Buy the VIX index for renewed volatility! (page 1 of 3)

A recurrent theme of this commentary since the end of last year was that money supply growth had been slowing down in the US, and that international liquidity growth had been decelerating. We, therefore, expected the US dollar to strengthen and industrial commodity prices to weaken. We also expected the global economy to slow down, and for the S&P 500 to encounter heavy resistance in the 1200 to 1225 range.

So far so good, but where do we go from here? Looking at the recent miserable performance of the Baltic Dry Index, declining air cargo volumes, falling steel, aluminum, tin, zinc, and lead prices and the miserable performance of economic sensitive stocks, it increasingly appears that the global economy is now far weaker than what the super bulls on the US economy want us to believe.

Not a pretty picture! I may add that, in late June, when Google just broke out on the upside through $ 300 barrier, a well-known CNBC commentator told the audience that the stock was a 'must own' and that it would go straight to $ 350. On the same day, an analyst told the audience to sell Oracle. Since then Google is down 5% while Oracle is up almost 15%.

This is not to say that my forecasting record is any better, but that the performance of stocks and commodities are usually a far better forecaster of economic activity than the endless analyses and commentaries of strategists, analysts, and mentally disturbed economist who find a home at the US Federal Reserve Board. So, if at the same time, Aluminum prices and steel stocks break down, maybe something is no longer all that rosy in the economic environment.

Please note that at today's level, aluminum prices are lower than they were at the beginning of 2004! Similarly, the shares of US Steel are now no higher than they were in early 2004. US Steel is also down by almost 50% from its early 2005 high, when one could not find one bearish analyst on the steel industry, as 'China was expected to buy all the world's available steel'.

As a side, I may add that when US Steel's stock was inexpensive and trading a tad above $ 10 in 2000 and 2001, analysts were in love with 'new economy' stocks and recommended to avoid old economy stocks like the plague. To be fair to the analytical community, if any strategists or analyst had been recommending steel stocks in the midst of the NASDAQ bubble in 2000, investors would have, at that time, paid as little attention to such an odd recommendation as to the one to buy gold and oil.

I should like to emphasize here that it is not analysts' recommendations that make markets move. However, when markets move for a while in a direction, then analysts and strategists, and at the very end of the trend, even TV personalities will jump on the subject. They will then write extensive studies and make comments that justify and explain the price increases. In fact, the longer the price of a stock or industry goes up, the thicker the research reports will become.

Weighing up analysis

Thus, as an investor, you need to buy a post office scale. When all the reports on a stock or sector are light, it means 'buy'. Conversely, when weekly the reports you receive on an industry add to several kilos then 'sell'! So, after all, brokerage research does have a very useful function but not through its content but weight.

But back to the 'strong' and 'healthy' economy of the invincible empire! It is not capital spending that would lead to rising durable goods orders but consumption, which, as explained on numerous occasion before, is being driven by a huge credit expansion that lifted home prices and allowed money to be extracted from homes through refinancing activity.

Now, someone could argue that weakness in some industrial commodities and steel may be isolated cases of weakening demand but that the rest of the economy was in great shape, as we continuously hear from well known economists in the world's leading financial media.