Mish's Global Economic Trend Analysis

Frugality the New Reality in Australia; Predatory Customers Addicted to Discounts
News Alert: Sky Does Not Fall
Charts Show Analysts Historically Overestimate Corporate Earnings by 100%
Deon Long for Florida District 24
ECRI Weekly Leading Indicators at Negative 9.8; Has the ECRI Blown Yet Another Recession Call?

Frugality the New Reality in Australia; Predatory Customers Addicted to Discounts

Posted: 20 Jul 2010 09:08 PM PDT

I have commented many times on US Consumer and Corporate Frugality but inquiring minds might be interested in happenings down under. Frugality has gone global.

Predatory Customers Addicted to Discounts

The Herald Sun reports Retailers could take years to recover because customers addicted to discounts.

A bargain frenzy since the global financial crisis has led consumers to expect and accept only slashed prices.

The dire forecast, from market research company TNS director Chris Kirby, comes as bored staff in some stores are put to work cleaning, tidying and changing window displays because of a lack of customers.

At some sites, especially fashion outlets, stock is discounted by up to 70 per cent as soon as it hits shelves to attract shopper interest.

"Consumers are no longer willing to accept the first price they find. They know there's a good chance of finding it cheaper somewhere else," Mr Kirby said. "In essence the industry is training us to become professional, if not predatory, consumers."

The caution came as a Commonwealth Bank economic index that tracks credit and debit card transaction value trends across a wide range of industries reported the weakest spending since the height of the global financial crisis in early 2008.

Desperate Retailers Slashing Prices by 75 Percent

Please consider Retailers slashing prices by 75% as Queensland sales slow

One retail organisation, the United Retail Federation, said the slump was at its worst in Queensland, where small retailers were struggling to move stock, even after heavily discounting items.

The bleak picture is at odds with scenes of hundreds of shoppers queuing at lay-by counters to take advantage of major toy sales.

Thousands of bargain hunters queued at Big W stores for the start of its two-week toy sale, which ended last week.

One Gold Coast shopper complained of a four-hour wait at her local Big W store, and of being hit in the ankles with shopping trolleys in the stampede.

Target will follow with its toy sale from July 22 to August 4, having already released its 72-page catalogue offering 120 half-price bargains.

But Australian Retailers Association director Russell Zimmerman said retailers generally were finding it difficult to clear stock, even at hefty discounts. "It's tough out there and retailers are finding it harder to move product at the moment than they have in the past," Mr Zimmerman said.

"They are offering 50, 60, and 70 per cent-off sales, which is unheard of. We are seeing that 20 per cent off isn't enough to entice customers these days."

Consumers get the Jitters

Th Australian reports Economic jittes causing consumers to closely watch spending

Rising interest rates, a falling Australian dollar and economic gloom in Europe have overshadowed the fact that unemployment remains near record lows.

Department stores Myer and David Jones kicked off their winter clearance sales this week with discounts of up to 60 per cent.

But if consumer sentiment figures are anything to go by, they are going to have a tough time getting customers through the doors.

Over the past two months, the Westpac-Melbourne Institute consumer sentiment index has had its biggest fall since March 2008 and now sits at 101.9 points, just above the 100 level that denotes an equal number of optimistic and pessimistic survey responses.

Paradoxically, the release of the figures were followed by labour-force data showing unemployment fell last month to a 16-month low of 5.2 per cent.

Australian Retailers Association executive director Russell Zimmerman says that since then, things have become much worse.

"Some shopping centres in Sydney are seeing a 10 per cent decline in customer numbers; people don't want to go to a shopping centre because they're worried they'll be tempted to spend money," he says.

Consumers are right to be concerned over interest rates: the average variable mortgage rate at 7.4 per cent in May compared with 5.75 per cent 12 months earlier, adds $95 a week to the payments on an average home loan of about $300,000.

RBA Expects Private Demand To Pick Up!

The Reserve Bank of Australia has finally managed to scare some sense into Australian consumers. Unfortunately it is far too late.

Australia's property bubble is among the biggest worldwide, if indeed not the biggest. When the bubble pops and consumers toss in the towel, it's lights out.

