Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Notches Best Month Since 1979 - 12th Aug 20
Silver Shorts Get Squeezed Hard… What’s Next? - 12th Aug 20
A Tale of Two Precious Metal Bulls - 12th Aug 20
Stock Market Melt-Up Continues While Precious Metals Warn of Risks - 12th Aug 20
How Does the Gold Fit the Corona World? - 12th Aug 20
3 (free) ways to ride next big wave in EURUSD, USDJPY, gold, silver and more - 12th Aug 20
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Markets Signaling Economic Recession

Stock-Markets / Financial Markets 2011 Sep 30, 2011 - 10:45 AM GMT

By: EconMatters

Stock-Markets

Best Financial Markets Analysis ArticleWe at EconMatters expected the QE2 froth to come out of markets once the fed experiment of artificially inflating asset prices was over, and for the most part this is exactly where we are today at the crossroads.

Are we going to just trudge along with a slow growth economy until the world finally works its way out of the housing inventory overhang, and the next building phase takes hold and there is a strong surge in the labor markets from the bottom up, or are we going to take the next leg down and head back into a recessionary environment?


Remember, the official definition for a recession is two consecutive quarters of negative GDP growth, and is determined after the fact. However, there are some market signs which in real time can give us a clue as to which course the economy seems to be taking.

Crude Oil 

The First is the price of Oil which is a barometer for economic growth and future expectations for demand. I know that is the analyst approach for the benchmark, the more cynical side of me believes the price of Oil trades more in line with the S&P 500, and is really more of an asset class investment vehicle than any true economic indicator of strong future demand for the commodity.

But in either case if WTI falls below $70 and stays there than I would say this is a pretty good sign that the US is likely experiencing at least one quarter of negative GDP growth, and pretty near recessionary levels. In regards to Brent, there is approximately a $22 premium over WTI right now, and any significant tightening of this spread would also be something to pay attention to for recessionary concerns.

An overall price level for Brent potentially signaling a recession would be the $85 level, if Brent trades below this level for any significant amount of time this not only indicates that things are pretty bad in the US and Europe, but that China is experiencing a substantial slowdown as well.

The reason for this is that if China is still growing at 9% they can use lower Oil prices to stockpile supplies and provide some kind of floor in the Oil market, but if the Brent contract price becomes weak this tells a lot about what economic conditions are like in the emerging economies.

Copper 

The Second asset class to be cognizant of is the Copper market. Copper is often referred to as having a PhD in economics for its insight into industrial demand for the manufacturing, construction, and supply chain sectors of the economy.

It has lost some of that appeal as an economic indicator with its recent (last couple of years) status as a currency hedge being pulled up by Silver and Gold in particular on currency devaluation concerns.
But still if Copper trades below $2.50 a pound and stays there then we are probably in a full blown recession, and fiscal and monetary policy responses will be direly needed to counteract this deflationary spiral.


Congress would have to get serious about stimulating the economy by providing some reallocation of resources which create little to no additive jobs to large scale infrastructure projects which create many more jobs all along the supply chain and also incorporate heavy handed tax incentive policies for small and medium sized businesses which are struggling now due to reduced loan capacity from the lending institutions.

Congress probably needs to incentivize banks to lend maybe even at the expense of some bad loans along the way if we are at this stage in the economy because this stage feeds on itself and perpetuates the deflationary cycle further.

S&P 500

The Third asset class is the S&P 500, if it falls below 950 and stays there then for all intents and purposes we are in a recession, officially designated or not. The S&P 500 was last in this territory July of 2009, and has really not looked back since. A bearish revisit to the 950 area spells recession for the following reasons.

This means risk capital has left the building so to speak, and is tucked away in capital preservation mode. It also means the “Wealth Effect” in reverse, people don`t feel much like spending (especially on discretionary consuming) when they feel poor, and are in the hunkered down saving mode.


These effects extend all the way through the economy from the retail sector which needs fewer employees, to the entertainment and dining sector of the economy as well. All this means less jobs, and higher unemployment.

Another troubling sign for the economy is that CEOs watch stock prices diligently, maybe a little too much, but they do. And a weak stock price for large companies means a conservative nature towards financing aggressive projects, and even worse full blown cost cutting mode. All of which means less jobs, and a continued perpetuation of the deflationary cycle in the economy.

Another disconcerting aspect of a 950 S&P level would be that an already beleaguered banking and financial services sector would probably be reducing jobs at a significantly higher rate, and this sector weakness permeating through the economic has the definition of recession written all over it.

Cotton 

The Fourth asset class is Cotton which had quite a run this past year going from around $80 around July of 2010 to a high of $227 in March of 2011. Most analysts at the time bought into all the supply shortage rhetoric that permeates Wall Street in the midst of a bullish QE2 asset inflating all you can eat bonanza buffet trade.

However, being skeptical by nature and observing that Cotton behaved similarly to many other commodities like Oil, RBOB, Silver, Copper, and Equities prior to and directly after Bernanke`s Jackson Hole Speech where he signaled QE2 all the way to the ending of QE2 and its effects.


It appears that the run up in Cotton was for the most part fueled by artificial means and not true demand, or supply shortage issues. By artificial means I refer to as hot capital inflows into the commodity fund space, with the added artificiality of $600 Billion of new liquidity sloshing around the financial markets looking for a home like a bull in a china shop.

Cotton is currently trading around $100, and breaking through the $60 level would be quite bearish and reflective of a recessionary trend for the commodity as clothes when you really get right down to it are highly discretionary.

When global consumers pull back because of several quarters of above average inflation and stagnant wages, this equates to lower purchasing power and eventually prices must come back down as the entire supply chain adjusts to a lower consumption model.

So if we should witness $60 Cotton, this is a sign that consumers have pulled back, and is now being reflected back through the supply channels to the base commodity Cotton, and is another deflationary recessionary market signal.

A Real Inflection Point

My thought was that asset prices were correcting naturally after QE2, summers usually experience a slowdown in the economic data and activity, and that the overall economy would need to recover from above average commodity prices for a couple of months.

But that come mid October through the Christmas Holiday season where many businesses make their numbers, and economic activity and data start grinding higher that this just represents an excellent buying opportunity (maybe one more little leg down).

Furthermore, that asset prices and economic activity remain bullish through the strong investment and business activity months of January through May, with the added benefits of 2012 being an election year, that markets could go on a nice run from mid-October to the end of May before any signs of summer selling occurs, and investors might want to take some profits.

And who knows with it being an election year, we might run straight through until the end of 2012 ( a lot of this depends on Congress working together, markets approving of election results, etc.) So this appeared to be a great time to start accumulating positions.

But Markets have been selling hard into any rallies, there is a lot of investor and business uncertainty out there in the market, and there are more signs that we have the potential to move in the other direction, towards another recession, the dreaded double dip, then there were just a month ago.

In short, the economy seems to be at a crucial point, and a credible argument can be made for going in either direction from here, and this is illustrated in the cautious approach by investors.

So these are some of the market signs that may give investors and market watchers a heads-up that the economy is heading in the wrong direction long before the economic data and GDP reports confirm that we are indeed in a recession.

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2011 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules