Sunday, July 26, 2009

Carney: Recession is over!

Mark Carney made headlines this week as he proclaimed that the recession is over.


This post will not be to critique his forecast, although as you may guess, I am skeptical. This post will cover how much it is dangerous to put too much faith any one person's forecast (including yours truly).

Carney is stating that GDP will grow this quarter and forever so by definition, that makes this recession over. Time will tell.

The combination of his declaration (and similar ones from Bernanke and other central bankers) combined with the sharp rally since March, with the new highs of this past week, has the bulls sitting pretty, and bears like myself, look very wrong.

A very close family member asked me today if he should reduce some of his high cash position due to this rally and Carney's comments.

Watch the bank economists get all giddy by Carney's words.

"It is there in black and white, that the recovery has effectively begun," said Douglas Porter, deputy chief economist at BMO Capital Markets. "I think it is astonishing how quickly the economy turned to the good in the last four or five months."

He may be right. Perhaps GDP will be positive this quarter. That does not necessarily mean that the recession is over. Recession can have positive quarters. Carney may also be wrong. We are only 25% of the way through the third quarter. There is nothing written in stone that this quarter will be positive. Recession ending? Let's wait and see, but I am very skeptical.

Let's also remember another bold forecast by Carney (again, he may be right this time):

From almost exactly 1 year ago today (July 17/08), from the Toronto Star:
today's update on the central bank's thinking, governor Mark Carney expressed hope that the worst might be over for the Canadian economy, which slumped badly in the first three months of 2008 but could slowly rebound in line with a recovery in the United States.

My comment: The worst hadn't even begun. Terrible forecast.

As a result, Carney indicated the bank, which held its trend-setting overnight rate at 3 per cent on Tuesday, will be no hurry to adjust rates up or down.

My comment: There was a hurry: to drop rates to zero.

The bank says "a gradual recovery in the U.S. economy" and other factors will help Canada's economy pick up steam early next year and return to normal growth in 2010.

My comment: How did that gradual recovery work out for you. Pick up steam? Yeah, the steam from a train going off the tracks!

But the 8-page "Monetary Policy Update" issued this morning concludes that "growth in the United States could also be weaker than expected, particularly in those sectors that are most relevant for Canadian exports."

The bank has consistently underestimated the impact of the U.S. economic slump on Canada's business conditions. At the beginning of the year, it forecast 2008 growth in Canada at 1.8 per cent but has now nearly halved that estimate to 1 per cent growth--the worst performance by the Canadian economy since the early 1990s.

Today, the bank said it missed the mark because growth in household spending fell short and a drop in inventory investment - after a buildup in late 2007 - was steeper than it had thought in April.

It also said today that, because of high oil prices, consumer price inflation in Canada will peak at 4.3 per cent in the first months of next year, a level well above the bank's target of 2 per cent.

But Carney predicted that as energy prices stabilize next year, inflation is likely to return to the 2 per cent level.

My comment: Oil prices plummeted, again not forecast by Carney & Co. Inflation was peaking back then and not in first months of 2009. Energy prices did not stabilize and fell to $33 early in 2009, from $147 in July 2008. They have stabilized around $60-70 (for now) but not at $147.

Again, this post is not to criticize Carney's current forecast, only to point out that his crystal ball is about as murky as they get. I have chosen July 2008 since it was exactly a year ago and it shows the danger of false hope.

Millions of Canadians, including family members of yours truly, are putting some faith in Mr. Carney's proclamation this week. I am just saying to have some healthy skepticism as he has made some poor predictions before, and he is basically a cheerleader for the Canadian economy. The history of these types of post-bubble credit contractions are such that the establishment types often proclaim victory at the most dangerous moments. Perhaps this time will be different?

Thursday, July 23, 2009

Stampede

The bulls are stampeding higher on "strong" earnings. Most companies have nicely beat earnings on the back of cost cutting (ie layoffs, drop in spending). This game can continue for a little while, but for the rally and the recovery to be real, either consumer or business spending is going to have to recover.

I have mentioned that often there are key turning points in the stock market around July 17-22 (look up charts on 1981, 1982, 1987, 1990, 1998, 2001, 2002, 2007 & 2008). As I write this on July 23, the S&P is stampeding higher to 968, breaking the January & June highs. Assuming that 2009 did not have a key turning point around July 17-22, this gives the market the opportunity to ramp into the first week of August. There are a number of cycle turning points that point to a significant inflection point around that time.

