There are two services I subscribe to that I find invaluable for the assessment of fundamental data:
- Shadow Stats: www.shadowstats.com
- ECRI Light: www.businesscycle.com
Shadow Stats provides an alternative data source to official US statistics and ECRI Light provides reliable leading indicators on the state of the US economic growth and inflation. The two together provide data on whether or not my ideas about ‘long-term’ perspective are being reflected in the economy.
I tend to rely more on the ECRI report than Shadow Stats and will lean to the former if there is a conflict. But right now they both agree: the US economy sucks. Despite the rosy picture provided by Non-Farm payrolls, the latest Shadow Stats demonstrates why the official figures are an illusion.
The ECRI published Friday Dec 7 2007 for the week ending Nov 30, shows US economic growth at a 5-year low and inflation down a tad. The ECRI indicators have about a 3-months lead time. So, I’ll know if my idea – that the massive increase in the money supply in August through to November 2007 will lead to a rise in inflation despite the weak economy – will be correct about 3-months before there is pressure on the FEDS to raise rates. But that’s for the future.
For today, the true state of the economy is the focus. Tuesday 2:00 PM EST, the FEDS will announce their decision. The worry for me is I am in the majority camp – I think there is little chance there will not be a .25 cut in the Fed Fund Rate and in the Discount Rate. But given the state of the economy, the sub-prime liquidity crunch, and Bernanke’s ideas of the causes of the 1929 Depression, I rate the probability of a hike above .25 around 67%.
If it were just the matter of the economy, I’d rate the probability much higher. However in the near term, the FEDS have the US$ to worry about. I would hesitate a guess that despite the jaw-boning, they would not be averse to a sliding US$ as a measure against recession. However, what they don’t want to see is a US$ rout. And that is what they are likely to get if they decreased rates in the Fed Fund Rate and the Discount rate by 0.50. In addition, the decrease in rates in the Fed Fund Rate has done little to assuage the liquidity problem.
So, for all these reasons, I rate the probability of about 67% for a decrease of .50 in the Discount Rate and a .25 cut in the Fed Fund Rate. Such a move at least provides some chance the US$ decline will not turn into a bearish stampede.
What do I see happening if such an eventuality occurs? Well, I’d expect the ES to rally strongly and take out the current highs before year-end. We’re only 70 points or so away, so that’s not hard to imagine.
I’d expect the US$ to drop strongly over the next week but do expect to see some buying come in. December is seasonally a strong month for the US$ and so far it has held up well.
As always, whatever your position (long or short), in whatever instrument (Gold, Interest Rates, Stocks and Stock Indices etc), I recommend you create some worse case scenarios in case the FEDS do something unexpected and/or the market reacts in a way contrary to your expectations. Preparation is my key to preventing the ‘rat brain’ seizing control and thus turning a well-planned loss into a catastrophic one.