Friday, January 15, 2021

How Much Can You Make Using Automated Trading Strategies? Answer: Over $1.2M in 2020

Strategy #5

If you've read any of my previous posts you know that I'm a big fan of three things:

  1. Trading Futures
  2. Liberty and Economic Justice (Blockchain / Bitcoin)
  3. Automated Streams of Income

This post touches on all three categories; it ties trading NASDAQ futures to automated trading strategies, which can lead to economic freedom.  

So what's the catch?

The catch is that you have to find profitable trading strategies. 

What is an automated trading strategy?

Automated trading (also referred to as algorithmic trading) is a trading strategy that makes automated trades based on a set of inputs or a program that you create. Traders like to use automated strategies to remove emotion from the decision making process when making trades.

For example, here's a description of the automated trading strategy we refer to as Strategy #5.

This strategy made over $15K in 1,000 trades between 10/18/2020 and 1/6/2021. It made 13.16 average trades per day and had an average daily profit of $194, which is a profit of $15 per trade:

Strategy #5 uses the MACD Indicator (MACD), Double Stochastics (DS) and the Relative Spread Strength (RSS).  These are all commonly provided by trading platforms for traders to include on charts.

So what do you do with these indicators? 

You use them to develop a strategy and then you automate that strategy. 

Here’s how you would describe and automate Strategy 5:

Enter Long - When MACD (MACD plot) crosses above MACD (Avg plot), with a look back period of 2, AND, when DS with an RSS input series, is greater than 90.

Exit Long - When MACD (MACD plot) crosses below MACD (Avg plot).

Enter Short - When MACD (MACD plot) crosses below MACD (Avg plot), with a look back period of 2, AND, when DS with an RSS input series, is less than 10.

Exit Short - When MACD (MACD plot) crosses above MACD (Avg plot).


For MACD, use 26 as the Slow parameter, 9 for Smooth, and 12 for fast.

For RSS, use 10 for EMA1, 40 for EMA2, and 5 for Length.

You can test this strategy by duplicating our results (see the chart below).

This is what the strategy looks like in chart form:


Which automated trading strategies are the best and how do you you know?

This is what we do -- we hunt for high performing automated trading strategies for the NQ futures contract.

We've tested over 500 strategies and we're sharing our best performing strategies with you.

The following are the best performing strategies:

Backtest Results based on ~1,000 trades

Backtest Results based on 1 year of trades

Our results are based on how well the strategy performs after 1,000 trades and how well it does after one year of trading. Then, we compare each strategy based on the following attributes: 

  • Drawdown - This refers to the maximum drawdown statistic, which provides you with information regarding the biggest decrease (drawdown) in account size experienced by the strategy. Drawdown is often used as an indicator of risk.

    Drawdown = single largest Drawdown

    As an example, your account rises from $25,000 to $50,000. It then subsequently drops to $40,000 but rises again to $60,000. The drawdown in this case would be $10,000 or -20%. Take note that drawdown does not necessarily have to correspond with a loss in your original account principal.

  • Profit - The net profit made on the strategy for the backtest.

  • #trades per day - The average number of trades made per day using the strategy.

  • Profit / Day - The average profit made per day.

  • Profit / Trade - The average profit made per trade.

  • Lowest daily new profit - The worst performing day of the strategy in the backtest.

  • Highest daily net profit - The best performing day of the strategy in the backtest.

So, how much can you make using automated trading strategies? 

If you were to trade 1 NQ contract on each of our 9 strategies listed above, you could have made over $1.2 million in 2020**.

Backtest Results based on 1 year of trades

* Profit assumes no commission

You can have access to a description of all strategies with a subscription to our newsletter: Automated Trading Strategies on Substack. A subscription gives you the opportunity to use and copy our best strategies. 

Our highest performing strategy made over $270K last year.

As a subscriber, you'll also be the first to receive strategy performance updates as well as new strategies added to the list.

You will also receive:

  • The ability to download the strategy into NinjaTrader 7 (not available for NinjaTrader 8)

  • A detailed description of how to duplicate the automated strategy.

If you're already a subscriber, all strategies are available below:

Automated Trading Strategies: Strategy #1

Automated Trading Strategies: Strategy #2

Automated Trading Strategies: Strategy #3

Automated Trading Strategies: Strategy #4

Automated Trading Strategies: Strategy #5

Automated Trading Strategies: Strategy #6

Automated Trading Strategies: Strategy #7

Automated Trading Strategies: Strategy #8

Automated Trading Strategies: Strategy #9


Download Instructions

Strategies are made available by description (like the description for Strategy #5 above) and/or as a download for Ninjatrader 7. If you're having difficulty creating an automated strategy with the description, please contact us directly at celanbryant @ gmail.com.