Thus, I have to laugh at the Minutes of the Monetary Policy Meeting of the Reserve Bank Board 6 July 2010

The domestic economy had been growing at a solid rate over the past year, including a sizeable contribution from fiscal spending. The economy was now entering a period in which private demand was expected to strengthen due to a pick-up in business investment flowing from the high level of the terms of trade. This was expected to offset the scaling back in public demand that would be taking place. There were tentative signs that this 'hand over' from public to private demand may be starting to occur, though this would warrant careful monitoring.

After a series of hikes to cool the property bubble and inflation, the RBA expects private demand to pick up? Really?!

Well it seems it did not and if history is any guide it won't. This was likely the last hurrah for Australian consumers.

$AORD Australian Weekly Composite

click on chart to sharpen image

Lights Out

Technically, these head and shoulder patterns are appearing all over the place in foreign and domestic issues, across many timeframes. It does not portend anything good in my opinion.

Moreover, I doubt it matters if the RBA starts cutting rates somewhere down the line. Once consumers toss in the towel, it's light out.

The global economy continues to weaken and few even notice. Everyone is busy cheering beat- the-street earnings that cannot and will not last.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

News Alert: Sky Does Not Fall

Posted: 20 Jul 2010 12:38 PM PDT

Maywoood, California outsourced all city services including police and fire. The unions predicted dire consequences. Well, not only did the sky not fall, but services have improved.

Please consider A City Outsources Everything. Sky Doesn't Fall.

While many communities are fearfully contemplating extensive cuts, Maywood says it is the first city in the nation in the current downturn to take an ax to everyone.

The school crossing guards were let go. Parking enforcement was contracted out, City Hall workers dismissed, street maintenance workers made redundant. The public safety duties of the Police Department were handed over to the Los Angeles County Sheriff's Department.

At first, people in this poor, long-troubled and heavily Hispanic city southeast of Los Angeles braced for anarchy.

Senior citizens were afraid they would be assaulted as they walked down the street. Parents worried the parks would be shut and their children would have nowhere to safely play. Landlords said their tenants had begun suggesting that without city-run services they would no longer feel obliged to pay rent.

The apocalypse never arrived. In fact, it seems this city was so bad at being a city that outsourcing — so far, at least — is being viewed as an act of municipal genius.

"We don't want to be the model for other cities to lay off their employees," said Magdalena Prado, a spokeswoman for the city who works on contract. "But our residents have been somewhat pleased."

That includes Mayor Ana Rosa Rizo, who was gratified to see her husband get a parking ticket on July 1, hours after the Police Department had been disbanded. The ticket was issued by enforcement clerks for the neighboring city of Bell, which is being paid about $50,000 a month by Maywood to perform various services.

Maywood's biggest problem by far has been its police department. A report by the state attorney general last year concluded the culture of the department "is one permeated with sexual innuendo, harassment, vulgarity, discourtesy to members of the public as well as among officers, and a lack of cultural, racial and ethnic sensitivity and respect."

There are $19 million in claims pending against the police, which made it effectively impossible for the city to get insurance for any of its employees. If Maywood did not dismiss the municipal work force, officials said, bankruptcy would have been the only option.

The budget for the Police Department last year was nearly $8 million, more than half of Maywood's revenues. The contract with the Los Angeles County Sheriff's Department will cost about half of that. Insurance premiums for the city have fallen to $200,000 from $1 million.

The deputies have already engendered good will, Councilman Aguirre said, by cracking down on a local hotel that was a haven for prostitution.

And others said they have seen an increased police presence in the last few weeks. "The deputies are there right away," said Maria Mendez, who has lived in Maywood for most of her 73 years. "Before you used to wait and wait for the police."

As I have said on many occasions, getting rid of public unions is the only long-term cure for states' budget messes. The added bonus is non-union replacements actually seem glad to have a job and try to perform it.

San Jose councilman calls for pension reform

Mercury News reports San Jose councilman calls for pension reform.

With dozens of California cities and counties seeking to reform soaring employee retirement costs, San Jose Councilman Pierluigi Oliverio on Monday called for voters to decide whether they want to continue paying millions into the city's pension system.

