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Tuesday, October 28, 2008


consumer confidence record low

the conference board reported this morning that their measure of consumer confidence notched its third-steepest one-month fall on record, and fell to an all-time low in october.

this is not the godawful news it might be construed as. of course it isn't good -- low confidence means low spending means slowing monetary velocity. but perhaps one can look through the current situation to some extent.

i track the differential between the future expectations component and the current conditions component to get a feel as to how things might play out. normally, economic downturns are presaged by the expectations component falling significantly beneath the current conditions for some duration -- as explained here, usually readings of (-20) are prelude to mild recessions, (-50) to more severe strains, frequently with a lead time of many months to a few years. this led me -- along with a then-inverted yield curve -- to begin pondering recession back in 2005.

but the converse is that when future expectations brighten and start to outpoll current conditions, the groundwork is being laid for a recovery. we can see in tracking the differential that we've resolved from an anticipation of a severe recession back in march 2007 to an essentially neutral condition -- where both future expectations and current conditions are reading all-time series lows, to be sure, indicating that the united states is in the teeth of recession.

at some future point, the outlook will start to brighten and the differential start to post meaningfully positive readings as it did first in november and december of 2002, then more persistently in mid-2003.

it is worth noting that the current component will naturally lag recovery and particularly the stock market -- it put in its cycle low last time in september 2003. moreover, the future expectations component is notoriously volatile -- it seemed to be improving from a cyclical low point by march 2002, reaching up to 110 that month. subsequently the measure crashed to a cycle low of 61 in march 2003. it's only really in taking the two together that there seems to be much anticipatory power in the series.

to be sure, this neutral condition can last for quite a while. it's also possible for future expectations to dig lower and return the differential to a deeper negative reading. so this is no surefire buy signal quite yet. but that day will come, and when it does it should prove harbinger of a sustained economic (and equity market) upturn.

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