Understanding Global Money Flows- Four Tools for Investors

The Global Economy has been most interesting in recent months. We have endured Britex, continued guessing about the Fed, and other geopolitical events, including tensions in the South China Sea, and the upcoming US elections. During such uncertainty, investors need to think in terms of market cycles and using some basic tools to understand the global economy. In this post we will give you four quick tools to help the everyday investor make sense of things.

  1. US Bonds

US Federal Bonds are the traditional safe-haven to risk markets such as stocks. As part of our regular Global Market Analysis (GMA) we study the main US bonds and their yields. Broadly speaking if bond prices rise, then there might be some evidence of a movement of global money into bonds. Yields are generally inversely related to bond prices.

A movement of money into bonds over a prolonged period, particularly longer term bonds, such as 10 year bonds, can be a good indicator risk markets are about to change, or at least, money moving into risk markets such as stocks is thinning.

Studying the charts of the main bonds in the US is now quite easy. They can be accessed readily via stockcharts.com. We focus on the longer term weekly charts here. The key bond markets include:

  • US 10 year Treasury Bonds (code: $UST);
  • US 5 year Treasury Bonds: (code: $USFV);
  • US 2 year Treasury Bonds (code: $USTU).
  1. Currency Defensives

Similarly, in currency markets, the US Dollar (USD), the Japanese Yen (JPY) and sometimes the Swiss Frank (CHF) are seen as defensive markets. If there is a strong movement of funds over time into these currencies away form risk markets, such as the British Pound (GBP) or the Euro (EUR), then this can be evidence of a movement away from risk markets, such as stocks.

The key here is to understand the intrinsic strength or weakness of the currency. You can do this by comparing, say the USD against a basket of other currencies, which is cumbersome. Or you can use a Currency Strength Metre, or simply use a currency index, such as the USD Index (code: $USD).

A word of warning though, particularly with the USD. Given the ongoing uncertainty about whether and when the Fed will raise US interest rates, this is a confounding factor when looking at the USD. That is, it might be rising because the Fed is likely to raise rates soon, and not because of a flight to safety to defensives such as the USD.

This is why is it best to look at a at least two or three currencies such as the USD, the JPY and/or the CHF. Further, this currency analysis should be only part of your framework- you should view it in conjunction with the other tools we are discussing, such as US Bonds, Volatility Indices and Commodity Defensives.

  1. Volatility Indices

The main Volatility Index in the US is the VIX (code: $VIX). It tries to measure how volatile US stocks and options are over time. The broad rule is, if the VIX is high, especially if it is above 30.0 and remains there, then this might indicate a reversal in stocks. However, like all tools in the market it is not a Holy Grail. We will often see spikes and then retreats. Again, when used in conjunction with other tools, it can be more instructive.

Your local exchange will also have its own VIX. For example, the Australian equivalent is the S&P/ASX 200 VIX Index. Our practice, is to examine the US VIX and then local VIX to find if there is any sustainable evidence of a change in sentiment in the markets.

  1. Commodity Defensives- Gold

The precious metals, particularly gold has been a traditional hedge against risk. So, if there is a sustained movement of global monies into gold, or gold related stocks or managed funds, or Exchange Traded Funds (ETFs), then this might be evidence of a possible turn in risk markets, such as stocks.

You can study the charts of gold or related markets quite easily now days. Our preference is to focus on the futures market to get the purest idea of what gold is doing. Again stockcharts.com can bring up a chart quickly, code: $GOLD.

Putting it all Together- The Global Market Analysis (GMA)

As mentioned, no one tool is perfect or will give you a definitive signal. However, over the years we have developed a comprehensive combination of key tools and areas of analysis. This gives us quite a good idea of where global money flows are going. We call this the Global Market Analysis (GMA). We conduct it regularly, usually every 2-3 weeks.

For the everyday investor, understanding these tools and applying them regularly is a must. If you are just reading other people’s views of what might or might not be happening in the global economy, this is not good enough. Focus on the hard data and evidence. Create a framework for disciplined decision-making. Do not rely on secondary, often sketchy opinions. This is not how professional, independent investors succeed long term.