Ninjatrader 7 download instructions:

  1. Click on the link within the post to download file from GoogleDrive.

  2. Download the Strategy to your desktop, keep them in the compressed .zip file.

  3. From the Control Center window in Ninjatrader 7, select the menu: File> Utilities> Import Strategy.

  4. Select the downloaded .zip file.

  5. NinjaTrader will then confirm if the import has been successful. 

 

If you've never used an automated strategy in NinjaTrader 7, NinjaTrader provides instructions here.

Subscribe to Automated Trading Strategies

**There is no guarantee that these strategies will have the same performance in the future. We use backtests to compare historical strategy performance, but there are no guarantees that this performance will continue in the future.  

Friday, January 8, 2021

January 6 Was A Game Changer - Time To BUY, BUY, BUY

Unless you're in a cave you know that the U.S. was threatened on Jan. 6 by a group of protestors that stormed Capital Hill as lawmakers debated electoral college results. The fear is that this event could make the markets unstable.

Given the tools of the Federal Reserve to buy up everything in sight it's no surprise that the market rallied on January 7, especially since lawmakers have gone home until January 20. In other words, it's all on the Federal Reserve to create stability. And that's exactly what they did. On a day when the market should have tanked, it skyrocketed. 

As a technical trader, I can tell you that the funds flow was strong and this buying will most likely continue until the inauguration. 

What can you do now?

Buy the dip. My previous post predicted a sell-off in the first quarter, but January 6 was a game-changer. The Federal Reserve is on high alert and it will do anything it has to to protect the market. I don't know how long this market freebie will occur, but I do know that it will be very strong over the next 10 days.

So, whatever you trade, if it's related to the equity markets, now is the time to buy. 

If you trade futures, like I do, that means buy all dips on whatever you trade - NQ, ES, YM. If you trade specific stocks, buy dips on those stock on a market index (Dow, NASDAQ, S&P). These are the only stocks the Fed really has to worry about from a market stability perspective, so extra care will be taken to support these equities.

I'll provide another quick update after January 20.

Tuesday, December 22, 2020

Technically, The Market Is About To Take a Dive in Q1 2021

Technically, the market is about to take a dive in Q1. It's going to be brutal unless the Fed comes in and starts buying, which it very well might do. I'll talk about why I don't think that's going to matter in a moment. First, let's revisit bitcoin.

As advised, we hit a bottom in bitcoin in Sept/early Oct and then started trending up. We passed 13,500 by the end of October. Then we made new highs and now we're trading at 23,440.90. 

I told you to get in at 11,000 in October and now we're at 23,440.90. We doubled our stack!

I'm a HODLer, so I don't sell bitcoin, but if you're in this for the trading opportunity, now is the time to take profit. 

Don't fret, another opportunity is coming. 

What about equity futures?

I'm putting myself on the line here, because I know the Fed can come in and start buying up assets at any time (to the point of insolvency), but I think the pressure is going to be so strong, it won't matter. 

The Pressure

The pressure started last March. It's been gaining momentum all year. At some point, the bow will break and nothing will be able to stop it. That's just how the technical market goes. 

The Federal Reserve has warned of this. They've been staunch advocates of direct stimulus, but politics has made direct stimulus difficult. So now we're in a pressure cooker and all it takes is one spark. That spark is 12,000. That's the RUBICON.

How will it happen? 

The chart below is a daily Nasdaq futures chart. It's showing us that we need to start to selling when the Nasdaq breaks through 12,000. There might be a slight pullback on that, but it will continue down and it will continue for at least 30 days. 


There will also be a pullback at around 10,000. If the market continues through 10,000 -- hold on to your horses because we're in for a wild ride.

What Else Can You Do?

I'd also start looking at buying gold (offshore) and if you own equities, focus on companies that are in countries that had a large direct stimulus package. 

The graph below is from Time Magazine.

It shows that Japan has been the leader of the pack on spending as a percentage of GDP. Japan started direct payments before COVID to stave off deflation. That's where the Fed got the $1,200 figure from to begin with (10,000 HK = $1,200 US). Japan made the first direct payment in what is referred to as a helicopter drop by the Fed. In fact, Japan did it just before the market tanked in the US (February 2020). And, they've continued to be the front-runner in this effort. 

So, my money is on Japan. Specifically, I'm looking at companies/start-ups that rely primarily on Japanese spending.

