4 Little-Known (Scary) Economic Indicators
There Are Some Economic Indicators Which Are Not Widely Followed
Certain data indicators are used to gauge the health of the economy. For example, the unemployment rate can demonstrate if the nation's workforce is productive, while the inflation rate can demonstrate if the value of our dollar is shrinking.
Unfortunately, the more widely followed the data point, the less useful the information. When a trade gets crowded, the potential usefulness of the information diminishes.
In other words, when everyone is reacting to the same information (and usually they will all act in a similar fashion to one another), the masses commonly get average results. Perhaps there is a better way.
A superior approach is to watch more obscure, little known, and rarely followed events. Some of these may imply future price direction for most stocks and the overall economy.
Below are some of the indicators which are very rarely followed. Each of these will provide guidance and direction for your investments.
While it is true that they are not as commonly cited as most typical data points, some of the following "obscure" and "abstract" economic indicators can be very powerful. And as always, by "powerful" I mean profitable.
The Velocity of Money
The velocity of money is an indicator which shows you how many times a single dollar is spent over time, as it works its way through the economy.
If the restaurant owner paid the contractor, and the contractor paid the doctor, then the doctor paid the farmer for some of the produce he sells, that represents a velocity of three. That single dollar was used three times as it worked its way through the economy.
The velocity of money peaked at 10.7 in the year 2008.
Since then, that velocity has fallen all the way down to 5.8, and pretty quickly too.
The actual velocity value is very relevant of course, but it is not as important as the change in that velocity. When the velocity of money is falling, as it is now, it represents that the overall economy is slowing down.
This means people are holding onto their money for longer, and they are spending less frequently. The problem with this situation is that it can be a self-fulfilling vicious cycle. Reduced spending puts a strain on most businesses and people, which is typically met by even more reduced spending.
Since our entire economy is consumer driven, any slowdown in overall activity can be (and should be) worrisome. Most businesses will face decreasing sales levels, while at the same time there will be reduced tax revenues for governments and municipalities.
The current speed at which the economy's velocity of money is declining is quite serious, and almost certainly points directly towards recession. Keep an eye on the velocity of money, because if it does not reverse and start moving higher again (and soon), we may be in for a very difficult time coming up for our economy.
The Q Ratio
Simply put, "The Q Ratio" takes the value of all the stocks trading on the markets, and compares it to the cost to replace all the assets of those companies.
By its nature, The Q Ratio is not sustainable near, or above, 1.0.
In fact, The Q Ratio only exceeded 1.0 five times over the course of the last 116 years (starting with the year 1,900). In each and every case, the stock market faced a historically significant crash or correction.
With that investment meltdown, The Q Ratio was able to normalize by decreasing back down to its more historically appropriate levels closer to 0.4. It was not until after those points, where the queue ratio sank during the stock market chaos, that the stock market was able to turn around start recovering some of the losses.
With the current Q Ratio level of 0.99, people should be cautious with the valuations of most investments. The obscure Q Ratio indicator is suggesting, rather loudly in fact, that we are about to experience an unforgettable stock market correction.
The Taxi Driver Indicator
When your taxi driver starts talking to you about the latest "hot stock," we are almost certainly at a market top! Many Manhattan investors have used the taxi driver indicator to gauge when they should be more cautious when it comes to their investments.
When everybody is giving you their stock market opinions, this is typical as a direct result of strong widespread performances among most shares. It also demonstrates that greed has overtaken caution, and people are stampeding into investments.
While not as commonly followed as most economic indicators, the taxi driver indicator should be. Specifically, because it is consistently reliable and accurate.
The point when you see the "taxi driver indicator," it usually implies that the stock market is currently highly overvalued. The next move for investments is typically going to be sharply lower, and usually pretty soon too.
The Grandma Indicator
This is even a step beyond the taxi driver indicator. When your grandma calls you up about a stock that she thinks is going to do well, that is a representation of an absolutely out-of-control, overexuberant market.
The grandma indicator went crazy right before the Dot Com bubble burst. This indicator is much more abstract than most others, and besides waiting for the call from your parents' parents, there really are not a lot of good ways to keep an eye on it.
What is important is to notice when less experienced individuals start talking up stocks to you. Whether we are talking about the Dot Com market top, or any of the other many stampede's and bubbles that have crossed our paths in recent years, any information you get about an investment from your grandmother should be a blaring symbol that the market top has arrived.
We all know how these things end.
The 4 Abstract Economic Indicators
The unique, and not widely followed, economic indicators mentioned above can go a long way to helping guide your investment decisions. When the queue ratio is way too high, the velocity of money is sinking, or your cab driver talks to you about a stock he heard about through his grandma, it may be time to hide in your basement.
While they are not typically widely followed and don't necessarily make as much sense as the most common economic indicators cited in the media, those theories mentioned above 10 to play out pretty much exactly as you would expect every time.
Perhaps the fact that they are not very widely followed is the reason they can be so reliable. The masses will always do what the masses do. But this simply means that they are all going to act in the exact same fashion as one another.
This means that the majority of the population will always achieve approximately average returns. However, if you focus on the less widely followed concepts in the stock market, you have the potential to open yourself up to good-sized gains, which could never be considered standard or average.