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Tales From The Dark Side

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Regular readers of this blog know that I frequently discuss my skepticism about the true state of America’s economy.  It gets painful listening to the “usual cheerleaders” constantly tell us about the robust state of our economy.  The most recent Federal Reserve Beige Book serves as the Bible for these true believers.  One need only check in on a few of the websites listed on my blogroll (at the right side of this page) to find plenty of opinions which run contrary to the current dogma that America is on its way to a full economic recovery.

One of my favorite websites from this blogroll is Edward Harrison’s Credit Writedowns.  When I visited that site this evening, I was amazed at the number of contrarian commentaries posted there.  One piece, “The economy is nowhere near as robust as stocks would have you believe” dealt with one of my favorite subjects:  the Federal Reserve’s inflation of the stock market indices by way of quantitative easing.  Here is an interesting passage from Harrison’s essay:

My view is that the stock market has gotten way ahead of itself.  Easy money has caused people to pile into risk assets as risk seeks return in a zero-rate environment.  The real economy is nowhere near as robust as the increase in shares would have you believe. Moreover, even the falling earnings growth is telling you this.

Bottom line: The US economy is getting a sugar high from easy money, economic stimulus, and the typical cyclical aides to GDP that have promoted some modest releveraging.  But the underlying issues of excess household indebtedness, particularly as related to housing and increasingly student debt, will keep this recovery from being robust until more of the debts are written down or paid off.  That means the cyclical boost that comes from hiring to meet anticipated demand, construction spending, and increased capital spending isn’t going to happen at a good clip.  Meanwhile, people are really struggling.

The hope is we can keep this going for long enough so that the cyclical hiring trends to pick up before overindebted consumers get fatigued again.  Underneath things are very fragile. Any setback in the economy will be met with populist outrage – that you can bet on.

Another posting at Credit Writedowns was based on this remark by financier George Soros:  ”People don’t realize that the system has actually collapsed.”

Bloomberg News has been running a multi-installment series of articles by financial analyst Gary Shilling, which are focused on the question of whether the United States will avoid a recession in 2012.  In the third installment of the series, Shilling said this:

In the first two installments, I laid out the reasons why the U.S. economy, despite current strong consumer spending and the recent euphoria of investors over stocks, will weaken into a recession as the year progresses, led by renewed consumer retrenchment.

If my forecast pans out, the Federal Reserve and Congress may be compelled to take further action to bolster the economy.

*   *   *

Meanwhile, a number of economic indicators are pointing in the direction of a faltering economy.  The Economic Cycle Research Institute index remains in recession territory.  The ratio of coincident to lagging economic indicators, often a better leading indicator than the leading indicator index itself, is declining.  Electricity generation, though influenced by the warm winter, is falling rapidly.

One of the most popular blogs among those of us who refuse to drink the Kool-Aid being served by the “rose-colored glasses crowd” is Michael Panzner’s Financial Armageddon.  In a recent posting, Mr. Panzner underscored the fact that those of us who refuse to believe the “happy talk” are no longer in the minority:

In “Americans Agree: There Is No Recovery,” I highlighted a recent Washington PostABC News poll, noting that

no matter how you break it down — whether by party/ideology, household income, age, or any other category — the majority of Americans agree on one thing: there is no recovery.

But the fact that things haven’t returned to normal isn’t just a matter of (public) opinion. As the Globe and Mail’s Market Blog reveals in “These Are Bad Days for Garbage,” the volume of waste being created nowadays essentially means that, despite persistent talk (from Wall Street, among others) of a renaissance in consumer spending, people are continuing to consume less and recycle more than they used to.

Many people (especially commentators employed by the mainstream media) prefer to avoid “dwelling on negativity”, so they ignore unpleasant economic forecasts.  Others appear trapped in a new-age belief system, centered around such notions as the idea that you can actually cause the economy to go bad by simply perceiving it as bad.  Nevertheless, the rest of us have learned (sometimes the hard way) that effective use of one’s peripheral vision can be of great value in avoiding a “sucker punch”.  Keep your eyes open!


