Leading Indicators Predictive Value
Bill King points out that the “LEI, which has increased for five straight months, is heavily weighted to monetary indicators and the stock market. Its predictive value for the stock market has been poor due to over-used monetary stimulus.”
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chart courtesy of Bill King, Ramsey Securities
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The LEI trended lower from 1997 to 2000 as US stocks bubbled. It declined from 2004 to 2008 as the monetary medication carried a diminishing effect on the real economy.
Economist Dr. Michael Hudson notes a related pet peeve: We’re in a phase change where the economic relationships, proportions, leads and lags do not operate as they did in the past. So any mathematical model that’s based on this sequence is going to be junk mathematics. The last time we had junk mathematics we had the big financial crises that we’re bailing out today.
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September 22nd, 2009 at 11:41 am
“junk mathematics.” I believe this is the same as bullshit. A rose by any other name.
We still have our non-junk leading indicators, and they include: increasing unemployment, mortgage resets/balloon payments (CRE and RRE), deflation (eventually followed by run away inflation), unprecedented and dangerous P/E ratios, insider stock liquidation, the Fed/Treasury circle jerk, Federal budget deficits (a.k.a: debt to China), and the end of Federal stimulus.
I no longer wonder how this will end.
September 22nd, 2009 at 11:42 am
A negative divergence between the LEI’s and the stock market could be worth something. A negative divergence won’t tell you WHEN the turn in the market will occur, but may be an indication of how powerful the ensuing reversal will be.
September 22nd, 2009 at 11:57 am
It’s not supposed to! The leading indicator is for the economy, not the stock market. No surprise that the linkage is odd. Remember the stock market axiom that the market leads the economy, which might be the case sometimes. But assuming that both are leading indicators, and one goes up before the other, then voila, they’re inversely related. One is rising; the other is still falling.
September 22nd, 2009 at 12:23 pm
From the entry above: “We’re in a phase change where the economic relationships, proportions, leads and lags do not operate as they did in the past.”
I have been saying this since Spring yet everyone keeps telling me why this is like some other past time when we had recessions. It’s not. The relationships are different. What we’re seeing now is a correction of equities back to the point of equilibrium. That equilibrium, based upon what I believe is a mini boom cycle in the economy, is somewhere in Dow 11,500-12,000. That’s where we’re heading.
September 22nd, 2009 at 12:36 pm
Dollar making new lows every day. I suspect we will see UUP touching $22 anytime soon.
September 22nd, 2009 at 12:45 pm
manhattanguy: I’d take that bet. I think it will easily go to $22 fairly soon. Hopefully it does and continues lower. The indices will continue their ascent more rapidly as a result.
September 22nd, 2009 at 12:53 pm
Wouldn’t all the “mathematical models” have been written by the same Chicago School economists who proved to be completely clueless? Don’t these same Chicago School economists regard fiscal policy as the Bane of All that is Holy and Good?
September 22nd, 2009 at 12:55 pm
Don’t feed the Trolls
September 22nd, 2009 at 1:22 pm
trolls??? where??? let’s send out the battle axe wielding Dwarfs! or possibly some Orcs :-) !!!!
September 22nd, 2009 at 1:29 pm
Ahab – I think the Ents would be a better choice ;-)
September 22nd, 2009 at 1:33 pm
Wow Thor-
I don’t even know what an Ent is- i was pulling from deep within my brain to come up w/ Orcs-
Ralphie May dropped the battle axe wielding Dwarf line in one of his stand ups- funny dude he is
September 22nd, 2009 at 2:06 pm
My recommendation $RAX is on fire. S&P sure aiming for 1100.
September 22nd, 2009 at 2:20 pm
That’s pretty interesting. I’ve see a lot of talking heads talking about that LEI being a good indicator…but this chart makes it look sort of meaningless…. That’s a “noisy” chart….
Notice the big spike in late 2001….well before the market bottomed…
September 22nd, 2009 at 3:19 pm
Any static model will be out-of-phase at some point in every cycle. Models are merely simplified abstractions of the real world, and are only as perfect as the developer of the model… in every case an imperfect human (or derivative of a human)
September 22nd, 2009 at 3:44 pm
Why should anyone expect the LEI predict the stock market? The stock market is actually one of the components of the LEI.
This is a bit like saying my toothpaste is not an effective breakfast food.
As Mr. Natural said: “At home or at work, the right tool for the right job.”
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BR: LEIs are supposed to forecast the economy, and the market is supposed to anticipate economic recoveries, therefore . . .
I dont buy it either, but I thought it was an interesting thesis
September 22nd, 2009 at 4:10 pm
I completely agree. In fact when Laskshman came on here a few months ago and remarked about their similarly flawed gauges at ECRI, I pretty much wrote the same comment as Michael Hudson’s comments today. ie These “experts” rely on too many “models” that fail to take into consideration how fundamentals are different and re-igniting the credit bubble is not a sign of economic recovery. There are too many intellectually lazy people who don’t truly grasp fundamentals. Of course, this very reason is why Wall Street and Frankenstein finance is blowing up in the first place.
September 22nd, 2009 at 5:04 pm
I’ve been following ECRI for many years because they’ve been so consistently right on the direction of the economy. Once again this year they said in April 2009 that the recession would end this summer at a time when nobody was saying that — they were as usual ahead of the pack.
