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.
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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.
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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.”
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“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.
Rampant Stock Market Pumping
It has always been one of my pet peeves. The usual stock market cheerleaders start chanting into the echo chamber. Do they always believe that their efforts will create a genuine, consensus reality? A posting at the Daily Beast website by Zachary Karabell caught my attention. The headline said, “Bells Are Ringing! Confidence Rises as the Dow – Finally – Hits 13,000 Again”. After highlighting all of the exciting news, Mr. Karabell was thoughtful enough to mention the trepidation experienced by a good number of money managers, given all the potential risks out there. Nevertheless, the piece concluded with this thought:
As luck would have it, my next stop was at the Pragmatic Capitalism blog, where I came across a clever essay by Lance Roberts, which had been cross-posted from his Streettalklive website. The title of the piece, “Media Headlines Will Lead You To Ruin”, jumped right out at me. Here’s how it began:
Lance Roberts provided some great advice which you aren’t likely to hear from the cheerleading perma-bulls – such as, “getting back to even is not an investment strategy.”
As a longtime fan of the Zero Hedge blog, I immediately become cynical at the first sign of irrational exuberance demonstrated by any commentator who downplays economic headwinds while encouraging the public to buy, buy, buy. Those who feel tempted to respond to that siren song would do well to follow the Weekly Market Comments by economist John Hussman of the Hussman Funds. In this week’s edition, Dr. Hussman admitted that there may still be an opportunity to make some gains, although the risks weigh heavily toward a more cautious strategy:
Economist Nouriel Roubini (a/k/a Dr. Doom) provided a sobering counterpoint to the recent stock market enthusiasm in a piece he wrote for the Project Syndicate website entitled, “The Uptick’s Downside”. Dr. Roubini focused on the fact that “at least four downside risks are likely to materialize this year”. These include: “fiscal austerity pushing the eurozone periphery into economic free-fall” as well as “evidence of weakening performance in China and the rest of Asia”. The third and fourth risks were explained in the following terms:
Any latecomers to the recent festival of bullishness should be mindful of the fact that their fellow investors could suddenly feel inspired to head for the exits in response to one of these risks. Lance Roberts said it best in the concluding paragraph of his February 21 commentary: