Having been a member of the Federal Reserve System, principal duties forayed into the analytical expanses of monetary policy- namely open market operations/reserve requirements- influenced the supply/demand equilibrium of bank balances held at regional Federal Reserve districts as a determinant of federal funds rates. Presiding at the helm of the FOMC, Chairman Ben Bernanke, purveyor of short term interest rates, embarked on a campaign of increasing fed funds rates to obstruct perceived inflationary and credit cycle imbalances. Juxtaposed against this backdrop, was an inverted yield-curve commonly perceived as an ominous indicator of looming economic weakness, which went unheeded by the Chairman of the Federal Reserve Board. Prolonged tight credit policies galvanized deteriorating economic forces by negating banks interest margins, in variably curtailing credit inflows into mortgage bank bonds and an array of credit derivatives.

Ineffectual monetary policies proved decisive as a harbinger of disparate national economic ills: credit-implosion, consumer retrenchment, housing inversion and manufacturing ailments as dire consequences of a monetary and policy dogma gone awry. Pursuant to the fact, a multitude of entities have attempted to either ingratiate their models as the decreed standard in the context of current and prior economic readings all the while disavowing existing models, which have proven infallible and without ill-repute in the context of duration tenable over the course of time. One such blog which has piqued my interest of late is the one under the aegis of Professor Krugman of MISH Global Economic Trend Analysis site. It ensconces itself with erroneous and contrived statements and statistical-tells, misconstruing the work of the acclaimed Economic Cycle Research Institute (ECRI), which has been deemed by the investment community, policy makers, G-7 member nations, among other luminaries as precise in data and statistical veracity stemming the course of a century nigh.

The ostentatious contempt by slander of ECRI’s internationally heralded work as an undefiled accurate gauge of future economic conditions compels me to disavow and decry Trend Analysis’ postulates as bereft of merit as I am keen to underscore. MISH’s blog misconstrues statements as to the ECRI interest rate/oil shock recessionary readings as shocks not pronounced and pervasive enough to the degree of triggering an outright recession in lieu of Weekly Leading Index’s (WLI) buoyancy. The clichéd use of ‘Its different this time’ is unqualified defamation. In haranguing this affront, preceding interest rate/oil shock indicators can be correlated to the Director of Research at the ECRI – Mr. Anirvan Banerji – in his examination of the Katona effect which measures and incorporates attributes of consumer spending to oil-price level gyrations. The volatility of the intermediate standard deviation of food/energy CPI has dovetailed with alacrity underlying movements of consumer spending. It essentially has been espoused that oil-shocks of particular magnitude always portent a recession in conjunction with the ECRI’s vaunted WLI’s, created by Dr. Geoffrey H.Moore. Hence, the ECRI is on official record of disseminating the criteria for the plunge in WLI’s, underscoring the prior quarter’s buoyancy of the economy’s resilience stoked by Fed rate hikes and oil price spikes. Attenuated interest rate level and policy stimuli did not arrive opportunely to stanch impending economic upheaval.

The ECRI’s key denoted aspects are the cogs of the economic wheel scrutinized in data minutiae: inflation; employment; growth. The former indicator is known by the founding institute as the Future Inflation Gauge (FIG). Managing Director of the ECRI, Mr. Lakshman Achuthan, has gone on record at the advent of 2008 incontrovertible to the financial community that WLI and FIG have borne about real-time readings of unequivocal economic downswings which the policy-setting authorities could have thwarted with timely interest rate cuts which never materialized. The dour WLI’s were telegraphed as imminent and manifest danger in spite of a benign FIG reading. As a consequence of inopportune monetary and fiscal stimuli timing, morose indicators including, (but not limited to), leading home price indexes, overall employment, manufacturing (historically 1/3 component aggrandizement of the GDP), services and trade balance impaired piecemeal. These indicators monitor with meticulousness the peaks and troughs of the business cycle within a period of space and time, so as to give a synchronous read on the health of the economy.

