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Wednesday, March 7, 2012

Mish's Global Economic Trend Analysis

Concerns in Germany About Its Gold at the NY Fed, London, and Paris; German Gold Off Limits, Greek Gold Subject to Confiscation
Mish Video on Capital Account, March 6: Netherlands, Greek Exit, Stock Valuations, War in Iran, Where to Put Your Money, Faber's Formula for Safety
LPS Home Price Index Shows U.S. Home Prices Accelerated Decline; Psychology Change and Demographics Suggests Bubble Mentality Shattered for Decades to Come

Concerns in Germany About Its Gold at the NY Fed, London, and Paris; German Gold Off Limits, Greek Gold Subject to Confiscation

Posted: 07 Mar 2012 01:02 PM PST

GoldCore has a pair of interesting articles on German concerns about its gold reserves. The most recent article regards gold held outside Germany.

Please consider Germany to Review Bundesbank Gold Reserves in Frankfurt, Paris, London and Federal Reserve Bank of New York

German lawmakers are to review Bundesbank controls of and management of Germany's gold reserves. Parliament's Budget Committee will assess how the central bank manages its inventory of Germany's gold bullion bars that are believed to be stored in Frankfurt, Paris, London and the Federal Reserve Bank of New York, according to German newspaper Bild.

The German Federal Audit Office has criticised the Bundesbank's lax auditing and inventory controls regarding Germany's sizeable gold reserves – 3,396.3 tonnes of gold or some 73.7% of Germany's national foreign exchange reserves.

There is increasing nervousness amongst the German public, German politicians and indeed the Bundesbank itself regarding the gigantic risk on the balance sheet of Germany's central bank and this is leading some in Germany to voice concerns about the location and exact amount of Germany's gold reserves.

The eurozone's central bank system is massively imbalanced after the ECB's balance sheet surged to a record 3.02 trillion euros ($3.96 trillion) last week, 31% bigger than the German economy, after a second tranche of three-year loans.

The concern is that were the eurozone to collapse, Bundesbank's losses could be half a trillion euros - more than one-and-a-half times the size of the Germany's annual budget.

In that scenario, Germany's national patrimony of gold bullion reserves would be needed to support the currency – whether that be a new euro or a return to the Deutsche mark.

Jim Rickards has outlined possible plans by the Federal Reserve to commandeer Germany's and all foreign depositors of sovereign gold at the New York Federal Reserve in the event of a dollar and monetary crisis leading to intensified "currency wars" and the 'nuclear option' of a drastic upward revision of the price of gold and a return to a quasi gold standard is contemplated by embattled central banks to prevent debt deflation.

Currency Wars

It is difficult to separate fact from fantasy, and speculation from reality in such stories, but those wishing to learn more about Jim Rickards' ideas, might be interested in his book, "Currency Wars: The Making of the Next Global Crisis"

In January, Eric King had an Interview with Jim Rickard on King World News.

Rickards' Biography

James G. Rickards is a writer, lawyer and economist with over 30 years experience in global capital markets. He is Senior Managing Director at Omnis, Inc., a consulting firm in McLean, VA and is the leading practitioner at the intersection of global capital markets and national security. His advice to clients from 2002 to 2006 included early warning of impending financial collapse, the rise of sovereign wealth funds, the decline of the dollar and the sharp rise in gold prices years in advance of these events. He has held senior executive positions at Citibank, Long-Term Capital Management and Caxton Associates. In 1998, he was the principal negotiator of the rescue of LTCM sponsored by the Federal Reserve Bank of New York.

German Gold Off Limits, Greek Gold Subject to Confiscation

The other article of note on GoldCore regarding German gold reserves was back in November when various proposals for Germany to backstop Greece and the EFSF with its gold surfaced.

Please see Germany to G20: German Gold "Must Remain Off Limits"; Italian Gold Sale Again Proposed in Germany for details.

Those proposals were shot down quickly. However, Germany did make Greek gold subject to confiscation in the latest bailout proposal by the Troika.

Greece is foolish to accept this parasitic offer of "help". Greek gold reserves may be the only thing that prevents all-out hyperinflation and complete destruction of currency when Greece returns to the drachma.

Please see Pact With the Devil Over Gold for further discussion as to sad state of affairs that may befall Greece.

