What if It Is a 'V' Recovery?

One day I feel the economy may be getting a little better, the next day I have doubts based on the data I see.

One person who has consistently maintained this will be a “V” recovery is Lakshman Achuthan, Managing Director at Economic Cycle Research Institute (ECRI) who says.

A number of our leading indexes, including the Weekly Leading Index, are pointing to a stronger recovery than most people expect. While anticipating the timing of cyclical turns is the primary strength of ECRI’s approach, the performance of ECRI indicators -- like the WLI -- are suggesting that the early stage of this recovery is likely to be the strongest we’ve seen since the early 1980’s, i.e., stronger than the last two recoveries. In pundit-type language I’ve suggested at least a lower case “v-shaped” recovery.

In addition, our Long Leading Index, which has a longer lead than the WLI, is also pointing to a robust early stage to the recovery (I cannot get into the details of the LLI as it’s proprietary, but because it is a long leading index it does not include stock prices).

ECRI correctly forecasted the timing and severity of the Great Recession. Let us be clear, Lakshman is not looking at the same data I review here weekly.

The coincident data we review can be compared to driving a car only able to look backwards while wearing blinders. We cannot see transitions in terrain or road conditions until the change has actually occurred. Analysts must forecast the future by looking at the past. Like weathermen, we are mostly correct – as the weather tomorrow has an 85% chance as being the same weather as today.

We are at a transition point economically. No one will dispute that as the economy will not keep free falling forever. The question then becomes does America slowly fad away, enter a Japanese ‘L” recovery, a big “W” – or even a traditional recession ending “V” recovery.

As an investor, I surely hope it is a “V”. As an analyst, I am corrupted by looking at terrible data.

What about treasury yields during the month of August? Treasuries yields are falling. This is normally a sign that the market believes the future will be tough. I asked Lakshman why:

Hard to know exactly why markets do what they do, but there are times when the business cycle is out of synch with the inflation cycle, and that may help explain what seems on the surface to be a disconnect. In fact, it is a common mistake to equate growth to inflation to jobs. In our view, while cycles in these three aspects of the economy are certainly related, the cyclical turning points in their respective cycles can diverge significantly.

Today our leading indexes of the business cycle have turned up decisively, yet our Future Inflation Gauge is just moving up from a 51-year low. For the moment, we’re in a sweet spot of stronger growth without inflation.

ECRI’s published economic forecasts go out about six months. I asked Lakshman what potential obstacle(s) do you see beyond the range of your indicators (like the federal deficit). What forces do you see building which could make this economic recovery continue?

My mentor, Geoffrey H. Moore, once warned me to never predict the predictors. While we do not see a new recession starting before the middle of next year we cannot see farther than that with our approach. The virtuous cycle that is recovery tends to feed on itself which allows it to persist for a while – more production increases employment, which in turn supports income and sales, which then boosts production. Our leading indexes are sensitive to when that process breaks down in a way that suggests the direction will soon reverse. It may be that the reason or story behind the next downturn has yet to be determined. For example, much may depend on the timing of the Fed’s exit strategy vis-à-vis the timing of the next inflation cycle upturn.

While I had Lakshman’s ear, I just started firing questions,

Do you believe we are in a deflationary cycle? There seems to be a bit of controversy on this point – even two fundamentally different definitions of inflation. For me, this is an important issue as our economic forces seem to only be able to expand in an inflationary environment.

I don’t think so, because of the rise in the FIG to a seven month high. Now that’s not saying too much, because that’s off of a 51-year low, but it is in the right direction, and we do have a business cycle recovery in place. Mind you, we’ve been dating inflation cycles for decades much the way we date business cycles (we identify a cluster of inflection points for many broad measures of inflation like the PPI, CPI, GDP/PCE deflators, etc.) so there’s no fitting of the data to a particular viewpoint.

Looking ahead one could say the risk of inflation and deflation are both significant. If the Fed “exits” too quickly, the risk of a new recession in fairly short order rises, and ECRI’s research (over centuries in the U.S. and 60 years globally) shows that back-to-back recessions are associated with deflationary environments. If the Fed is too slow, then there’s more chance for the FIG to rise sharply suggesting a surge in inflation.

You mention back-to-back recessions. This is almost the “W” recovery being thrown around by some. Is a “W” not possible?

Faced with the undeniable reality that the economy’s output has already begun to increase in the current quarter, more pessimistic forecasters who, until recently, were predicting an "L-shaped recovery" whenever it arrived, have been forced to scrunch their "L" into a "W" and predict a "double dip" back to negative growth in the fourth quarter. This is wishful thinking: the message from every one of our leading indexes is unambiguous – there is no double dip anywhere on the horizon.

