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There continues to be much confusion over the outlook for the worldwide economy and particularly as it pertains to the U.S. Most of the confusion centers on which indicators lead, coincide, or lag future economic events. Wall Street, which is most often bullish, pays little attention to which is which. Their entire mantra revolves around low-balling predictions and then buying on “better than expected.”

The old-fashioned leading indicators originated by the National Bureau of Economic Research remain strong – the problem being that some 45% weight is given to financial indicators, which cannot work when the Federal Reserve controls short-term interest rates at 0%. If one disregards these indicators, things look worrisome. We understand that these will be changed later this month for that very reason. As an aside, over the years there have been many financial indicators that have been tested for use as leading indicators. None of them have been reliable. We tested them all. The reason, of course, is that markets are not efficient, despite what nearly all the textbooks teach. That being the case, their usage is of little value.

There is a financial correlation that is in sync most of the time – that being long government bond yields tend to go up with the stock market as well as down. Please note the two charts which display that relationship. Note that over the last six months or so that correlation has diverged. Someone has it wrong. We believe it is the stock market.

Adapted from dshort.com

Adapted from pragcap.com 

In our opinion, lower stock prices, lower government bond yields, and economic recession are in our future.

Central Plains Advisors

Information contained in these commentaries is based upon information obtained from sources both external and internal which we consider to be reliable, but the accuracy of the information and the recommendations contained herein cannot be guaranteed, nor do they constitute a solicitation for the purchase or sale of any securities mentioned herein. Information contained in this commentary may not be reproduced in any form without written permission from Central Plains Advisors.

Disclosures: As benchmarks for comparison, the indexes used represent an unmanaged, passive buy-and-hold approach. The volatility and investment characteristics of the benchmarks cited may differ materially from those of Central Plains Advisors. Please be advised that the comparison to the S&P 500 is not an apples to apples comparison, as they are a different class of assets. The account performance figures reflect the reinvestment of dividends and capital gains. Past performance may not be indicative of future results and does not guarantee positive returns. The performance results for 1991 through 2009 have been independently compiled by CPAs from information provided by Central Plains Advisors. The period of 1991-1999 was one of generally rising stocks and bonds. The period of 2000-2003 was one of generally lower stocks, but rising bonds. The period of 2004-2007 was one of rising stocks and bonds. The year 2008 experienced a stock market crash and average bond market. 2009 experienced a strong stock market and positive bond market. 2010 was a good year for both stocks and bonds.