The Weekly Report

By: Mick P | Sun, Dec 7, 2008
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Welcome to the Weekly Report. This week some fool decided the US had been in recession for a year. I hope they don't get paid too much. What I find amusing is that straight away all sorts of bull side writers and shills started talking about the US stock market being a discounting system, looking 6 months ahead, look for signs of recovery etc blah.


The stock markets are heavily manipulated right now, bans on short selling alone distort the real conditions of the stocks, government bailouts allow dead businesses to keep walking and the expectation of centralist bail outs for conglomerates considered too big to fail keep prices higher on mis-placed optimism. Attempting to use stock markets as a leading indicator with so much interference in place is not a wise move. Maybe one day in the future it will be worth monitoring stocks but right now they are a sideshow.

Anyway, back to our 12 month recession, was there anything that we could have monitored over the past 12 months that would have indicated what was coming?

Here is the ISM report for manufacturing:

No sign of a bottom here then. Indeed it looks as if the trends are continuing and at a faster pace. Notice new orders and imports? If I had to use the ISM report as an indicator, it would be these 2 series I would watch for signs that the current trends in manufacturing may be changing.

How about non-manufacturing ISM?

* Non-Manufacturing ISM Report On Business® data is seasonally adjusted for Business Activity, New Orders, Prices and Employment. Manufacturing ISM Report On Business® data is seasonally adjusted for New Orders, Production, Employment, Supplier Deliveries and Inventories.

** Number of months moving in current direction.

Here the trends are not as pronounced as manufacturing but as we can see the trend is one of falling activity that is accelerating. Interestingly employment, often accused of being a lagging indicator, was the first series to show slowdown and the November reading should have made Fridays unemployment figures unsurprising. I would recommend that you keep an eye on the ISM report over the next year, especially those series that gave an early warning of the current situation. Right now I see absolutely nothing that would want me to buy stocks based on a macro-economic viewpoint.

So if stock markets are not telling us the whole story, what is?

Courtesy of

Yields have plunged across the board since July but a noticeable acceleration of the trend kicked in during late October. This follows on from last weeks report were subscribers read about the move of the US into a Quantitative Easing policy (QE) which involves Ben Bernanke's favoured method of controlling the yield curve across all bond asset classes:

Such support for all bond classes tells us 2 things. The first is that treasury bonds may be expensive and low yielding now but that does not mean they have hit a peak. Beware of shorting bonds just yet. Secondly, the measures mentioned in Bernanke's remarks were from his speech in 2002 titled Deflation, making sure "it" doesn't happen here, however the remarks were in the section titled "Curing deflation". Ben thinks we are already in a deflationary environment; he is not trying to prevent "it" but cure "it".

Quantitative Easing is another way of acknowledging moral hazard and increasing it exponentially. Once started, as Bernanke is beginning to discover, QE cannot be suddenly dropped from the game plan as its very existence becomes the only bulwark of confidence for all markets. The inevitable outcome of QE, on the scale envisaged by Bernanke, when taken to its conclusion is that no asset can be left outside of the guarantee, regardless of the solvency of the underlying corporation. This was the lesson Japan learned when it underwrote its banking sector. Bernanke has a much greater struggle to contend with, he has to underwrite practically the whole economy.

Many economic writers are currently looking at the rise of M1& M2 and shouting about the inflation that will occur in the near future, however they are looking at the new situation through the wrong lens:

Is the rise in M1&M2 unexpected? Clearly, those that have studied QE in Japan would say no:

The comparison to the M1/M2 Fed chart is no coincidence. The outcome of the US adopting a QE policy will have wide ranging consequences but today I want to flag up a comparison that can be used by investors.

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Mick P

Author: Mick P

Mick P (Collection Agency)
About Collection Agency

An Occasional Letter From The Collection Agency in association with Live Charts UK.

For some years now I have written an ongoing letter, using macro-economics, to try and peer into the economic future 6 to 18 months ahead. The letter was posted on a financial bulletin board to allow others discuss its topic.The letter contains no recommendations to buy or sell, indeed I leave that to all the other letters out there and to the readers own judgement. The letter is designed to make us all think about what may be coming, what macro trends are occurring and how that will affect future trends and how those trends will filter down to everyday life and help spot weak or strong areas to focus on for trading or investing.

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