I'll provide more commentary at the end of January. Until then, short US stocks, buy gold and companies that rely on Japanese spending, and HODL bitcoin.

Wednesday, November 11, 2020

Bitcoin Price: On Our Way To New Highs By EOY

As advised, we hit a bottom in Sept/early Oct and then started trending up. We passed 13,500 by the end of October.

Now that we've passed 13,500,  technical charts are showing a target of 18,000 and possibly new highs by the end of the year depending on momentum. Level of support is 15,000 to 15,300.


Friday, October 9, 2020

Daily #BTC Futures Chart - We Are On Our Way To $13,500 (#Bitcoin Daily Chart)

 Get your orders in. We're on our way up to $13,500 by the end November 2020.


 
The chart below was taken at the end of September. We were in a period of consolidation while the market decided on which way to go, a breakout south or a continuation with the trend that's been established over the last 6 months
 
Time to get your buy orders -- we're going higher.



Thursday, September 3, 2020

My Favorite Technical Trading Indicator - Trend Lines (#futures #qqq #nasdaq)


“It's only when the tide goes out that you learn who's been swimming naked.”  -Warren Buffett

If you follow any market for an extended period of time you will notice certain patterns in price action. In particular, you will notice that the market moves in waves. It is pushed in certain directions by large buyers and sellers in the markets. These large buyers and sellers have the ability to change the direction of the wave pattern. And, when they all align you get a tsunami. Just like the guy trying to find that monster wave, traders are on the look out for the same phenomena.

At what point do you know the wave is about to "break"? This is the million dollar question, because in surfing and trading, timing is everything.

One of my favorite tools to use in trading are trend-lines. Trend-lines help you to see where the "break" is.

Trend-lines are used to find the trend, but they also tell you when the trend has changed direction. That is, when another large buyer or seller has entered the market and changed the direction of the prevailing trend. If the dominant trend is up and a major player comes in and starts selling, it will push the trend in another direction. This push causes a "break" in the trend. In the world of trading this is referred to as a breakout.

Let's take a moment to familiarize  ourselves with the following chart. This is my own chart setup on Ninjatrader 7.  We're looking at a price chart of NASDAQ futures (my favorite instrument to trade). 

For now, disregard the bottom half of the chart and just focus on the top segment. Also disregard the green, yellow and orange lines -- we'll talk about what those mean later. For now, just focus on the candlesticks and the blue lines. The blue lines are trend-lines.

At first, you will notice blue lines following the trend up and then the trend changes and starts going down.

Now let's get laser focused on the first trend-line going up.

 

As you can see, the price bounces off the bottom of the trendline three times before finally gaining enough traction to continue upward. It doesn't quite reach the top of the trend-line before it starts trending down. This is when you start looking for a breakout.


The trendline supported the price three times before, and now it's breaking through the trend line. This breach is the breakout. Once you see the breakout, it's time to act. As you can see there are two breakouts. The first one is a breakout down and the second is a breakout up.


 Both breakouts represent an opportunity to "ride the wave".  The trend is up, another wave comes in and starts selling and changes the wave pattern down. The push is so strong that it forces the trend to change direction and that change in direction is marked by a breakout.

In trading, there is no sure thing. The best thing you can do is find an indicator that works 75% of the time. One way to boost your accuracy is by confirming the direction of the breakout with another indicator. 

Buy gold & silver bullion - Goldbroker.com 

Now we can look at the bottom part of the chart. The breakout down is confirmed with a down movement by both of the bottom indicators. The second breakout is also confirmed by an up movement by both of the bottom indicators.


Now what? Once you find the breakout you want to place a trade with a take profit (TP) that's at least 2x as much as your stop loss (SL). For example, once I see the first breakout I'm going to place a trade with a SL of 40 ticks and a TP at 80 ticks. Some traders like to go for 3x or 4x. That depends on your risk. When you're first starting out, I think it's safe to go for 2x. This way, if you get one trade wrong and one trade right, you're still up.

This is by far my favorite set up. If you have any questions, post them in the comments below or email me at celanbryant @ gmail.com.

Good luck.


Wednesday, September 2, 2020

Campbell's Technical Analysis: Buy The Pullback (Campbell Soup Company ($CPB))



Summary
  • At a time when when the major tenants of investment valuation have been undermined, investors are looking for a confirmation -- a confirmation that the fundamentals aren't lying.
  • Technical analysts study price trends. We look for patterns that play out regardless of the asset being traded.
  • Campbell Soup has been trending up for the past 2 years, but the trend is reversing in the short-term.
  • Long-term play: Buy the pullback. Both the trend-line and the moving average converge around $49.15, which is the best place to put your buy order.
  • Short-term play: You can sell now with a take profit at $49.15. Or, you can buy at $49.15 and take profit at $55 even.

