A recession is not unlikely due to tight monetary policy.

 

 

 

The above chart shows the ISM index for manufacturing (blue line) and the change of the PPI for crude goods (red line).

 

 

Commodities (using the above PPI as a proxy for commodities) rise following strength in manufacturing (ISM rises). Commodity weaken when manufacturing is slowing down.

 

Right now manufacturing is slowing down and commodities are weakening. In other words, a weaker economy forces prices to grow slower.

 

The important point I want to make is that these ups and downs do not happen by chance My work shows that when the Fed eases, economy and prices rise. When the Fed is following a tightening policy the economy slows down and commodities decline.

 

The recent weakness in the economy (see previous posts) is not happening by chance or because of the weather. The fundamental reason is the Fed (willingly or unwillingly) has been tightening since early 2014.

 

the bottom line is this. If I am correct the economy is likely to weaken even further and commodities will keep heading lower.

 

These trends will have a major and defining effect on the stock market and bond yields.

 

Of course, if I am correct. Time will tell.



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George Dagnino, PhD

Editor
The Peter Dag Portfolio
Since 1977
 

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