About Me

Retired chief investment officer and former NYSE firm partner with 40 years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Friday, May 29, 2015

US Economy -- At Fail Safe Point

Over 100 years of monetary, economic and stock market data show conclusively that when
the monetary base adjusted for inflation flattens out or declines for an extended period, bad
things happen to the economy and the stock market. The time between the end of growth of
the base and trouble varies considerably with the key variables being the strength of private
sector credit supply and demand. When the Fed has tightened up on liquidity, the economy
and the stock market can continue to flourish so long as borrowers can avail themselves of
ample credit.

When the Fed made it clear it was ending the very  large QE 3 program after the tapering
process, I argued that there would be an economic slowdown that carried well into 2015 and
that the prospects for the economy would largely depend on confident borrowers and lenders.
The unfolding economic slowdown witnessed since late 2014 has been made worse by bad
winter weather, a large decline in drilling for oil during an emerging supply glut and a couple
of other very transitory factors.

The slowing of sales and production growth this year has reached an economic fail safe point
in that further weakness may well invite economic recession. In short, the economy needs to
do better soon and it is unwise not to follow its direction very carefully going forward lest you
get caught with excess risk exposure. The adjusted monetary base has been flat since Aug. 2014.
The Fed has held short rates at the zero bound level, but It has tightened liquidity and policy
very appreciably.

So, before we worry about when and by how much the Fed may raise rates, we need to make
sure the economy is not about to dip into a downturn. The weekly leading economic indicator
I use has been improving since the end of Mar. this year, and this suggests we should see
some improvement in business sales and production come Jun. Moreover, the banking sector
has ample liquidity to underwrite rising credit demand in support of economic growth going
forward. Even so, be from Missouri on this one (Show me the growth).

The Philadelphia Fed leading economic index has fallen to 1%. There have been periods in
the past when the index has fallen below 1% but has subsequently recovered, leaving the
economy to grow further but note when the index has not recouped. Leading Indicator

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