Weakness in leading economic indicators has become so pervasive the Economic Cycle Research Institute now predicts a new recession is unavoidable.
"The vicious cycle is starting where lower sales, lower production, lower employment and lower income [leads] back to lower sales," co-founder Lakshman Achuthan declares in the accompanying video.
Whereas Achuthan said the jury is still out in late August, the weakness in leading economic indicators — and ECRI uses a dozen for the U.S. alone, he notes — has become a "contagion" that is spreading like "wildfire."
Although the recovery has been "subpar" by nearly every measure, Achuthan refutes the idea the economy never got out of recession in the first place. "Just because it looks and feels a certain way doesn't mean it's a recession," he says. "You haven't seen anything yet. It's going to get a lot worse."
It's too soon to predict just how bad it's going to get, but he expects another spike in unemployment and further expansion of the federal government's $1 trillion deficit. This forecast has huge ramifications for the 2012 election and the already struggling U.S. consumer and Achuthan says a "mild" recession is the best-case scenario.
By now you may be wondering what separates ECRI's recession call from the myriad other recession calls out there. First, ECRI's primary raison d'etre is predicting recession and recovery calls. Second, and more importantly, The Economist reports ECRI has never issued a "false alarm" on a recession call, meaning many of the Chicken Littles currently declaring "the sky is falling" might actually be right this time around.
I tend to agree with this general premise. I have my own Canaries in the coal mine that point to the same out come!
My 6 Canaries
I had 5 Canaries, but I've found a new one that seems to correlate well with stock market bottoms and tops and economic health. Here they are in random order.
$COPPER Monthly: If you've read my stock market blog then you know I'm a big user of divergences in price compared to the MACD and RSI. I tend to believe the bigger the divergence and the longer the time frame the more important that development is to a potential change in direction.
We have very large divergences on both the RSI and MACD on the monthly chart. That's a very serious development because it's quite bearish for the price of Copper, a key component in so many goods manufactured around the world. If price is going down for Copper is it signaling weak demand for Copper and the end goods it goes into?
If you've read my blogs, then you know I'm a big proponent of the the MACD rolling over as an additional tool for a change in price direction, and the longer the time frame the more important that development is for price. We have a MACD roll over on the monthly time frame.
The combination of divergences and the MACD on the monthly time frame for Copper is screamingly bearish for Copper. That doesn't mean it collapses in price perse, but it suggests we have entered a bear market for Copper. A bear market for Copper should equate to a recession in the global economy.
It might take 1-2 years before Copper bottoms based on the MACD traveling below zero like it did the last time. My current expectation is that price could test the blue line, which is minor support and then bounce. If we get below the blue line then copper could test the black up trend line, which is where I think we eventually get to.
$PALL Monthly: This is my new Canary. What I find important is highlighted in three red circles and two green circles. In 2001, the price of Palladium topped and the monthly MACD rolled over. That correlated well with a stock market sell off and a recession in the US economy. In 2003, the first green circle reflects the MACD turning up with price, which correlated with a bottom in stocks and a growing economy moving forward. Price topped and the MACD rolled as 2008 began and once again correlated well with the 2008 recession and stock market sell off. And finally, price bottomed with the stock market and economy in early 2009.
Once again, we have price and the MACD rolling over. The correlation between palladium and the stock markets/economy has been so good we have to take this as a seriously bearish warning, especially if price continues to slide.
AAPL: I use AAPL as an indicator for stock market health all the time because it's the largest component of the NASDAQ and it's weighting is just too important.
Let me say something I haven't heard yet: Who is not in AAPL stock yet? Does it not seem like every investment house in the world is in the world's most popular stock? Does it not seem like we are all in AAPL?
I raise these questions because who is left to buy AAPL? It seems like when a wave crests there is only one thing it can do. If all the money that can go into this stock is already in, there's only one way for it to go. OUT!
Getting to the technicals, we have a divergence building on the RSI and the monthly MACD is close to rolling over. These developments could take a few more months to complete, but we do seem massively over bought. In the pending correction, if all we did was see price test the prior peak that is a large correction.
And if the world's favorite stock sold off that much in price, you can image what the rest of the market will do!
IBM: The other stock that I use an indicator for market and economic health is Big Blue. It is the largest weighted component of the Dow Jones Industrials. It's simply too important to the stock market, which is a discounting mechanism for the economy.
It tends to hold up much better then most stocks, as money flows to it as corrections begin. So, it's price might be more of a lagging or confirmation indicator for the over all economy. What I'm looking for most is the pending roll over in the monthly MACD, again this should be viewed as more of a confirmation tool and not a leading indicator for the economy or stocks.
That being said, we could see IBM trade a little higher, say $200ish, but at some point the MACD and price will have to reverse. The turned down of the monthly MACD should usher in a correctional phase for IBM that could last 1-2 years.
As goes Big Blue, so should the stock markets and the economy!
$RLX Weekly: Retail spending is just to large a percentage of GDP to not be a Canary. The retail index below broke above the prior peak but failed and reversed. That is potentially very bearish. I have two thoughts from here, the first is that price is now retesting that prior high and will fail and sell off harshly, or price needs one more little push up to finish an ending diagonal then sell off harshly.
A break down in the retail index should be viewed as bearish economically because it represents consumer spending. The price of retail stocks would only fall harshly if consumer spending is expected to decline or slow, which would be in a recession.
JNK Daily: My last Canary is the junk bond market. It serves as a gauge for the appetite for risk. You'll notice is double bottomed exactly with the stock market. And then rose step for step with the stock market. And now, it looks to be in sell off mode with Mr. Market.
Summary
Are we headed for another recession? No..........Not at all!
We are headed for the next deflationary leg down. The charts are potentially very bearish and this might make 2008 look and feel like a picnic in many ways.
The leading indicators like Copper and Palladium are already suggesting it's going to happen. We might see the retail index sell off sharply as the next little indicator of deflation.
Any confirmation from AAPL and IBM of their pending corrections would be damaging confirmation!
Hope all is well.
J.D. Rosendahl, Rosey