As the ECRI has been wont to do over its esteemed existence with a resolutely unmarred real-time record, so too do an amalgamation of leading indices bolster the institute’s call for a ‘V-Shaped’ recovery. Belated stimulus infusions have resulted in an accelerated burst of consumer spending, forcing manufacturers to replenish dilapidated production instead of whittling down already-lean inventories. In response to the Fed allowing M2 money-supply growth to accelerate via its open-market activities, this liquidity in conjunction with a positive turn in private sector borrowing, has supported a cyclical recovery in stocks and nominal GDP with a marked increase in the velocity of money. Weekly and coincident indicators have gained momentum quarter over quarter with rising retail and industrial production numbers buttressing dramatic increases in corporate profits, as rising output has risen sharply and earnings power has recovered. Negative job loss momentum is abating in the wake of improved spending and production. New factory orders are rising indicative of manufacturers newly-engendered confidence. Single and multi-family housing starts, indicative of building permits issued, reported brisk activity signifying an upturn in demand for new housing. In addition, the level of capacity utilization has been gaining momentum in tandem with the aforementioned. Pronounced among all indicators is the S&P 500 index, closely aligned by WLI’s time-tested parallel underlying general directional changes; exhibiting all traits of a V-Shaped recovery, much to the chagrin of the doomsayers.

In summary, the preceding vividly illustrates a preponderance of date sequences embedded within leading and coincident economic indicators which have gauged without flaw directional business cycles over the past century. While ECRI never attests to predicting the magnitude of upheavals and upturns, the trajectory of the discerned move has always been accurately presaged in real-time. It is deplorable that the author of MISH’s Global Economic Trend Analysis resorts to beguilement and disinformation to entreat the reader of the blog to one of the most pronounced and venerable economic forecasting institutes of its time. I, along with views shared by members of the international financial community, laud ECRI principal members’ indefatigable work in striving for and attaining continued detailed conformity to directional business cycle gyrations with paramount exactitude .

ECRI:

this is THE question – why not use the other indexes to predict the indexes? as you know, this is an illogical do-loop.

using the WLI you would have not bought into the pre-march 2008 rallies.

investing is always sectors and timing. the wli is a tool. like any tool, it works only as well as the person who uses it.

there seems to be a lot of anger out there about the current market rally. i have some myself as it seems unfair people profit as others lose their jobs. i am angry at the government for ignoring jobs creation. i am angry at economists for getting us into this mess.

You say ECRI “missed to predict” the latest recession. This is not true.

The real misconception is that the timing of a recession becomes inevitable many months or even years before the fact, and that there is nothing anyone can do in the intervening months and years to alter that timing.

As students of the business cycle we know that this is not true, although policy makers and the economists who serve as their advisers are typically oblivious to the critical importance of policy timing.

It is a fact that our publicly release Weekly Leading Index (WLI) peaked in June of 2007, and therefore had a six-month lead over the recession start date, which we learned, a year after the fact, was in Dec. 2007. Furthermore, the widely followed smoothed annualized growth rate turned negative in August 2007, and by the time the recession began in December 2007 WLI growth was already at its worst reading since the 2001 recession. In other words, even our publicly available leading index showed impeccable performance.

Yet this is the launching point of Mish’s tirade against ECRI:

“ECRI makes the following bold statement: “The [WLI] is an index that’s been around for over a quarter of a century, and over that time (shown here) it has correctly predicted every recession and recovery in real-time.””

What Mish didn’t understand after his 10 hours of research is that this isn’t technical analysis. As we discuss in great detail in our book, “Beating the Business Cycle,” the way you determine whether a decline in the WLI is a recession signal is based on how pronounced, pervasive and persistent the declines are in the WLI and its components compared to past recessionary downturns. For example, Mish asserts that the WLI made a false signal in 1987 following the crash. Totally not true. Sticking to our methodology (developed over many decades, not hours) we knew at the time that despite widespread recession fears, there was really no recession risk. The views of our group (we were at Columbia University at the time) was highlighted on page one of The Wall Street Journal as a contrarian call.

