An insightful article today from Bill Hester at Hussman Funds discussing the recent statement from the NBER's Business Cycle Dating Committee saying that it was unable to declare the end of the recession—yet: “Although most indicators have turned up, the committee decided that the determination of the trough data on the basis of current data would be premature.”
Hester's article takes us through the 5 main metrics that the NBER Committee uses to define the end of a recession and shows us why 4 of them are so far faltering well below the average improvement we would normally see at this point in a typical economic recovery. These are the same concerns that Martin Feldstein has noted in his belief that the Business Cycle Dating Committee should postpone declaring the end of the recession. Feldstein has two main concerns. One is that most of the data the group looks at will be revised over the next few months, and it is presently difficult to clearly see a date that the economy turned up. His second point is that this time the recession dating process is “complicated by the fact that we are still far below the levels that the economy was at when it turned down, and in my judgment, there is a continuing risk that this economy could run out of steam and could turn down again.” When we look at the 5 charts in Hester's article we can see Feldstein and the NBER Committee's hesitation to sound the all clear.
A further interesting study, Hester looks at the second year of the presidential cycle and notes that when markets start into the April-September period (which we just entered) at high valuations (present CAPE 22) the average return in these periods was -11%, and includes 2002 when the S&P fell by almost 30%. And following an April to September decline, the markets typically enjoyed a strong 12 month period again starting in the fourth quarter of year two. This market has been looking for a good excuse to test downside support for months now. Maybe this will be it. The economic loss to travel and trade goods caused by Iceland's volcanic ash also won't help the struggling global recovery.
The Hester article is well worth the read. See: Business Cycles, Election Cycles and Potential Risks
On a separate note regarding the Goldman Fraud charges and today's market action. We saw a big sell-off overseas last night and in early trading this morning in North America, followed so far, by a late day rebound. I think the rebound today in North America is a testament to the extreme arrogance of Wall Street and its assumption that the SEC charges will be successfully defeated or bought off in a relatively small fine behind closed doors. I think that they are overly-confident because they have got away with so much for so long. Perhaps they will again.
It is my impression however that this issue will be with financial markets for a lot longer than today's rebound admits. I would suggest that present optimism is another opportunity to sell risk into strength and opt for caution over the next few months while some of these key themes play out.
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Danielle,
Do you ever feel that acting on what you know to be sound economics and moral is not prudent in a market place that is so full of corruption, spin, manipulation etc?
If the players on Wall Street were able to push the DOW to 14,000 then wouldn't they be able to push it a lot higher since they are now backstopped by the government? (not to mention mark to fiction accounting nonsense)
I have for many months felt the system is rigged and one might be better off betting on the corruption that occurs versus economic fundamentals.
Nope, and I will tell you why. That way lies madness. Manipulators do succeed in artificially inflating asset prices, but they cannot hold them there permanently (as we have seen) and when they fall they fall hard and fast. Not only that but trying to speculate on speculators is a very tricky proposition. As we have seen with GS and Paulson they have a rigged game as they make the products and then play both sides. The odds are against those trying to swim with them. It may seem boring, but in the end sticking to sane rules and careful discipline is the only rational course and gives us the highest probability of surviving as opposed to shiny returns and spectacular blow ups. We stand for something, or we fall for anything. This is the choice each person has to make.
No moral is the “new normal”
http://theburningplatform.com/blog/2010/04/20/america%E2%80%99s-economic-recovery-is-a-rotten-sham/
Glad to see your answer on this, Danielle. Your steadfastness in “standing for something” is a big part of what keeps me coming back to this website. When you share with us that the road is clear for investing once again, I know that your opinion will be based on something more than a need for more clients or more site traffic.
Rather than investing in products I really don't understand or products that might benefit me but only at the expense of others, I have decided to stand aside for now. Our extra money is going into reducing upcoming retirement expenses (paying off our mortage, insulating better to reduce future energy costs, etc.).
For future investing, I am now starting to watch for individual companies with ethical management, whose product or service seems to me fundamentally needed and economically viable. My goal is to assemble a list of 20-30 companies I would be willing to invest in if conditions look favorable.
It's completely irrelevant what the NBER thinks about dating recessions since their methodology is so much out of whack.
They always miss the target by a mile because they glued to the rear view mirror.
Thanks Moses there is ECRI whose dating is right on the money.
Even Gluskin/Sheff, among others, find their work pretty accurate.
The manipulators are a combination of government, the big banks, the Fed and they have the ability to print money out of thin air (something I am sure Greece wishes they could do right now).
In my opinion they are responsible for creating these exaggerated boom and bust cycles… and it defies logic how some believe we are in the midst of a recovery when the factors that contributed to the economic crisis are more pronounced today than before – the only thing we have done is increase the debt and move it off the books of the banks and onto government. Soon we will see entire nations go belly up – but before they do I am thinking they will most certainly use everything in their arsenal which will mean devaluing their currencies.
Perhaps I have been listening too much to Marc Farber! lol
His views about this all ending up in a world war are a bit over the top but he sure makes sense about his long term view on money. The problem I have is determining where to park my money because so much is out there chasing so few assets.