Oliverio wants to change the city charter — which requires a public vote — to remove language that spells out at what age employees can retire and how much the city must pay into their pensions. Instead, he wants the council to have the flexibility to determine those numbers.

While union officials assailed the proposal, Oliverio called the city's pension costs "out of control." Even as it lays off workers, the cash-strapped city will pay nearly $200 million this year to cover its pension obligations; next year, that's projected to swell as high as $250 million.

"If you're a resident and if you've ever said, 'Why is my street not paved? Why is my library not open? Why aren't there enough police officers?', it's because the pension system has grown to such a large proportion," said Oliverio.

In San Jose, officials say employee costs have risen three times faster than revenues in the last decade, driving a nine-year run of red ink that's projected to continue.

Pension costs alone have soared 131 percent during that time. And to make up losses from the recent stock market crash, the city will have to boost its $138 million annual contribution to its pension funds by more than $60 million this year.

Taxpayers are on the hook to make up the difference if the funds do not hit their projected return rates, which are set by two independent pension boards.

Most San Jose city employees can retire at 50 percent salary at age 55 if they have 20 years of service. The average retiree receives $38,666 a year, as well as free health care and other benefits.

Public safety officers do considerably better: they can retire at 90 percent salary at age 50 if they have 25 years of service. Those retirees receive an average pension of $85,000 a year.

As always, the union response is to bitch and moan like they always do. In fact, unions spend more time bitching and whining and collecting benefits than they do working. Police can retire at age 50 after 25 years, and if they live to age 75 or longer, they collect more in unemployment than they did working.

The solution is not to increase union contribution levels but to eliminate public contribution and responsibility totally. Taxpayers should not be on the hook for inane pension plan assumptions of 8.5% a year or so.

The best way to go about this is to outsource the whole thing just as Maywood did. San Jose could then lower property taxes, putting much needed money in taxpayer pockets.

Montreal port lockout jams up Seaway

Global News reports Montreal port lockout jams up Seaway

The St. Lawrence River is supposed to be Eastern Canada's busiest shipping route, a quick way for overseas companies to get their liquor and clothes to Chicago and Detroit as well as Quebec and Ontario. But events over the past seven days have jammed the river with ships lined up stem to stern and new arrivals are being turned away to U.S. East Coast ports.

"The port is shut down. There are no ships and no trains coming in or out," Port of Montreal spokesman Jean-Pierre Lejeune said Monday. Four or five commercial vessels are in the river outside port waters and they're not moving, he said.

Some of the largest shipping lines that normally dock at Montreal are diverting to the U.S. ports of New York and Norfolk, Va., said Gilles Corriveau, spokesman for the Maritime Employers Association, the main industry group representing shipping lines and other employers in the port.

The Employers Association said it locked out some 850 dock workers as of Monday in a disagreement over pay. The two sides had been in negotiations for a new labour contract that expired in December 2008.

The dispute centres on terms of the expired collective agreement related to pay and job security. Under the agreement's decades-old job security plan, Montreal's longshoremen are guaranteed between 1,280 and 1,600 work hours over a 40-week period each year and receive full pay even when they are not working.

Read that last paragraph again. The union demands to be paid 32-40 weeks whether there enough work or not. Clearly this is insane.

The union whines this will assure a "guaranteed pool of workers available for work 24 hours a day every day."

On the other hand, I assure you that if they killed this union, there would be a line 5 miles long of people wanting those jobs. That is the "seen".

The unseen benefit is lower transportation costs means lower costs across the board to consumers. It would be a win-win situation to get rid of the union.

Ontario to appeal for public-sector wage freezes

As in many cities and states in the US, public union wage and benefit discussions are taking place in Canada. Please consider Ontario to appeal for public-sector wage freezes.

Ontario Finance Minister Dwight Duncan will meet public-sector employers and labour leaders on Tuesday, where he will appeal directly to them to impose wage freezes.

Mr. Duncan put teachers, nurses and other unionized workers on notice in the provincial budget in March that there will be no money for wage hikes when their collective bargaining contracts expire. But Tuesday will be the first time he delivers that message face-to-face to about 60 public-sector executives and union leaders.