 

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When the Music Stops

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Forget about all that talk concerning the Mayan calendar and December 21, 2012.  The date you should be worried about is January 1, 2013.  I’ve been reading so much about it that I decided to try a Google search using “January 1, 2013” to see what results would appear.  Sure enough – the fifth item on the list was an article from Peter Coy at Bloomberg BusinessWeek entitled, “The End Is Coming:  January 1, 2013”.  The theme of that piece is best summarized in the following passage:

With the attention of the political class fixated on the presidential campaign, Washington is in danger of getting caught in a suffocating fiscal bind.  If Congress does nothing between now and January to change the course of policy, a combination of mandatory spending reductions and expiring tax cuts will kick in – depriving the economy of oxygen and imperiling a recovery likely to remain fragile through the end of 2012.  Congress could inadvertently send the U.S. economy hurtling over what Federal Reserve Chairman Ben Bernanke recently called a “massive fiscal cliff of large spending cuts and tax increases.”

Peter Coy’s take on this impending crisis seemed a bit optimistic to me.  My perspective on the New Year’s Meltdown had been previously shaped by a great essay from the folks at Comstock Partners.  The Comstock explanation was particularly convincing because it focused on the effects of the Federal Reserve’s quantitative easing programs, emphasizing what many commentators describe as the Fed’s “Third Mandate”:  keeping the stock market inflated.  Beyond that, Comstock pointed out the absurdity of that cherished belief held by the magical-thinking, rose-colored glasses crowd:  the Fed is about to introduce another round of quantitative easing (QE 3).  Here is Comstock’s dose of common sense:

A growing number of indicators suggest that the market is running out of steam.  Equities have been in a temporary sweet spot where investors have been factoring in a self-sustaining U.S. economic recovery while also anticipating the imminent institution of QE3.  This is a contradiction.  If the economy were indeed as strong as they say, we wouldn’t need QE3.  The fact that market observers eagerly look forward toward the possibility of QE3 is itself an indication that the economy is weaker than they think.  We can have one or the other, but we can’t have both.

After two rounds of quantitative easing – followed by “operation twist” – the smart people are warning the rest of us about what is likely to happen when the music finally stops.  Here is Comstock’s admonition:

The economy is also facing the so-called “fiscal cliff” beginning on January 1, 2013.  This includes expiration of the Bush tax cuts, the payroll tax cuts, emergency unemployment benefits and the sequester.  Various estimates placed the hit to GDP as being anywhere between 2% and 3.5%, a number that would probably throw the economy into recession, if it isn’t already in one before then.  At about that time we will also be hitting the debt limit once again.   U.S. economic growth will also be hampered by recession in Europe and decreasing growth and a possible hard landing in China.

Technically, all of the good news seems to have been discounted by the market rally of the last three years and the last few months.  The market is heavily overbought, sentiment is extremely high, daily new highs are falling and volume is both low and declining.  In our view the odds of a significant decline are high.

Charles Biderman is the founder and Chief Executive Officer of TrimTabs Investment Research.  He was recently interviewed by Chris Martenson.  Biderman’s primary theme concerned the Federal Reserve’s “rigging” of the stock market through its quantitative easing programs, which have steered so much money into stocks that stock prices have now become a “function of liquidity” rather than fundamental value.  Biderman estimated that the Fed’s liquidity pump has fed the stock market “$1.8 billion per day since August”.  He does not believe this story will have a happy ending:

In January of ’10, I went on CNBC and on Bloomberg and said that there is no money coming into stocks, and yet the stock market keeps going up.  The law of supply and demand still exists and for stock prices to go up, there has to be more money buying those shares.  There is no other way in aggregate that that could happen.

So I said it has to be coming from the government.  And everybody thought I was a lunatic, conspiracy theorist, whatever.  And then lo and behold, on October of 2011, Mr. Bernanke then says officially, that the purpose of QE1 and QE2 is to raise asset prices.  And if I remember correctly, equities are an asset, and bonds are an asset.

So asset prices have gone up as the Fed has been manipulating the market. At the same time as the economy is not growing (or not growing very fast).

*   *   *

At some point, the world is going to recognize the Emperor is naked. The only question is when.

Will it be this year?  I do not think it will be before the election, I think there is too much vested interest in keeping things rosy and positive.

