ECRI: Follow up to a "famous" post

This is a long overdue post following up on my "famous" post on ECRI from July 2009. This post was quite widely read, including a mention from Mish and Barry Ritholz.


Everyone makes mistakes. I have made many (ex. I thought that a double dip recession would start in 2010 and I did not think the market would ever hit 1300 again back in 2009). I just wish that ECRI would have admitted that they were a little late in calling the last recession. I don’t agree that there was a unique opportunity to avoid recession and Lehman in early 2008. I wish they would admit that they blew the housing market call in 2007. I wish they would stop using selective passages to market their past track record (as Mish has chronicled well a few times).

That being said, I admit that I was wrong back in July 2009 and ECRI was right (their call was made on April 30, 2009), when they were among the biggest bulls on the economy and they correctly stated that  "We'll definitely see the end of this recession this summer."

According to NBER, the recession ended in June 2009. I issue a full apology to ECRI for that particular criticism.

Now that past issues are out of the way, let’s focus on 2010. ECRI was once again right in their call that the economy would not double dip, despite a huge drop in the publicly disclosed WLI Index.  (Once again, I thought we would double dip, but I was wrong).

Now, as of September 2011, ECRI has come out with their “recession is inevitable” call. Now that the stock market has rallied big time since early October, people are getting a little nasty with ECRI as this recent CNBC interview demonstrates. The fact that ECRI's call is coming in the face of a sharp stock market rally (as was also the case in 2001 and 2008) and is being attacked by many, gives me further confidence that they are right.

It is possible that their call is one again late, as GDP was very slow in Q1 and Q2 2011, and with further revisions, it is possible that a recession has already started.

It is also possible that the recession will start soon (the best case scenario for ECRI). I agree with Lakshman that the stock market is nowcasting and likely responding to coincident indicators.

I greatly respect ECRI’s opinion, since they have no false calls and they were way ahead of the consensus on their 2001 and 2008 recession calls. They are back in my good book after their excellent calls of 2009 and 2010.

As far as I know, the consensus has never once predicted a recession. The Steve Liesmans and mainstream economists of the world will never tell you about one until it is well established.

My personal view, outside of the information from ECRI, is that we are going back to recession. John Hussman has laid out a compelling argument. Nothing is 100%, as he correctly states, but a recession is quite likely. 

Blogging

I haven't blogged for a long time. I just can't find the time given that family and work seem to take up nearly all of my time. Unfortunately, blogging also doesn't pay well for me, so as much as I would like to continue blogging and I have appreciated all the valuable comments, I don't think it will be possible, beyond an occasional comment.

The markets seem to finally waking up to the fact that there is just too much damn debt out there. Another recession is likely looming and with it, a bear market as well. A QE3 announcement from the Fed is more and more likely (although it will be interesting to see if the Tea Party is able to defeat it) and maybe another rally, but it appears that the markets are coming to the conclusion that you can not solve a credit problem with more credit.

Italy with $2 trillion of debt (about as much as Germany) can only be bailed out if it decides to give its sovereignty to Germany. Ditto for Spain. It can't be that easy as wars were fought over this type of thing in the past.

I still have all my long term bearish views from the past. However, I have learned from my mistake of being too bearish, on a cyclical basis, that when the sun is out, you need to go out and play. I was very bullish on certain stocks such as CMG and LULU but my bearishness prevented me from buying them once the market set a low in March 2009 (likely not THE low in my opinion). I subscribe to the Investor's Business Daily (William O'Neil) approach and if the market does give buy signals again, I will look for stocks.

For now, cash is king.  Preferably US cash, in my humble opinion.

Disclosure: long US cash, short Euro and the loonie

PIMCO vs Spain

From today's WSJ:

Prime Minister José Luis Rodríguez Zapatero declared that the European debt crisis is over but said that the governments have to work better together and with markets to stave off such events.

"I believe that the debt crisis affecting Spain, and the euro zone in general, has passed," Mr. Zapatero said in an interview with The Wall Street Journal on Tuesday.

Mr. Zapatero said his message is that "confidence has been restored," particularly after the country released results of tests that evaluated the soundness of its banking system in late July. The risk aversion toward Spain has also subsided as the government has shown progress in reducing its deficit. 

PIMCO is saying the exact opposite.

“Market measures of risk for peripheral European countries (Greece, Ireland, Portugal and Spain) are at or near danger levels,” El-Erian wrote in an article posted Monday on Pimco’s Web site.
That’s despite “exceptional” support from the European Central Bank, the European Union and the International Monetary Fund, he added.
“The failure to reduce risk spreads means that the public sector bailout is not working,” El-Erian wrote. Rather than provide assurances of better times ahead and, thus, encourage new investments, ECB/EU/IMF support funding is being used by existing investors to exit their exposures to the most vulnerable peripheral European countries.”

