The economy

I keep hearing people on TV telling me how great the economy is doing.  They usually point to the housing and employment data when making their case.  Now I am not an economist, but I have done a little reading about economic data over the years.  The first thing I figured out is the commonly available data is completely useless for forecasting.  This is why most economists, including the FED, are often way off.  The ECRI has their own proprietary data that allows them to forecast much more accurately.  They are the only economists I will listen to.  The second thing I figured out is that seasonal adjustments can really cause big distortions in the data.  We just had one of the warmest winters in decades coming after two pretty cold winters.  Of all the data most affected by weather in the winter it is probably housing and employment.  It was warm enough for people to work outside and look at houses all winter long.  Can we trust the data at all?  The Q4 GDP had a huge inventory build.  So far this year the inventory data keeps surprising to the upside.  This means inventories are still building faster then expected.  Not all inventory builds lead to recessions, but all recessions start out with an inventory build.  The ECRI forecast a recession in the U.S. last fall and are still sticking with the call. What does the market think about the economy?  Lets take a look at the difference between now and last year with SPX in the 1370 area.  The chart below shows SPX and economically sensitive indexes all at the highs together.  We ended up with a 20% move down, but that was more about Europe and debt then the economy.

Fast forward to today.   Check out the difference now in the chart below.

Clearly the market has questions about the economy it did not have last year.  All three economically sensitive indexes have trend lines slanting down, not up.  The XLB has the steepest slope down.  The basic materials stocks are pretty much at the beginning of the economic food chain and they are in the worst shape.

Most people seem to agree that the emerging markets have been the engine of growth the last few years.  Lest see how they are doing now.

Hmm, last year EEM was at its highs along with SPX.  It looks like we have a little bit different picture today.  Take a peek back at the summer of 2010.  You can see EEM made a higher low in early July while SPX made a slightly lower low.  It was also showing relative strength through Aug. before SPX caught fire in Sept.  The global economy was starting to pick up again before the big rally late that year.  That clearly is not the case today. 

Bob