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

Mish Video on Capital Account, March 6: Netherlands, Greek Exit, Stock Valuations, War in Iran, Where to Put Your Money, Faber's Formula for Safety

Posted: 07 Mar 2012 11:46 AM PST

Once again it was a pleasure to be on Capital Account with Lauren Lyster yesterday afternoon. We discussed Europe, a Eurozone breakup, and general investment ideas proposed by Marc Faber, and my own thoughts on the same subject.

Link if video does not play: Netherlands looking for Euro Exit as Supercomputer prepares for Financial Judgment Day.

Normally I can see the same thing you see in the video above while the live TV show is recorded. This time, the video feed went down, so I could not see the charts they asked me to comment or, Lauren Lyster, or anything else. This was recorded (from my perspective) on audio cue only.

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

LPS Home Price Index Shows U.S. Home Prices Accelerated Decline; Psychology Change and Demographics Suggests Bubble Mentality Shattered for Decades to Come

Posted: 07 Mar 2012 09:47 AM PST

U.S. home prices declines to a new low for the move and are back to a level last seen in September-October 2002 according to a LPS News Release.

The LPS HPI national average home price for transactions during December 2011 reached a price level not seen since September 2002. This is the sixth consecutive month of price decreases.

Price changes were largely consistent across the country during December, increasing in only 8.0 percent of the ZIP codes in the LPS HPI. Price changes were also consistent across price tiers with a uniform decline of 1.0 percent.

"Despite the broad picture of home price declines following the bubble, prices have not been consistently declining for all MSAs in the country. About one-fifth (89) of all the MSAs that LPS covers has seen average home prices increase since December 2008," commented Dosaj. "For 90 percent of these MSAs, prices rose only if the lowest-priced homes in their markets rose. This correlation did not necessarily hold for higher-priced homes in those areas. Unfortunately, the MSAs that have seen price increases since December 2008 are generally relatively small; Boston and Pittsburgh are exceptions."

About the LPS Home Price Index

The LPS HPI is one of the most complete and accurate home price sources available. It summarizes sales concluded during each month using a repeat sales analysis of home prices as of the transaction dates. Each month, the LPS HPI reports five price levels in each of more than 14,500 U.S. ZIP codes. Five price levels are also reported at the national and state levels and for 436 of the statistical areas defined by the White House Office of Management and Budget; including all 29 of the Metropolitan Divisions and their 11 MSA "parents." The five historical paths of price levels can be easily used to find price paths of intermediate prices. The LPS HPI also supplies REO discount rates for each ZIP code, which are used in the HPI calculations to correct for the impact on estimates of open-market prices that REO sale prices would have.

By combining property and loan data in its repeat sales analysis, the LPS HPI covers about 75 percent of single-family residential properties in the U.S. The innovative approach used to maximize geographical resolution enables the LPS HPI to meaningfully cover about 98 percent of these properties at the ZIP-code level.

The LPS HPI provides the financial industry with the most accurately timed home-price information available – detecting market changes sooner than other HPIs – with valuation accuracies competitive with AVMs in out-of-sample tests.

Bubble Mentality Shattered for Decades to Come

The key take-away is home prices still have not bottomed in most areas. Moreover, nothing stops a renewed decline in those 8% of areas that did not decline.

Also bear in mind that first chart shows nominal prices. Inflation adjusted prices have likely taken back the entire rise in prices, except of course for property taxes.

Once there is a bottom, and we are certainly closer to a bottom than a top, expect home prices to generally languish due to immense shadow inventory, anemic wage growth, anemic job growth, boomer downsize demographics, and most importantly psychology.

Housing prices were a once-in-a-multi-generational bubble, now gone bust. The mentality that "your home is your retirement" is dead for decades to come. A similar bust will happen in Canada, Australia, and China.

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

Tuesday, March 6, 2012

Mish's Global Economic Trend Analysis

Recession Hits Australia; 21st Monthly Decline in Construction; Service Sector in Contraction, New Orders Plunge; Ring, Ring Goes The Bell
Athens' Pitifully Hollow Warning to Bond Holdouts; Self-Serving, Misguided Hype by IIF on "Implications of a Disorderly Greek Default and Euro Exit"
Obama Unveils New J.P. Morgan, Wells Fargo Bailout Plan, Disguised as Mortgage Relief
Misty Water-Colored Memories, Dirt-Cheap Stocks, and Patient Opportunism

Recession Hits Australia; 21st Monthly Decline in Construction; Service Sector in Contraction, New Orders Plunge; Ring, Ring Goes The Bell

Posted: 06 Mar 2012 10:18 PM PST

A set of incredibly weak economic reports from down under have left me with in inescapable conclusion that Australia has entered recession.

