Recession Around the Corner?

The Stalwart submits: The bane of any contrarian is the anecdotal contrarian indicator. In other words, whenever you perceive there to be a bubble in something, or at least an overextended trend, it's easy to find isolated items that to your mind must be evidence of a top. You know the kind of stuff we're talking about. Lakshmi Mittal (in photo on right) on the cover of People Magazine has to be a sign that commodities are peaking. Your kid sister just made her first $250,000 on a leveraged condo investment; real estate's gotta be heading south.

Unfortunately, these rarely turn out to be good markers. Who knows Lakshmi Mittal may make People Magazine's top 25 sexiest people in the world for the next five years. Meanwhile, you've been shorting commodities all the way up, ever since the magazine cover, because you thought you were so clever.

But that's the problem, it's clever, not analytical.

However, if you're like us, you're interested in noting key events in addition to your harder analysis. So instead of looking out for the "signs of the top", how about some straightforward signs that trouble may be around the corner. Here's a few things we've seen:

Bad manufacturing report. Last week, a surprise report from the Philly Fed indicated a sharp pullback in manufacturing growth. For the first time in several months, the data indicate a contraction.

Yahoo advertising weakness. There's been nothing hotter than web advertising. The company is saying it's based on weakness in the financial and automotive sectors.

Yahoo's forced unpaid vacation. OK, this is two Yahoo things in a row, but hello, 2002 called, it wants its forced unpaid vacation back. Remember, last year, we were making "hello, 1999 called..." jokes (a not so subtle shift).

jetBlue selling planes. The official airline of the 'wart. A prolific grower and buyer of fresh Embraer jets is going to sell some planes and gird for a period of slower growth.

Commodities decline. Almost all of the explanations for the across-the-board decline in commodity prices are totally unsatisfactory. Our favorite, of course, is the conspiracy that the gas companies are bringing the price down to help their Republican pals hold Congress. Ok, but then what about the nickel and sugar makers? The most reasonable and robust explanation is the same one that explained the multi-year rise in prices: economic strength. If economic growth cools, inventories will likely rise and price will drift downward. And that's what we're seeing.

Housing. Even if housing was never a bubble, and we don't see a precipitous bust, prices are declining. We'll not wade into this discussion much, except to argue that this is probably not a sign of economic strength.

And yet the market is near all-time highs. So either our motley basket of cherry-picked evidence isn't meaningful, or the market is wrong. That's another debate.

Oh, and we can resist one major contrarian point:

Marc Faber turns temporarily bullish. We've often had a hard time understanding Marc Faber's reasoning, but this is disturbing. Remember that happened to the markets the last time a committed bear changed his tune.

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Comments

[Ray Lopez:]

What a difference a month makes. Phily Beige book report was offset by strength from other regions. Yahoo, JetBlue are isolated, company-specific or sector specific (regional airlines suck) problems. Commodities, housing are simply coming off of decade highs (at the moment the Schiller housing futures forecast an average -7% decline over the next 12 months for housing--not a big deal). And Marc Faber is right, as usual.

One way of looking at it is to remember that the much heralded stock market Crash of 1929 did not bring on a depression. In fact, it was a routine (by preWWII standards) recession. Only when the herd panicked, and wages did not come down as expected, not to mention bad monetary policy by the Fed(s) (UK, US trying to reestablish the pre WWI Gold Standard), did the recession turn to depression. Sources: Charles Kindleberger, Barry Eichengreen.

Right now we've hit a soft patch but we should power through, unless something crazy like a Great Leader Kim Il Sung nuclear first strike springs into being.

2006 Oct 18 06:27 AM