Canadian Union of Public Employees Ontario president Fred Hahn said he plans to tell Mr. Duncan that wage restraints don't work, especially at a time when the economy is showing signs of recovery.

"It's a punitive, panic-driven measure that we think will hurt the economy," Mr. Hahn said in an interview on Sunday.

Fred Hahn proves that public union bitching, whining, and moaning is not just a US phenomenon.

The problem is wages do not need to be frozen, they need to be rolled back, as do pension promises.

Once again, the best way to address this is to simply get rid of the union workers, as Maywood did.

I assure my Ontario and California readers the sky will not fall if these actions are taken. Better yet, getting rid of unions will put money back in taxpayer pockets where it belongs.

Addendum:
San Jose can no longer afford Janitors

Here is an article about San Jose that was just brought to my attention: Cities Rent Police, Janitors to Save Cash

Faced with a $118 million budget deficit, the city of San Jose, Calif., recently decided it could no longer afford its own janitors. So the city's budget called for dropping its custodial staff and hiring outside contractors to clean its city hall and airport, saving about $4 million.

To keep all its swimming pools open and staffed, the city is replacing some city workers with contractors.

"These are cases where the question is being asked, 'Is this a core service at the city level?' " said Michelle McGurk, senior policy adviser to the San Jose mayor.

After years of whittling staff and cutting back on services, towns and cities are now outsourcing some of the most basic functions of local government, from policing to trash collection. Services that cities can no longer afford to provide are being contracted to private vendors, counties or even neighboring towns.

Cities say they have little choice. Municipalities across the U.S. will face a projected shortfall of $56 to $86 billion between 2010 and 2012, according to a report from the National League of Cities.

"You can do across-the-board cuts for only so long," said Andrew Belknap, Western Regional Vice President for Management Partners, a government consulting group. "It's gone from the tactical cost cutting to get through a recession, to in some cases saying we have to exit that business or service altogether."

San Jose will quickly discover the sky will not fall. Hopefully that will provide the impetus to do what really needs to be done: outsource the police and fire departments.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Charts Show Analysts Historically Overestimate Corporate Earnings by 100%

Posted: 20 Jul 2010 09:58 AM PDT

In response to Five Reasons for Nonsensical Forward Earnings Estimates several people sent me a link to a McKinsey Quarterly report Equity analysts: Still too bullish

No executive would dispute that analysts' forecasts serve as an important benchmark of the current and future health of companies. To better understand their accuracy, we undertook research nearly a decade ago that produced sobering results. Analysts, we found, were typically overoptimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined.

click on chart to expand

Moreover, analysts have been persistently overoptimistic for the past 25 years, with estimates ranging from 10 to 12 percent a year,4 compared with actual earnings growth of 6 percent. Over this time frame, actual earnings growth surpassed forecasts in only two instances, both during the earnings recovery following a recession. On average, analysts' forecasts have been almost 100 percent too high.

click on chart to expand

Here are my Five Reasons Explaining this Phenomenon.

Reasons for Nonsensical Earnings Estimates

Analysts do not do their homework on what is really happening and why. Instead they see rising earnings and take them at face value, nearly always figuring following quarters will be better yet.
Analysts do not understand the dynamics of debt deflation, peak credit, the baby boomer retirement dynamics, etc. In short, Analysts do not understand the global macro picture is bleak.
Analysts look at a steep yield curve and think the Fed can lift the economy.
Analysts have not yet caught on to the fact that consumer spending and bank lending attitudes have changed for good.
Analysts in general have a vested interest in getting the public to buy stocks, annuities, etc. because that is how they make money.

Given that debt deflation, and attitudes were not issues in many past blown estimates, a second look suggests points #1 and #5 (especially 5) are the real reasons in play.

Regardless of the reasons, the key point is forward earnings estimates have been ratcheted up several times in the past year and are now wildly optimistic. I don't believe them and history suggests you should not either.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Deon Long for Florida District 24

Posted: 20 Jul 2010 09:36 AM PDT

I have a few more candidates that I would like you to consider supporting in the upcoming mid-term elections. The first of these candidates is Deon Long, running in Florida's 24th Congressional District.