One of my favorite economists is John Hussman of the Hussman Funds.  In his most recent Weekly Market Comment, Dr. Hussman warned us that the “music” must eventually stop:

What remains then is a fairly simple assertion:  the primary way to boost corporate profits to abnormally high – but unsustainable – levels is for the government and the household sector to both spend beyond their means at the same time.

*   *   *

The conclusion is straightforward.  The hope for continued high profit margins really comes down to the hope that government and the household sector will both continue along unsustainable spending trajectories indefinitely.  Conversely, any deleveraging of presently debt-heavy government and household balance sheets will predictably create a sustained retreat in corporate profit margins.  With the ratio of corporate profits to GDP now about 70% above the historical norm, driven by a federal deficit in excess of 8% of GDP and a deeply depressed household saving rate, we view Wall Street’s embedded assumption of a permanently high plateau in profit margins as myopic.

Will January 1, 2013 be the day when the world realizes that “the Emperor is naked”?  Will the American economy fall off the “massive fiscal cliff of large spending cuts and tax increases” eleven days after the end of the Mayan calendar?  When we wake-up with our annual New Year’s Hangover on January 1 – will we all regret not having followed the example set by those Doomsday Preppers on the National Geographic Channel?

Get your “bug-out bag” ready!  You still have nine months!


 

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Recession Watch

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A recession relapse is the last thing Team Obama wants to see during this election year.  The President’s State of the Union address featured plenty of “happy talk” about how the economy is improving.  Nevertheless, more than a few wise people have expressed their concerns that we might be headed back into another period of at least six months of economic contraction.

Last fall, the Economic Cycle Research Institute (ECRI) predicted that the United States would fall back into recession.  More recently, the ECRI’s weekly leading index has been showing small increments of improvement, although not enough to dispel the possibility of a relapse.  Take a look at the chart which accompanied the January 27 article by Mark Gongloff of The Wall Street Journal.  Here are some of Mr. Gongloff’s observations:

The index itself actually ticked down a bit, to 122.8 from 123.3 the week before, but that’s still among the highest readings since this summer.

*   *   *

That’s still not great, still in negative territory where it has been since the late summer.  But it is the best growth rate since September 2.

Whatever that means.  It’s hard to say this index is telling us whether a recession is coming or not, because the ECRI’s recession call is based on top-secret longer leading indexes.

Economist John Hussman of the Hussman Funds has been in full agreement with the ECRI’s recession call since it was first published.  In his most recent Weekly Market Comment, Dr. Hussman discussed the impact of an increasingly probable recession on deteriorating stock market conditions:

Once again, we now have a set of market conditions that is associated almost exclusively with steeply negative outcomes.  In this case, we’re observing an “exhaustion” syndrome that has typically been followed by market losses on the order of 25% over the following 6-7 month period (not a typo).  Worse, this is coupled with evidence from leading economic measures that continue to be associated with a very high risk of oncoming recession in the U.S. – despite a modest firming in various lagging and coincident economic indicators, at still-tepid levels.  Compound this with unresolved credit strains and an effectively insolvent banking system in Europe, and we face a likely outcome aptly described as a Goat Rodeo.

My concern is that an improbably large number of things will have to go right in order to avoid a major decline in stock market value in the months ahead.

Another fund manager expressing similar concern is bond guru Jeffrey Gundlach of DoubleLine Capital. Daniel Fisher of Forbes recently interviewed Gundlach, who explained that he is more afraid of recession than of higher interest rates.

Many commentators have discussed a new, global recession, sparked by a recession across Europe.  Mike Shedlock (a/k/a Mish), recently emphasized that “without a doubt Europe is already in recession.”  It is feared that the recession in Europe – where America exports most of its products – could cause another recession in the United States, as a result of decreased demand for the products we manufacture.  The January 24 World Economic Outlook Update issued by the IMF offered this insight:

The euro area economy is now expected to go into a mild recession in 2012 – consistent with what was presented as a downside scenario in the January 2011 WEO Update.

*   *   *

For the United States, the growth impact of such spillovers is broadly offset by stronger underlying domestic demand dynamics in 2012.  Nonetheless, activity slows from the pace reached during the second half of 2011, as higher risk aversion tightens financial conditions and fiscal policy turns more contractionary.

