Wednesday, June 24, 2009

Economic Trend Followers Are About to Get Slapped... a new downturn in the economy

Ben Bernanke's sudden reversal in Fed policy, to very slow money growth, is about to nip the current rebound. This is going to cause major forecasting errors by those who don't have a business cycle theory, and merely follow stacks of data. They get long term trends righ, but they always miss the inflection points.

Mark Perry, for example, puts some mighty interesting information up at his blog, but it is clear he doesn't have any business cycle theoy and just watches bunches of data for trends.

His two most recent posts show the improving economy (which are the result of prior Fed money printing). He posts the Richmond Fed Manufacturing Index and the latest ECRI Leading Index data.

Both these pieces of information are great pieces of data to confirm a trend, but they will lead you astray when money growth is changing direction.

If money growth was still in heavy double digits, I would be using this same data to confirm the money growth recovery signal, but now that money growth is slowed, it will take some time for the data to show the new down trend in the economy. When that happens, I will be posting that data as a confirmatiom of the new money slowdown that is now going on.

Changes in trends always start with the money supply, ALL other data follows.


  1. would it follow then, that the dollar is safe for a while - that we will see another flight to safety as we saw late last year?(that is, assuming this reversal is not itself reversed in short order).

  2. "Changes in trends always start with the money supply, ALL other data follows."

    There's your "Gold Standard".


  3. @Nick Kaster

    Very good, question.

    I would generally say yes. But given the role of the dollar as the international reserve currency, and the possibility that a flight out of the dollar could start at anytime.That said, we could simply see a repeat flight to the dollar as safety---its real tricky to bet one way or the other on the dollar short term. Long term, it looks doomed.