I would imagine that this time window of another 2 weeks would give the market time to get to 1000, which would equate to a 50% rally from the 666 low.

I have yet to hear from any major company (especially those that beat on their earnings) that there is anything more than a minor recovery in underlying end demand. In the past 2-3 quarters, companies have been hit a double whammy of by slowing end demand by customers AND a slashing of inventory levels by these customers. In the past quarter, the slashing of the inventory has mostly ended (and even reversed in some cases due to optimism about Q3 & Q4) and the drop in end demand has stopped and stabilized.

The hope is that inventory rebuilding is indicative of a coming recovery and the stabilization of end demand (or marginal pickup due to pent-up demand) will lead to some type of recovery in final end demand in Q3 & Q4. So far, IMHO, there is no proof of this recovery in final end demand beyond a possible blip due to demand that was suppressed during the Crash of 2008.

The other interesting thing is that companies are saying that they see little or no impact from the Obama stimulus. If you are bullish, you could interpret this as a positive since that impact may be coming, but if you are bearish, you could use this point as proof that this rebound is simply part of the ebb & flow of a super bear market. Also, much of the confidence in this rally has been supposedly caused by confidence that the government has saved the economy from the abyss, as President Obama took credit for doing yesterday.

What am I doing? As I mentioned, I called an audible and sold most of my ultrashorts around S&P 890ish. Unfortunately, I have bought them all back from roughly S&P 930 to 950, meaning I am underwater on them. Presently, I am planning to hold these and put aside discipline, as I have a strong conviction that August and September are going to be very, very ugly. I have room to add to my ultrashorts (and put options) but I will wait for some clear signs that the stampede is ending (think Wile E. Coyote off a cliff) before doing so.

I suspect that a slew of discoveries in the banking sector worldwide are imminent and when the "green shoots" talk is put to rest, there will be a very quick and deep drop in confidence.

Disclosure: positions in USD, Yen, CAD, ultrashorts in oil & various equity indexes, selected equities & puts, long gold.

Wednesday, July 15, 2009

Quick Update

On Monday, I closed out all my ultrashorts for small profits (leaving individual shorts in place) once it looked like the market was done going down for the time being. According to some of the cycle analysis that I use, July 6/7 was a key turning point and when it looked as if the S&P 882 was going to hold (and we broke resistance at 888), I sold off all of my ultrashorts during the day (between S&P 890-900 approx).

However, beginning on Tuesday and especially Wednesday, I have begun to rebuild those ultrashorts once again, to the point where I am roughly 50% back. There is a possibility (again according to cycle analysis and key anniversary dates) that the top is unfolding this week or to roughly July 22nd. Many key turning points (both tops & bottoms) have transpired around mid July. Recent examples of key tops in mid-July were in 1990 & 2007.

Another possibility is that we continue to rally until the first week of August. Either way, I believe the sell-off will commence within the next few weeks, and that August and September are going to be very, very ugly.

I mentioned in my recent missive:

I now think that the real move lower started on June 11th when we hit S&P 956. I am not sure if we are going straight down from here or if we are going to rally a little bit first here and then go lower in August...

I may change my analysis tomorrow, so do your own homework...
Obviously, we did rally and it appears that the line in the sand for the bulls is around 870-875. It appears that the Goldman & Intel earnings have triggered an option expiration bull stampede. I don't believe this changes anything regarding the 10 factors I outlined in the previous post.

My plan is to continue to average down in these ultrashorts over the next few days and possibly, even go bigger now that this last gasp rally appears to be in place. The action of this past week seems to be impetuous (Canadian dollar rallying from around 85 to 90 in 3 sessions is a case in point).

Disclosure: positions in USD, Yen, CAD, ultrashorts in oil & various equity indexes, selected equities, long gold.

Thursday, July 9, 2009

ECRI's reply to my post

I am delighted and honored that Lakshan Achuthan, the Managing Director of ECRI, was kind enough to respond to my earlier post on ECRI. He has allowed me to post his comments (in blue) and my reply to his comments appear in red.




I don't have too much respect for the field of economics. There are many brilliant economists but, as a whole, I think that they rely too much on modelling and theory.


FYI, ECRI’s work is not based on econometric models.


