Recession Warning Clouds Continue To Grow

Everyone breathed a sigh of relief last week when the Federal Reserve decided to take a break from their campaign to raise interest rates. As is usually the case with the Fed, they are late to the dance. The stage is set, now we just sit back and watch.

One of the most reliable indicators of future recession is the yield curve. It has been negative for better than a month. Based on historical evidence, that gives a better than even chance of a recession in the next 12 to 18 months. My bet is on sometime in 2007.

Now further evidence is coming to light. First, a chart provided by John Mauldin at Thoughts From the Frontline (http://www.2000wave.com/gateway.htm) shows us a pretty strong correlation between the housing market and the S & P 500. Chart 2 above tells the story.

Another disturbing piece of evidence is in the copper market. For several years now copper has been on a tear. Most folks knowledgeable in the ins and outs of the copper market will tell you that the price of copper is closely tied to the strength or weakness of the housing market and does a pretty good job of predicting the economy.

Marc Farber recently posted this chart of copper, which shows that copper is on the verge of a breakout. It could be up, but with the other indicators we have talked about this morning, the chances are that the breakout will be down and so will our economy.

See chart 1 above.

Finally, to kind of put some closure to all of this happy news, let me quote John Mauldin, who in my estimation is the most levelheaded analyst in the business. Here is what he says about the coming recession:

"But I find it interesting that so many are so adamant about the possibility of a soft landing. Soft landings are about as rare as a white buffalo of western B-movie lore. Everyone claims to have seen one or know someone who has, but actually finding one is difficult.

We have seen 16 periods in the modern era where we have ended a Fed tightening cycle. Only one resulted in a soft landing."

Hard landing here we come. Prepare accordingly.