Australia GDP Expands "Less Than Expected" .04% in 4th Quarter

The BBC reports Australia's economy expands 0.4% in the fourth-quarter

Australia's economy has expanded by less than expected in the fourth quarter of 2011, as business spending dropped, sending the dollar to a six-week low.

Gross domestic product rose by 0.4% in the three months to the end of December compared with the previous three months, said the Bureau of Statistics. Analysts were expecting growth of 0.8%.

However, most analysts say that growth is expected to pick up in the coming months. "We're doing much better than most," said Stephen Walters, from JP Morgan.

The Reserve Bank of Australia (RBA) said it still expects growth of 3-3.5% this year and next.

3.5% growth? What the heck are these guys smoking?

21st Monthly Decline in Construction

Bloomberg reports Australian Construction Index Falls to Lowest in Four Months

A gauge of Australia's construction industry fell to the lowest level in four months as commercial construction remained weak and house building declined.

The construction performance index fell to 35.6 in February from 39.8 a month earlier, the 21st monthly decline, a survey by the Australian Industry Group and the Housing Industry Association released in Sydney today showed. A reading below 50 represents a contraction.

"The tentative signs of recovery that had emerged in the closing months of 2011 as interest rates were lowered appear to have dissipated since the start of this year," Australian Industry Group Director of Public Policy Peter Burn said in a statement. "With new orders also weak in February and with market interest rates somewhat higher, the outlook for the next few months remains flat."

Tentative signs of recovery? With construction dropping 21 straight months? Really?

Service Sector in Contraction

Markit reports Australia Service Sector in Falls in February.

Key Findings

Service sector activity fell in February according to the latest seasonally adjusted Australian Industry Group/ Commonwealth Bank Australian Performance of Services Index (Australian PSI®) which was down 5.2 points to 46.7 in the month.

And in three-month-moving-average terms, the Australian PSI® has remained below the critical 50 point level for four consecutive months.

Reports of declining activity levels in February were common across the sector, with businesses reporting that sales, new orders and employment levels all fell back in the month.

The new orders component of the Australian PSI® recorded a particularly sharp fall, and is now at its lowest level in over 12 months.

In line with these soft trading conditions, the average selling price index declined in February, and is also at its lowest level in over 12 months.

New orders

On a seasonally adjusted basis, new order levels fell sharply in February after remaining broadly steady over much of the past year.

The new orders component of the Australian PSI® fell by 8.5 points to 45.6.

New order levels declined across most service sub-sectors in February, with particularly sharp declines reported in the retail trade and communication services sub-sectors.

This was only partly offset by solid growth in new orders in the finance & insurance and personal & recreational services sub-sectors.

Australia PSI

click on chart for sharper image

Huge Price Squeeze

Please take a good look at that chart. Wages have risen 31 months. Input prices have risen 108 consecutive months!

Every other component of the PSI is in contraction. Selling prices have fallen for 3 months while new orders have plunged.

Trendline Growth

For another look at GDP growth in Australia, please consider The Australian economy is not growing at trend

The outcome over 5 years? Trend growth at 0.72% per annum, with peak to trough and current total growth as marked on the chart.

Over the last 12 months, yearly GDP per capita growth was at 0.7% - substantially less than the long term rate of 1.48% over the last ten years, or the 2.4% rate over the whole data series.

The Australian economy is still growing, but at half the long term pace on a person by person basis, and given the problems with the standard CPI measurement (which contrary to popular belief, does not measure inflation), it is likely that purchasing power is not being maintained either.

With a government forced to return to surplus to maintain its AAA rating and thus reduce stimulus spending, credit growth running at 35 year lows and decelerating, a slowdown and likely reversal in Terms of Trade from record high commodity prices and in the absence of further Chinese stimulus (which arguably did more than all the endogenous stimuli post GFC), its hard to see how GDP growth can return to the mean trend of pre-GFC years.

It's also hard to see how this is surprising.

Ring, Ring Goes The Bell

Indeed, it's not surprising (to a few of us anyway).

Yesterday I stated Australia Retail and Housing Bloodbath Coming Up.

Today I am ringing the bells of recession.

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

Athens' Pitifully Hollow Warning to Bond Holdouts; Self-Serving, Misguided Hype by IIF on "Implications of a Disorderly Greek Default and Euro Exit"

Posted: 06 Mar 2012 11:45 AM PST

I can't help laughing at the Financial Times headline story Athens threat to bond holdouts.

