Posts filed under “Cycles”
The Chicago Fed’s National Activity Index – one of my favorite measures — printed this morning. The monthly number edged down slightly, and the 3-month moving average, which the folks in Chicago tell us to focus on, rose somewhat.
Here, however, is the money shot from the release (my bold):
May’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. Moving above +0.20, the index’s three-month moving average in May also reached a level historically associated with a mature economic recovery following a recession. With regard to inflation, the CFNAI-MA3 in May indicates limited inflationary pressure from economic activity over the coming year.
So here’s the Chicago Fed letting us know that we may well have seen the best of what this “recovery” had to offer. I would note that the Personal Consumption and Housing sub-component of the index continued to be mired in negative territory, subtracting 0.42 from the overall print. Now, this is not to imply that a double dip is a foregone conclusion, though that is certainly one outcome. At the very least, it argues for a very slow growth scenario.>
Chicago Fed National Activity Index
Having composed this post, I decided to reach out to my contact at the Chicago Fed to inquire specifically about their use of the word “mature.” He told me that I should read it as if it were “ongoing,” and pointed me to the headline of their piece — Index Shows Economic Activity Continued to Expand in May. I suppose that whether they should have substituted the word “ongoing” for the word “mature” may be a matter for linguists (cunning and otherwise). This may be hair-splitting and nit-picking, but I personally infer a meaning from the word “mature” that it appears the Chi Fed may not have meant to convey. What say you linguists — what does “mature” imply to you?
There is a terrific cover story on the PermaBears in the upcoming BusinessWeek. I spoke with the reporter about some of the bears discussed in the article on background. The March 2009 bullish call managed to keep me off the Perma-bear list, and for that, I am grateful. The article looks at the “bearish forecasters…Read More
This is something that I want to discuss in general terms — I want readers to not only understand my perspective, but to grasp what typically occurs heading into recessions and recoveries, into new bull and bear markets. (Note I am speaking generally, and not referring tot he details of this cycle).
Over the next week, I will put together a broad overview of the positives and negatives of the economy, looking at the risks and opportunities presented. For now, let’s discuss the sentiment that typically accompanies oscillating phenomena, such as markets or the economic cycle.
Today, I want to look at the big overview. Historically, the sentiment that occurs at inflection points are extremes. The are the result of the prior few years of economic/market activity. They lag the cycle — often quite significantly.
• Humans have an unfortunate tendency of to overemphasize our most recent experiences. We draw from what has just happened, rather than deduce based on what is occurring right now.
• Following that idea, the analyst community is typically too bullish at tops, too bearish at bottoms. They extrapolate from the most recent data to infinity or zero. Hence, they miss the inflection points.
• Sentiment is a justification of recent actions. Very often, equity buyers describe themselves as bullish after their purchase. The comments they make can are often an attempt to reassure themselves.
• Changing viewpoints is a gradual process. Flipping from bullish to bearish and vice versa is difficult. We remember what most recently rewarded us, and internalize that. After a period of economic expansion, we are slow to grasp the change for the worse. At the tail end of an ugly recession, we find it hard to imagine an imminent improvement.
• Investors develop the equivalent of Muscle memory. During a bull market, every dip that was bought made us money. When the cycle changes, we are slow to perceive it. Bulls become out of phase with what is taking place, buying on the way down in a bear market.
• The reverse takes place after a long Bear market. Selling rallies made us money, preserved capital during the downturn. When the sell off ends and a new bull cycle begins, the bears have a similar hard time getting back into sync with the market. Since it was so rewarding to sell into prior rallies, it becomes difficult to flip towards the positive perspective.
• Excuse making rationalizing the missed turn becomes endemic. We get conspiracy theories (the Fed is buying SPX minis!), complaints about the artifice of the market, Fed bashing, etc. They all have their roots in the missed turn. I even suspect some of the Goldman bashing (deserved tho it may be) is also partly rooted in this issue.
Consider this chart, which I first showed back in 2005 — but its worth reviewing again:
If you like these sorts of things, there are more psychology visualizations after the jump . . .
I love the mere concept of this chart from Jim Bianco — the CRB Index going all the back to the year 1,450: > courtesy of Bianco Research > About now, you may be saying to yourself, “How on earth could anyone find this ancient data — and can it possibly be accurate?” The answers…Read More
The NY Fed has a curious research piece out, looking at areas of Upstate New York that were “insulated” from housing price volatility. They note that many parts of the country have not experienced dramatic declines in housing prices, and upstate metropolitan areas of Buffalo, Rochester, and Syracuse even enjoyed price increases during the recession….Read More
Here is a fascinating piece of investing arcana — from the St. Louis Fed FRASER archives. A history of booms and busts from 1775- 1944. Emphasis is on post war economies. As described by the paper: A study of the reaction of business activity immediately following previous wars can, in a measure, act as a…Read More
One of the things I hate about a secular bull market — especially towards its rampaging tail end — is how everyone and everything gets silly. Money and champagne flows, conspicuous consumption is on full display. I recall people — literally — dancing on bars during the late 90s in NYC. To be sure, Fed…Read More
By one of those oddly serendipitous coincidences, this week marks not one but two major Wall Street anniversaries: Happy Bottoms: The 12 year low was set one year ago this week. On March 6, 2009, the markets made their “Devil” bottom: The S&P500 hit 666.79, down 57.69% from October 11, 2007 high of 1576.09. The…Read More
The St. Louis Fed has made it official, at least through their lens. The recession ended in June 2009. As you read here first in January, late last year the St. Louis Fed discontinued the use of recession shading (thereby signalling its end) in its graphs as of mid-2009. They have now retooled their Tracking the Recession page to…Read More