From Edo-period Japan, where traders applied technical analysis to profit from Osaka’s rice futures market, to the 1930's Wyckoff Method still taught in major trading houses today, technical trading withstands the test of time. That's because it's based on price patterns and those price patterns are based on human behavior. Specifically, trading is based on auction mechanics.

So, at a time when the major tenants of investment valuation have been undermined, is it any wonder that technical trading is gaining in popularity again?

  • How can you trust a DCF model that assumes a positive risk-free rate?
  • How can you trust a P/E ratio when companies are sacrificing dividends for stock buybacks.
  • How can you trust an economy with stock prices that move in the opposite direction of earnings? 

In other words, now, more than ever, investors are looking for a confirmation -- a confirmation that the fundamentals aren't lying.

Technical analysts study price trends. We look for patterns that play out regardless of the asset being traded. That's why technical analysis works for everything from rice in Osaka Japan to soup companies like Campbell's (CPB).

Fundamentally, Campbell Soup Company excels in both good and bad times. In other words, people find a use for its products no matter what's happening in the world.

 

Buy gold & silver bullion - Goldbroker.com

 

Here's what the CEO had to say on the last earnings call:

“In the quarter, we experienced unprecedented broad-based demand across our brands as consumers sought food that delivered comfort, quality and value. This demand resulted in double-digit increases in organic sales, adjusted EBIT and adjusted EPS. In addition, Campbell’s products were purchased by millions of new households, with total company household penetration increasing over 6 percentage points in the quarter compared to the third quarter of fiscal 2019.”

We can see this upward trend play out on the technical level as well.

The chart below is split into 4 segments. The top segment is the price chart and the bottom 3 segments are the technical indicators I use to confirm the price trend. As you can see from the top segment of the daily price chart below, the company has been trending up since the beginning of 2019.

For now, let's just focus on the upper part of the chart. The black vertical line is where the company was in September of 2019. The white box is the period in time that the market rallied due to COVID. The yellow and green lines represent the moving average. As you can see, the market likes to use the moving average as a point of support and resistance. This is because institutional traders like to buy and sell at these areas. Campbell Technical Analysis 1  

Now, let's look at the bottom part of the same chart (see below). We're going to compare last year (yellow circles) to this year (blue circles).

As you can see from the price chart at the top, marked by a yellow circle, Campbell's took off in September of last year. Now let's look at the three indicator charts below the price chart. In all three charts, as noted by the green up arrows, the indicators are trending up, which confirms the price trend.

We're coming up on the same time period for 2020. This is marked by the blue circles on the right. The price is going up moving into September 2020, but it looks like it's ready for a pullback.

Now let's look at the 3 indicator charts below the price chart for confirmation. These indicators confirm that the price trend may be reversing, at least temporarily. In all three charts, as noted by the red down arrows, the trend is down or about to go down.Campbell Techincal Analysis 3  

Conclusion: It would appear as though CPBs price is trending up, but it's slightly oversold after the last earnings call so investors can expect a minor pullback. The question is how far? We can use trend lines to answer this question.

The chart below shows trend lines in blue. The trend was lost during the COVID rally, but soon returned to normal. We can use these blue trend lines to help extrapolate the price for the next 2-3 months.

Campbell Technical Analysis 3 

 As you can see from the chart below, we are at the top of the trend line, so this is a bad time to purchase the stock for optimal gain. Campbell's Technical Analysis 4 Investment Recommendation:

Long-term play: Buy the pullback. Both the trend-line and the moving average converge around $49.15, which is the best place to put your buy order.

Short-term play: You can sell now with a take profit at $49.15. Or, you can buy at $49.15 and take profit at $55 even.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Monday, August 10, 2020

Learn How To Trade Futures: Why NOW Is The Perfect Time To Earn A Futures Account


 
“It's only when the tide goes out that you learn who's been swimming naked.”  -Warren Buffett


I love this quote by Warren Buffett, because it's so true. That's one reason I like to trade futures. With futures, the only way you're going to get caught is if you swim against the tide. So, the most salient phrase of advice for trading futures is: the trend is your friend. In this way, it does not matter if the tide is out or in, just that you know which way it's going. If you can figure out a way to follow the trend, you will do very well in the futures market.

The focus of this post is on the futures market. It's a market that most people are taught to stay away from, and rightly so. However, due to the volatility in today's market, it's also very lucrative, which warrants attention.

