The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Last week, we ran this series of Sentiment charts.

Today, I want to share with you a few interesting economic cycle charts:

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Our favorite collection of sentiment cycle charts — updated . . .

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Chick to enlarge:

Source: Bianco Research LLC
Charts Of The Week, December 7, 2011

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The Weekly Leading Index (WLI) growth indicator of the Economic Cycle Research Institute (ECRI) posted -7.8 in its latest reading, data through November 25. The latest public data point is more negative than last week’s downwardly revised -7.4 (previously -7.3).

See also the recent Bloomberg interview with Lakshman Achuthan, the Co-founder of ECRI (video).

Their Recession Call remains intact.

Fascinating chart from Ron Griess of the Chart Store looking at the Dow Jones Industrial Average, via a 20 year rolling return.

The key takeaway is that buying equities when 20 year rolling returns are high is ill advised; making purchases when when 20 year rolling returns are flat to negative seems to generate excellent performance numbers . . .

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20 Year Rolling Returns DJIA

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The Global Macro Monitor posted several pieces earlier in the year about the Presidential Stock Cycle.  See here, here, and here.   The third year of a first term President is the strongest year in the cycle.  The table illustrates that if the S&P500 doesn’t close at 1257.64 (closed Friday at 1244.28) or higher,  President Obama will be the first post-war “Investor in Chief” to  have a S&P500  down year in the third year of his first term.

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It’s also beginning to feel a lot like 1971.   We had thought earlier in the year the market would trade more like 1991, also a year of macro swans, including a major credit crunch and the first gulf war.   After trading up early that year, the market moved in a relatively tight range and ramped hard at the end of the year, 10.5 percent in last 14 trading days.  We also thought the volatility band would expand this year, but not as much as it has.

Bespoke had a great piece out last week showing that since August 1st the S&P500 has had eight declines of 5 percent or more and eight advances of 5 percent or more.  Contrast that to several stretches in the 1990′s where the S&P500 went more than a year without a rally or decline of 5 percent.

The S&P500 now appears to be tracking the 1971 analog, also the third year of a first term President.  Ironically, 1971 was a year of similar currency turmoil as President Nixon officially ended the gold standard and the Breton Woods international monetary system in the middle of August.   The IMF was also at the center of the global volatility.

During the massive run on gold, then Treasury Secretary John Connally and Under Secretary for Monetary Affairs Paul Volcker advised President Nixon to let the dollar float, effectively rendering the greenback a full blown fiat currency.  This caused panic in the global markets until other countries let their currencies go.

History is rhyming now with the current Euro and sovereign debt crisis.

Let’s also hope Santa brings us a similar December ramp in the S&P500 as he did in 1971 and 1991.   The results of the EU summit at the end of the week and the stability of money demand in the Euro core if the ECB chooses to monetize will, in our opinion,  largely determine if Santa Claus or the Grinch shows up this December.   We’ll worry about 1972 2012 when we get there.

This is our best guess, which often diverges from reality as it unfolds.    And that, folks, partially explains why markets are so volatile as they move from perception to reality and back to perception.

Stay tuned.

“It’s a little known fact,” as Cliff Clavin would tell us, “that the first city to have its housing bubble burst was Boston.”  How appropriate, eh?

Since no one lives in either Composite10 or Composite20, below is a portion of a spreadsheet I maintain chronicling the popping of the bubble (this is on a NSA basis) in each of the 20 metro areas.  Boston kicked things off in September 2005 (peak cells shaded with green), and city after city crested and began its decline over the next two years, ending with Charlotte in August 2007.  (Green text signifies an uptick from the prior month, red text a downtick.)

The last row — beneath the yellow line — is the most recent CS print.  It’s interesting, still, to see the most recent prints versus the peak values.

(Click through for ginormous — necessary to really see the numbers)

(Source: S&P Case-Shiller.  All cities indexed to 100 at January 2000)

Invictus here.

Interested parties were treated to a fascinating debate on the evening of November 14, as the Munk Debates assembled four estimable economic minds to debate the following resolution:

Be it resolved North America faces a Japan-style era of high unemployment and slow growth

Arguing the pro side of the resolution were David Rosenberg and Paul Krugman.  Arguing the con side were Lawrence Summers and Ian Bremmer.  Should the video be made available for replay, I’d suggest it’s well worth ~90 minutes of your time to watch.  Felix Salmon posted on the debate here, and Paul Krugman made mention of it on his blog here.

The results tell us that Summers/Bremmer swayed the undecideds to their side:

Personally, I went in on the “pro” side and came out unpersuaded by Summers/Bremmer.

My take on the essence of each debater’s arguments:

• Krugman – There are solutions to our current issues, but our political system is — and will remain — too dysfunctional to enact them.
• Rosenberg – We are undergoing a massive, wrenching deleveraging that must run its course, notwithstanding monetary/fiscal policy.
• Bremmer – Essentially argued that the US will always be the least dirty shirt in the hamper.
• Summers – His most persuasive argument, I thought, was his closing comment that pessimism can be a self-fulfilling prophecy.  The audience seemed swayed by this rhetorical flourish, though we certainly all know by now that hope is neither a plan nor a solution.