On January 28, Steve Odland of Forbes suggested that the Great Recession, which began in the fourth quarter of 2007, never really ended.  Odland emphasized that the continuing drag of the housing market, the lack of liquidity for small businesses to create jobs, despite trillions of dollars in cash on the sidelines, has resulted in an “invisible recovery”.

Jennifer Smith of The Wall Street Journal explained how this situation has played out at law firms:

Conditions at law firms have stabilized since 2009, when the legal industry shed 41,900 positions, according to the Labor Department.  Cuts were more moderate last year, with some 2,700 positions eliminated, and recruiters report more opportunities for experienced midlevel associates.

But many elite firms have shrunk their ranks of entry-level lawyers by as much as half from 2008, when market turmoil was at its peak.

Regardless of whether the economic recovery may have been “invisible”, economist Nouriel Roubini (a/k/a Dr. Doom) has consistently described the recovery as “U-shaped” rather than the usual “V-shaped” graph pattern we have seen depicting previous recessions.  Today Online reported on a discussion Dr. Roubini held concerning this matter at the World Economic Forum’s meeting in Davos:

Slow growth in advanced economies will likely lead to “a U-shaped recovery rather than a typical V”, and could last up to 10 years if there is too much debt in the public and private sector, he said.

At a panel discussion yesterday, Dr Roubini also said Greece will probably leave Europe’s single currency within 12 months and could soon be followed by Portugal.

“The euro zone is a slow-motion train wreck,” he said.  “Not only Greece, other countries as well are insolvent.”

In a December 8 interview conducted by Tom Keene on Bloomberg Television’s “Surveillance Midday”, Lakshman Achuthan, chief operations officer of the Economic Cycle Research Institute, explained his position:

“The downturn we have now is very different than the downturn in 2010, which did not persist.  This one is persisting.”

*  *  *

“If there’s no recession in Q4 or in the first half I’d say of 2012, then we’re wrong.  …   You’re not going to know whether or not we’re wrong until a year from now.”

I’m afraid that we might know the answer before then.


 

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Stock Market Bears Have Not Yet Left The Building

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The new year has brought an onslaught of optimistic forecasts about the stock market and the economy.  I suspect that much of this enthusiasm is the result of the return of stock market indices to “pre-Lehman levels” (with the S&P 500 above 1,250).  The “Lehman benchmark” is based on conditions as they existed on September 12, 2008 – the date on which Lehman Brothers collapsed.  The importance of the Lehman benchmark is primarily psychological — often a goal to be reached in this era of “less bad” economic conditions.  The focus on the return of market and economic indicators to pre-Lehman levels is something I refer to as “pre-Lehmanism”.  You can find examples of  pre-Lehmanism in discussions of such diverse subjects as:  the plastic molding press industry in Japan, copper consumption, home sales, bank dividends (hopeless) and economic growth.  Sometimes, pre-Lehmanism will drive a discussion to prognostication based on the premise that since we have surpassed the Lehman benchmark, we could be on our way back to good times.  Here’s a recent example from Bloomberg News:

“Lehman is the poster child for the demise of the banking industry,” said Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust Co. in Boston.  “We’ve recovered from that.  We’re comfortable with equities. If we do get a continuation of the strength in the economy and corporate earnings, we could get a reasonably good year for stocks in 2011.”

Despite all of this enthusiasm, some commentators are looking behind the rosy headlines to examine the substantive facts underlying the claims.  Consider this recent discussion by Michael Panzner, publisher of Financial Armageddon and When Giants Fall:

Yes, there are some developments that look, superficially at least, like good news.  But if you dig even a little bit deeper, it seems that more often than not nowadays there is less there than meets the eye.

The optimists have talked, for example, about the recovery in corporate profits, but they downplay the layoffs and cut-backs in investment that contributed to those gains.  They note the recovery in the banking sector, but forget to mention all of the financial and political assistance those firms have received — and are still receiving.  They highlight signs of stability in the housing market, but ignore lopsidedly bearish supply-and-demand fundamentals that are impossible to miss.

In an earlier posting, Michael Panzner questioned the enthusiasm about a report that 24 percent of employers participating in a survey expressed plans to boost hiring of full-time employees during 2011, compared to last year’s 20 percent of surveyed employers:

Call me a cynic (for the umpteenth time), but the fact that less that less than a quarter of employers plan to boost full-time hiring this year — a measly four percentage-point increase from last year — doesn’t sound especially “healthy” to me.

