By now, even the most bullish commentator has begun to acknowledge that the Stimulus high is ending and we are likely entering a “double dip” recession later this year.
It is not difficult to see why, every indicator worth anything is pointing to a massive drop in GDP coming shortly. The ECRI, which has a 100% accuracy rate for predicting recessions has just posted its fastest collapse in history and is already at levels indicating another recession is a “sure thing.” (Click to enlarge)
In plain terms, the above chart indicates that we are heading into a recession that will be on par with that which occurred in 2001… and this is with unemployment already at 9.5% (if not higher) and private sector GDP having barely staged a bounce!
The Consumer Metrics Index (CMI), which measures spending on discretionary items and services (and has proven a good GDP predicting tool), also points to a coming collapse in GDP later this year. Note that the blue line (the CMI) is plunging ahead of GDP (pink line).
There is also the Baltic Dry index, which measures the price of shipping and as such is a good indicator for global trade. As you can see, the Baltic has entered a free fall. This is the sharpest Quarter over Quarter decline in history except for 2008.
All of the above items point to the US economy entering a NEW recession later this year. In plain terms, the Stimulus dead cat bounce is over for GDP and we are resuming the mega-downtrend began in late 2007.
In other words, BUCKLE UP.
Some investors will read these words and say, “so what? Stocks don’t need to trade based on economic fundamentals.”
In the short-term this is correct, market volatility and price action are largely the result of the Fed’s loose money and easy credit policies. However, the below chart depicting the Baltic Dry Index and the S&P 500 illustrates clearly that those who bet against economic indicators are in for a rude awakening.
Note that the Baltic’s collapse in 2008 and subsequent rally in 2009 lead the S&P 500 by about several month. Also, please note that the Baltic is in a free-fall now, while the S&P 500 continues to try and push higher. This divergence can last for a while… but not long.
The below chart shows a close up of this divergence.
As you can see, the Baltic Dry index peaked in November 2009 leading the stock market peak by about five months. It then staged a collapse and subsequent bounce which failed to re-test the previous high (just as stocks are doing now). It has since entered a total free-fall. Based on its market leading qualities, this spells out that stocks should collapse horribly within the next few months.