There are a few great ones (David Rosenberg, for example). Others that I sometimes disagree with (Paul McCulley and Paul Krugman) must be read as they are brilliant thinkers. Even Alan Greenspan and Ben Bernanke are intelligent, although they have made many grave errors.

Until late 2007/early 2008, I had thought that ECRI (Economic Cycle Research Institute) was a star and I assumed that whenever the recession hit, they would be leading the call.

Why?

I believe that they are one of the few (or only?) major organization that correctly called the 1991 and 2001 recessions, without any false alarms. In addition, ECRI had a legend, Geoffrey H. Moore, as its founder. Click here for more details on Moore and ECRI.

In September 2000, ECRI warned of a possible recession while most (including yours truly, sadly) thought that the tech boom would last another decade. In March 2001, ECRI called a recession at some point in 2001 inevitable. Later it was determined by NBER (National Bureau of Economic Research) that a recession started that month (March 2001). Never mind that they gave no definitive advance warning of that recession (they stated some point in 2001 when in fact, the recession started that month). At least they were on the right side of the fence.

The 2001 call was borderline, in that it did not advance notice as they are supposed to predict cyclical turns.


I am reminded of what Geoffrey Moore once told us, viz., that if you could predict a recession just when it was starting, you were doing very well as a forecaster. By those standards, I think we did very well in predicting the 2001 recession. In fact, it is practically impossible to consistently predict recessions many months in advance in real time unless you are willing to issue a fair number of false alarms.

Also, if I may, I’d like to cite the precise wording we used in our September 2000 warning of recession danger to our subscribers: “Never in this expansion have the leading indicators been so close to forecasting a recession.” That’s more than a warning of a “possible” recession, wouldn’t you say?

Yet we also went on to write that “Luckily, underlying inflationary pressures have already turned down,” meaning that the Fed had room to cut rates right away, in September 2000. As we now know, the Fed waited four long months before staring its rate cut cycle, and by March 2001 our leading indexes were down so far that a recession was unavoidable. At the time, 95% of economists surveyed by The Economist magazine thought that there would be no recession, so if our March 2001 call about the inevitability of recession was “marginal,” we’re happy to take that, thank you!

This brings home another important point, which is that recessions are rarely as unavoidable in real time as they appear in retrospect. It is quite possible that if the Fed had slashed rates starting in September 2000 we wouldn’t have had the 2001 recession, despite the dot-com bust. As I discuss later, this was also true of the current recession.


For 2001: I take it back; You are correct, and I think that Mr. Moore was probably correct, in that there would be some false alarms.


However, I disagree with the whole Fed causing and preventing recession thing because that is part of the problem that got us here: The Fed as some type of godlike group that can manage the business cycle. As capitalists, we ridicule central planning and communism, yet we believe that some economists can manage the business cycle better than the market? That false belief by investors and government was part of the reason that we had so many bubbles in the past 15 years. The Fed does deserve some blame but this was a global phenomenon. I subscribe more to the Austrian school on this stuff. One need only to look at the fine work a private sector organization like yours performs, versus the shoddy leading indicators that currently come from the government. The Fed has some control over short term rates but often the market leads the Fed. In the above example, short term rates set by the market had already started dropping well ahead of the first Fed cut in January 2001. And even if you are right, and the Fed could have prevented the 2001 recession, I believe that recessions are necessary to clean up the excesses of the past boom, and preventing them leads to an even larger recession eventually. The shallowness of the 1991 & 2001 recessions and the quick fixes via stimulus/deficit spending/this false belief probably worsened the current recession. We had a great worldwide boom from 1992-2007, some of which was based on excess credit and inflated assets. I think it is to be expected that a great bust should follow.

I am willing to concede that this is probably conjecture.


The current recession was determined to have begun in December 2007 by NBER. In December 2007 (from ECRI's site):

"With Weekly Leading Index growth not far from its lowest reading since the 2001 recession, U.S. growth prospects have clearly darkened, but a recession is still not inevitable," said Lakshman Achuthan, managing director at ECRI.

OK, fine, let's assume that ECRI did not agree with NBER that the recession started in December 2007.


