectively changes the amount of debt everyone has to pay back to their lender.
- Fed Funds Rate (EFFR):
- When rates rise, your credit card debts start piling up faster. When rates rise, loans become more burdensome. When rates rise, borrowed money becomes more expensive to pay back…
- When rates fall, borrowed money becomes a cheaper commodity. The stock market tends to go up when the Fed lowers interest rates because it’s taken as a sign to investors that people have easier access to money and will be spending more because of this, and companies will ramp up production and create more jobs to keep up with increased demand.
3. Participation Awareness
Pay attention to the level of participation in markets. This is also known as liquidity. Are investors actively buying and selling or not really? Are shares of stock being exchanged and is market activity rising or are the markets drying up and exchanging shares less frequently?
- The best markets are the most liquid markets [while] illiquid markets… make for a less efficient, less fruitful marketplace…
- [When] buyers can’t find sellers and sellers can’t find buyers it leads to market prices plunging and, eventually, a market crash. (i.e. what happened in 1929 during the Great Depression)
- Beyond just in the stock market, liquidity means ability to convert an asset into cash easily…In order for there to be liquidity, there needs to be many buyers ever willing to buy. Also, certain asset types, such as shares of stock or crypto for example, have higher liquidity due to their hyper-mobile nature. Assets like a house or a car are less mobile, and, therefore, less liquid.
- When investors are saying we’re in a high liquidity market, it means there are ever growing numbers of people with outstanding cash wanting to buy into the market.
Pay attention to these financial things in our economy. Stay financially “woke” to avoid being financially broke.