What the indicators are saying?

This essay follows up my earlier comments on the real health of the world's 4th largest economy. (See article for initial comments).

Since late February we have seen the following:

A top (at least short term) in the FTSE 100. From a technical point of view the top was perfectly timed and at a psychologically important level. Since then the downtrend, whilst not setting any records has been relentless and if my reading is correct should significantly increase over the coming months. That said nothing in the markets is "for sure" so while the FTSE 100 remains above 4500 there is a possibility of a further high, although each passing day makes this less likely.

A continuation of the inverted yield curve. Short term rates do indeed appear to have peaked at 4.75% and with 10 year Gilts returning 4.40% the "canary in a coalmine" is finding it difficult to breath. A recession by Qtr1 2006?

In February's comment I said the UK consumer was seeing nothing but blue sky and had been spending with abandon for years. Boosted by, first the stock bubble then the housing bubble any thought of "trouble ahead" was laughed at. What a difference a couple of months make.

Xmas 2004 spending worst since 1982 (bottom of consumer sentiment gauge)

Feb spending down

Mar spending up - (skewed by early Easter bank holiday)

April - worst retail figures for 10 years - (even after negative effect of March Easter)

Worst sector was home furnishings and big ticket electricals - white goods.

Hmmm! Lets just think why -

If prior years spending was fuelled by bubbles (see above) why are things different now?

Central bankers cannot go on blowing bubbles add infinitum. They can exploit social mood for the good or for the bad but they cannot change it. Simply put for 20 years optimism amongst the populace has been growing (since the trough in early 80's). When people are happy and optimistic they spend, invest, spend, spend. What happens when you reach a peak in optimism? (Throw a pen in the air and watch it rise and rise and rise... forever? NO! at some point it will fall) Optimism is changing to pessimism at an ever faster rate. What do pessimistic people do? They save, pay down debt, save, save - Remember in 1982 savings rate in UK was 12% of income, now only 4% (How long before we get to 12% again?) - What effect will this have on the high street? - Watch the retail sector shrivel!

So we have a consumer slowly realising that you cannot borrow yourself wealthy and start to cut back. Have a look at the FTSE retail sector charts to see the predictive power of the market.

Housing

Is everyone talking about it? - Enough said!

Prices down and on hold, transactions more than 30% down on this time last year, this is typical of a housing market in the early stages of a big fall. Prices will not crash until sellers become forced sellers. That will happen when they cannot pay their mortgage. That will happen when they lose their jobs.

Did anyone hear of a car manufacturer going bust? Suppliers shedding jobs even before the gates closed on Rover? IBM "rationalising" 13000 positions? Index closing over 100 stores? Housing industry lay offs next, then more retail and then throw in the financial sector.

Do I hear the sound of a bubble bursting?

Are there any other signs that optimism is turning to pessimism, that smiles are turning to frowns, that worry lines are returning and that social mood is darkening?

What entertains you?

Remember films like Legally Blonde, all those teen movies even Star Wars episode 1? Remember the Spice girls, boy bands, girl bands, pop music with nothing to say?

Remember fashion's trend to expose more and more flesh.

What do all these things have in common? They saw there zenith in the late 90's and early millennium, they represented the entertainment world's interpretation of "irrational exuberance" and they have been declining in importance in recent months.

Horror movies are making a comeback (not seen in volume or anger since late 70's and early 80's - What was social mood like then?). In recent movie charts 2 horror films have made it to no1. More are scheduled for release in 2005 than any other year. - WHY? Horror is selling again. WHY? Social mood?

Rock albums have been out selling light weight pop for a couple of years in the UK. Look at the singles charts, a subtle change is taking place (Note how angry rap has become over the last 5 years plus) - WHY? Harder edged music is selling. WHY? Social mood?

(Remember the light weight pop of the "swinging Sixties" giving way to the harder and harder rock of the seventies culminating in the destruction of punk).

(Pop trash of the "Go-go Nineties gives way to harder and harder rock of the new millennium?)

Look at the fashions in the high street windows. Bohemian? Certainly not the "bare all" of recent years. Less and less skin is visible, and if your high street has looked anything like mine in recent years aren't we glad. (Why do ladies with a more healthy covering of flesh insist on showing us as much as a catwalk model?) WHY? Longer skirts / dresses / tops are selling. WHY? Social mood?

Manchester United Indicator

Could social mood effect sport? Well if it could it would see its impact in the most popular sport. In the case of the UK - Football /Soccer. Drill that down a little further and perhaps it would effect the most popular team - Manchester United. Is there an indicator of social mood in there somewhere? - Or perhaps you stop reading now because I have obviously gone mad!

The stock market saw a top in the mid to late sixties, accompanied (not surprisingly) with a peak in social mood. The Swinging Sixties! (The roaring Twenties, the Go-go Nineties - Link?)

Manchester United won the old First Division in 1965 & 1967, runners up in 1964, 1968.

Manchester United won the European Cup in 1968

Manchester United won the FA cup in 1963 & 1966

The social mood then took a dive in the early seventies, at least until the crash bottom of the 1974 bear market.

Manchester United were relegated to Division 2 in 1974

Manchester United were promoted as Champions of division 2 in 1975

Manchester United were FA cup runners up in 1976 and winners in 1977

The next major top in the stock market came in 1999. The Go-go Nineties saw the greatest bull market in stocks ever. How did United fare?

Manchester United won the Premiership (old first division) in 1993 (after the bad recession of the early nineties), 1994, 1996, 1997, 1999, 2000, 2001, 2003

Manchester United won the European Champions League in 1999

Manchester United won the FA Cup in 1994, 1996, 1999, 2004

Note the record treble win in 1999 - greatest year for stocks.

So do we have an indicator? Well if we do then the recent drop off in form of United (failed to win Championship in last two seasons (both seasons finishing third) and continued poor showing in the European Champions league suggests that we are entering a period when the positive social mood that may or may not influence this club is turning. Look for the fortunes of Manchester United to fall in line with social mood and the financial markets.

Also of interest the boom in gambling is evidence of a failing social mood and a last hurrah for the financial world. Manchester United have just released plans to build a casino at Old Trafford - Well!!!!

Summary:

• Cash is King
• Get out of the Markets
• Housing's bubble is bursting
• Learn to play heavy metal guitar and form a rock group
• Wear black and look miserable
• Do not support Manchester United

Many thanks to the ongoing work in the Socionomic world of Robert Prechter and Elliott Wave International.