Not at all – we agree with the NBER that the recession began in December 2007. In fact, knowing that this was precisely what was likely if emergency action wasn’t taken, we wrote (http://www.businesscycle.com/news/press/1402/) in January 2008 that “a self-reinforcing downturn has already begun (italics mine). If allowed to continue, it will amount to the vicious cycle known as a business cycle recession.”


OK, at least there was warning of a downturn. I would have preferred a clearer call but at least, the self-reinforcing downturn was called.


In late March 2008, they gave the official call:

The U.S. economy is now on a recession track. Yet this is a recession that could have been averted.

I think it is clear, as it was then, was that this was not a recession that could have been averted. No amount of stimulus in late 2007 would have saved Lehman, Bear Stearns, AIG, nor would it have saved the US consumer , nor would it have prevented the US housing bubble from blowing up. No amount of stimulus would have saved the commodity bubble, nor would it have saved the record high profit margins of US corporations. This "averted" is simply a way of deflecting blame on a missed call.


The Weekly Leading Index turned down in early June 2007 in real time, six months before the recession began (please recall that in both the second and third quarters of 2007, GDP – a coincident measure -- grew at almost a 5% pace, matching a four-year high, confounding many prematurely pessimistic economists).

But our January 2008 note also explained why we believed at the time, and still firmly believe, that there was a highly unusual opportunity for immediate fiscal stimulus to push back the recession – with very different potential consequences, we believe, for Lehman et al, because resolving the credit crisis outside an ongoing recession is very different from trying to do so in the context of recessionary job losses driving up foreclosures and thus multiplying the “toxic” assets at the root of the crisis.

Of course, fiscal policy action in early 2008 would not have prevented the US housing bubble from blowing up – but the major top in home prices was in late 2005, two years before the recession began, meaning that the home price downturn was not joined at the hip with recession.

This recalls the larger point, that while business cycles cannot be abolished, recessions are rarely as inevitable as they are made out to be in retrospect. Many now blame the recession on the lax monetary policy of 2002-03. We don’t disagree, but once the Fed had made that mistake, are you saying there was nothing anyone could have done in the next five years to avert the current recession?


See above point- depressions happen usually once in a lifetime (assuming that this is a depression) partly since no one expects one since they never experienced it firsthand.

Perhaps Lehman et al would have bought some more time, but again, it depends on which side of the ideological fence you sit on. Lehman, AIG, Bear, Citigroup etc.. basically were insolvent and in some cases committed fraud via off balance sheet, no different than Enron. There is no free lunch. If they were illiquid, fine, stimulus may have helped buy time for them to raise capital. They were insolvent and overly leveraged.


A little late in my opinion, for an organization that is supposed to predict recessions, not call them in real-time time, or after the fact.

This is Strike #1 (i.e. no real advance warning again and quite possibly late by 4 months if you believe NBER, as I do).


Our March 2008 recession call was three months after the recession began in December 2007, right? But as we’ve already noted, we knew at the time, and wrote explicitly in January, that if emergency policy action was not taken, a recession would be judged in retrospect to have already begun before January.


Fair enough- thank you for the clarification


In fairness to ECRI, their leading indexes did deteriorate by December 2007, but perhaps not early enough or far enough to issue a call. Their leading indexes also did deteriorate in the fall of 2008 to multi-decade lows.

Strike #2:

The Economic Cycle Research Institute's Leading Home Price Index is "pointing to a bottom in home prices" and signaling a recovery in demand, said Lakshman Achuthan, ECRI's managing director.

This was written on May 2007 (on the ECRI site). Oops. Housing prices only really began to plummet after this call.


Actually, the data on both median new and existing home prices show that there really was a short-lived home price upturn from September 2006 to March 2007 that was correctly anticipated by the Leading Home Price Index (LHPI). But the LHPI then turned down after peaking in February 2007. The data available at the time I made that statement did not yet show enough of a downturn to indicate that a new cyclical downturn in the LHPI had indeed begun.


This I take issue with. If I was relying on your index to buy a home in 2007, I would be possibly in deep trouble. I acknowledge the short-lived upturn, but I think unlike the calls above, this one has to be judged, with 20/20 hindsight, to be dead wrong. Housing prices are down enormously since then. Also, I read your book and when a similar call that housing would hold up and even prosper in the 2001 recession (100% correct), you touted this call. If this call had been correct and housing did bottom, I suspect that you would tout this call as well. This is not correct, IMHO.


Strike 3?