To quote, my mentor’s mentor, Wesley Mitchell’s writing from the 1920s (while quoting A.C. Pigou), "The error of optimism dies in the crisis but in dying it gives birth to an error of pessimism. This new error is born, not an infant, but a giant."

It is this giant error of pessimism, now rampant, that prevents otherwise intelligent people from recognizing the objective reality that the recession is over, and, according to reliable leading indexes, which do not serve any agenda, there is no double dip in sight.

The reason so many people are currently experiencing such hard times is because, when a recession is ending, we are at the bottom of the business cycle. This is when the reality of the economy is at its harshest. But, just as it is darkest before dawn, so too are prevailing economic conditions at their bleakest before recoveries.

The problem is that the pessimists are basing their views of the near future on projections from the recent past – a method of prediction that is guaranteed to fail at turning points. In fact, weakness in coincident indicators like retail sales and overall consumer confidence is quite normal near the bottom of the business cycle, but is no reason to infer that the recovery will not take hold as it always has in the wake of decisive upswings in ECRI’s array of leading indexes.

It is important to understand that ECRI’s economic outlook is rooted neither in our subjective opinion and gut feel, nor in econometric models back-fitted to recent business cycles. Rather, they are based on a rigorous leading indicator methodology that is more thoroughly tried and tested than any other approach to business cycle forecasting.

We are under no illusion that the economy’s long term fundamentals are in good shape. In fact, for the past year we’ve been highlighting the danger of more frequent recessions in the years ahead.

Yet, given the growing strength in ECRI’s objective leading indexes, the odds are rising that the early stage of this economic recovery will be the strongest since the early 1980s. In other words, it is high time for decision makers to break from the herd of blindsided pessimists, who will continue to bemoan the weakness of the economy long after the Great Recession is history.

The consensus of the economists is that this will be a jobless recovery. Every time I look at revised economic forecasts recently, they have raised GDP projections – while lowering employment estimates. With unemployed and underemployed Americans well over 10% well into the future, why will this not restrain economic growth (as we are taking at least a few percent off of GDP from loss of spending)?

We will see non-manufacturing jobs growth as part of the recovery, and this is important as 91% of people are employed outside of the manufacturing sector. The troubles with manufacturing employment will not be cured by the end of this recession. Still the 90% of people who are employed play a big role in the recovery. Their fear of being fired is much different today than it was at the beginning of the year, and with pent up demand we will see sales increase at the right price.

Also, with home prices stabilizing the drag from that loss of wealth is easing, while the stock market has recovered noticeably, on balance helping household finances from where there were early this year.

Furthermore, let’s not forget that the wealthiest make up a huge chunk of consumer spending. Their ability to return to a pre-crisis lifestyle is essentially intact, and as they emerge from their bunkers they’re staring at very low prices.

Let me summarize….

I do not work for or am any way compensated by ECRI, although I will admit being Lakshman’s friend on Facebook. ECRI makes its money from businesses – not from the investors, traders, analysts, advisors, financial managers, etc who read Seeking Alpha.

• They are for profit. If they are wrong on what they are saying, it would not be good for business.
• Their specialty is forward-looking indicators. This is their thing. I can think of no else in the same league.

Could they be wrong? I am not sure they can forecast H1N1 or earthquakes.

For those who skimmed, Lakshman is saying:

• Our economy will keep improving at least until the middle of next year – and he can forecast no further ahead. The forces are already acting to make this happen.
• This looks like a normal to strong “V” shape recovery.
• There are dangers and structural economic issues which are over the horizon. This was not a Goldilocks outlook by Lakshman.
• How the Fed unwinds from its Great Recession positions in interest rates and its portfolio will determine the fate of the recovery.
• Recessions may begin to occur more often.
• The risk of inflation and deflation are great.

We can either accept or reject what Lakshman is saying, ECRI is using data and tools not available to us.

The coincident data just now is not reassuring. This pretty much jades my outlook. But even if I have a long term negative economic outlook, this does not mean the economy will not cycle up and down on its way down.

In other words, even though I have an overall negative economic view - what Lakshman is saying is not in conflict with my view.

Logic tells me that everything cycles. ECRI is saying we are in an up cycle. I have survived my professional life because I knew when to listen – and when to accept advice of experts over my prejudices.

Manufacturing and Business

No good news on same store retail sales (ex-Wal Mart). Although there were some industry bright spots, no end of recession boost is happening yet to retail sales. Because of the variations in monthly shopping cycles (like we are in a back-to-school shopping cycle), the only way to analyze same store sales is by calculating the change in YoY sales figures. It is possible to compare MoM improvements by comparing the YoY percentage change.