So, let me be clear, futures, the investment product I'm about to introduce, cannot be tamed. It is a beast. Think of it as the perfect wave for the experienced surfer.



Due to the unprecedented amount of liquidity being pumped into the market, these are incredibly volatile times.  The waves are HUGE -- they are the kind of waves that people spend their entire lives trying to find, and they're happening every day. They are also the kind of waves that wipe people out, especially inexperienced surfers.

So what are the advantages of trading in the futures market? The futures market is like the stock market on steroids. Market movements are more frequent, which makes technical trading easier

Technical trading is the art of using historical trends and patterns to guide your trades. This is different from fundamental trading, which uses information about the market to guide trades. Most investors use fundamental analysis to determine what to buy and technical analysis to determine when to buy it.  The futures market is largely driven by short-term, technical trades. Traders note certain price points and bid or sell at those price points. 

It's important to remember that trading takes place as an auction. It is an electronic auction with hundreds of buyers and sellers. When more buyers enter the room, the volume of bids goes up, which usually increases the price. Likewise, when buyers leave the room, the volume of bids decreases, which decreases the price. 

Like anything else, trading is a sport. It is said that you must dedicate 10,000 hours to anything to master it and the same can be said for trading. It takes stamina and like large waves, must be respected. 

I started my own journey with trading almost 20 years ago as a trading assistant on the FX sales and trading floor of a large investment bank. I didn't start trading on my own until 13 years later. Then, it took another 3 years for me to start taking it seriously. 

I often ask myself if the journey was worth it and the answer is a pensive yes. The answer is fragile in the beginning, but then over time grows more certain until I gradually realize that it's one of the best things I've ever learned how to do.

Honestly, I struggled with discussing my life as a futures trader because you will have bad days and I didn't want to be responsible for those bad days. If you do this right, you will come to hate me, but then, as you improve, you'll thank me for it. I'll take a bottle of your favorite red wine as a thank you. 


Buy gold & silver bullion - Goldbroker.com  

Step 1:

 
What's the first thing you should do? Take one year to learn through simulation.  Try out at least 5 different platforms, including Ninjatrader and Tradovate. Figure out how you like to see the market. Do you like charts or POC data? Do you like a white or black background? What are your favorite indicators? I'll share some of my favorite indicators with you in a follow up post. This is called, "Developing your workspace" and it is uniquely yours. It takes time to develop. 

Step 2: 

In year two, you're ready to pick your trading instruments. Do you want to trade the futures equity markets or the futures commodity market? There are dozens of futures markets to trade. The one you select depends on your trading style and personal interests. I'll discuss why I prefer the equity markets in a later post.

Step 3: 

In year three, you're ready to test the waters with a live test on a virtual $50K account. Repeat this every 6 months, and no sooner. Over the next 3 years you will develop a few strategies that work for you. You'll go from losing money, to breaking even, to making money. 

If you're just starting out, I recommend two trading houses where you can watch live trading and discuss trading with others.  Learning the lingo is just as important as developing your trading plan. 

The first house is TopStepTrader. These guys have been around a long time. They are a reputable online shop and they have free classes and webinars that you can attend and listen to on a daily basis. To be clear, these classes and webinars are free, YOU DON'T HAVE TO PAY FOR ANYTHING TO LISTEN & WATCH.

I also recommend Collective2. This is for people that want to follow the trades of another person. I just started a virtual hedge fund on Colletctive2.

I trade between 1 and 5 contracts on a daily basis and you can sign up to follow my trades on a real time basis. You can even auto-trade my trades for $150. I made $4,165 for each of my followers just today and future posts will discuss the nature of these trades.

These are just two of my favorite ways to monetize your trading knowledge without having to invest your own money. I will continue to share others with you in future posts. 

The most important thing to remember is that you can learn a lot without spending any money. Max out on the free-trial offers and when you run out, contact the company and ask for an extension. 

Tuesday, May 5, 2020

2020 - 2025 Investment Predictions: Capital Assets & Futures Contracts

It's been a while since I've posted anything. I'll explain why in my next post. For this post, however, I'd like to discuss my 2020 - 2025 investment predictions.

My predictions are roughly the same as they were before the virus: buy capital assets -- stay away from debt, but everything else is fair game.

Why?

Because prior to COVID, the Fed was fully committed to supporting the market. And now, after-COVID, the Fed and every major central bank around the world has doubled down on their commitment to support the market as this AP reporter discusses in the following segment:




So my predictions for 2020 remain the same, except for a few changes, which I will discuss at the end of this post.

