Interpreting the Indicators (part 3)
How to read the Indicators from Money Guide: Commodities, Stocks, Crypto
This is the third part of a series explaining the Money Guide Indicators. Parts 1 & 2 can be accessed as standalone posts through the Resources tab on the homepage or by clicking here:
As I wrote before, processed information for decision making can become “actionable intelligence”. Usually, the processing itself depends on context. Every report can’t contain every piece of contextual data, we have to rely on our knowledge for that. The Money Guide Indicators contain condensed information, that can be combined with contextual knowledge to convey a sense of the performance of different financial assets and economic sectors. Let’s dig in:
Commodities
S&P Commodity Index (GSCI)
Brent Oil Futures
Gold Futures
Higher prices ▲=🔴 negative
Lower prices ▼=🟢 positive
Commodities are the primary traded goods and resources (food, energy, minerals). Their prices are dependent on natural, geographical, political, technical, and commercial circumstances that are constantly in flux. Commodities are the building blocks for manufactured products, and even influence the service economy:
Higher prices for commodities push other prices up. Since the pricing of manufactured products and the service economy depend on costs, more expensive commodities eat into profit margins and tend to cause price increases. The mere uncertainty can have the same effects, since companies tend to hedge their exposure to price swings, and the cost of those protective hedges can become substantial.
Lower prices for commodities push other prices down. Since the pricing of manufactured products and the service economy depend on costs, cheaper commodities widen profit margins and prices are driven down by market competition. When commodities’ prices are lower and volatility is reduced, the cost of protective hedges are also lower.
Most commodities are traded through futures markets, where participants buy and sell contracts for deliveries on upcoming specific dates.
The GSCI Index is a world-production benchmark that aggregates as many commodities as possible.
Brent Crude Oil Futures are used as the benchamrk to price most of the internationally traded oil supplies.
Gold is mainly traded as a reserve hard currency and as a material for jewelry, electronics and medicine products. It is considered an inflation hedge compared to sovereign currencies, and has been in use as a store-of-value for millenia.
Stocks
Dow Jones Industrial Average (DJIA) Index
S&P 500 Index
Nasdaq (NDQ) 100 Index
Russell 2000 (RUT) Index
Higher prices ▲=🟢 positive
Lower prices ▼=🔴 negative
Stocks are fractional ownership shares of publicly traded companies. Stocks are valuated through different methods, often arriving at a present-day value of discounted future cash flows. Indexes aggregate stocks from different companies, and reflect big economic sectors:
Improving economic conditions are reflected on higher index prices. Lower costs of capital (through equity or debt), lower costs of resources and higher consumer activity contribute to companies’ growth and, by extension, overall economic growth.
Worsening economic conditions are reflected on lower index prices. Higher costs of capital (through equity or debt), higher costs of resources and lower consumer activity reduce companies’ growth and, by extension, overall economic growth.
The DJIA index aggregates the stock prices of 30 of the most important US public companies. It is the second-oldest US index.
The S&P 500 index aggregates the weighted stock prices of the 500 biggest US public companies. It is the most commonly followed equity index, and is considered the most adequate index for historic economic performance benchmarking.
The NDQ 100 index aggregates the weighted stock prices of the 100 biggest non-financial US public companies. It is heavily influenced by Big-Tech companies.
The RUT 2000 index aggregates the weighted stock prices of the 2000 smallest US public companies from the Russell 3000 index. It reflects the state of the US economy due to its focus on small-cap companies.
Crypto
Bitcoin (BTC)
Ethereum (ETH)
Higher prices ▲=🟢 positive
Lower prices ▼=🔴 negative
Cryptographic currencies and tokens are, at the moment, mainly speculative assets. There is an ongoing debate about their possible applications and benefits, with numerous supporters and skeptics. As such, their prices are highly volatile and tend to have a strong correlation to other high risk investments and to other more established asset classes (like currencies, bonds, commodities and stocks):
Higher Crypto prices signal abundance of capital. When the economy is growing and capital costs are lower, investments on speculative assets become more attractive from a risk/reward perspective
Higher Crypto prices signal shortage of capital. When the economy is shrinking or growing at a slow pace and capital costs are higher, investments on speculative assets become less attractive from a risk/reward perspective
Bitcoin is the first project for a decentralized cryptographic currency that achieved a large enough network size. As such, it is considered the main benchmark for the asset class, and has the highest name recognition. Its main use case are economic transactions.
ETH is the main token of the Ethereum Network that was conceived as a decentralized computer that could be used in a variety of ways. Tokens can be created and deployed on the network with multiple use cases.
I hope this series makes easier to understand and make-us-of the Money Guide Indicators.
-SM
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