It's time to start keeping an eye on the components:
1. Average number of initial applications for unemployment insurance
2. Number of manufacturers' new orders for consumer goods and materials
3. Speed of delivery of new merchandise to vendors from suppliers
4. Amount of new orders for capital goods unrelated to defense
5. Amount of new building permits for residential buildings
6. The S&P 500 stock index
7. Inflation-adjusted money supply (M2)
8. Spread between long and short interest rates (the yield curve)
9. Consumer sentiment
10 .Average weekly hours worked by manufacturing workers
I rank most of the components neutral to positive right now. Consumer sentiment is the weakest, and S&P stock performance and money supply growth the strongest. Most of the others could go either way, depending on results of incoming data. But, this recession is for all practical purposes over. Most of the leading indicators are very close to turning positive. It'll be big news for mainstream media about a month or two down the road, but it is time to make your plans as though the Bear is in hibernation. As the March data is released next month, I'll break each category down in more detail, but major downside just doesn't look to be anywhere in the cards.
OK, Mr. Wenzel, I am ready to transfer my entire 401k out of cash and back in to an index fund, but I have a question I could use your help with first: What do we think of the fact that the components are being cooked and manipulated at an unprecedented level, as documented here?
ReplyDeleteI have to confess that I have only in the past year become aware of how badly these things have been manipulated over the past two decades, but it seems like, to that point, the public's awareness has been raised. In the words of Daniel Hannan "I know and you know and you know I know" that it's all made up.
So do I trade now assuming that everyone is wink-wink-knudge-knudging each other and putting cash back in to the market, and then also assume that I'll get out before the bubble is popped? Can I trust that you will publish an early "sell signal", or will you convert to a subscription format right before you do that? ;-)
@Steve,
ReplyDeleteThanks for your comment
A few points:.
1. I would never put all my assets into one investment. If you don't have savings outside of your 401k, I would not put more than 25% in an index fund.
2. You keep talking about "trading". Trading is for pros, you will eventually get killed trading, unless you follow the markets very closely AND know what you are doing.
3. Some components are cooked some are not. You have to adjust for that. S&P and money supply are not cooked.
4. As part of my consulting work I always tell clients to trade against various different economic trends. For example, currently an up economy but also a turn to the upside for interest rates, thus a fund that goes short bonds would be interesting to me.
5. I am very good, but the stock market and economy are very complex, so don't assume I will publish an "early sell signal." At anytime, on any particular "signal" I could miss a key factor that will be influencing a market trend. If you want certainty, call Bernie Madoff.
6.I have no plans to start charging for EPJ. That said, this is probably a good time to mention that I will soon be announcing the launch of the EPJ Quarterly Economic Outlook. It will be a subscription service and cover in depth the data I mention on a more sporadic basis at EPJ. Watch for details this coming week.
Hmm, the recession is soon over you say? Well, in nominal figures, I'd pretty much agree - but two questions emerge :
ReplyDelete1 ) How long before the next one hits - even if we get some positive signs, a stock market rally etc. etc. while inflations starts rising, I can't see the next crisis being far off (1-2 years ahead maybe?). After all - either the FED brings the next recession to avoid hyperinflation, or it avoids the next recession and brings hyperinflation. Although the later option seems to be guaranteed to bring the recession 70's style.
2 ) How can one measure "real" economic growth in an inflationary situation, if one does not trust the official CPI figures?
In todays climate - I'm pretty glad I don't have much savings - it would inevitably lead to cardiac problems.
Thanks very much for the response. My 401k is about half my assets. The non-401k assets are tucked away in dollar hedged investments (dividend paying international stocks, foreign currencies, commodity indexes, and precious metals.) My "problem child" is the 401k because of it's limited options for "hiding" from the dollar, and my belief that it will eventually be confiscated as the government runs out of money. With my new found understanding of the corruption and manipulation of the financial markets, I have given up on the buy and hold of indexes, so that means either leave it in cash and watch declining purchasing power eat it all away, or to try to time the market and keep up. As far as shorting bonds... my company feels that kind of thing "is to advanced and risky" for 401k participants. The fund choices are wide but pretty generic from an asset category perspective.
ReplyDeleteSince it will probably end up in the governments pocket anyway, I'll try my hand at market timing (again).
Thanks again for your very complete response to my half tongue-in-cheek post. I will look forward to your quarterly letter.
Best Regards,
Steve
@hpx83
ReplyDeleteNo question things are going to get worse further down the road. But there will be this bump.
Down the road, its most likely stagflation.
The ratio of coincident to lagging indicators went positive by the barest of margins last month. If it turns up more decisively this month (March released 4/20/09), NBER will probably mark this as the end of the recession, plus or minus a month.
ReplyDelete