So on the surface it appears things are less bad. But we are comparing YoY data – and about a year ago retail sales started their decline. We are in a period where we must adjust the YoY numbers to judge whether there is an improvement.

August 2008 was approximately 0.5% increase compared to August 2007. The YoY increase for July 2008 was almost 2%. So the change between July 2008 and August 2008 was 1.5%. This 1.5% should be added to the August 2009 percentage to compare it to July 2009.

To make what I am saying simple, the sales in August 2009 are statistically similar to July 2009 – and there is no evidence the consumer is buying at a higher rate than the recessionary lows.

Revised productivity and cost data released this week for 2Q 2009 still shows the largest productivity increase since 2003. The data release stated in part:

……reflects declines of 1.5 percent in output and 7.6 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the second quarter of 2008 to the second quarter of 2009, output fell 5.5 percent while hours fell 7.2 percent, yielding an increase in productivity of 1.9 percent (chart 1, tables A and 2). Nonfarm business productivity increased at an annual rate of 2.5 percent from 2000 through 2008.

Of course productivity is increasing. We are exporting labor intensive high paying jobs and keeping lower paying automated jobs. This is the kind of data which certain analysts believe means America is getting more competitive.

For those of us in business:

Current Unfilled orders = Last months unfilled orders + New Orders – Shipments + change in inventories

So the only number you need to watch is unfilled orders – not new orders. Everything else is hocus-pocus. So now that the preliminary data (not advance data which is surveyed), is out on Manufacturers’ Shipments, Inventories and Orders for July 2009, we can see things did not improve in July.

So forget the headline about manufacturing new order headline saying orders were up 1.3% in July. If you were in industry, the situation did not improve.

Look at the non-seasonally adjusted data - this is what the people in the trenches are seeing. Even the seasonally adjusted data did not improve. There are indications that the August data will improve slightly.

And one more point, inventories continued to fall in July. I have forewarned you that despite some analysts believing inventories would not be a drag on GDP in the 3Q, that this is not a given and inventories could continue to decline throughout this quarter.

The subjective non-analytical Institute of Supply Management (ISM) Report on Manufacturing Business for August 2009 showed manufacturing conditions for the first since June 2007 was improving. Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management said:

The year-and-a-half decline in manufacturing output has come to an end, as 11 of 18 manufacturing industries are reporting growth when comparing August to July. While this is certainly a positive occurrence, we have to keep in mind that it is the beginning of a new cycle and that all industries are not yet participating in the growth. The August index of 52.9 percent is the highest since June 2007. The 4 percentage point increase was driven by significant strength in the New Orders Index, which is up 9.6 points to 64.9 percent, the highest since December 2004. The growth appears sustainable in the short term, as inventories have been reduced for 40 consecutive months and supply chains will have to re-stock to meet this new demand.

The past relationship between the PMI and the overall economy indicates that the average PMI for January through August (42.2 percent) corresponds to a 0.3 percent increase in real gross domestic product (GDP). However, if the PMI for August (52.9 percent) is annualized, it corresponds to a 3.7 percent increase in real GDP annually.

I am just looking at order backlog as this tells me all I want to know about this report. It is the kind of data you get at a cocktail party except somebody put percentages on the information they provide. Things seem to be slowly improving. It is a steady trend.

But what scares people is that this is not a robust improvement. Many were expecting inventories (which are still falling overall) would already be rising and business would be off to the races. Remember, this is survey data and the ISM did not even know that production was declining even six months into our Great Recession.

Also this past week, ISM released their report on non-manufacturing business for August 2009. It was surprising that their subjective survey of non-manufacturing business showed it was still contracting. As every other indicator is now showing a bottom or a slight improvement, this is a little confusing.

Non-manufacturing business represents approximately 90% of business. This survey is either in error, or we are not through this recession yet. We will have to wait to see quantitative data. Again, the ISM did not see the recession coming – and their methodology is objective (no effort made to produce a qualitative sample of business).

Cash-For-Clunkers was a big success – or was it? Looking at the raw numbers there is no question as auto sales have soared. With the sole exception of GM (this month), the foreign automakers are the beneficiaries. This program is causing positive blips all over the manufacturing and business data.