For a glimpse of what my predictions were before the virus, here's a post I wrote in January 2020. It was titled, "2020 Predictions":


There are several ways to look at the current market, but the best is with a historical lens.
We know that debt deflation is on its way, if not already here. We also know that the Federal Reserve has more power than it ever has. It has the full use of the American dollar and new tools like quantitative easing and reverse repo agreements to pump large amounts of liquidity into the market. 
Central banks all over the world have done the same. Japan is the leader of the pack, followed by the EU. They are in a panic to stave off deflation. So much so, that they employed a policy of negative interest rates. A move which is akin to winning the battle by moving the sun.

But, now that we know the extent to which central banks will go and the degree of power they have over the world economy, I think it's fair to say that we shouldn't be surprised by anything. I predict two things will happen over the next 50 years:

1) The stock market will be permanently supported by the Federal Reserve. It will never come down.

2) The United States will enter into a long, protracted deflationary period. It will experience massive layoffs and bankruptcies as the rest of the economy cycles through what should be a recession.

In other words, what you can expect is a stock market that's booming -- anyone that owns capital assets will do very well -- but an economy on rails.

Your portfolio should be heavy on index stocks and grocery store chains. You should be quietly accumulating bitcoin, but not in large quantities, and only on dips. Gold, silver and other precious metals are also a good play. These are also great opportunities to load up on your HSA and 401k.


The only thing I would add to my prediction is to stay away from all bank and travel related stocks, but all other capital assets are on the table.

I've also added a new asset class for some of you -- futures. For most people futures are scary and they should be, but there is no better time to be a trader in the futures market. What does that mean for you? It means there's a lot of volatility in the market.

That does not mean futures are easier to trade in times of high volatility, it means it's easier to make money if you already know how to trade.  

Brokers make money from every trade, so naturally they're going to tell you that volatility makes trading futures and options easier, but it doesn't. That would be like saying higher waves makes it easier to surf. High waves are actually very dangerous if you don't know how to surf. They are only good for those that already know how to surf. Everyone else WILL GET WIPED OUT. 

Trading is like any other sport. It comes naturally for some people; it takes 10,000 hours or more for others.

In my next article I'll talk more about the futures market and how you can participate.

Sunday, September 29, 2019

Debt Deflation, Irving Fisher & Why The Fed Should Say "No" To Negative Rates: UBI Is The Only Way To Avoid A Global Depression


World leaders are falling in love with the idea of negative rates to save us from a global recession, but can negative rates save the global economy? 

After much research, the answer is no. If you don't make it past the next paragraph, here's the main thing you need to know about negative rates, they push the stock market up, but do not grow the economy (GDP). As a result, many analysts use stock market growth as a sign that negative rates are good for the economy, when they aren't. The stock market is up because wealth is being forced into the stock market, but there's no growth in the economy. In other words, economies are being pimped by low rates.

In a recent article, I researched what Warren Buffet, Alan Greenspan and Jim Cramer had to say about low and negative rates. There was little agreement. The one thing they all agreed on -- it's not good, and we are in uncharted territory. These same words have been echoed by our past and current Federal Reserve Chairs. 

In some ways, they have a point. We are in a period of unprecedented monetary policy, technological growth, overproduction, Brexit, negative rates and trade tariffs. On the other hand, these times aren't really uncharted. If we drill out for a moment, and look at the situation over a longer period of time, we'll see that we have been down this road before. The causes may seem different, but the end result is the same and it has been well documented, especially by a man named Irving Fisher.

Irving Fisher's Debt Deflation Warning  

Irving Fisher was born in upstate New York in 1867. He earned the first Ph.D. in economics ever awarded by Yale. Although he damaged his reputation by insisting recovery was imminent throughout the Great Depression, Fisher attempted to answer the same question we are asking today -- what really happened? Or, in our present case, what's really going on? He asked this question in hindsight and so had the benefit of clarity. This clarity told him that excessive debt and deflation are a bad mix. He referred to the phenomena as debt deflation.

Fisher had much time on his hands after losing his family's fortune and finally came to the conclusion that economic policy had conveniently left out one fact -- debt greatly exacerbates economic cycles, especially when mixed with deflation.

Of course, economists know that debt greatly exacerbates economic cycles. We have all been taught that too much cash or liquidity leads to high inflation. So, tools were put in place to prevent inflation throughout the Fed's massive debt monetization scheme (quantitative easing). Inflation become the primary indicator of economic performance.

All eyes were on inflation.

When the Fed saw no increase in inflation, it ramped up quantitative easing even more, which led to overproduction and lower prices. We were all looking for inflation, when we should have been keeping our eye on deflation.