Now, ECRI is saying the following (and to their credit, said this back in late April, before the consensus embraced this view):

"We'll definitely see the end of this recession this summer," ECRI managing director Lakshman Achuthan said Wednesday. "As unique and unprecedented as this recession has been, the transition to recovery is showing up in a textbook way in the leading indicator charts."

Achuthan acknowledged that difficulties such as unemployment and excess debt will take a long time to overcome, and that confidence is weak. That's to be expected.

"The general mood is probably overly pessimistic. That's quite normal in the wake of a crisis. There is almost always a giant error of pessimism," he said.

I suspect that their models work better with garden variety recessions, not credit and housing bubble induced depressions. If they blow this call, I think that this will be strike #3 in my book. I suspect we will learn the truth in the next few months, and if I am wrong, I will issue a full apology to ECRI for my criticism on this blog.


Our leading indexes should work not only with garden-variety recessions but also with jungle-variety panics, depressions and crises – because uniquely, ECRI’s indicator systems were originally built on that basis, and we have leading index data going back well over a century. Our leading indexes are even more emphatic now about a near-term end to the recession than they were in April, but we’ll have to wait for the dust to settle over the next few months before we know whether we were right to make the call.


On this, I agree, only time will tell.


While I think ECRI is wrong, I will admit that they are the only thing going for the bull camp in my book.

I wanted to add, that this exercise illustrates how great an organization ECRI is, in that it provides gutsy calls and more often than not, have been either 100% correct or way ahead of the 95% of economists cited above. I have picked on bank economists and central bankers as being way behind the curve and would never bother analyzing their calls to this degree since I would have to write a novel.

Perhaps ECRI has only 1 strike in my book (the housing bottom call) thus far. At least, their call to an end of the reession is backed by much more than the talking heads on CNBC. Time will tell if they are right on their end to the recession call.


Thank you so much, Lakshman, for taking the time to reply to my little blog and for your excellent work over the years. With clarification, some of my criticisms may have been a little too harsh, while I still stand by others. Nonetheless, I will always remain interested and read the work of ECRI.

Monday, July 6, 2009

I THINK THAT WINTER HAS RETURNED

Not a weather discussion (although I will say that this summer sucks and I am a global warming skeptic).

On May 2nd (and S&P 877), I wrote the following:
I believe that we are nearing an inflection point here. A downleg is starting that should take us to approximately S&P 777ish over the four weeks. From there, we can either start a nice summer rally (back to current levels of S&P 877 or higher to 900-1000) or we can go right to a retest of the March lows. The real move lower will probably start in August 2009, but I am still not sure when. Ultimately, I believe the stock market is going to go a lot lower.

An inflection point did ensue on May 8th, when the S&P hit 930. From that day forward, the market stopped going straight up and basically stalled and entered a trading range between 878 and 956. Currently, we sit at 898 and tested the lower end of the range today.

I was wrong in that the market did not just roll over and sell off to S&P 777. I talked about a summer rally back to 877 or 1000. Obviously, that hasn't happened yet. Perhaps the two merged together? The bears (777 or lower) fought the bulls (summer rally to 1000) and we called it a draw for the past 2 months and we are now close to that 877 (we hit 886 this morning).

"The real move lower will probably start in August 2009, but I am still not sure when."

I now think that the real move lower started on June 11th when we hit S&P 956. I am not sure if we are going straight down from here or if we are going to rally a little bit first here and then go lower in August.

I do feel that a top is in. Why?