• At the end of the program Toyota (TM) accounted for 19.4 % of sales, followed by General Motors with 17.6 %, Ford (F) with 14.4 %, Honda (HMC) with 13.0 %, and Nissan (NSANY) with 8.7%.
• This program had two aims – stimulate USA industry (and therefore the economy) and getting the gas guzzling vehicles off of the street. It got gas guzzlers off of the street, but may have permanently exported even more manufacturing jobs overseas.
• What happened to the used car market? Ya got it! The prices here increased because the trade-ins were destroyed. And, new car sales are included in GDP, while used car sales are not. Does anyone think this program helped the lower income population? This is a political program to boost GDP.
• The economy can be argued is in a liquidity trap – people hoarding money because they sense the economy is worsening which creates the situation where the economy gets worse. Unfortunately, hoarding by definition is the consumer spending less and returning to past savings levels.

If the consumer is really saving more (and I believe they are), then the gains of this program are transitory because the consumer was lured to purchase now because they needed a new car AND the rebate had a time window.

But in any event, the evidence is indisputable, that the government’s program has destroyed more of the market for American auto manufacturers. Cash-for-Clunkers program has turned out to be another political program which has eroded America for my grandchildren.

Jobs, Jobs, Jobs

Watching CNBC analyze the jobs report with our new headline 9.7% unemployment rate on Friday shows few understand what it means – but I will agree that the only way you can make sense of the August 2009 employment situation is to assume the July 2009 report was erroneous.

Last month our headline unemployment rate actually improved 0.1%, this month unemployment got worse by 0.3%. I told you last months data did not make sense.

The new U-6 unemployment number (unemployed plus marginally employed plus plus) is 16.8%. This rose by 0.5% vs the 0.3% for headline unemployment???? No explanation why this number jumped more than all the rest of the five other unemployment measures.

There are several other inconsistencies in the jobs report, and the government seems to be struggling to get this report right. If anyone from the Bureau of Labor Statistics (BLS) reads this, I would suggest a statistical analyst should write an errata summary pointing out the data inconsistencies, and then give an opinion of what the data should have said.

Overall, trying to get a clear understanding of unemployment levels is close to impossible – except we know it is still rising because the population is growing and the number of jobs is falling.

An alternate and much clearer view of employment is provided by ADP whose employment report stated nonfarm private employment decreased 298,000 from July to August 2009 on a seasonally adjusted basis. You will notice that the rate of job destruction is getting less bad every month.

Using ADP’s data MoM data instead of the government’s, unemployment increased 0.35% percent instead of the government’s 0.3%. And if I correct last month’s government data – the headline unemployment rate is easily over 10%.

The BLS employment reports are based on flawed analytical analysis and sampling methodology. They know it is giving the wrong answer, and over the years have continued to try to improve it. The end result today is that it is nonsense.

We no longer can go back to previous recessions to compare because of changing methodologies. Their birth / death rate adjustments which end up reducing the potential workforce in the face of a growing population pretty much drives the final nail in the coffin,

It is sad that you can actually be dumber after reading the government’s employment reports. My advice is to watch the ADP numbers and use the BLS employment report in the cat’s litter box.

The 4 week moving average of advance initial unemployment claims increased slightly this week to 571,250. In three of the last four weeks, the 4 week moving average has increased. The downward trend line has now been broken, and unemployment claims are trending up.

The current upward trend should be short lived. This is a common event, not only in this recession – but in past recessions. The decline in unemployment claims is not linear, and baring an unexpected event will continue its overall downward trend in the coming weeks.

Additional Economic Data This Week

The rate of new mortgage applications again decreased over 2% this past week but remains in the range it has been bouncing around within since April 2009. The four week moving average ofmortgage loan application volume (which includes refinancing) increased 1.7% WoW, and increased almost 23% compared with the same week one year earlier.

The average interest rate for 30-year fixed-rate mortgage decreased 9 basis points to 5.15%. This data is telling me that home sales based on conventional mortgages are flat lined, and that any increase in home sales must be due to FHA financing (first time buyers) – or no financing required at all.

Filing for Bankruptcy: Guaranty Financial Group (GFG) Baseline Oil & Gas (BOGA) Samsonite Company Stores (SAMC) Freedom Communications (Privately held)

Bank failures this week:

Economic Forecasts Published This Past Week

The Economic Cycle Research Institute (ECRI) released their Weekly Leading Index now is at a 38 year high. Lakshman Achuthan, Managing Director at ECRI added:

With WLI growth rising to a new 38-year high, U.S. economic growth is poised for a stronger snap-back than most expect. The index was pulled higher this week by stronger housing activity.

This week’s John Mauldin’s Thoughts from the Frontline Weekly Newsletter suggested reading a NY Times Magazine op-ed written by Paul Krugman. Both are a must read for a three day weekend.

