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GLOBALLY SYNCHRONIZED RECESSION COMING
by Bob Bronson
Bronson Capital Markets Research
August 8, 2004

History and business-cycle theory show that stock markets tend to peak when the aggregate of other leading economic indicators are also peaking, which altogether usually anticipate business-cycle peaks by a few quarters.

One way to track long-term (quarters to years) stock market cyclical turning points is with six-month rates of change, where the time-series lag created by such multi-month averaging (smoothing) offsets the lead from using more volatile first derivatives, or rates of change.

The timing of our expectation of a world business-cycle slowdown leading to a globally synchronized recession has been confirmed by the confluence of January peaks, plus or minus a month or two, in the six-month rates of change of various countries' leading economic indicator indexes, as measured by OECD in the table below.

This is also consistent with the February peak in the Dow Jones World Stock Index (see the chart below), as well as other international stock market indexes.

This nearly simultaneous peaking in the world stock market and the aggregate of international leading economic indicator indexes is more than simply reminiscent of four years ago, when the stock market and the Kitchin business cycle peaked, exhibiting left cycle translation and as was projected in our SMECT forecasting model, respectively:

http://www.financialsense.com/editorials/bronson/2004/0308.html

http://www.financialsense.com/editorials/bronson/2004/0701.html

This further benchmarks our expectation that a globally synchronized recession will fully emerge next year. As we have opined before, it will be led by over-extended US consumers cutting back on their spending and borrowing, thereby increasing their income-based savings rate, caused by a severe negative wealth effect resulting from predictable simultaneous corrections in the stock market's echo bubble and the home-equity speculation bubble.

With the substantially reduced stimulative intervention power of both monetary and fiscal policy-makers -- because short term interest rates are already extremely low and because 4% and 5% fiscal and trade deficits, respectively, have already been accumulated --  and without incremental economic stimulus from substantially increased spending on homeland security and defense in the war on terror, or some other government spending initiative, this second recession could be so severe that here will only need to be one follow-on, or after-shock recession, for a total of three recessions in this K-Cycle Winter. This would be in contrast to four recessions related to the four 48-month Kitchin cycles that typically constitute a K-Cycle Winter -- note Japan since yearend 1989 and again see our SMECT forecasting model.

http://www.oecd.org/department/0,2688,en_2649_34249_1_1_1_1_1,00.html

© 2004 Bob Bronson
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Bob Bronson
Bronson Capital Markets Research
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