Greece has threatened to default on any of its bondholders who do not take part in this week's €206bn debt restructuring, raising the pressure on potential holdouts.

The threat is aimed in particular at the 14 per cent of investors who own Greek bonds issued under international law. The remaining 86 per cent, who own bonds covered by Greek law, were warned in the same statement that Greece would use so-called collective action clauses to make any deal binding on any holdouts.

People involved in the deal said there would be no sympathy for any holdouts in the international law bonds, as many of them were hedge funds who had bought in on the hope of being paid back in full as other investors suffered losses of about 75 per cent.

"They will be portrayed as evil hedge funds and nobody will have any pity for them. That means you can be violent with them. They need to realise that they don't have a free option here," one person close to the deal said.

Pitiful Threat

This pitiful threat demonizing evil hedge funds will prove to be as effective as a parent telling a child, "If you don't clean up your room, I will give you piece of cake".

The hedge funds want a default. They are the ones covered with CDS contracts that will pay them in case of default. Those covered by CDS contracts have no incentive to agree to deals and threats to blow the entire deal sky high is exactly what most of the holdouts want to hear.

Implications of a Disorderly Greek Default and Euro Exit

Even more pathetic than the Greek "threat" is a "confidential" (purposely leaked) report by the Institute of International Finance which which represents about 450 banks and other private creditors to Greece.

The Wall Street Journal has posted the document, Implications of a Disorderly Greek Default and Euro Exit so let's take a look at the hype.

Direct losses on Greek debt holdings (€73 billion) that would probably result from a generalized default on Greek debt (owed to both private and public sector creditors);

Sizeable potential losses by the ECB: we estimate that ECB exposure to Greece (€177 billion) is over 200% of the ECB's capital base;

The likely need to provide substantial additional support to both Portugal and Ireland (government and well as banks) to convince market participants that these countries were indeed fully insulated from Greece (possibly a combined €380 billion over a 5 year horizon);

The likely need to provide substantial support to Spain and Italy to stem contagion there (possibly another €350 billion of combined support from the EFSF/ESM and IMF);

The ECB would be directly damaged by a Greek default, but would come under pressure to significantly expand its SMP (currently €219 billion) to support sovereign debt markets;

There would be sizeable bank recapitalization costs, which could easily be €160 billion. Private investors would be very leery to provide additional equity, thus leaving governments with the choice of either funding the equity themselves, or seeing banks achieve improved ratios through even sharper deleveraging;

There would be lost tax revenues from weaker Euro Area growth and higher interest payments from higher debt levels implied in providing additional lending;

There would be lower tax revenues resulting from lower global growth. The global growth implications of a disorderly default are, ex ante, hard to quantify. Lehman Brothers was far smaller than Greece and its demise was supposedly well anticipated. It is very hard to be confident about how producers and consumers in the Euro Area and beyond will respond when such an extreme event as a disorderly sovereign default occurs.

There is a more profound issue, however. The increased involvement of the ECB in
supporting the Euro Area financial system has been such that a disorderly Greek default would lead to significant losses and strains on the ECB itself. When combined with the strong likelihood that a disorderly Greek default would lead to the hurried exit of Greece from the Euro Area, this financial shock to the ECB could raise significant stability issues about the monetary union.

Self-Serving, Misguided Hype by IIF

That "confidential" PDF is one of the biggest examples of self-serving nonsensical financial hype stories as you can find anywhere. It was put together by nannyzone supporters attempting to scare everyone about eurozone breakup costs.

For starters the ECB will not be impacted by Greece regardless of what happens. The ECB would be made whole by EMU member nations if necessary.

Moreover, the idea that tiny Greece will "cause" a Lehman-like cascade is farcical. The "cause" of this mess is the woefully inept treaty that created the eurozone.

Greece, Spain, and Portugal are all bankrupt and all will exit the eurozone in due time and one cannot lay the blame for this on Greece. Indeed, had the fools at the EMU, IMF, and ECB allowed Greece to default two years ago, damage would have been minimized.

Foolish attempts to "contain" Greece made matters far worse. That the damages will be higher now is a direct consequence of the ECB president Jaan-Claude Trichet's policy "we say no to default".

At every opportunity to do the right thing (let Greece default), bureaucrats in the ECB, IMF, and EMU member countries threw more and more money at Greece in repeated attempts to prevent the inevitable.