Hat tip to Steve at MEMETICS & MARKETING for editing support.

Disclosures: long MMFs, GOOG, SLV, EWZ, EWY, EWA, EWC, PIN, Physical Gold.

Comments

[Ted Kavadas:]

The comments made about ECRI, as well as ECRI's statements, are indeed interesting.

I found this quote particularly noteworthy: "My mentor, Geoffrey H. Moore, once warned me to never predict the predictors."

It seems to me like "predicting the predictors" is a necessity, especially during a volatile economic environment like that we are in now.

I for one do not agree with ECRI's current outlook. I have previously made comments about ECRI on a blog post here:

www.economicgreenfield.../

Sep 07 11:00 AM

[Solar child:]

Unfortunately, having but a "FIG" leafs chance in a downturn appears insufficient for our purposes. A novel approach would be to consider "fault analysis" in a manufacturing process and apply it to the downturn(as a process). Knowledge of the fault curve shows us that as long as disruptive periods-events occur normalcy or
continous operation can not occur. While we have moved
significantly away from the beginning of the process and the probabilities of fault(further disruption) are becoming smaller improvements in continuity are evident. However,
knowledge of "faulty analysis" curves indicate a gradual
build up of the probability to fault towards the end of the
curve and we cannot say that we are there yet. Evidence
to date shows us temporary inventory build-ups to replace
depleted inventory is currently the fact as well as movement in exports. This I believe is contributing to the
"FIG". The caveat and most current disruptive concern is
what will occur in the financial markets as a result of
residential and commercial mortgage resets. More blows
to the integrity and confidence of the markets will again
create opportunities for fault(disruption) along the curve
slowing the recovery and producing more shadows of a
recovery.

Sep 07 11:27 AM

[enigmaman:]

Im not buying what he is selling, sure they were right calling this current economic recession but they were wrong calling the market in 07, so before they were right they were wrong. The entire discussion is conflicting, we are , we arent, recession is over, more frequent recessions going forward, maybe inflation, maybe deflation, good till middle of next year and then what, your right, your wrong, give me a break. Since ECRI is technical analysis of the economy what happens to his predictions if the consumer doesn't show up to the party, I mean there is that chance, give me some stats if 100% return, 90%, 80% 70%, the key is the consumer, its been said the US economy is the engine that drives the worlds economies, and if the US consumer makes up 70% of US GDP, what happens if they can are no longer carry that burden, does that factor in ECRI calculations anywhere.

Sep 07 11:59 AM

[untrusting ...:]

John,
The following article from the John Hussman site provides an excellent comparison of past serious recessions and indicators which showed the end of "bear markets".
www.hussmanfunds.com/r...
It is well worth the time to read and think about it.

What it basically shows is that none of the three key conditions that occurred at the end of past bear markets are present in the current bear market rally. Thus while ECRI is showing a present "V" shaped recovery, which many seem to be interpreting as a continuing stock market rally (to wit comments such as the start of a new bull market), the odds heavily favor this being just a ST abberation or a ST secular bull market retracement.

What we all really what to know is: will the stock market continue to rise or even stay near current levels as opposed to making yet another serious downleg(s)? Those relying on ECRI claims of a "V" shaped recovery apparently believe that current or rising market levels are sustainable. As shown in the Hussman/Hester analysis, this is highly unlikely to be the case.

In short, this is clearly a great ST trading rally for those that are astute enough to trade it. But to be buying the rally at this point with a view to LT investing, is highly unlikely to be worth the risk. The odds and past comparisons show that there will very likely be much better buying opportunities and at much better valuations in the future.



On Sep 06 10:13 AM John Lounsbury wrote:

> Steve - - -
>
> Excellent article. I have also been looking at the rising bond market
> and trying to integrate that with the idea of a recovery. The ECRI
> leading indicators are extremely strong, so some sort of recovery
> seems certain. Just what it is, how strong and how long, is what
> we should all be talking about. You certainly are doing that. I keep
> wondering if the strength in the WLI is a function of how bad things
> got rather than of good things will be.
>
> As every week, you have pulled together a smorgasboard of facts and
> opinion that makes one think and prompts a good comment stream.<br/>
>
> Roger - - -
>
> Excellent list(s) of some of the things that are different this time.
>
>
> David - - -
>
> Will you charge admission? I'd like to see your pigs, whether they
> stay on the ground or fly.

Sep 07 12:08 PM

[Hmm?!:]

Steve,

An excellent column. Thank You.
However looking at the data you have below, I do not think it really supports your comment.