Back to my recession call. But the situation was more complicated in the lead up to the recession. We were well aware of the housing and credit problems, and the reluctance of the Fed to move quickly (a whole ‘nother story), but we were aware of a highly unique opportunity of policy intervention from the fiscal side which is practically never a timely option. Specifically, even though manufacturing employment is now only 9% of total payroll employment, in every past recession they had constituted the majority of job losses. We knew that once recessionary job losses began, foreclosures would shoot up, home prices would plunge and there was therefore a risk that the credit crisis would flare out of control. But because of rising recession fears throughout 2007 businesses had slashed inventories to bare-bones levels by November 2007 (the opposite of a normal cyclical pattern), providing an opportunity to create “an inventory short squeeze” that would have postponed the recession at least for a quarter or two, providing a window of time to mitigate the credit crisis.

With this understanding, we allowed that the recession was not a done deal even though we publicly stated in January 2008 that, “a self-reinforcing downturn has already begun. If allowed to continue, it will amount to the vicious cycle known as a business cycle recession.” http://kirklindstrom.blogspot.com/2008/01/ecri-says-there-is-window-of.html

I want to share something else with you all. Some have questioned our motives in all of this. ECRI’s mission is to preserve and advance business cycle research in the tradition established by its founder Geoffrey H. Moore. Also, as far as possible, we are here to help people using our insights from the study of the business cycle. That’s the main reason why we give some of our research away freely. In early January 2008 I personally went to Washington to highlight the extreme risk to the national economy, and the need for urgent action using all policy levers, but especially those that would get money into consumers hands IMMEDIATELY because even if they spent some of that money manufacturers would need to scramble to meet demand, forestalling the otherwise inevitable layoffs, until the lagged effect of monetary policy could begin to provide some cushion. In the days that followed monetary and fiscal policy makers certainly talked the talk, you might recall, slashing rates and enacting the first stimulus package – remember that? Perhaps this was all that was politically possible, but the fiscal stimulus wasn’t designed to hit the economy until about six months after the beginning of recession.

That is why we wrote publicly in January 2008, “Imagine a large Roman column that has just started to topple. At that moment, a modest push back near the top would be enough to right it again. But if its fall gains momentum, it would be virtually impossible to stop it from crashing down. Today, the column that is the expansion has just begun to tip.” Calling for prompt stimulus to temporarily boost consumer spending, we emphasized that “time is truly of the essence – the stimulus is needed in a matter of weeks, not months.”

In early February I told U.S. News & World Report that “The window of opportunity to avert a U.S. recession is about to slam shut. This isn’t good.”

Regarding debt and employment, it is important to understand that some measures cited by analysts like the jobless rate and the savings rate always rise in the early stage of recovery. If those were bars to recovery we’d never have had any recoveries. As far as debt is concerned, that is something that has built up over a long time, as you point out, and will remain a drag on the economy for a long time as a result. The key point is that this does not preclude the business cycle recovery. In fact, our leading indexes are saying that the business cycle dynamics that dictate a snap-back from a deep recession (not the stimulus) is what is driving the recovery forward, and that is why it is currently unstoppable. This is really all about timing.

As students of the business cycle we are confident that there will be another recession, the only question is when. At this time time our leading indexes are telling us very objectively that the next recession will not arrive before mid 2010 at the earliest, that’s all.

I would reply to Steve Hansen and ask him following:

The only thing I can see from the graph with WLI and S&P 500 is how strongly correlated they are. This suggest that some US stock market index is a major component of the WLI. I don’t understand how the WLI is supposed to help with investing or trading, if there isn’t any regular lead to the S&P 500. Why not using the Nasdaq as predictor for the S&P 500 then? Or just the auto-correlation of the S&P 500?

rc

charlatan

StatArb,

I’m a little slow on the uptake when it comes to certain things, If you wouldn’t mind, could you clearify what you intended in your post, above?

At this point we know the recession started in 2007 but we do not know whether immediate stimulus could have turned things around in Jan/Feb 2008. The mistake may be by those of you planning to time the top and bottom with ECRI calls. As CXO advisory has demonstrated, the WLI is more or less coincident with the stock market. And I guess you could have still beaten the market when they did make their recession calls although you could probably have done better just by looking at the 200-day SMA and using Mebane Faber’s strategy.

charlatan