Only Realistic Solution is Eurozone Breakup

Throwing still more money at Greece now will not prevent Greece, Portugal, and Spain from leaving the eurozone later. Instead, repeated attempts to stay on this road-to-ruin will do nothing but up costs later on, just as Miracle Monti's misguided LTRO programs will likewise do.

For a more realistic discussion of the impacts and a recommended proper approach, please consider Report Shows Netherlands Would Benefit by Leaving Eurozone; Country by Country Aggregate Costs; Dutch Freedom Party Wants Euro Exit Referendum; Critical Juncture for Eurozone

The euro and the eurozone are fundamentally flawed. Those flaws cannot be fixed by throwing more money at the problem. The only solution that really works is a breakup of the Eurozone, and the sooner the bureaucrats accept that simple fact, the better off everyone will be.

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

Obama Unveils New J.P. Morgan, Wells Fargo Bailout Plan, Disguised as Mortgage Relief

Posted: 06 Mar 2012 09:46 AM PST

Under guise of helping homeowners, president Obama has finalized his plan to further aid banks. Please consider Obama's alleged Mortgage Relief Plan.

The White House on Tuesday announced it was cutting the mortgage fees charged by the Federal Housing Administration's refinancing program in another effort to help the languishing housing market recover.

President Barack Obama will announce the move at an afternoon press conference, his first since November.

An estimated 2 million to 3 million FHA borrowers will be eligible to benefit from the revamped program, the White House said in a statement.

The measures to be announced by Obama this afternoon do not need Congressional approval.

Under the revised FHA streamlined refinancing program for loans originated prior to June 2009, borrowers refinancing existing FHA loans would pay an up-front mortgage insurance premium of 0.01%, down from 1.0%. The annual premiums will be cut in half to 0.55%.

The reductions could save the typical FHA borrower about a thousand dollars per year, the White House said.

Jaret Seiberg, senior policy analyst with Guggenheim, said the plan would be "broadly positive" for housing and the economy by reducing foreclosures and freeing up income for consumers.

Big banks like J.P. Morgan Chase JPM and Wells Fargo WFC would see fee income related to FHA mortgages spike with this program, Seiberg said in a research note.

Broadly Positive For Whom?

Contrary to the opinions of Seiberg, this plan will not be "broadly positive" for housing and the economy any more than numerous other misguided attempts purported to do the same thing, all of which failed at their stated intent.

Throwing more taxpayer money down the drain will of course be "broadly positive" for big banks that will see income rise.

Indeed, much of the rally in bank shares this year has been in regards to "broadly positive" measures by the administration and the Fed purposely designed to bailout banks in contrast to stated reasons.

Moreover, the plan is sure to be "broadly positive" for Obama's reelection chances, and "broadly negative" for taxpayers who will no doubt end up footing the bill, perhaps in more ways than one.

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

Misty Water-Colored Memories, Dirt-Cheap Stocks, and Patient Opportunism

Posted: 06 Mar 2012 02:12 AM PST

Looking at forward earnings estimates, buy recommendations, and numerous explanations once again as to why "stocks are cheap" I am left wondering (to paraphrase Barbara Streisand) "Can it be that it is all so simple now? Or has time repeated every lie?"

Looking back, all that's left from the housing crash is "misty water-colored memories" of opportunities to cash out at the top (or dreams of not buying in the first place). The same can be said of the Nasdaq technology bubble that peaked at 5132 in March of 2000.

12 years later, the Nasdaq has managed to crawl back to 3000. Will it be another 10 years before the Nasdaq again hits 5000?

"Dirt Cheap" says Analyst Dick Bove

In 2000, in 2007, and again recently, we have heard many misguided explanations as to why "stocks are cheap". Some use forward earnings estimates, others tortured rationale such as "stocks are cheap compared to bonds", and still others use historical P/E estimates as if recent history is a guide to repeatable earnings.

Recently, analyst Dick Bove said Bank Stocks 'Dirt Cheap' as Image Starts to Turn

The Rochdale Securities vice president of equity research has long held that big banks have been most hampered not by their balance sheets by rather by negative perceptions - from Washington, Wall Street, and individual investors.

But as positions improve and policy makers begin to indicate that some of the more onerous new regulation proposals could be eased, that in turn presents opportunity, Bove said.

"What we're looking at is the complete change in attitude towards this industry from what it's been over the past three years," he said in an interview. "What has killed this industry over the last three years has been the negative psychology. It's not negative any longer."

