Email of the day (2)
Comment of the Day

October 15 2010

Commentary by Eoin Treacy

Email of the day (2)

on a contrarian attitude:
"I notice that Lakshman Acuthan of ECRI has been saying recently that by the end of this month ECRI will have a definitive view whether or not the US economy is headed further down. I understand that ECRI's forecasts are taken very seriously by the Fed. If that month-end forecast is not for a further decline in US growth (their leading indicators seem to be perking up a little), perhaps a new round of QE2 is not as certain as the markets seem to be thinking now. Further the elections may mean that Republican majorities in both Houses prevent a further presidential stimulus plan. Do I have an arguable point? If you think so, might not this contrarian scenario be cause for some serious mean reversion across asset classes? Keep up your always interesting work!"

Eoin Treacy's view Thank you for this interesting email. The ECRI Weekly Leading Index Growth Rate found medium-term support in July and has improved steadily since. While I do not claim to have any insight into how this measure should be interpreted, I suspect that the continued actions of the Fed aimed at promoting inflation will likely help to avoid a return to outright deflation. I continue to view stagflation as a credible medium-term risk.

I have made the point repeatedly in the audio and in yesterday's Comment of the Day that I believe the risk of a mean reversion pull back and corresponding Dollar rally are increasing. The Dow Jones Industrials has rallied impressively since early September and is now testing the April highs near 11,200. Commonality dictates that with an increasing number of indices breaking to new recovery and all time highs the odds are in favour of a move above 11200 over the medium term. However, considering how oversold the Dollar is in the short term; maybe the Index will consolidate its recent gains first. A sustained move below 10,500 would be required to question medium-term upside potential.

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