No matter how you slice it, the so-called recovery still seems to be largely a figment of the bulls’ imagination.

As for specific expectations about stock market performance during 2011, Jessie of Jesse’s Café Américain provided us with the outlook of someone on the trading floor of an exchange:

I had the opportunity to speak with a pit trader the other day, and he described the mood amongst traders as cautious.  They see the stock market rising and cannot get in front of it, as the buying is too well backed.  But the volumes are so thin and the action so phony that they cannot get comfortable on the long side either, so are buying insurance against a correction even while riding the rally higher.

This is a market setup for a flash crash.

Last May’s “flash crash” and the suspicious “late day rallies” on thin volume aren’t the only events causing individual investors to feel as though they’re being scammed.  A recent essay by Charles Hugh Smith noted the consequences of driving “the little guy” out of the market:

Small investors (so-called retail investors) have been exiting the U.S. stock market for 34 straight weeks, pulling almost $100 billion out of the market. They are voting with their feet based on their situational awareness that the game is rigged, and that the rigging alone greatly increases the risks of another meltdown.

John Hussman of the Hussman Funds recently provided a technical analysis demonstrating that – at least for now – the risk/reward ratio is just not that favorable:

As of last week, the stock market remained characterized by an overvalued, overbought, overbullish, rising-yields condition that has historically produced poor average market returns, and consistently so across historical time frames.  However, this condition is also associated with what I’ve called “unpleasant skew” – the most probable market movement is actually a small advance to marginal new highs, but the right tail is truncated and the left tail is fat, meaning that there is a lower than normal likelihood of large gains, and a much larger than normal potential for sharp and abrupt market losses.

The notoriously bearish Doug Kass is actually restrained with his pessimism for 2011, expecting the market to go “sideways” or “flat” (meaning no significant rise or fall).  Nevertheless, Kass saw fit to express his displeasure over the degree of cheerleading that can be seen in the mass media:

The recent market advance has spurred an accumulation of optimism.  S&P price targets are being lifted by many whose memories are short and who had blinders on as the equity market and economy entered the last downturn.  Bullish sentiment, coincident with rising share prices, is approaching an extreme, and the chorus of bullish talking heads grows ever louder on CNBC and elsewhere.

Speculation has entered the market.  The Iomegans of the late 1990s tech bubble have been replaced by the Shen Zhous, who worship at the altar of rare earths.

Not only are trends in the market being too easily extrapolated, the same might be true for the health of the domestic economy.

On New Year’s Eve, Kelly Evans of The Wall Street Journal wrote a great little article, summing-up the year-end data, which has fueled the market bullishness.  Beyond that, Ms. Evans provided a caveat that would never cross the minds of most commentators:

Still, Wall Street’s exuberance should send shudders down any contrarian’s spine.  To the extent the stock market anticipates growth, the economy will have to fire on all cylinders next year and then some.  At least one cylinder, the housing market, still is sputtering.  Upward pressure on food and gas prices also threatens to keep a lid on consumer confidence and rob from spending power even as the labor market continues its gradual and choppy recovery.

The coming year could turn out to be the reverse of 2010:  decent economic growth, but a disappointing showing by the stock market.  That’s the last thing most people expect right now, precisely why investors should be worried about it happening.

The new year may be off to a great start  . . .  but the stock market bears have not yet left the building.  Ignore their warnings at your own peril.


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Seeing Reality With Gold Glasses

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March 8, 2010

The most recent report from the Bureau of Labor Statistics concerning non-farm payrolls for the month of February has surprised most people and it has left a number of commentators feeling upbeat.  Reuters had reported that “The median forecast from the ten most accurate forecasters is for payrolls to fall by 70,000.”  Nevertheless, the BLS report disclosed a figure of approximately half that much.  Only 36,000 jobs had been lost and unemployment was holding at 9.7%.   One enthusiastic reaction to that news came from the Mad Hedge Fund Trader:

While the employment rate for those with no high school diploma is 16%, the kind of worker who lost their manufacturing jobs to China, the jobless rate for those with college degrees is only 4.5%.  This is proof that the dying sectors of the US economy are delivering the highest unemployment rates, and that America is clawing its way up the value chain in the global race for economic supremacy.  It is what America does best, creative destruction with a turbocharger.  There is a third influence here, which could be huge.  The BLS only contacts existing businesses for its survey.