"If you take a look at this industry based on any historical comparison to what the true value of the companies would be, they're dirt cheap," Bove said. "They remain dirt cheap, and the fact is that either you've got to come to the conclusion that the industry will never get back to the multiples it had in the past...or that it will get back to where it was in the past, in which case these stocks are still very, very cheap."

Warning: A New Who's Who of Awful Times to Invest

Please compare the analysis by Bove to that presented by John Hussman in Warning: A New Who's Who of Awful Times to Invest

Banking Notes

The FDIC Quarterly Banking Profile for the fourth quarter of 2011 was released last week. The headline: "Banks earned $26.3 billion in the fourth quarter, an increase of $4.9 billion (23.1%) from the same period in 2010." This FDIC report was quickly picked up by news articles as a sign of clear recovery in the banking sector.

The details: "Earnings benefited further from lower provisions for loan losses. Insured institutions set aside $19.5 billion in provisions for loan losses during the fourth quarter." The amount set aside for loan losses declined $13.1 billion (40.1%) from the fourth quarter of 2010. Actual net charge-offs of $25.4 billion exceeded loss provisions of $19.5 billion. As a result, total loan loss reserves declined by $6.3 billion (3.2%), falling for the 7th consecutive quarter. Meanwhile, full-year net operating revenue declined for only the second time since 1938 (the only other decline occurred in 2008).

In another widely reported sign of recovery, the number of insured institutions on the FDIC's "problem list" fell from 844 to 813 during the quarter. Of course, 18 insured institutions actually failed last quarter, and so are no longer on the list. Nearly 1% of insured institutions were merged into other institutions during the quarter, likely accounting for much of the remainder.

Similarly, banks enjoyed their largest quarterly increase in lending since 2008, which was hailed as a sign of resurgence in economic activity.

A good amount of bad debt has been written down, but the remaining bad debt still needs restructuring. Notably, non-current assets and bank-owned non-foreclosed property ("other real estate owned" or OREO) is actually a larger percentage of bank assets today than in 2008. Restructuring generally means reducing the interest spread or writing down a portion of the principal, and this process is likely to siphon off earnings in the financial sector for years. Despite their preferred status as "risk on" speculative assets, I continue to view financials as a minefield.

Bubbles Are Not Reblown

To Hussman's distinctly sobering bank forecast, let me add a couple of thoughts. For starters, the last bubble is not re-blown.

Consider the "4 horseman" of the internet boom: Microsoft, Intel, Dell and Cisco. Where are they now? Sure there are some new leaders like Google and Apple, but the old ideas have languished.

Consider the housing bust: In spite of every trick in the book used by Congress and the Fed, housing prices make new low after new low.

Consider the banking sector: In spite of every effort by the Fed to get banks to lend, banks simply are not lending.

I suggest the financial sector will be dead money (at best) for years, perhaps decades, just as waiting for the return of Intel, Cisco, or Microsoft has been.

Cisco Monthly

click on chart for sharper image

Citigroup Monthly

Is there going to be another credit lending bubble?

Take a look at excess reserves parked at the Fed for your answer. The same can be said for reserves piling up at the ECB. So where's that earning's growth going to come from? Mars?

About That Increase in Lending

Analysts went gaga (a continual state of affairs actually) over recent increases in bank lending. For example, consumer credit expanded by $19 billion in December of which $11.8 was non-revolving credit.

I took a look at non-revolving credit in Consumer Credit "Demolishes Expectations" Really? No Not Really! The "Non-Bounce" in Non-Revolving Credit and noted that $8.8 billion of that is growth in federal government loans (which just happens to be where student loans are parked).

Non-Revolving Loans Minus Government Loans

Non-Revolving Loans Minus Government Loans Detail

True Bounce in Percentage Terms

Note that the year-over-year "bounce" has not even gotten back to the zero-line in spite of exceptionally easy comparisons.

Eight Reasons Banks Aren't Lending

Banks are capital impaired
New Basel may require banks to hold more capital
Few credit-worthy businesses want to expand
Banks can park trillions of dollars at the Fed and make .25% interest risk-free for doing nothing.
Demographics: Retiring boomers are scaling back purchases
Real wages are declining
Banks are sitting on massive amounts of real estate, SIVs, and off-balance sheet garbage still not marked to market
Banks simply do not like the risks

Are U.S. Stocks (In General) Dirt Cheap?