Please check out Where Deon Long Stands on Issues.

Deon Long Writes ...

Dear Mish,

I am in a five-way primary battle for the Republican nomination in Florida's 24th Congressional District.

I am running to represent Florida's24th Congressional District because America needs to undertake a structural rebirth to allow American to return to a free market, pro growth economy with it appurtenant individual and property rights as contemplated by the Constitution.

The insidious progressive tax rule, inflationary monetary policy, deficit spending and protectionist trade policies are a burden to entrepreneuralship and small business formation.

I want to return power from Washington back to the states and American citizens. To accomplish such I am a champion of:

1) Passage of the FairTax proposal;
2) Ratification of a balanced budget amendment;
3) A return to the gold standard;
4) Campaign Finance Reform;
5) Repeal of Sarbanes-Oxley;
6) Tort reform.

With the passage of the FairTax, the ratification of an amendment negating the 16th Amendment should be taken up contemporaneous with a balanced budget amendment.

I am a staunch advocate of the 10th Amendment and state sovereignty. I also support the abiding by the letter and spirit of the 17th Amendment as advocated by the Founding Fathers.

Lastly, under no circumstances would I have voted for the bailout or the stimulus package. I am a follower of Austrian economic and free market principles and totally reject Keynesian economic handouts.

Thanks.
Deon Long

It is not often voters get a chance to elect a candidate of the quality of a Ron Paul or Deon Long.

Please do what you can to Support Deon Long. If you wish to volunteer time, please Contact Deon Long.

It's long overdue we elect Congressional representatives who will uphold the constitution, are fiscally conservative, and genuinely want to do something about bureaucratic waste and massive government spending.

I am optimistic about Deon Long's chances, but you have to help. Please make a contribution of time or money.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

ECRI Weekly Leading Indicators at Negative 9.8; Has the ECRI Blown Yet Another Recession Call?

Posted: 20 Jul 2010 12:48 AM PDT

Inquiring minds have been watching the ECRI's weekly leading index plunge nonstop since October of 2009. Moreover the WLI has been in negative territory for 6 consecutive weeks.

click on chart for sharper image

Is that a recession call by the ECRI?

Absolutely not, at least as of June 14, according to Lakshman Achuthan managing director of ECRI who blasted the Wall Street Journal for misleading reporting.

The Business Insider discusses the situation in Why Last Week's Collapsing ECRI Leading Indicator WASN'T A Recession Signal.

Following the Business Insider link back one step takes us to Jeff Miller's "A Dash of Insight" Weighing the Week Ahead: Negativity Prevails where I see that I was cited along with the Wall Street Journal, Zero Hedge, the Pragmatic Capitalist, and the Financial Times for incorrect intrepretation of the WLI.

Miller quoting a comment in response to the Wall Street Journal article writes...

Meanwhile, in the comments there was a stern rebuke. Lakshman Achuthan wrote:

While we certainly appreciate the attention given to our Weekly Leading Index, I'd like to clarify a few points raised in the article. First, according to the Economist magazine, "the ECRI" has not ever given false alarms on a recession forecast. http://www.businesscycle.com/about/testimonials/

The purported false alarms from "the ECRI" mentioned in this article come from a mistaken and simplistic view that negative growth in ECRI's Weekly Leading Index (WLI) is tantamount to a recession forecast. In fact, since 1983, cyclical downturns have taken WLI growth under the zero line a dozen times, but recessions have followed on only three of those occasions – times when ECRI actually made a recession forecast.

Since ECRI itself has never used WLI growth going negative as a recession signal, it is important that such "false alarms" are attributed not to ECRI or even to the WLI, but to what is a mistaken interpretation of the WLI.

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.

Just The Facts Maam, Not The Spin

If the ECRI does not want people assuming the WLI can be used as a recession forecast, then perhaps they ought not present it that way.

Please consider some charts and text from the ECRI publication The Great Recession and Recovery

ECRI Weekly Leading Index

"This 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."

I need to repeat that, over this entire time period, I was present to see each of the correct recession and recoveries calls in real-time, without false signals in between.