How did we get here?
The initial stimulus back in 2008 created a shock-wave in the market that has only grown in size and amplitude. It is this shock-wave that Fisher attempted to warn us about some 90 years ago. He warned us that debt and deflation amplify the market imbalance. In other words, a regular market can bounce back from a shock. An amplified market can't because each wave grows in strength until something breaks.

Time and regret fueled Fisher's research which produced the paper: The Debt-Deflation Theory of Great Depressions.


The paper consists of 49 conclusions or observations made about the links between excessive debt and economic decline. What makes his theory unique is that it suggests that the economic decline we're currently experiencing is due to deflation, not inflation. Fisher admits that due to the economic theory at the time, he and his colleagues were all looking in the wrong direction, and at the wrong signs (sound familiar?). He then suggests that a new theory be added to explain what occurs when the economy is faced with excessive debt and lower prices.


The Debt Deflation Theory of Great Depressions


Debt deflation is a phenomena in which excessive debt (or cheap debt) creates overproduction, which drives down prices. Lower prices leads to lower earnings, which creates layoffs. Meanwhile, the dollar value of debt is growing due to deflation. In our case, and unlike in Fisher's case, the phenomena is further exacerbated by the pace of technology and automation.

I want to dig a bit deeper into Fisher's most relevant points for today.

First, he felt that there were many causes for market "dis-equilibrium", but only three main "tendencies":

(A) growth or trend tendencies, which are steady; (B) haphazard disturbances, which are unsteady; (C) cyclical tendencies, which are unsteady but steadily repeated. These are tendencies that can throw off market equilibrium.

Fisher then goes on to describe the ubiquitous nature of the market, which is seemingly in equilibrium. This is the same "delicate" market he experienced prior to The Great Depression:

There may be equilibrium which, though stable, is so delicately poised that, after departure from it beyond certain limits, instability ensues, just as, at first, a stick may bend under strain, ready all the time to bend back, until a certain point is reached, when it breaks. This simile probably applies when a debtor gets "broke," or when the breaking of many debtors constitutes a "crash," after which there is no coming back to the original equilibrium. To take another simile, such a disaster is somewhat like the "capsizing" of a ship which, under ordinary conditions, is always near stable equilibrium but which, after being tipped beyond a certain angle, has no longer this tendency to return to equilibrium, but, instead, a tendency to depart further from it.

He goes on to say that:

Under such assumptions, and taking account of "economic friction," which is always present, it follows that, unless some outside force intervenes, any "free" oscillations about equilibrium must tend progressively to grow smaller and smaller, just as a rocking chair set in motion tends to stop. That is, while "forced" cycles, such as seasonal, tend to continue unabated in amplitude, ordinary "free" cycles tend to cease, giving way to equilibrium.

So we know that Fisher believed business cycles were natural, but what can his observations tell us about warning signs. Is there anything that would have alerted Fisher that the Great Depression was looming?

To this Fisher would respond,

...I doubt the adequacy of over-production, under-consumption, over-capacity, price-dislocation, maladjustment between agricultural and industrial prices, over-confidence, over-investment, over-saving, over-spending, and the discrepancy between saving and investment. ...each of the above-named factors has played a subordinate role as compared with two dominant factors, namely over-indebtedness to start with and deflation following soon after; also that where any of the other factors do become conspicuous, they are often merely effects or symptoms of these two. In short, the big bad actors are debt disturbances and price-level disturbance. He refers to these two bad actors as the "price-level disease" and the "debt disease".


While quite ready to change my opinion, I have, at present, a strong conviction that these two economic maladies, the debt disease and the price-level disease (or dollar disease), are, in the great booms and depressions, more important causes than all others put together,

He goes on to make the point crystal clear:

Thus over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money. That is, over-indebtedness may lend importance to over-investment or to over-speculation. The same is true as to over-confidence. I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt. ...On the other hand, if debt and deflation are absent, other disturbances are powerless to bring on crises comparable in severity to those of 1837, 1873, or 1929-33. Why is this? It's because deflation due to excessive debt has a greater impact than inflation due to excessive debt. This is due to its cyclical and compounding nature. Debt creates deflation and deflation artificially increases debt levels.

In other words, disequilibrium due to market forces tends to create an initial shock to the system that, over time and like a pendulum, will slowly work itself back to equilibrium. Disequilibrium due to market intervention, however, tends to create an initial shock and that shock is just the beginning. When further compounded by excessive debt, its oscillations gain momentum with each swing. This is the impact of debt deflation. It builds upon itself.

