Central banks across the globe have been waging a war against the natural economic ebb and flow. Like any war, it has had many battles. Since 2008, central banks have won every battle. Now their luck is running out.
I do not know how the war will turn out, but last week my model gave a definitive call that central banks are likely to lose this battle.
Economic indicators can be broadly divided into three categories: the lagging indicators, the coincident indicators, and the leading indicators.
The focus of our research at The Arora Report is leading indicators from 23 countries. As the name implies, leading indicators provide an early indication of the direction of an economy. Examples of such indicators are vendor delivery schedules, hours worked in a week, and new construction permits.
Early last year, when the consensus was that the world may enter into a recession, our models based on the leading indicators were forecasting a slower economy, but no recession in the U.S. or Asia, and only a mild recession in Europe. This correct call by our economic models was primarily responsible for generating profits last year.
This time the picture is different. The leading indicators are warning that the probability of a recession has increased.
We do not rely solely on economic indicators for market timing.
At present the following are the key ingredients of our timing model.
1. Aggressiveness of fund flows
2. Leading global economic indicators
3. Commodity price movements
4. Relationship between currencies
5. Risk appetite as demonstrated by the relationship between the price movements of the assets deemed safe vs. assets considered speculative…Read more at MarketWatch
