What’s Next? Will Quantitative Easing Demolish Stock Indicators?

In late 2008, we knew we had a problem.

For years we had used the Economic Cycle Research Institute (ECRI) for predicting recessions before they occurred. This leading indicator had a much better track record than the more traditional ones.

But after QE started in November of that year, this indicator started to falter. The institute had predicted a recession in early 2011, but as QE dragged on, it just didn’t happen.

ECRI wasn’t the only one. The Consumer Metrics Institute’s (CMI) Daily Growth Index also started to fail from early 2010 forward.

I remember introducing Rick Davis, CMI’s founder, at one of our conferences back in 2008. I told our subscribers “we have a secret weapon here,” as few people knew about this indicator.

Now, like ECRI, the Daily Growth Index is merely a coincident indicator, not a leading one.

It’s not that these indicators are inaccurate. They were once about as spot on as you can get.

It’s that we’ve poisoned the economy with something-for-nothing, QE-driven policies, essentially draining these indicators of all the power they once had.

When major leading indicators start to warn that the economy is beginning to weaken, what do central banks do? Just up the ante and inject enough money to offset the downturn.

Magic!

Here’s a chart that shows just how well the ECRI Weekly Leading Index was at forecasting recessions well ahead of time… until QE got in the way.

 

This shows you that we have an artificial economy. Money injections keep banks and bad loans from failing as much as they otherwise would. Zero interest rates — both short- and long-term, adjusted for inflation — encourage greater speculation and something-for-nothing profits.

That helps financial institutions and higher net-worth households. The everyday person? Not so much.

A normal recovery would create a reset that rebalances the economy and allows for growth. Consumers would start spending again. Businesses would start reinvesting in production capacity and jobs. Those jobs would reinforce the economic rebound and spending! That’s what these leading indicators measure.