"The economy during the Great Depression was up and down as demonstrated by the following GDP numbers (in 1937 chained dollars)"

You have a very wide U shape with one number (1938) slightly out of snyc at the end???? I am personally stuck at; ECRI may be right and there is a short blip....... followed by more recession and employment does not have to recover at all.


On Sep 06 07:29 PM Steven Hansen wrote:

> Every week, I try to provoke thought about our economy. I do not
> have the all answers but I have a lot of questions.
>
> One answer that I do not know is what are the elements inside the
> indicators ECRI uses. Another is how many indicators are they using
> - i do know it is more that what they expose on their website. And
> finally, I do not know the methodology they use.
>
> Several comments above may have made assumptions on these points.
> If you know the answers to any of the above questions please advise
> what they are so we can learn.
>
> The economy during the Great Depression was up and down as demonstrated
> by the following GDP numbers (in 1937 chained dollars):
> 1929-87.3
> 1930-79.8
> 1931-74.6
> 1932-64.9
> 1933-64.0
> 1934-71.0
> 1935-77.3
> 1936-87.4
> 1937-91.9
> 1938-88.7
> 1939-95.9
> 1940-104.3
>
> you cannot compare the results of what happened with the great depression
> to the great recession. we have much better real time data and quicker
> economic countermeasures.
>
> we are creating our own mess with our countermeasures and our grandchildren
> can study our mistakes.
>
> but to reject out of hand that the economy may be cycling up - for
> whatever reason - is illogical. Everything cycles.
>
> The pertinent question many have asked is whether ECRI's indicators
> will work in this economic event. I have had conversations with Lakshman
> in the past on this point.
>
> They are convinced they will work.

Sep 07 01:14 PM

[Blair Dehuff:]

If the consumer is 70% of the economy, then where is the "recovery" coming from? Jobs are still being lost, there are 6 applicants for every job opening, personal bankrupts are increasing, credit cards still tapped out, banks won't loan money to anyone, HELOC's are being pulled by banks, mortgage defaults INCREASING (not decreasing) among prime borrowers, etc. Added to this is the fact that banks will continue to hoard cash for a LONG time. All those toxic assets are still on the books, and commercial real estate is now falling off a cliff which will add a lot more write downs.

IF the definition of "recovery" means things are still getting worse just a little more slowly, then I guess (maybe) we are in a recovery. However, if recovery means that most indicators relevant to the consumer are starting to point UP, then we are not in a recovery headed for V, L , W or any other letter of the alphabet.

Sep 07 01:26 PM

[Jaysan:]

My question is not specific to this particular discussion: How on earth do you sort out from all the confusing data, disagreements, forecasts etc. a reliable picture of what's going on so that you can invest intelligently?

Prechter says he doesn't read or listen to any of this, just relies on the few indicators he trusts. His views are usually very long term, though back in the '80's, before the '87 crash, he called practically every turn in the market and I profited from following him. After '87 he was off-base until recently.

I can't profit from Hansen so far, though I deeply appreciate his honesty, intelligence and seriousness. He provides much more information than I can digest.

Sep 07 01:54 PM

[enigmaman:]

jaysan- what I found is that if your lucky you will find someone who has a system that works great until it doesnt, then you find another that works great until it doesnt, but in between you will find plenty who will lose you money. If you can find anybody that is consistently in the ball park where you can make money consistently you will be very lucky indeed, there are thousands of so called experts to choose from and if you dont want to bother you can always use your kitchen clock, just unplug it and you can count on it being correct at least 2 hours out of every 24, it will never let you down


On Sep 07 01:54 PM Jaysan wrote:

> My question is not specific to this particular discussion: How on
> earth do you sort out from all the confusing data, disagreements,
> forecasts etc. a reliable picture of what's going on so that you
> can invest intelligently?
>
> Prechter says he doesn't read or listen to any of this, just relies
> on the few indicators he trusts. His views are usually very long
> term, though back in the '80's, before the '87 crash, he called practically
> every turn in the market and I profited from following him. After
> '87 he was off-base until recently.
>
> I can't profit from Hansen so far, though I deeply appreciate his
> honesty, intelligence and seriousness. He provides much more information
> than I can digest.

Sep 07 02:26 PM

[Steven Hansen:]

Skepticism is healthy - especially at points where there is an economic disconnect occurring. the point made that "if your lucky you will find someone who has a system that works great until it doesnt, then you find another that works great until it doesnt, but in between you will find plenty who will lose you money" is one of my mottoes.

Along the lines of what Blair Dehuff was saying is the terrible ISM data for non-manufacturing business for August. this is 90% of business which is still is not recovering.