1) Lowry's Report. Basically, they are saying that the underlying demand and supply of the market is much worse than what the price action of the indexes is indicating. Their head Paul Desmond recently went on CNBC to say this and he expects a break of the March lows.
2) The gold/silver ratio is warning of trouble ahead (thanks Bob Hoye) by jumping to 70 from 61. A similar jump happened last August. We all know what happened in September 2008! This ratio often leads in a crisis.
3) The US dollar appears to have bottomed. Another nail in the coffin of the bulls if it is true.
4) Commodities appear to have peaked. Another nail.
5) Jeffrey Cooper from Minyanville.com, one of the best out there and a master of cycles analysis, has been warning of impending trouble from mid August onward. I agree.
6) The green shoots were a myth. The proof is overwhelming that all you had was a slower decline in GDP not a return to sustainable growth (ie underlying demand, not inventory building). You could conceivably have green shoots at some point. I just don't see them yet. The biggest green shoot is the stock market. Yeah, that worked out real nicely in October 2007, when the S&P hit a new high, a month before the recession started, didn't it? Also, last month's US unemployment figures were horrible (while better than earlier in 2009, they were worse than anything in the last recession, including the period after 9/11- remember all those airline layoffs!). Consumer spending has also been atrocious of late.
7) The history of monster bear markets is that they often have 40%+ rallies and then ultimately go to new lows. Look at the Nasdaq 2000-03. Ditto for Dow 1929-32 and Japan 1989-? Their purpose is to reset the shorts (by stopping them out or burying them) and suck in the bulls. Bear markets are as much a function of time as price. We have had a severe decline in price (although I think we need more). In terms of time, for a megabear market, this one has been quite short (20 months). More time is necessary to change psychology on a long term basis
8) Sentiment has become almost universally bullish. It always does in a bear market rally after a crash. There are no shortage of people who have claimed that the worst is over. I believe the worst is coming. Even some of the bears are only looking for a retest of the March lows (the bulls are looking to 1000 to 1300 and laugh at the thought of a retest; they are convinced that a 40% rally means that a new bull market has started). I am looking for a break of the March lows.
9) International problems are likely to rear their ugly head (North Korea, Iran, swine flu, Latvia, Ireland, Chinese smoke & mirrors- I am a China skeptic).
10) The recent spike in long term interest rates is a possible warning shot of problems ahead. Higher interest rates are sinking the economy and are likely to cause further problems as they spread to non-government bonds.

There are plenty of other confirmations, including my own gut. The one fly in the ointment is ECRI. If the recession is truly over, I suspect that the March lows are not going to be retested and that I will be wrong.

Where do we go from here?

I am positioning myself quite heavily on the short side for the first time this year (and the first time since last fall). I am targeting a move to S&P 600 as my conservative target sometime this fall/winter. A move to S&P 444 is possible if things really unravel although that may be a target for later in 2010.

I realize that these numbers sound crazy, but these targets are consistent with other major bubbles (remember that the Nasdaq-100 lost 83% and the Dow lost 90% in the 30s).

I also remember writing this back on September 5th, 2008 (S&P 1242):
If things got really ugly in October/November and we sunk to say 770 S&P with a few bank failures, you could even have the end to the bear in terms of price.
While I retract the "even have the end to the bear in terms of price" portion, the S&P 770 was 38% below the price of that day and 50% from the all-time high. A move to S&P 600 would be a similar 38% move. A move to S&P444 would be a full retracement of the entire bull market move from 1994/95.

I also warned of TSX 9,000 and $60 oil back on July 8, 2008, when oil just finished peaking at $147 and the TSX hit 15,000. Didn't that sound ridiculous?

I am bullish on USD and Japanese Yen and that's about it for the time being. There will be few places to hide for the rest of the year, I believe. I see the loonie going to new lows and oil going to $20 or $30 eventually. Gold is likely to get liquidated as well, but may present a fantastic buying opportunity in the fall (I am currently long a little gold but I suspect that I will get stopped out soon).

I may change my analysis tomorrow, so do your own homework, but I just wanted to update the reader (if I have any left?) on my thinking.

Disclosure: positions in USD, Yen, CAD, ultrashorts in oil & various equity indexes, selected equities, long gold.

ECRI: Two strikes

I don't have too much respect for the field of economics. There are many brilliant economists but, as a whole, I think that they rely too much on modelling and theory.

There are a few great ones (David Rosenberg, for example). Others that I sometimes disagree with (Paul McCulley and Paul Krugman) must be read as they are brilliant thinkers. Even Alan Greenspan and Ben Bernanke are intelligent, although they have made many grave errors.

Until late 2007/early 2008, I had thought that ECRI (Economic Cycle Research Institute) was a star and I assumed that whenever the recession hit, they would be leading the call.

Why?

I believe that they are one of the few (or only?) major organization that correctly called the 1991 and 2001 recessions, without any false alarms. In addition, ECRI had a legend, Geoffrey H. Moore, as its founder. Click here for more details on Moore and ECRI.