I don't always agree with PIMCO as I believe that they are often talking their book (by pushing for government intervention in Fannie/Freddie while they hold billions of their bonds). Spain is "talking their book" as well, as they hope to build confidence in their economy and their bonds. However, in this case, I side with PIMCO.

History is littered with these types of statements just at the time that crisis worsens. In May 2008, there were tons of declarations that the credit crunch was over, when in reality, it was only a pause before the real credit crunch started.

The Euro is approaching its summer highs at 1.34 as it ignores the developments that PIMCO highlighted, but I believe that before the year is done, we should see a return to the 1.15-1.25 range that I highlighted back in late 2009 when the Euro was near 1.48.

Ultimately, the Euro is heading back to par or lower but that may be something for 2011 or 2012. I believe that a super strong US dollar would wreak havoc on the stock market.

Disclosure: Position in the Euro and US dollar.

Great interview with Robert Prechter

I wanted to pass along this great interview with legendary Robert Prechter of Elliot Wave International. Mr Prechter wrote an amazing book, Conquer the Crash back in 2002





and updated it in 2009,







Much of what he predicted is happening, albeit much later than even he had thought back then. I highly recommend this book. It predicted the demise of Fannie, the current deflationary depression, the meltdown in the financial system, etc...


Anyway, this interview by the Daily Crux explains the deflation camp thesis very well and also surprisingly mentions Toronto (and Canada by extension)...

Crux: Well, not everything. Gold is at all-time highs...

Prechter: And so are Toronto real estate and vintage wine. But let's put these markets in perspective.

Prechter goes on to say later:

Here in 2010, a few late bloomers are making new all-time highs. I never thought the long-term inflationary topping process would take this long, but it has.

At each of these peaks, investors have focused on one area or another. Every time it's happened, the area of focus has reversed trend, plummeting in price by 50% or more. 

This latest credit reflation is the weakest yet, so it hardly inspires confidence that today's isolated bull markets will end any differently. Each time a bull market matures, investors are sure it can't reverse. They said that about technology and Internet stocks; they said it about real estate; they said it about oil.

Now that a couple of markets are at all-time highs, we hear the same argument about them. This is natural, because investors always want to own markets that are way up. But investors in those previous booms are never going to get back to break even. Many of them were ruined.

Imagine a 50% price drop in Toronto!...Ultimately, I believe that the US real estate market is heading to a roughly 50% crash (it is at 30% right now). It sounds crazy to think that Toronto (and much of the Canadian real estate market) are going to drop 50% as well, but the history of bubbles indicates that as "today's isolated bull markets" reverse, such a drop may indeed happen.

Your parents' advice is wrong!

Now that all the Obama adminstration housing gimmicks are finished, housing is heading back down after a brief bounce the past year.

I believe that all these gimmicks did is postpone the decline, waste taxpayers money and favor those that made mistakes with their housing decisions.

Housing sales dropped 27% to their lowest level since 1995, and point to a renewed drop in prices in the months ahead. The news was not unexpected, and adds to the recent dismal news in retail sales and unemployment. The only positives that I can see in the US economy right now is the ISM is still positive and corporate profits are strong. The ISM may turn soon and it will be interesting to see if there are any earnings pre-announcements in the coming weeks that point to weakening profits.

I also found this WSJ article interesting:

In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.
With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.
“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.
For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.
The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.

In the US (and especially California), people STILL expect housing to go up 10% a year! With inflation near zero, that is an astronomical assumption. That would put housing prices at record highs (even after inflation) by the middle part of this decade. These people just assume that what happened over the past few years was just a correction.

It is interesting how the housing wisdom of the Baby Boomers and the Silent Generation (in the parlance of Howe and Strauss) is actually not sound advice. And I hear it all the time from people my age and my parents generation. Even after the events in the US of the past few years. Renting is throwing away money in their view. Throughout most of their lifetimes, it was and housing has produced incredible wealth. In reality, it really was but a rare confluence of "a 100 year flood" type events concentrated in about 25 years.

Even in the best of years before the 1997 housing bubble, housing returned about 1% above inflation. I think it will take another 5-10 years to kill this 10% mentality (via a renewed 20-30% drop in home prices in the US over the next few years, followed by little or no appreciation for another few years). Then, maybe, housing will return to its traditional role as a necessary consumer durable but not an investment for most people.