In defense of ECRI's call of the the Great Recession, i would like to have you look at my first ECRI post which has their graph of their WLI index seekingalpha.com/artic....

From a logic point of view, if their indicators saw the event coming - then their indicators should also see when it was going.

All I am recommending is that you do not reject out of hand the possibility of a "v" shaped recovery. It is healthy to have doubts that this will happen. I would not bet a "v" recovery will not happen.

I want to remind you that this same discussion we are having here today happened at the end of the 2001 recession - there is always a discussion that fundamentals changed and a normal recovery is not on the cards - and one day it will be true.

Before this recession, it was difficult for many to accept the ravings of Peter Schiff. he was brutalized on TV - scorned by fellow analysts and most investors.

Because someone is talking against common wisdom does make them automatically wrong. Just keep an open mind on the recovery. We will know soon enough know whether we will have a L, U, W, or V.

Sep 07 07:02 PM

[Sober Realist:]

36+ million American's on food stamps now and the middle class is still up to their eyeballs in debt. No real healthcare reform and, therefore, the medical-bill-induced bankruptcies will continue. I could go on, but I won't. These are facts. Unless we are expecting the top 10% to drive this consumption-based economy, there will be no recovery in this middle-class liquidating country, just bouncing along the bottom and readjusting to lower standards of living. Maybe these facts can be overlooked by the stock market since its a manipulated, propped-up market that is disconnected from reality.

Sep 07 08:49 PM

[John Lounsbury:]

I have been having a great discussion with Clive Corcoran. One conclusion I have come to is that maybe we are being mislead by following the flow of things, of indicators, of what we think we understand. What always gets us in the end is the disconnect. In mathematics, it's called a singular point or a discontinuity.

Sep 07 10:10 PM

[Ada:]

www.marketthoughts.com...
Please read what ECRI predicted in January 2002. We all know what happened after that to the stock market.

Sep 07 10:44 PM

[tripleblack:]

I like this article, mainly because it supports my own general prediction.

LOL, I had just yesterday suggested to a friend that he was morphing his "L shape" into a "W" rather than admit he had been off in his prediction.

Sep 08 07:38 AM

[John Lounsbury:]

Ada - - -

ECRI does not give stock market advice. They track indicators of economic activity. For the 2001 recession, they declared it had ended 18 months before the official pronouncement from the BEA. And their data indicated the recession had ended only two months after the date that BEA eventually determined to be the end date.

Do not criticize them with claims that they failed at something they do not do. It is the investor's problem if they can not properly use the good data that ECRI provides.

In previous comments in this stream I have discussed what I think the interpretation problems may be with the current ECRI data. But I did not criticize the data.


On Sep 07 10:44 PM Ada wrote:

> www.marketthoughts.com...
> Please read what ECRI predicted in January 2002. We all know what
> happened after that to the stock market.

Sep 08 12:40 PM

[Michael Clark:]

"But history shows that American Constitutional regimes live about 70 years, and then are replaced."

I'd like to be enlightened on this. Was FDR the new Constitutional regime? Was Lincoln another? Yes, the American revolution I can see.

Sep 08 01:01 PM

[Michael Clark:]

Steve: I like this:


The economy during the Great Depression was up and down as demonstrated
> by the following GDP numbers (in 1937 chained dollars):
> 1929-87.3
> 1930-79.8
> 1931-74.6
> 1932-64.9
> 1933-64.0
> 1934-71.0
> 1935-77.3
> 1936-87.4
> 1937-91.9
> 1938-88.7
> 1939-95.9
> 1940-104.3
>

No question the economy 'breathes', even during depression. We had a depression 1929-1933; another 1936-7; anotehr 1937-40; and world war 1941-45; and a final depression 1946-47. Of course there is ebb and flow, rise and fall, expansion and contraction. But the primary stream during a depression is contraction. (There is a 'war' between expansion-contraction all the time. Contraction wins at night; expansion wins during day.)

Sep 08 01:06 PM

[Michael Clark:]

In literature, it's called the theme. The theme is the river. And the individual indicators are the branches and debris floating in the stream. Focusing on the debris tells you very little about the river, about the theme.

The theme is the metaphysical cause and the effects are the debris floating in the river. During the Nights (Contractions) the debris floats down-stream. During the Days (the Expansions), the debris floats up-stream.


On Sep 07 10:10 PM John Lounsbury wrote:

> I have been having a great discussion with Clive Corcoran. One conclusion
> I have come to is that maybe we are being mislead by following the
> flow of things, of indicators, of what we think we understand. What
> always gets us in the end is the disconnect. In mathematics, it's
> called a singular point or a discontinuity.

