Thanks to our friends over at Zero Hedge for the fantastic presentation by Albert Edwards on the “next leg down” in the bear market (highly recommended reading for those that haven’t seen it). What jumped out at me was the reference to the ECRI’s leading indicator, an often referenced indicator here at TPC. As regular readers know, the indicator and the ECRI’s Managing Director Lakshman Achuthan have been very confident about the sustainability of the economic recovery and have predicted a much stronger recovery than most suspect. After months of very bullish talk out of the ECRI they suddenly appeared to be hedging their bets a bit in an article on NPR’s website last week. Now, Albert Edwards is referencing the surge in the ECRI’s leading indicator (in comparison to what occurred in Japan) as a possible contrarian sign:
The secret to making money in Japan was to remember to exit just as most investors had become convinced of a self-sustaining recovery. Investors should have sold as the leading indicators began to turn down (see chart below).
The leading indicators have begun to turn down in the US (see charts below) and so risk assets are therefore dangerous. Almost no-one will be willing to predict renewed global recession and no-one will predict new lows in equities. And with the market so bullish a cyclical failure will come as a crushing blow to sentiment. It is time for caution. It is time to sell.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.