In September 2000, ECRI warned of a possible recession while most (including yours truly, sadly) thought that the tech boom would last another decade. In March 2001, ECRI called a recession at some point in 2001 inevitable. Later it was determined by NBER (National Bureau of Economic Research) that a recession started that month (March 2001). Never mind that they gave no definitive advance warning of that recession (they stated some point in 2001 when in fact, the recession started that month). At least they were on the right side of the fence.

The 2001 call was borderline, in that it did not advance notice as they are supposed to predict cyclical turns. The current recession was determined to have begun in December 2007 by NBER. In December 2007 (from ECRI's site):

"With Weekly Leading Index growth not far from its lowest reading since the 2001 recession, U.S. growth prospects have clearly darkened, but a recession is still not inevitable," said Lakshman Achuthan, managing director at ECRI.

OK, fine, let's assume that ECRI did not agree with NBER that the recession started in December 2007.

In late March 2008, they gave the official call:

The U.S. economy is now on a recession track. Yet this is a recession that could have been averted.

I think it is clear, as it was then, was that this was not a recession that could have been averted. No amount of stimulus in late 2007 would have saved Lehman, Bear Stearns, AIG, nor would it have saved the US consumer , nor would it have prevented the US housing bubble from blowing up. No amount of stimulus would have saved the commodity bubble, nor would it have saved the record high profit margins of US corporations. This "averted" is simply a way of deflecting blame on a missed call.

A little late in my opinion, for an organization that is supposed to predict recessions, not call them in real-time time, or after the fact.

This is Strike #1 (i.e. no real advance warning again and quite possibly late by 4 months if you believe NBER, as I do). In fairness to ECRI, their leading indexes did deteriorate by December 2007, but perhaps not early enough or far enough to issue a call. Their leading indexes also did deteriorate in the fall of 2008 to multi-decade lows.

Strike #2:
The Economic Cycle Research Institute's Leading Home Price Index is "pointing to a bottom in home prices" and signaling a recovery in demand, said Lakshman Achuthan, ECRI's managing director.
This was written on May 2007 (on the ECRI site). Oops. Housing prices only really began to plummet after this call.

Strike 3?

Now, ECRI is saying the following (and to their credit, said this back in late April, before the consensus embraced this view):
"We'll definitely see the end of this recession this summer," ECRI managing director Lakshman Achuthan said Wednesday. "As unique and unprecedented as this recession has been, the transition to recovery is showing up in a textbook way in the leading indicator charts."

Achuthan acknowledged that difficulties such as unemployment and excess debt will take a long time to overcome, and that confidence is weak. That's to be expected.

"The general mood is probably overly pessimistic. That's quite normal in the wake of a crisis. There is almost always a giant error of pessimism," he said.
I suspect that their models work better with garden variety recessions, not credit and housing bubble induced depressions. If they blow this call, I think that this will be strike #3 in my book. I suspect we will learn the truth in the next few months, and if I am wrong, I will issue a full apology to ECRI for my criticism on this blog.

While I think ECRI is wrong, I will admit that they are the only thing going for the bull camp in my book.

Update July 9/09: I have made a few small changes to my posting, mostly to clarify a few points (as pointed out by an astute reader: ECRI was definitely not blind to the onset of the current recession). Their leading indexes did do a fairly good job, but either they did not sink far or early enough or the interpretation by Mr. Lakshman Acuthan was not accurate. Mr. Acuthan appears to be a very decent and very intelligent person, and this is not meant as a personal slight. It is simply based on the facts as I see them. I will send the link to this post to ECRI and see if they wish to comment.

Mish

Mish Shedlock has a great blog. It is rare for an American blog to cover Canada, but once in a while, Mish covers the great white north.


An excellent entry today, which is in complete agreement with what I have been writing. Canadians are overextended....

http://globaleconomicanalysis.blogspot.com/2009/07/500000-canadians-90-days-behind-on.html

Sunday, July 5, 2009

Fantastic article

I wanted to refer you all to a great article that I just read on the Canadian housing market and banking system. This is the type of analysis that is sorely lacking in the Globe and Mail and mainstream media in Canada.


http://marketdepth.typepad.com/marketdepth/2009/06/sell-the-banks.html

In particular, I love the analysis on that Kremlin type organization, the CMHC, which I believe is a Fannie Mae Lite.

I agree pretty much 100% with this article, and it basically describes the shenanigans that CMHC is busy concocting in a doomed attempt to avoid a housing collapse.

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