Fin - Breakout - US

Traders, Just Trade — And Let the Economists Do the Worrying

Jeff Macke
Breakout

Newly minted "Friend of Breakout" John Lewis joined us remotely from Ohio to help make some sense of the economic mumbo jumbo clogging everyone's brain (or at least mine) while we just try to trade stocks.

Why should you care? Because I've personally lost money letting my brain getting clogged with the dismal science's seemingly endless supply of reasons we're all going to end up wearing barrels and living in Hoovervilles.

Lewis offered both comfort and cause for pause. On the dark side, he shared research he's done regarding the spread between yields on relatively low-rated debt and presumably sound 10-year Treasuries -- sort of a fancy way of looking at the market's appetite for taking on risk in order to get higher returns. For the sake of comparison, the average spread for the last quarter-century has been around 5.5%.

Only a few times in history has the spread gone below 3% -- a level of complacency and calm that has generally resulted in an economic storm. Today the spread between moderate-grade corporate debt and the 10-year is just south of 3.5% and moving lower. Lewis is "getting a little bit concerned" at these levels, comparing it to March 2007.

As for U.S. debt in general, Lewis isn't paying much attention to the International Monetary Fund getting all worked up about American debt levels. "Foreign governments continue to be voracious buyers of our debt," Lewis says. As long as that continues the IMF can whine all they want, but our economy is more or less fine, and the U.S. Federal Reserve still has options.

Bottom line: Keep your eye on debt spreads and non-American nations' appetite for our paper. Beyond that, well, there's still plenty to keep you up at night if you're so inclined. To quote Mr. Mojo Risin, "The future's uncertain, and the end is always near."

That being the case, it's probably best just to trade in the now.

Also a good idea to let us know what you think. Comment below the post, or send an email to breakoutcrew@yahoo.com.

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