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Wednesday, July 19, 2006

State of the Markets

Right now: Stagflation refers to a situation with rising inflation in a slowing economy. Data points that this is where the US markets are at the moment.

FED: If two monthly inflation figures between now and Sept 22 show lower and trending numbers with slowing economy -- pause in rate hikes. But with economy slowing and inflation spiking, FED will raise. No one is sure because both camps have valid arguments for tightening further or pausing.

Thus FED's future policy will be determined by DATA that will come out in between meetings. Therefore: WATCH out for key economic indicators as they come out as these will determine market direction. Keep positions relatively flat on these periods.

Key Points showing a Slowdown:

Leading Economic Index

The Leading Economic Index, as compiled by the Conference Board, has now contracted over the past six months. As compiled by Van Hoisington and Hunt (Quarterly Review and Outlook) this has happened 13 times since the Korean War, and the US had outright recession after 9 of those periods and serious economic slowdowns followed the other 4 episodes.

Leading Indicators Point to Employment Slowdown

Two other key leading indicators of employment, the temporary employment index and the help wanted index are heading down. As the chart shows, when that happens, a recession or slowdown in the economy (shaded area) shortly follows.

Thus, this blog can:

Keep close tabs when economic announcements come out. And since a slowdown will show up in the 4thQ 2006 or 1stQ 2007, then stocks will probably be better played on the short side on any rallies. Bonds are poised to be a good investment.



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