Rosie was clearly the most fact-based debater.  The arsenal of facts he has at his disposal is simply mind-boggling.  He could likely tell you the unemployment rate in April 1955 as easily as he could tell you his youngest son’s name.

The sad truth of the matter, though, is that we’re already mired in an “era of Japan-style era of high unemployment and slow growth.”  The only real question for debate is how much longer it will last.  Consider:

The unemployment rate has been above 7 percent since the end of 2008.  The Fed, which has done nothing but downgrade its economic assessments for quarter after painful quarter, did so again earlier this month:

(Click through for larger)

(Source: FOMC release November 2, 2011)

Note the drastic uptick in their assessment of the unemployment rate over the next few years, and the introduction of a forecast for 2014.  Here’s a graphic representation that metric:

(Source: FOMC release November 2, 2011)

If they’re right — and they’ve been too optimistic all along — and we see a 6.8% unemployment rate in 2014 (best case), that will take it down to a level last seen in November 2008, a six year round-trip up to 10.1% and back.  And, by the way, let’s not even kid ourselves that 6.8% is anywhere near acceptable.

In metrics that matter most to Americans, we are simply not moving the needle.  Or, more accurately, we’re moving it in the wrong direction.

(Click through all for larger)

(Source: Census.gov, Household Tables, H-6)

Takeaway: Well over a decade of stagnant incomes.

(Source: St. Louis FRED, Series SPCS20RSA)

Takeaway:  Home prices are at mid-2003 levels, so we’re where we were 8+ years ago.

(Source: St. Louis FRED, Series USPRIV)

Takeaway:  Private Payrolls are at about the same level they were at in late 1999 — well over a decade of stagnation here while the population has done nothing but go up.

I’ve already gone over poverty and food stamp statistics — the trends there are downright depressing, as were last week’s Census releases on children in poverty.  Of the myriad statistics I look at, analyze, and digest on a regular basis, nothing saddens me more than stats on children living in poverty, be it in the United States or elsewhere.  Many studies have shown that it is virtually impossible to overcome such an early disadvantage, and we should be doing all we can to eradicate this problem and ensure that our children begin their lives on a solid footing.

Bottom line:  Had I been drawing up the debate resolution, I would have written it as follows: “Be it resolved North America faces an ongoing Japan-style era of high unemployment and slow growth.”

Next month will mark the fourth anniversary of the beginning of our Great Recession — December 2007.  The progress we have made since then has been painfully slow and many metrics, some of which I display above, are still at levels first seen years ago.  Given the glacial pace at which things have been improving, it’s hard to argue that the answer to the original debate resolution — or my modification of it — is anything but “yes.”

Ed Easterling of Crestmont Research boils down his views on long term markets to 12 rules of secular stock market cycles. In case you are unfamiliar with Ed’s work, several books, including Unexpected Returns: Understanding Secular Stock Market Cycles; he also wrote Probable Outcomes.

Here are Ed Easterling’s 12 Rules of Market Cycles:

1. Secular cycles are driven by the inflation rate (deflation, price stability, and higher inflation)

2. Secular bulls occur when P/E starts low and ends high over an extended period

3. Secular bears occur when P/E starts high and ends low over an extended period

4. Cyclical bulls and bears are interim periods of directional swings within secular periods

5. Cyclical cycles are driven by market psychology, illiquidity, or other generally temporary condition(s)

6. Time is irrelevant to the length of secular stock market cycles

7. Secular bulls require a doubling or tripling of P/E

8. Secular bears occur as P/E stalls and falls by one-third to two-thirds or more

9. When real economic growth is near 3%, there is a natural floor for P/E between 5 and 10, a natural ceiling around the mid-20s, and a typical average in the mid-teens

10. If economic growth shifts upward or downward for the foreseeable future, the natural range moves upward or downward, respectively

11. Inflation drives P/Es location within the range; economic growth drives the level of the range

12. The stock market is not consistently predictable over months, quarters, or periods of a few years; the stock market is, however, quite predictable over periods approaching a decade or longer based upon starting P/E

Good stuff. That’s an interesting take on broad cycles.

Today’s futures makes the latest missive from Andrew Horowitz of the Disciplined Investor all the more timely: How does all of the volatility these days compare historically to past market cycles?

Looking at daily and intraday moves over a long period, 2008 has had some of the biggest daily moves, only second to the 1930′s. On a point basis, it has been significant. But from a historical perspective, the recent action does not make a big showing in the Top 25 on a percentage basis.

First is a look at the biggest net point gains and percent moves on an intraday basis:

*Intraday data starts 1/2/1987.

Next, the best and worst daily net point gains. Notice that there are several during 2011.

Finally, the best and worst days on a percentage basis. The 1930′s takes the award.

**Earliest available date for daily gains and losses after 1/1/1901 is 1/2/1901 or the next trading day.

Source: The Disciplined Investor

Yesterday we looked at 4 Major Secular Bear Markets.

Several people asked for an inflation adjusted version. Thanks to Lance Roberts of Street Talk Advisors, you will find that below:

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Real Price S&P 500 with Shiller’s Data and recessions

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