Supposedly the WLI in "real-time" has correctly predicted every recession without a single false signal.

That is quite an amazing claim. It is also false, for multiple reasons!

Flashback November 2007 ECRI Vol. XII, No. 11: Weakness In Leading Indicators Not Yet Recessionary

Please consider the following image snip. Highlighting is mine.

In November of 2007 the ECRI was bragging it did not forecast a recession "despite an inverted yield curve, which many economists have long considered to be the best predictor of a recession"

In contrast note the spin from The Great Recession and Recovery.

Accompanying that slide the ECRI said "And we issued a clear Recession Warning noting that: "The magnitude of oil and interest rate shocks are near recessionary readings." A month later, as we now know, the recession began.

Compare that slide, with the above image snip, noting the yellow highlighting.

The ECRI was clearly bragging not only about besting the yield curve, but also said "The Difference this time is that, even though the shocks have arrived, good leading indexes like USLLI are not showing recessionary weakness. ... as Chart 1 shows, the level of the USLLI is already a little lower now than it was three months earlier. However, this weakness is not pronounced, pervasive and persistent enough to be recessionary"

It's Different This Time!

After the fact, the ECRI took one statement out of context, a statement they went to great lengths to refute, then has the blatant gall to claim they issued a "recession warning".

By the way. The Bold Headline on the page with the yellow highlighting is "WEAKNESS IN LEADING INDEXES NOT YET RECESSIONARY"

ECRI's Predictive Capability

The facts show that the ECRI did not actually "predict" the recession until we were in it for several months. They get away with this nonsense because of an even longer delay by the NBER in setting the start of the recession.

Want proof?

Friday, January 25, 2008

ECRI Says There Is A Window of Opportunity for the US Economy

The U.S. economy is now in a clear window of vulnerability, given the plunge in ECRI's Weekly Leading Index (WLI) since last spring. Yet there is a brief window of opportunity within that window of vulnerability to avert a recession. That is why ECRI has not yet forecast a recession.

Self-Fulfilling or Self-Negating?

If we have a recession this year, it will be the best advertised in history. Recently, several Wall Street houses joined the 70% of Americans who have been expecting a recession for the last few months. A number of other prominent economists boosted their estimates of the probability of a recession above 50%.

Yet such probability estimates imply that a recession is a matter of chance, whereas it is still a matter of choice. This is why, having correctly predicted the last two recessions in real time without crying wolf in between, we are not forecasting one yet.

The facts show the ECRI thought a recession that had already started about two months earlier could have been prevented.

Recession of Choice

Friday, March 28, 2008
ECRI Calls it "A Recession of Choice"

The U.S. economy is now on a recession track. Yet this is a recession that could have been averted. In January, given the plunge in the Weekly Leading Index, we declared that the economy had entered a clear window of vulnerability. Yet we emphasized the brief window of opportunity within that window of vulnerability for timely policy stimulus to head off a recession.

It is a somewhat different story with regard to GDP, because the cyclically volatile manufacturing sector still accounts for 36% of GDP. A mild downturn in that sector should limit the decline in GDP in this recession.

In fact, we may or may not see two straight down quarters of GDP in this recession. But, contrary to popular belief, as we have detailed* elsewhere, that is neither a necessary nor a sufficient condition for a recession.

Recession of Choice?

As noted above, on March 28, 2008, the ECRI states we are on a "recession track". At that time, the recession was already underway for a minimum of four months.

This statement is worth repeating: "In fact, we may or may not see two straight down quarters of GDP in this recession. But, contrary to popular belief, as we have detailed elsewhere, that is neither a necessary nor a sufficient condition for a recession."

The idea that this recession could have been prevented is far beyond silly. The excesses and reckless behaviors in residential real estate, commercial real estate, derivatives, credit lending, securitizations, credit cards, and debt at every level (not just in the United States but globally) were such that not only was a recession baked in the cake, but that a gargantuan consumer-led recession was 100% guaranteed.

There is absolutely nothing the Fed could have done to avoid this recession. To believe otherwise is foolish.

ECRI Paranoia

I believe it is a fair statement by Lakshman Achuthan that "the ECRI" has not ever given false alarms on a recession forecast.

