Posts filed under “Cycles”
I disagree with the New Normal thesis, but for very different reasons than Fisher does. (Note: I am a fan of his book, The Wall Street Waltz). I’ll post more on this later this week, but the shorter version is: The past few decades have been aberrational, and we are returning to the old normal.
As to the markets, I still believe the same thing I first observed in 2002: This is a secular Bear market, one likely to last 10-20 years, with strong rallies and selloffs occurring on a regular cyclical basis (think 1966-82).
I assume the next Bull market will start some time in the coming decade — 2015? 2017? Based on that, they both can be partially correct — the next few years can show mediocre returns, followed by a nice surge into 2020 and beyond.
“The next decade will be as good for investors as the 1990s, said Ken Fisher, the billionaire chief executive officer of Fisher Investments Inc., dismissing notions that developed economies face below-average growth.
Fisher said the concept of a “new normal” is “idiotic,” pitting him against money managers including Mohamed El-Erian, the CEO of Pacific Investment Management Co., which coined the term to describe a world of high unemployment, more regulation, and the shrinking importance of the U.S. in the global economy.
“We are chimpanzees with no memory,” Fisher said at the Forbes Global CEO Conference in Sydney. “The next 10 years are going to be just as good as the 1990s. The problems in this current environment we think are so different, and so new and so unique. It’s the same stupid old normal we’ve always had. We’ve got a great future.”
Where I disagree with Fisher is on the Fundamentals — in the 1990s, we had a massive build out in numerous tech industries: PCs, Networks, Software, Mobile, Storage, Semiconductors, etc. These are now much more mature industries, with the hockey stick portion of growth behind us.
I am less inclined to believe that alt.energy (solar, batteries, biofuel) nano-tech, and genetics can ramp up to that level of revenue and profit.
Ken Fisher Dubs Pimco’s New Normal Concept ‘Idiotic’
Angus Whitley and Jacob Greber
Bloomberg, Sept. 28 2010
There was a ton of data released last week, some of which we only get quarterly or annually. It would be virtually impossible to comment on all the items of interest contained in just three of the more bountiful reports — the Census Bureau’s annual release of Income, Poverty and Health Insurance in the United States, the quarterly Fed Flow of Funds report (one of my favorites, even though the data’s always a bit stale), and the monthly Small Business Economic Trends report from the National Federation of Independent Business. That said, here are a few items that caught my eye which tend to be overlooked and not reported elsewhere.
Among the things that jumped out at me in last week’s Income, Poverty and Health Insurance in the United States: 2009, which is always a fascinating read, was the virtually stagnant condition of household formation in the United States. Page 13 of the report shows the number of households in the U.S. in 2008 as 117,181,000. For 2009, Census tells us the number rose to 117,538,000, for a gain of 0.30%, the lowest growth rate on record according to their database (and eclipsing what had been the previous lowest on record — 0.34% — in 2008).
Here’s a graphic (calculated using Table HH-1):
The formation of new households is obviously critical for the growth of the economy for more reasons than I could detail here (think housing, for starters, then move on to durable goods, then perhaps autos). While one would expect the rate to decline in hard times (job insecurity, wage stagnation), a continuation of this trend will only serve to exacerbate some of the challenges we’re trying to work through.
[ADDING 9/20/2010: We have heard from Calculated Risk regarding the usability/utility of the chart above and the underlying data from which I derived it (i.e. it tends to be unreliable as a time series). In fact, CR had a post here just Saturday on this very topic; readers are encouraged to have a look. That said, we do clearly agree that “combined data suggest extremely slow growth over the last few years,” and that is my overarching point.]
HOUSEHOLD OWNERSHIP OF TREASURIES
Turning to Friday’s Fed Flow of Funds report, I noted that Treasury securities on the balance sheet of U.S. households have exploded — by $616 billion from the second quarter of 2009 to the second quarter of 2010. From $447.448B to 1.063622T:
Now, this is not to say I am in the bond bubble camp, as I am not. I am merely pointing out that the flight to safety is — and will likely continue to be — in full effect as economic uncertainty prevails and boomers (and retirees) struggle to get what safe income they can. I would also note that part of this equation probably has to do with the fact that — at ~2.75% on the 10-year — it takes a lot more bonds money to produce the same income than it would at, say, 5% or higher. None of this is to say that Treasuries represent a significant percent of household assets — they do not. But the almost vertical rise in dollar terms is noteworthy.
As Americans continue the long, hard slog of balance sheet repair, it is encouraging to see owners’ equity as a percent of real estate on the mend, though there’s a long way to go:
NATIONAL FEDERATION OF INDEPENDENT BUSINESS – SMALL BUSINESS ECONOMIC TRENDS
The NFIB put out its Small Business Economic Trends report last week, and although the Optimism Index eked out a modest gain (though still mired in recessionary terrain), much of the commentary was downright depressing:
There is no life in the jobs market.
The environment for capital spending is not good.
The weak economy continued to put downward pressure on prices.
