Data Diary

Albert Edwards – on seeing trees in forests

Posted on 10 December 2009

One of those Eureka moments – thankfully without the tour of the museum au natural – following is quote from Albert Edwards (lifted from Zero Hedge).

“The secret of making money in Japan was to remember to exit just as most investors had become convinced of a self-sustaining recovery”

There you have it – a trading strategy for these times:

• Buy when the government steps up
• Sell when the government steps away

The logic is sound.  The odds of a self-sustaining recovery occurring anytime soon are long indeed.  The global economy is reliant on government intervention of one form or another.  Paper mache may be good at covering up the cracks in the short term, and the likes of the clone army are paid to sell its virtues, but ultimately a whole lot of dollar bills held together by flour and water can’t stop the urge to deleverage.  (To be fair, I may just be hearing what I want to hear – The Royal Nonesuch – a blueprint for recovery – came to the same conclusion.)

Albert Edwards suggests the time to sell is when the leading indicators turn down – he looks to the ECRI and the US Conference Board.

One point to note, these charts map the rate of change in the leading indicators.  So while the leading indicators themselves are still tracking higher – their momentum is starting to lag.

This approach also makes intuitive sense – as the government withdraws its support, the real economy starts to asset its authority.  If the recovery cannot stand on its own legs, the weakness should show up in the leading indicators.

Compare and contrast to the November release (for September) of the OECD composite leading indicator:

Be interesting to see what the October squiggles are doing – they come out tomorrow.  Pity these leading indicators are published with such a lag…