Indeed, the ECRI seems so paranoid about making a mistake in calling recessions that it will not predict one until it is blatantly obvious by anyone with an ounce of common sense that we are already in one.

Now the ECRI is upset that people are using the WLI to predict recessions even though the ECRI posts their chart with the claim "This [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."

Amazingly the ECRI gets upset when people take them at their word, mistakenly thinking the WLI actually predicts something, perhaps because the ECRI posts a chart that says it does!

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.

Got that? I hope so.

Synopsis

So ... Please don't think the WLI predicts anything unless and until and after the fact Lakshman Achuthan and the ECRI says it does, in yet another publication hyping its stand-alone "real-time" predictive capability.

Meanwhile, I note the WLI has fallen to -9.8. Don't worry. It's not predicting anything, until after-the-fact it does. Then again others disagree.

Double-Dip Odds 2 out of 3

Dave Rosenberg had his sights on the ECRI in his July 19th 2010 Breakfast With Dave Commentary (red highlighting is mine).

The growth rate on the ECRI leading index did it again! It sank further into negative terrain, now at -9.8% during the week ending July 9, down from -9.1% the prior week. This was the tenth deterioration in a row and the growth index is now negative for six straight weeks. We have never failed to have a recession with the ECRI at current levels but there is also inherent volatility in the index that requires acknowledgment. Our reckoning is that in the past few weeks, the index has gone from pricing in even-odds of a double-dip to two-in-three odds. It may take a while, but Mr. Market will figure it out before long.

A Look at Both Sides

I want to be as fair as I possibly can to the ECRI so I will present both sides of the coin as best as I can.

Side 1

The ECRI grossly took statements out of context regarding its recession "Warning Call" in November 2007. There was no recession warning. In fact, the ECRI explicitly bragged that it gave no such warning in contrast to the inverted yield curve (which ironically had it correct).
The ECRI did not predict the 2007 recession until we were already in recession for 3-4 months.
The ECRI is blatantly hypocritical when it says the WLI "has correctly predicted every recession and recovery in real-time" while chastising the Wall Street Journal that the WLI needs to follow 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."
On January 25, 2008 the ECRI said "This is why, having correctly predicted the last two recessions in real time without crying wolf in between, we are not forecasting one yet." The recession had already started. The ECRI clearly blew the recession call. Nothing they do or say can paper over this fact.
Not only did the WLI blow the recession call, but the ECRI's U.S. Long Leading Index (USLLI) blew the call as well. So much for supposedly "leading" indicators.

Side 2

Investors could have used the ECRI's genuine "recession track" warning in March 28, 2008 and have exited the market at that time. Loss would have only been 14-15% from the peak, in retrospect, a nice exit.
The ECRI gave a nice entry in Spring of 2009.
Even though the ECRI has clearly blown a recession call, they can still claim they have not called for a recession that did not happen.

Then again, one could also have looked at the inverted yield curve and loaded up on long bonds or 10-year treasuries and possibly done much better. I freely admit hindsight is 20-20 and many thought long dated treasuries would implode.

Tools in the Bag

Once again, attempting to be as fair as possible, the WLI could be a very useful indicator when other data confirms.

For example, in late 2007 one could have looked at the inverted yield curve in conjunction with a negative WLI and decided it was not very smart to be invested in the market. Theoretically, the two tools together could have given a very timely exit signal.

Unfortunately, a negative yield curve is not going to happen again for a long time given the low end of the curve is at zero. So don't go looking for that combination now.

Although we do not have an inverted yield curve, we do have massive amounts of data including a yield curve that has flattened 100 basis points in short order, something one would never see in a recovery.

Once again, using all the tools in the toolbox and with numerous confirming data, it should be easy to see this economy is in trouble. However, as in 2007 the ECRI refuses to see it.

Why?

I am sticking with my thesis the ECRI is so paranoid about making a mistake in calling recessions that it will not predict one until it is blatantly obvious by anyone with an ounce of common sense that we are already in one.

That's fine by me, but not if it wants to make preposterous claims such as the WLI "has correctly predicted every recession and recovery in real-time"

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Tuesday, July 20, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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