Those looking for loans predominately are looking for cash flow support, not funds to expand or hire (see Small Business Credit in a Recession, 12/09).
Overall, 91 percent of the owners reported all their credit needs met or they did not want to borrow, unchanged from July.
The first two comments are fairly obvious to anyone with a pulse living in the United States. The third comment — supported by two inflation-related releases last week — argues that a deflationary scenario is not out of the question. The fourth comment is very troubling, in my opinion. It is disheartening to see that those businesses seeking credit are doing so to support their cash flow needs. Over time, without a more sustained recovery, that will not end well. While it is encouraging to see that 91% of small businesses either do not want to borrow or are having their borrowing needs met, it does call into question the talking point that “banks aren’t lending” or “credit is not available.” Finally, I would note that Poor Sales continue to be the Number One problem cited by small business — above Taxes, Gov’t Regulation/Red Tape, or any other issue: “What businesses need are customers, giving them a reason to hire and make capital expenditures and borrow to support those activities.” So for all the rhetoric about “uncertainty,” the simple fact of the matter is a lack of demand.
AND A WORD ON INFLATION after the jump
Is it possible that Dickens was trying to reconcile two seemingly conflicting charts of the labor market when he penned that famous line?
We’re all reminded, month after tedious month, that this is the mother of all jobless recoveries. One of the charts I (Invictus) have seen used most widely appears every month over at the most excellent Calculated Risk website (first chart in post at link). I (Invictus) get sick just looking at it. Bill’s chart is, of course, accurate (sickening though it may be). Other such charts and graphs have proliferated, and most discuss job losses since the onset of recession in December 2007, or something to that effect. David Rosenberg has frequently mentioned the hideousness of the job market “xx months since the recession’s start.” And he, too, is correct. (Aside: Can’t wait to see who still refers to me as BR in the comments.)
Here’s how one media report put it:
By almost every measure, the economy has been expanding at a healthy pace for six months. But the nation’s employers remain stubbornly reluctant to add jobs in the United States. [...] Another [reason for lack of hiring] is rising productivity, squeezing more work from existing staff and other efficiencies. [...] Despite strong economic growth since last summer, the current recovery started out very slowly and that helps to explain the lack of hiring.
That report, from the NY Times, is dated March 6, 2004, fully three years from the onset of the 2001 recession. And there’s this post’s “the more things change” reference.
If the economy is in recovery — a new cycle – for the the past 13 (or so) months — “technical” or not — should we perhaps be looking at the employment situation relative to the trough now, and not to the last peak? To be clear, I am not advocating hard one way or the other (though I will offer some thoughts in closing), simply pointing out that if the recession ended — as many, including the St. Louis Fed (see: Dude, Where’s My Recession Bar, Jan 2010, and St. Louis Fed Tracks Nascent Expansion, Mar 2010) – perhaps we should now be looking at our experience from the trough? This is more my offering an item for discussion than taking a stand on the issue — both sides have valid arguments.
Both of the following statements are true, and neither contradicts the other: We experienced the worst labor market recession since the Great Depression. From the trough, the labor market is generating jobs at a faster pace than the previous two recessions.
Let’s get to the topic of what date is used as the peg from which to measure. Here are the relevant charts, but first a few notes:
1) To avoid running into census worker issues, I have chosen to use Private Sector payrolls (USPRIV at the St. Louis Fed). We’ll keep the government out of this and focus on the private sector. Makes the comparisons apples-to-apples, as census was not at play in 2001 or 1991.
2) Y-axis scales on the two charts differ slightly and are set to best show changes.
3) BR stole a bit of my thunder by posting Kasriel’s related chart in a recent post, as it drives home a similar point in a totally different context (i.e. Boskin’s a lying sack of shit). For the record, my post was a work-in-progress at that time and in no way a result of the Kasriel post.
So, first let’s look at a chart indexed to 100 at the beginning of the past three recessions (and below that a chart indexed to their ends, two of which we know, the last we assume) — 2007, 2001 and 1990. Immediately below is what is generally seen floating around in various iterations and has become the de facto representation of the job market. Many charts show more recessions, or averages, or maximums and minimum. I’m focused on 2001 and 1990 because they defined modern-day “jobless recoveries” and are thus the appropriate choices. (It occurs to me that the phrase “jobless recovery” itself, by definition, arguably demands that we focus on the “recovery” and not the “recession,” or we would name it otherwise.)
True claim: “This is/was the worst job market since the onset of recession since the Great Depression.”
Now let’s have a look at labor market performance from business cycle bottoms, and I’ll offer the following question: Is this the more relevant yardstick at this point in time?
Today’s chart of the day comes to us via Reza Moghadam, who writes at IMF Direct. The chart makes it readily apparent that the so-called 100 year floods seem to come along every decade or so: > click for larger chart Chart courtesy of IMF > Source: Global Safety Nets: Crisis Prevention in an Age…Read More
Last week, we reviewed the History of US Interest Rates: 1790-Present via Doug Kass. Following that, several of you pointed us to this fascinating 60 year cycle in interest rates. It is quite compelling, to say the least: > chart from McClellan Financial Publications
The following was written by Lakshman Achuthan and Anirvan Banerji, co-founders of ECRI:
“As Geoffrey H. Moore once reminded us, if you can ‘predict’ a recession just as it’s beginning you are doing very well as a forecaster.” We recalled our mentor’s observation in our book, Beating the Business Cycle, and it’s just as relevant today as it ever was.
