SocGen’s Albert Edwards was out with a note today which is in line with my calls for a marked slowing of the economy toward the end of this year. He indicates that the rate of change in leading indicators in the real economy and in markets is rolling over right now. Edwards writes that this suggests softness in six-to-nine months (hat tip Scott).
I like his analysis because it depends on first derivatives or the rate of change rather than absolute levels which are misleading at turning points (see Has the increase in U.S. jobless claims peaked? from March 2009 for an example of first derivatives presaging the end of recession). Remember, a recession begins from a cyclical peak in economic activity. So, the economy is rising until that point. Analysts looking at absolute levels only will miss the slowing in the rate of change.
Edwards writes:
I have had a few e-mails recently about some of the key leading indicators reaching new cyclical highs last week, and what this means for our view. To be sure, the latest weekly reading for the Economic Cycle Research Institute (ECRI) key lead indicator reached a 99 week high. That, at first sight, looks very bullish for the continuation of this cyclical upturn. However, as with all of these lead indicators, it is the rate of change that is important. The ECRI also report a smoothed annual change in their index. Last week that slipped to +12.5% yoy, which is a 37-week low (see chart below). Now one doesn’t want to be too armageddonish at this stage, but this is clear evidence that in 6-9 months time there will be a discernible slowdown in the economic recovery from its recent moderate pace.
The same dynamic is true for the OECD and Conference Board leading indicators as well – as it is for the change in analysts’ global EPS optimism, which is rolling over and leading the OECD indicator down.
The chart I found most compelling was the change in analyst optimism mapped against the 6-month change in the S&P. Note, we are measuring the first derivatives for analyst opinions here. So that means the rate of change is slowing even while the optimism is increasing. Notice how well the datasets have coincided over the past decade.
Bottom line: This recovery is going to stall in the second half of 2010 unless… But, Obama probably doesn’t get that. As for investors, Edwards says:
[I]f the trend is your friend until it meets a bend, that trend is now the investor’s enemy.
Edward,
The expectation of a close to Zero growth or a renewed economic contraction, at least for the United States, is corroborated by the data provided by the Consumer Metrics Institute.
https://www.consumerindexes.com/
These data are supposed to represent the current demand for discretionary consumer goods through Internet orders and to be an early indicator of the GDP change one or two quarters downstream. The time lagged correlation between the provided Daily Growth Index and the GDP change seems to be quite high, although one could formulate the caveat that the data series, going back to 2005 only, is still quite short.
According to these data, demand in US has been contracting again since mid of January 2010, after the strong upswing in 2009. If this Daily Growth Index has a good predictive value indeed, it shows a stalling of the “recovery” or even another recession starting in the second or third quarter of 2010, which is totally at odds with all the optimism currently boosted in the commercial media, by analysts, and shown in investor sentiment indicators.
but Ed, fill in the blanks. Albert Edwards has been a superbear for – years. In fact, probably – decades by now.
Stopped clocks etc.
He’s been right too! If you look at the S&P or any Western European market index since he went bearish in 1997, they are a disaster – despite a massive 70% appreciation in the last year. Moreover, we are looking at another potential downturn in the next couple of years. I imagine that is also negative for shares.
Bottom line: he has every right to be fundamentally bearish. The question is how much risk one is willing to take on a cyclical level. And I think that’s where he has been wrong.
The charts about six-to-nine months speak for themselves, though.
Ed – fair enough, and completely coincidentally I’ve been bearish for exactly the same length of time:
https://www.blogger.com/profile/11427759744381570329
but I’m humble enough to admit that I was a good few years too early, so basically….i was wrong!
That’s always a tricky one Stevie. B: How do you invest if you think the fundamentals are poor. Jeremy Grantham has said he still believes high-quality companies like Microsoft and Coca-Cola offer good value because the market is being led by low-quality.
So, you can be bearish and still make money.
That’s always a tricky one Stevie. B: How do you invest if you think the fundamentals are poor. Jeremy Grantham has said he still believes high-quality companies like Microsoft and Coca-Cola offer good value because the market is being led by low-quality.
So, you can be bearish and still make money.
Well I’m personally still nervous as hell about things. But then so are most people, yet we are where we are market-wise. We are indeed now in that mega-forest of potential economic problems we discussed ages ago, but more to the point, we all know it and yet desite knowing….we are where we are. So it seems to me that worries are priced in, no matter what excuses-of-the-moment permabears make. And the market is strong despite a relatively strong $, which surely someday will have it’s day in the sun as everyone’s favorite whipping-boy/girl. And when that day comes and the $ weakens, of course the market should go up even more!
I can’t believe I’m writing this – can I really be bullish? Surely not!
Stevie, the markets are way up today and everyone is bullish. To me, Edwards makes a good case that this is sort of the blow-off top of this rebound because economic weakness is coming down the pike. And I suspect this is true on both sides of the pond.
well Ed, looks like you’ve discovered the perfect contrary indicator……
me!
Just to confirm my boredom with bearishness could be premature, we get this..
https://www.businessinsider.com/heres-why-copper-is-now-flashing-a-huge-warning-sign-for-stocks-2010-5
Looks like I might be a couple of years too early again – plus ca change etc…
and just to pile on the agony, there’s this:
https://1.bp.blogspot.com/_H2DePAZe2gA/S-mqIXpUGgI/AAAAAAAAMxY/B1MjbHo_g1w/s1600/debtgdp.JPG
Bullish? Moi?