Still think bank stocks "dirt cheap"? Heck, are stocks in general dirt cheap? Let's return to Hussman for an opinion.

Last week, the estimated return/risk profile of the S&P 500 fell to the worst 2.5% of all observations in history on our measures. This is not a runaway bull market. Rather, it is a market that again stands near the highs of an extended but volatile trading range. I am convinced that the breakdown of the market from this range has been deferred only through repeated and extraordinary central bank actions.

Importantly, the market is again characterized by an extreme set of conditions that we've previously associated with a "Who's Who of Awful Times to Invest." The rare instances we've seen this syndrome historically are reviewed in that previous weekly comment. They include the 1972-73 and 1987 market peaks, and several instances since 1998.

Arguments that stocks are "cheap on the basis of forward operating earnings" fail to adjust for the record high level of profit margins (about 50% above their historical norms), and also apply bubble-era norms for price-to-forward earnings multiples. This is the same argument that analysts made in 2007, and it is dangerously wrong.

Hussman has made those kinds of arguments before and so have I. If anything, I think Hussman may be an optimist. Indeed, I believe there is a decent chance of "Negative Returns for a Decade"

February 07, 2011: Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think
March 15, 2011: Anatomy of Bubbles; Negative Returns for a Decade Revisited; Is Gold in a Bubble?
August 23, 2011: Another "Lost Decade" Coming Up; Boomer Retirement Headwinds; P/E Expansion and Contraction Demographic Model; Negative Returns for a Decade Revisited
August 29, 2011: Value Restoration Project: Stock Market Valuations and Trends Over Time
January 23, 2012: Debt and Deleveraging: Did the U.S. Overcome the Debt Crisis? Light at the End of the Tunnel Anywhere? Five-Pronged Solution

Clearly I have been preaching a consistent message, and equally clearly the market has other ideas. I was in a similar situation in 2006, calling for a recession when the yield curve inverted, waiting an agonizingly long time for it to arrive.

This is yet another agonizingly long time for me as it has been for Hussman who writes ...

My greatest concern as an investment manager is the possibility that some number of our shareholders will grow so exasperated with remaining defensive during these periods that they capitulate and take a significant position in the market at the worst possible point.

In a market that has now underperformed Treasury bills for more than 13 years, with two plunges of more than 50% in the interim (all of which we anticipated), my hope is that shareholders recognize our record in identifying major downside risks, and understand - if not fully agree with - my insistence on stress-testing our methods against Depression-era data in 2009 in response to the credit crisis.

The completion of the present bull-bear market cycle (and it will be completed) will undoubtedly present strong opportunities to play offense, but today stands among a Who's Who of the worst historical times to do so. Particularly for investors who do not have a large number of future cycles between now and the point they will need to draw significantly on their assets, a defensive stance is crucial here.

Red highlighting is mine.

Here is a quote from Howard Marks at Oaktree Capital as referenced by Hussman.

Howard Marks, Oaktree Capital, The Most Important Thing (2011)

"You simply cannot create investment opportunities when they're not there. When prices are high, it's inescapable that prospective returns are low. That single sentence provides a great deal of guidance as to appropriate portfolio actions. Patient opportunism - waiting for bargains - is often your best strategy."

I tracked that message down to chapter 13 of Marks' Google Book The Most Important Thing: "The Most Important Thing Is .... Patient Opportunism"

The wait may be agonizing, but it beats the consequences of plunging in at exactly the wrong time as happened in the Nasdaq in 2000, in housing in 2005 (on arguments "get in now before it's too late), and in the stock market in 2007.

History suggests there will be better opportunities around the corner for those who have the patience to wait for them. How long that wait might be is still anyone's guess.

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

Monday, March 5, 2012

Mish's Global Economic Trend Analysis

Greek 1-Year Bond Yield Hits 1,006%
Report Shows Netherlands Would Benefit by Leaving Eurozone; Country by Country Aggregate Costs; Dutch Freedom Party Wants Euro Exit Referendum; Critical Juncture for Eurozone
Eurozone Services and Composite PMI Back in Contraction; Italy, Spain, France at New Lows
Disingenuous Recession Explanations from ECRI Regarding Coincident Indicators; An Email Response From ECRI; Does the ECRI Even Believe Its Own Indicators?

Greek 1-Year Bond Yield Hits 1,006%

Posted: 05 Mar 2012 05:28 PM PST

As a matter of curiosity more than anything else, I occasionally take a peek at Greek bond yields. Today, the Greek 1-year yield topped 1,000% for the first time.

