I churn through just about every piece of economic data that is released on a daily basis. Similar to watching the Red Sox scores at night, it helps me track where we are in respect to the direction of the global economy.
Looking ahead to the second half of this year there are three important questions: What is the picture that the data is painting, what will be the political and monetary response to that picture, and how will that affect the markets and different investments? It is a series of causes and effects that the world economy continuously follows.
Let's begin with the picture itself. The sky is darkening across the board for the economic recovery as just about every indicator is rolling over.
Today we received the weekly Leading Economic Indicator index which has now fallen to -8.3% from -7.6%. I discussed this index in detail in The Stage Is Now Set. As a reminder, when this index falls to -10%, it has forecasted a recession 100% of the time. We are closing in fast.
There is no final demand, and this is will bring our make believe fairy tale economy to its knees.
It appears that both residential real estate and the jobs market are poised to roll over during the second half of the year. This will be another crushing blow to consumer confidence.
My guess is that you will see another round of Quantitative Easing, a fancy word for printing money and buying assets, from the Federal Reserve. They may begin to buy municipal bonds, corporate bonds, additional mortgages, or treasury bonds. Anything to free up cash for consumers and businesses to continue to spend.
The government will most likely step in with stimulus 7.0, or whatever number we are on now. This will come in the form of unemployment benefits, help to local governments, or even sending checks to mail boxes in creative ways.
Both these actions will be the most destructive possible for an economy that is desperately trying to heal and re-structure itself. The heroine patient is lying comatose in the emergency room, and Bernanke and Obama will soon enter with enormous needles filled with more poison.
Now that we understand the economic picture and can see how our leaders will respond, the last question is how this all affects the markets and your investment strategy.
My view is that we will enter a period of disinflation over the second half of the year. Assets across the board will fall in value and it would be wise to raise cash now, safe cash, to prepare for better opportunities.
I am not selling the investments I already own, but I am not putting new money to work in any markets at this point. My hope is that the most desirable investments, such as precious metals, will fall in value with everything else, and investors will have one last opportunity to buy in at lower prices.
Enjoy this time in history, its going to be incredibly exciting.