*   *   *

The bottom line is that payroll figures are much better than they appear at first glance.

Prior to the release of that report, many commentators had been expressing their disappointment concerning the most recent economic indicators.  I discussed that subject on March 1.  On the following day, John Crudele of The New York Post focused on the dramatic drop in the Consumer Confidence Index, released by The Conference Board — a drop to 46 in February from January’s 56.5.  Here is the conclusion Mr. Crudele reached in assessing what most middle-class Americans understand about our current economic state:

Even with the stock market still bubbling and media trying its damnedest to convince us at least a million times a day that there’s an economic recovery, the American public isn’t buying it.

*   *   *

The economy has stabilized since then, helped greatly by the fact that some wealthy people feel wealthier because of an unbelievable snap back by the stock market during 2009.  (And by unbelievable in this context I mean that what happened shouldn’t be believed as either legitimate or sustainable.)

Don Luskin of The Wall Street Journal’s Smart Money blog articulated his dissatisfaction with the most recent economic indicators on February 26.  One week later, Luskin presented us with a very informative analysis for understanding the true value of one’s investments.  Luskin spelled it out this way:

Consider stocks priced not in money, but in gold.  In other words, instead of thinking of stocks as investments you make in order to increase your wealth in dollars, think of them as something to increase your wealth in gold.  After all, you don’t want to make money for its own sake — you want the money for what you can buy with it.  Gold is a symbol for all the things you might want to buy.

*   *   *

It’s easy to track stocks priced in gold because the price of the S&P 500 and the price of an ounce of gold vary closely with one another.  As of Thursday’s close, they were only about $10 apart, with the S&P 500 at 1123, and gold at about 1133.

How about a year ago, on the day of the bottom for stocks on March 9?  That day the S&P 500 closed at 676.53.  Gold closed at 920.85.  That means that one “unit” of the S&P could have bought 73% of an ounce of gold.

Today, with stocks and gold each having risen over the last year — but with stocks rising more — one “unit” of the S&P can buy 99% of an ounce of gold.  All we have to do is compare 73% a year ago to 99% now, and we can see that stocks, priced in gold, have risen 34.9%.

A 34.9% gain for stocks priced in gold is pretty good for a year’s work.  But it’s a far cry from the 69.1% that stocks have gained when they are priced in dollars.  Do you see what has happened here?  Stocks have made you lots of dollars.  But the dollar itself has fallen in value compared to the real and eternal value represented by gold.

Here’s the most troubling part.  The entire 34.9% gain made by stocks — priced in gold, that is — was achieved in just the first five weeks of rallying from the March 2009 bottom.  That means for most of the last year, since mid-April, while it has appeared that stocks have been furiously rallying, in reality they’ve just been sitting there.  All risk, no reward.

*   *   *

So why, then, did stocks — priced in dollars, not gold — continue so much higher?  Simple:  We experienced inflation-induced growth.  Throw enough stimulus money, an “extended period” of zero interest rates from the Fed, and a big dose of government debt at the economy, and you will get some growth — and, eventually, lots of inflation.

Luskin concluded the piece by explaining that if stocks move higher while gold moves lower, we will be seeing evidence of real growth.  On the other hand, if gold increases in value while stocks go down or simply get stuck where they are, there is no economic growth.

Luskin’s approach allows us to see through all that money-printing and excess liquidity Ben Bernanke has brought to the stock market, creating an illusion of increased value.

Everyone is hoping to see evidence of economic recovery as soon as possible.  Don Luskin has provided us with the “x-ray specs” for seeing through the hype to determine whether some of that evidence is real.



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A Wary Eye On The Indicators

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March 1, 2010

The past few days brought us some observations by a number of financial commentators, who expressed concern about how our economic recovery is coming along.  Although none of the following three are ready to start sounding alarms, they all seem to share a similar tone of discouragement.