US GDP contracted in May & June

As a follow up to my view that a double dip has started(if indeed the recession truly ended- I don't believe it did!). Courtesy of Gluskin Scheff's David Rosenberg, whose awesome daily publication is free(!!):

Our suspicions have been confirmed — the recession never ended. Macroeconomic Advisers produces a monthly U.S. real GDP series and it shows that the peak was in April, as we expected, with both May and June down 0.4% in the worst back-to-back performance since the economy was crying Uncle! back in the depths of despair in September-October 2008. The quarterly data show that Q2 stands at a +1.1% annual rate (so look for a steep downward revision for last quarter) and the “build in” for Q3 is -1.5% at an annual rate. Depending on the data flow through the July-September period, it looks like we could see a -0.5% to -1% annualized pace for the current quarter. Most economists have cut their forecasts but are still in a +2.5% to +3.5% range. What is truly amazing is that despite all the fiscal, monetary, and bailout stimulus, the level of real economy activity, as per the M.A. monthly data, is still 2.5% below the prior peak. To put this fact into context, the entire peak to trough contraction in the 2001 recession was 1.3%! That is incredible.

As I stated in June:

I believe that double dip has likely started. Yes, I know that economists have solid growth projected for 2010. I listen to the market, which is speakly very loudly right now. By the time, these bookish economists wake up, the S&P will be at 850.

As the great Bob Hoye has researched, in a post-bubble credit contraction, the economy and stock market often peak at the same time. The high in the 1873 and 1929 stock market was was September, and the respective depressions started in October and August respectively. In 2007, the stock market peaked in October, the recession started in December.

This clear peak in April, if it holds and if the stock market continues to sell off, likely means that a double dip has either started or will start very soon.

Now, I incorrectly thought that we would hit 950 in July (the lowest was 1010), but I have not changed my view about 850 by October as a recession becomes factored in as a possibility by the economists on Wall Street. Currently, they are bringing their numbers down to the slowdown camp. There are few forecasting an outright recession at this point, despite the fact that Q2 GDP will be revised down to 1.5% and Q3 looks even worse.

Now that Macroeconomic Advisers has put out a negative number for May/June, this lends credence to what I stated. The horrible economic data of recent weeks is also further confirming my suspicion that as is typical in a post-bubble credit contraction, the economy and the stock market peak at the same time. Using ISM as a guide for monthly GDP, it peaked in April. So did the S&P at 1220.

A double dip recession is by no means confirmed, but it is becoming more and more likely by the day.

Disclosure: Positions in HSD, SDS and related options

The "New Normal"

PIMCO has been saying that the economy is in a "New Normal" whereby the world economy will grow slower, be more regulated, have higher unemployment and continue to deleverage.

Earlier in 2010, when the cyclical rebound was in full swing, the New Normal was derided.

Bloomberg in January had an article featuring critics of the New Normal:

Christopher Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ in New York, who pegs potential growth at 2.6 percent. “We’ve had financial-market crises and big workforce changes before, and growth has pretty consistently come in around 2.5 percent over the past 50 to 60 years.”

I won't profess to know what the economy will do over the next 50 to 60 years. It is indeed possible that growth could come in around 2.5% or even better. What I do know is that the past 50 to 60 years have featured an incredible debt buildup, especially the second half of that period. If we do grow at 2.5%+, it will be not be fueled by bubble credit. That 2.5% will need to be based on a more sustainable and more efficient foundation.

The jist of Pimco's new normal is that the bubble credit that fueled growth the past few decades is over. The de-leveraging will lead to slow growth for at least 3 to 5 years. This is not your normal post WWII recovery (if it is indeed a recovery).

Is it normal that:

1) Nearly 3 years after the recession started, the unemployment rate is near 10%?
2) That trillions of dollars were used (wasted?) on quantitative easing (QE)?
3) That house prices and stock prices are 30% below their peak AFTER a one year rebound?
4) Interest rates are at zero and will likely remain there for an extended period?
5) Annual deficits are measured in TRILLIONS!? We used to shudder at a $200 billion deficit.
6) One year in to the recovery, we are contemplating a second trillion dollar QE?

And yet, despite these (and numerous other proofs), much of Wall Street plugs in typical 2.5% growth for the next few quarters and years, as if things are the old normal.

The debate about the New Normal will likely be resolved soon. Perhaps the economy will grow at 2.5%+ the next few quarters (I don't believe it will), but it likely will not be in the old normal way (where the recovery is self-sustaining). It would be based on more of the same short term solutions that will, at best, buy a little more time. The public is growing weary of these short term band-aid solutions that bankrupt the future for dubious short term gains (hence the Tea Party and plummeting Obama ratings). I believe that the November mid term elections may be very big this year, perhaps similar to November 1994.

Are Obama/Bernanke going to try to pull a few rabbits out of the hat the next few weeks in an effort to avoid a double dip and shore up the prospects for the Democrats? I believe that the American electorate is getting suspicious of the never ending stimulus, and this may lead to even greater voter anger in November. However, Obama seems to be in his own world right now, and sticking to his liberal agenda, despite the fact that US is not a liberal country.

Ultimately, another 2008 crash is coming, once the New Normal becomes the consensus, and we realize that all the gimmicks are not addressing the underlying cause of this mess (too much debt). Just not sure when that happens, but it is likely to happen around the same time as the public anger rises to a peak.