Your Economy (No Politics)

[Bullwinkle]

The Heavy Odds Against A Soft Landing
Comstock Partners, Inc.
Thursday, July 27, 2006


We continue to be amazed at the supreme confidence expressed by analysts, strategists and economists in the virtual inevitability of a soft landing in the economy and the markets. One would actually think that they are basing their optimistic views on solid historical evidence, when the opposite is the case. Investors being repeatedly assured in the press and on financial TV of the near certainty of a soft landing should consider the following.

1) Of the last 10 monetary tightening periods prior to this one, 8 were followed by recessions, and 9 by bear markets.

2) The last 10 times the 6-month annualized rate of change of the Conference Board leading indicators declined below zero coincided with these periods of tightening.

3) In 9 of these instances the yield curve, as measured by the difference in yields between the 30-year Treasury bond and the 90-day T-bill rate, dropped to 25 basis points or less. The one time the yield curve did not confirm the monetary tightening and the leading indicator rate change was 1994-1995, which was not followed by either a recession or a bear market.

4) Therefore in the 9 instances where monetary tightening, the leading indicator rate of change and yield curve were in accord, 8 were associated with recessions and all 9 with bear markets.

5) Currently, we have been through a period of tightening; the annualized 6-month rate of change of the leading indicators is minus 0.6%; and the differential between the 30-year bond rate and the 90-day bill rate is 15 basis points.

6) The consensus of leading economists has never predicted a recession, while the consensus of leading strategists has never predicted a bear market.

We therefore have a choice between a sensible list of indicators that have been correct on 8 of the last 9 recessions and 9 of the last 9 bear markets, as opposed to a group of pundits that have been wrong all 9 times. Of course nothing is certain in the market, and anything can happen, but why not go with the overwhelming odds?

http://www.comstockfunds.com/index.cfm/act/newsletter.cfm/CFID/3100225/CFTOKEN/15616716/category/Mar...