What many people including bdg123 don’t understand is that ECRI does not use any “models,” and their approach is rooted in pre-war boom bust cycles. This is in no way a defense of the LEI which is quite different. How many of you “historians” remember that in April 2009 (when ECRI made their end of recession call) the LEI hadn’t shown a single monthly uptick since June 2008?
Bottom line, if you’re able to set your set your presumptions aside and actually look at the facts about ECRI’s track record you would have more money today.
September 22nd, 2009 at 5:17 pm
Leading Indicators are total bollocks as it is all in the rear view mirror and a lot of the components are basically psychological (stock market, unless you are an EMH moron).
Better to look at real-time quantitative indexes: Baltic Dry, price of gasoline, high yield credit spreads etc..
ECRI didn’t call this recession until we were already in the Slough of Despond. Not very useful really. More tools.
September 22nd, 2009 at 5:28 pm
Go out to the suburbs and satellite communities; a way of life is gone.
The numbers are not capturing this because the Supreme Soviet only sees record harvests.
September 22nd, 2009 at 5:40 pm
Option 1: stay safe inside your comfort zone and place bets on leftback’s assertions.
Option 2: read what ECRI said publicly in March of 2008 (including link to Jan. 2008 public statement):
http://kirklindstrom.blogspot.com/2008/03/ecri-calls-it-recession-of-choice.html
I’m sure there are other options, but before you go there at least read the post.
September 22nd, 2009 at 5:43 pm
The Exurbs were created by and for the real estate industry, and were enabled by cheap gasoline, but fundamentally had no reason to exist except for “affordable housing”. Now that local jobs are disappearing and workers can afford to move inwards and reduce their commute, some of these places will be Ghost Towns and ExUrban Slums.
The economics community sees only the beautiful people of New York and Washington spending government money, indirectly in NYC via bank subsidies, or directly in DC, via government salaries. Meanwhile large parts of the country grind through a recession that feels like a depression in Michigan and Ohio and parts of California.
September 22nd, 2009 at 5:47 pm
owen: No arguments about March’s call by ECRI, but to be honest once the printing started that was really a no-brainer. (BTW, I was bullish in March, one of the few). But missing the prior downturn was unforgivable, rather like a baseball outfielder who makes good catches in spring training but then drops a pop fly in the World Series. Also I doubt that they will predict the double-dip that is likely to result from our increasingly Japanese trajectory.
These guys have no value in forming investment decisions. Always a day late and a dollar short.
September 22nd, 2009 at 6:36 pm
“We’re in a phase change where the economic relationships, proportions, leads and lags do not operate as they did in the past. So any mathematical model that’s based on this sequence is going to be junk mathematics.”
…To which I say to Dr. Hudson…
When did “leads and lags” EVER “operate as they DID in the past” that might have ever helped predict anything like the movement of securities prices over time, Dr. Smartypants?
Furthermore, there is no such thing as junk mathematics – only junk mathematicians. Mathematics, by definition can neither be, nor can it produce junk. Junk is what idiots who misapply mathematical principles think about the results from their misapplication, and in particular, when these same imbeciles choose to misapply perfectly good math in pursuit of truth in poorly conceived projects where math has no real place vis. predicting the future value of traded securities or commodities with any certainty just like you are fallaciously assuming possible.
In fact, if the use of any *real* mathematical principles, logically sound and duly proven, were indeed involved in the precipitation of the recent financial crisis, or its precursors – it was the entirely the due to the poor judgment of the boundlessly foolish and single-minded pedants who now draw financial firms’ paychecks; half-educated aspirants who spend their private time math-terbating to fantasies involving a long-since discredited 17th century mechanical universe fetish, “the secrets of God’s universe (and market patterns) are written in the language of mathematics, just give us time and we’ll solve EVERYTHING.”
That’s right my non tenure track, nerdy little geeks, go ahead and take your physics lecture notes and show them boys on Wall Street just how clever you are. Tell’em all about how you can square the financial circle, no matter that your microscopic common sense is screaming to you otherwise when you are smacked in the face with the *real* world outside your professors’ offices.
The financial burden we are all paying now is unfortunately what we get for allowing ourselves to accept assurances and risks defined by a handful of big shot aholes backed by a group of precocious pseudo-scholars – a useless band of smug, juvenile parvenus, who haven’t a clue what they’re really doing, nor care much either – instead of depending on our own native faculties of reason to guide us as we should have.
September 22nd, 2009 at 10:18 pm
Leftback: When you said, “ECRI didn’t call this recession until we were already in the Slough of Despond,” it sounded like you were saying they missed the recession call.
Now you say, “no argument?” Did you really click through and read the January post? I kind of doubt it. Here is the best description of their March (and January call) that I can find.
http://kirklindstrom.blogspot.com/2008/03/ecri-calls-it-recession-of-choice.html
I find it helpful in building my conviction level that ECRI is right and the double-dippers are wrong.
As for your comment that they’re “a day late and a dollar short,” it doesn’t add up. I have to troll for their public statements (which I doubt are the that fresh) and if you take March 2008 as their recession call (really it was January for an astute follower) and April 2009 as their recovery call you have the S&P at 1315 and 842 respectively. If you took them seriously you saved 473 points on the S&P. Furthermore if you got in around April you’re now up 230 points for over a 600 point swing. Aren’t you just making stuff up when you say “a day late and a dollar short?”
September 22nd, 2009 at 10:43 pm
Sorry, it’s late… over a 700 point S&P swing.