Some things I learned this week: 3/6/18

I remember receiving a piece of advice back in the fall of 2017 regarding the behavior of the stock market and it’s relation to unemployment rates. The observation made suggested that every time the unemployment rate hits a low around 3.7%, you better get ready for an impending economic contraction. In fact, the argument is elaborated in this piece by SeekingAlpha which offers that there is an observed inverse relationship between forward stock returns and unemployment rates in the United States (caveat: these are always trends, not laws).

Well, the FT just reported that the U.S. has hit 18-year lows in unemployment, currently sitting at 3.8%. This will likely lead to the Fed raising interest rates this month (June), and as Ray Dalio explains in his 30-minute introduction to the Economic Machine (12:34), borrowing rates should decrease as the costs of debts increase, which slows spending, so incomes drop, followed by an overall decrease in economic activity and we wind up with a recession. The trend, therefore, would suggest high likelihoods of an impending stock market crash, which has been suggested to be overdue.

 

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