Sep 08 01:12 PM

[REHeakins:]

Why would Laksman go on CNBC and tell the world everything the leading indicators are telling him? As a subscriber I would not be very happy if he gave all the data to everyone for free. In November 2005 the leading indicators were pointing to a downturn in home prices. This information was relayed to me and I sold all my positions in housing related companies. As the indicators pointed to a downturn in financials I sold off my financials except local bank stocks. In April 2008 on a confrence call Laksman told me he wouldn't be surprised if we had a another Bears Stern. My clients are happy since I have beat the S&P (total return) for the last 5 years by 5.4% annually thats in great part to the calls made by ECRI and did it by taking 35% less risk than the market experienced.

Ronald E Heakins


On Sep 06 03:44 PM John Lounsbury wrote:

> aa4aa - - -
>
> In the middle of March, 2008, Lakshman was on CNBC and stated that
> ECRI data indicated a recession had already started. That was a full
> nine months before the official pronouncement was made. I will concede
> that (as I remember it) he declined to speculate about how long or
> how deep the recession would be.
>
> I agree that the risk of inflation and deflation are both significant.
> You tell me how government and Fed policies will change or not change
> over the next twelve months and I'll start leaning one way or the
> other.
>
> MarcVdB - - -
>
> I agree with you that the ECRI model has limitations. But so do you
> and I. That does not stop us from sharing our analysis, thoughts
> and observations with the world.
>
> The ECRI model doesn't stink. It doesn't even smell bad. But it also
> was not written on a stone tablet in biblical times. It has not been,
> is not and never will be perfect. However, let us not deny the good
> in looking for the perfect.
>
> On Sep 06 01:56 PM aa44aa wrote:

Sep 08 05:52 PM

[billddrummer:]

On Sep 06 11:01 PM Ricard wrote:

> Mr. Hansen,
>
> "Take this statement in the context that we are programmed to believe
> productivity improvements are a good thing. Hell, we have enough
> economic formulas to prove that point. Take productivity improvements
> to its natural conclusion - no jobs."
>
> "We need to be creating as many jobs as productivity is destroying.
> our policies are not making this happen. so, i am saying that productivity
> improvements are bitter sweet at best - and nothing to cheer about
> on main street or wall street."
>
> Your point is valid. Perhaps I am taking a different viewpoint. The
> way I see it, productivity enhancements can also lead to the same
> number of employees churning out many times more products than before.
> Let's take kleenex for example. If the same number of employees can
> make twice as many boxes of kleenex, AND there is ample demand for
> more kleenex (say, inelastic demand - you can always find more uses
> for kleenex) then you can have the same number of employees churning
> out more profits by reducing variable costs.
>
> Arguments like these, coupled with this recent bloomberg article,
> make me nervous that perhaps I am being too bearish going into this
> winter:
>
> www.bloomberg.com/apps...;sid=aN8Zh1qEkeSw
>
>
> Corporations need to book profits before they begin re-hiring. If
> there really are productivity surges, and if these profits somehow
> find ways in America to develop into more profitable activity, then
> perhaps hiring will soon follow.
>
>
> "Ricardo, i agree with your disagreement. My point was the government
> used your money (which they borrowed without your permission) to
> ensure the tax base was destroyed - taking out future jobs in the
> process."
>
> LOL, admittedly I am positively biased towards the CFC program. I
> traded in my dad's poster-child 'clunker' for a MINI the week before
> the program ended. As far as I'm concerned, it was a GREAT PROGRAM!
> :D
>
> Cheers, and good luck with your investing.

With respect to increasing productivity and its unintended consequence of destroying jobs:

In the US, farm employment is less than 5% of total employment, yet the farming industry will produce (if the weather holds for 2 more weeks) bumper crops of both corn and soybeans--with yields so large that storage space will be bid at a premium. The farming industry is a multiple of efficiency better than it was a generation ago.

The downside? Fewer farm jobs.

This is an interesting thread, if only to open a dialogue about what will happen in the next six months. Thanks for the article, and for the discussion.

Sep 08 08:23 PM

[John Lounsbury:]

REHeakins - - -

Don't expect me go dig out the video again. I did that about six months ago and it took quite a bit of time to dig it out. I'd rather you consider me a liar than put that time in.

Lakshman makes frequent public statements and TV appearances that give snippets of information. It is called publicity. He does not, to my knowledge, "give away all data to everyone for free".

I am happy for you that you and your clients have profited from ECRI information. As I mentioned in another comment, the data is usually much better than the interpretation by some of the people who try to use it.

Sep 09 12:58 AM