Don Luskin of The Wall Street Journal ’s Smart Money blog began his February 26 piece with an explanation of how proud he used to be about the accuracy of his May, 2009 declaration that the recession had ended.  Although he still believes that he made the right call back then, the most recent economic indicators have muddied the picture:

I made my recession end call in May because of an entirely different set of statistics, designed to be predictive rather than merely to recognize what has already happened.  What worries me is that these statistics have all started to get a little worse recently.

Luskin explained that although initial unemployment claims reached their peak in early April, the four-week moving average has risen 7 percent from where it was a few weeks ago.

Over history, upticks like that have no predictive value.  There have been many of them, and very few have led to recessions.  Still, 7% is a big reversal.  In May when I got excited about the drop in claims, that drop was only about 4%!

Luskin found another disappointing trend in the fact that earnings expectations for the S&P 500 are now growing at a much slower pace than they were in April.  Two other trends concerned him as well.  The fact that the dollar has rallied ten percent in the last couple of months raises the question whether “the fear that gripped world markets in 2008 and 2009” could be returning.  Finally, the fact that the credit spread between Treasuries and “junk bonds” is now at six percent after having been below 5%, brings a little discomfort simply because of a move in the wrong direction.  Nevertheless, Luskin is still optimistic, although his perspective is tempered with realism:

So is the economic recovery over?  I don’t think so.  I think it’s just being tested.  None of the indicators I use to detect the onset of recession are giving signals.  But it’s haunting, nevertheless.  After the horrific global recession we went through, you’d think we ought to come roaring back. We’re back, but we’re not exactly roaring.

In Sunday’s Washington Post, Frank Ahrens wrote an article discussing three indicators that “spell trouble for the recovery”.  Here’s how he explained them:

— On Wednesday, the Commerce Department reported that January new-home sales dropped 11.2 percent from December, plunging to their lowest level in nearly 50 years.

— On Tuesday, the Conference Board reported that February consumer confidence fell sharply from January, driven down by the survey’s “present situation index” — how confident consumers feel right now — which hit its lowest mark since the 1983 recession.  On Friday, the Reuters/University of Michigan consumer sentiment survey also showed a falloff from January to February.

— On Thursday, the government’s report on new jobless claims filed during the previous week shot up 22,000, which was exactly opposite of what economists predicted.  Forecasters expected new jobless claims to drop by about 20,000.

Taken together, what do these reports tell us?

We’ve got a long way to go to get out of this economic mess, and we may be actually losing a little ground.

At the conclusion of that piece, Mr. Ahrens added that another factor holding back recovery is the current state of activity in the stock market.  Investors seem to be exhibiting caution, uncertainty and “a hard-to-shake sense that we haven’t hit bottom yet”.

As I frequently point out, one of my favorite financial gurus is Jeremy Grantham of GMO.  The February 26 issue of Bloomberg Business Week featured an article by Charles Stein concerning Grantham’s career.  In the section of the piece discussing Grantham’s current outlook, we see yet another view toward a very lean, slow recovery process:

Grantham’s favorite asset class today is high-quality U.S.stocks, companies defined by high, stable returns and low debt.  The allocation fund had 31 percent of its money in that category at year-end, sometimes called blue chips, according to the GMO Web site.  In the interview, he said he expects such stocks to return an average of 6.8 percent a year over the next seven years, compared with 1.3 percent for all large-cap U.S. stocks.

Emerging-market stocks may rise about 4 percent annually in the next seven years, as investor enthusiasm for economic growth in developing countries carries the stocks to unsustainable levels, Grantham said.

“Why not go along for the ride?” he said.  The MSCI Emerging Markets Index returned an average of 22 percent in the past seven years, compared with a gain of 5.5 percent by the S&P 500 index.

U.S.government bonds will return 1.1 percent a year over the seven-year period, according to the latest GMO forecast.  The Bank of America Merrill Lynch U.S. Treasury Master Index rose 4.3 percent from 2003 through 2009.

Grantham said he expects a difficult, not disastrous, period for the economy and investments.

“It will feel like the 1970s,” he said. “One step forward, one step back.”

None of the three gentlemen whom I have quoted here are seeing visions of rainbows and unicorns in our economic future — at least not for the next few years.  Be sure to keep the opinions of these experts in mind if the cheerleading by some perma-bull, TV pundit motivates you to “get in on the ground floor of the next stock market rally”.  You could save yourself a lot of money and even more pain.



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