In its most heinous form, deflation (or lower prices) actually pushes up the value of the dollar, which only adds to indebtedness. As a result, the debtor is stuck in a loop and can never pay down his debt. Fisher explains it far better than I can in the following paragraph:

...deflation caused by the debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes. In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed. Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing.

He goes on to say:


Unless some counteracting cause comes along to prevent the fall in the price level, such a depression as that of 1929-33 (namely when the more the debtors pay the more they owe) tends to continue, going deeper, in a vicious spiral, for many years. There is then no tendency of the boat to stop tipping until it has capsized. ...On the other hand, if the foregoing analysis is correct, it is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintaining that level unchanged. In other words, the only way to right the ship is to increase prices.


Reflate The Price Level


The market is full. It has eaten everything in sight for the past 10 years and now it needs a moment to pull back and digest, but glutton has gotten the best of him. The only self-correcting mechanism left for the Federal Reserve is something that relieves bloat.  

In economic terms, the market is asking for a distribution.

It is more commonly known as universal basic income or helicopter money. Presidential candidate Andrew Yang has rebranded it as the Freedom Dividend. You can call it whatever you want, but I like to think of it as a banking and automation distribution. These are the two "bad actors" that got us here and the market is demanding reparations.

Deutsche Bank reportedly said that "helicopter money," a term that refers to giving cash directly to households, "could be highly effective if properly deployed." Some reports claim that the Japanese central bank considered dropping payments to residents, but later decided to approve a $274 billion stimulus package instead.

Most central banks know we're in crisis mode. They know we need to raise prices, but they don't know how to do it. Japan's foray into negative rates in January of 2016 was, in actuality, an attempt to reflate prices, but they failed, over and over again. And now, the Federal Reserve is considering negative rates as well. Thankfully, we not only have the words of Irving Fisher, but our own Federal Reserve Bank of San Francisco to steer us in the right direction.

In August, two Federal Reserve Bank of San Francisco economists wrote a paper assessing Japan’s experiences with negative rates. The paper was titled: Negative Interest Rates and Inflation Expectations in Japan. 

They came to the following conclusion:

Because of the long period of low inflation in Japan, its experience provides an interesting example of the impact of negative monetary policy rates when inflation expectations are well-anchored at very low levels.

...Our results suggest that this movement resulted in decreased, rather than increased, immediate and medium-term expected inflation. This therefore suggests using caution when considering the efficacy of negative rates as expansionary policy tools under well-anchored inflation expectations.

In other words, negative rates don't work. The market loves them because it means free candy from the Fed, but the boat is only tipping over further.

The only thing negative rates are good at producing is higher stock prices, which is why the market rallied on Trump's negative rate tweets. But, does this market approval mean the central bank is acting in the best interest of the economy?

No.

This is the reason Robert Holzmann, the European Central Bank's newest Governing Council member and Austrian central bank governor, went on record as saying the ECB's latest move to lower rates to -.5% was a mistake.

 "Frankly speaking," said Holzmann, "I'm not so sure whether we are playing with the market or if the market's playing with us. Because, if my economics is right, at the moment the market is gaining for getting more and more in the negative territory, so perhaps it wants to lead us to believe that's the way. So, I don't think this market reaction is an indication that this is the way we have to go."


While it may be hard to find agreement on the calculus behind negative rates, everyone does agree on one thing -- quantitative easing and low rates created an unprecedented amount of debt around the world. Now the conundrum for economists worldwide has become: how do we raise prices after quantitative easing? If negative rates don't work, what will raise prices in a world of overproduction and automation?

Some say the answer is trade tariffs, but while trade tariffs raise prices, they also decrease spending. The only answer the market will accept is cash. Not debt, just cash.

This is anathema to the world's power structure, but it is the only answer the market will accept. It is the only answer that has the strength to keep the ship from capsizing.

In normal situations, giving $1,000 a month to every American would lead to inflation. Ironically, many opponents of UBI actually use Fisher’s theory of exchange to support their argument saying that:

...any increase in the supply of money must result in proportional reduction of the purchasing power of money. Since UBI is bound to reduce the economic output by reducing the workforce participation one could expect price-inflation even if the supply of money remained constant, creating another economic hurdle for UBI proponents in the form of net inflation equal or greater to the overall benefit of UBI.

I couldn't agree more, but we are not in a normal situation. Indeed, the impact of UBI (as described above) is the only thing that can get us out of the current debt deflation spiral we're in.  Universal basic income, however much you may not like it, is the only way to reflate prices.