With the economy slowing, the double-dip recession debate has naturally assumed center stage. Perhaps you already know something about the Economic Cycle Research Institute (ECRI) or the Weekly Leading Index from your favorite analyst, commentator or blog. But, as debates go, this one is becoming heated and ECRI is being misrepresented more often than not. We write this note in an effort to address the more extreme misperceptions.
Recent diatribes from investment managers with blogs have culminated in an accusation that we are dishonest when it comes to ECRI’s forecast track record in the lead-up to the 2007-09 recession. Having ECRI’s forecast challenged is nothing new, but we’ve never had our professional integrity called into question, until now. Criticism of our work comes with the territory, but such charges do not. Therefore we ask you to consider what’s been left out of that narrative and, more importantly, why. Inquiring minds would surely investigate before accepting such character assassination.
One would find that the facts are willfully misrepresented, perhaps in an attempt to undermine ECRI’s credibility when expedient. Our detractor’s declaration is based on a cherry-picked quote from a PowerPoint file (including discussion notes) that we posted on our website on October 5, 2009. Ten months later, on Aug. 4, 2010, the charge was that “ECRI is caught” in an “Outright Lie,” saying that we claim to have forecast the recession in November 2007. This is simply made up.
Evidence offered to support this allegation resides on the third slide of 23 from an October 2009 ECRI presentation titled The Great Recession and Recovery. That slide shows our Weekly Leading Index (WLI) and includes an ECRI discussion note for the presentation saying that the WLI has been around for over a quarter century and that “it has correctly predicted every recession and recovery in real-time.”
In fact, that statement is undeniably true. The WLI peaked and went into a cyclical downturn six months before the recession began. So this is hardly a smoking gun.
In evaluating the performance of any leading indicator, the key question is whether its cyclical turn occurred before the cyclical turn in the economy. If so, the follow-on question is whether that lead occurred in real time, or showed up only in revised data. In the case in question the WLI peak occurred well before the business cycle peak, in real time. That was the point of that slide.
But, nowhere on the slide in question does ECRI claim to have predicted the recession. Nowhere do we equate ECRI to the WLI. To the contrary, a few slides later, we say that ECRI called the recession in March 2008. It’s inconceivable that anyone attending the actual presentation, or reviewing the presentation in retrospect, could come away believing otherwise.
To be clear, our detractors are capable of understanding what we’ve been saying all along. On July 20, 2010 they wrote:
“I suppose you can see how confusing this is when the WLI ‘has correctly predicted every recession and recovery in real time’ yet Lakshman Achuthan also says … ‘In fact, at the very least, ECRI itself would need to see a ‘pronounced, pervasive and persistent’ decline in the level of the WLI (not merely negative readings in its growth rate) following a ‘pronounced, pervasive and persistent’ decline in ECRI’s U.S. Long Leading Index (not discussed in the article), before it makes a recession call.’ That is a clear statement that the WLI cannot in and of itself predict anything unless it follows the ECRI’s U.S. Long Leading Index.”
That focus on our “clear statement” is correct. In fact, ECRI interprets the WLI in the context of our full array of leading indexes (including the Long Leading Index) as outlined in chapter seven of Beating the Business Cycle (Doubleday, 2004). And yet, these critics try to malign ECRI by conflating the WLI’s movements with ECRI’s recession calls.
The Whole Truth
Just go to The Great Recession and Recovery, which provides a clear timeline of ECRI’s forecasts from the fall of 2007 through summer 2009. We encourage you to examine the full presentation firsthand, but here are the pertinent slides from that presentation, starting with the third slide:
The 56 year cycle mentioned yesterday (“Periods When to Make Money” (© 1883) was picked up by FT Alphaville; we hear it caused some “consternation” in certain circles where the marinating of ice cubes takes place. I find these approaches quite fascinating, if for no other reason than I consider myself a student of market…Read More
Yesterday, we looked at Long Term Market Cycles dating back to 1927; Today, lets have a look at periodicity dating back to 1763. The cycle the (unknown) author posis is a repeating 16/18/20 year Across the top is the legend “Years in which panics have occurred and will occur again.” The past panic century of…Read More
You may recall that last month we picked up on a troubling signpost in the divergence between temporary hiring and private sector payrolls (less temps). In that post, I produced the following chart (below is from last month’s post, not updated with most current data): I wrote: But here’s the thing: Temp jobs are now…Read More
(Invictus here, friends. Please note that technical problems booted me out of this post before I was done with it, and it posted before I could get back in. Therefore I’m doing I’ve done some after-the-fact editing, which I would normally not do.) As readers may know, I have used some pixels here and elsewhere exploring what…Read More