The following chart courtesy of Bloomberg.

To be specific, the yield is a nice 1,066.661%

That yield reflects the idea that 1-year bonds will be nearly worthless before the month is over.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Report Shows Netherlands Would Benefit by Leaving Eurozone; Country by Country Aggregate Costs; Dutch Freedom Party Wants Euro Exit Referendum; Critical Juncture for Eurozone

Posted: 05 Mar 2012 02:50 PM PST

Report Shows Netherlands Would Benefit by Leaving Eurozone

Inquiring minds are reading a 73 page detailed report The Netherlands & The Euro that explains country by country why Italy, Greece, Portugal, and Spain are going to need lots more money, and the Netherlands and Germany will end up footing the bill.

The study highlights the fundamental flaws of the Economic and Monetary Union (EMU), the damage done by the euro to date to the Netherlands, and the potential costs down the road. The report conclusion is Netherlands should exit the EMU.

Here are some snips from the report regarding the finances of Italy, Spain, and Portugal.

Italian Projections

It cannot be assumed that roll-over of existing debt as it matures can be done with private lenders, as in the past. Italy has virtually zero real growth, and interest rates that, at 6% or so, are 4-5% ahead of likely future inflation. A government debt burden well over 100% of GDP in a country whose real interest rate exceeds its real growth rate by 4% or more is theoretically unsustainable. The debt ratio is almost certain to mount indefinitely. In this context, it is realistic to analyse a scenario in which financial markets conclude that Italy has slipped into the "Greek trap". In that case, official Eurozone financing will be needed not just for the budget deficit, but to refinance maturing debt as well. This would be a major added burden, as Italy's maturities are €305 billion in 2012, €175 billion in 2013, and €140 billion in 2014 and 2015, before falling below €100 billion a year. In this scenario, financing Italy within the Eurozone could quadruple in cost to a five-year average of €250 billion a year.

All of the above highlights the risk that Italy's debt will increase its net ratio to GDP from 100%. But the SGP, Maastricht criteria, and recent pact to "save" the euro, all require that Italy reduce its gross debt ratio to 60% of GDP or less. Clearly there is not the slightest chance of this within decades, unless Italy quits the euro and inflation rises. The setting of this target is fantasy – the 60% number is arbitrary, relating to no rational (or achievable) objective, though for Italy in the euro, with negligible potential nominal growth, the sustainable limit of government debt is clearly far below the current level.

Spanish Projections

Portugal is in desperate trouble – well beyond rescue, with business net debts at 16 times net cash flow – and Spain, and possibly France, in serious trouble: their ratios of around 12 times net cash flow being about that of Japan in 1996 that was followed by six years of zero growth. The analysis here will focus on Spain, its grim conclusions simply being grimmer for Portugal. French risks will be seen to be less.

The Spanish government has actively pursued a tighter fiscal stance, in line with the current Eurozone insistence on austerity. It is likely to prove counter-productive. Unemployment has already mounted from 8% in late 2007 to over 20%. The government's GDP estimates have ceased to be credible, registering a real decline of just under 5% in the recession, with negligible recovery since. It is highly improbable that such a recession, less than that of the US, Germany or Britain, would lead to a 12 percentage-point rise in unemployment, even with the lay-off of masses of low-productivity casual construction labour, much of it migrants from eastern Europe. But, as elsewhere, denial followed by bluff has been the standard Eurozone response to critics throughout the crisis. Almost certainly, the true fall in GDP has been much greater.

Spain's business finances, in the context of austerity, are caught in the same vice as Italy's government finances. As long as they stay in the Euro, austerity is worsening, not reducing, the debt problem. The only solution to these debt problems is growth, and that is precisely what the Berlin-Brussels-Paris political élite is ensuring will not happen.

The risk, obviously, is to the Spanish banking system. Even after Japan's six-year "drying-out" period, its banks had to undergo a substantial debt write-down in early 2003 (8% of GDP) before economic recovery became sound. In Spain, it is unlikely that exaggerated asset values – especially in real estate, but also in business generally – can withstand the coming economic downswing. Once they start to tumble, the call on the government to bail out the banks could cause its debt to soar. This is like Ireland a couple of years ago, when it dealt with the business debt problem, so that government debt, which has soared, now accommodates the business debt excesses of the boom. A recession in Spain now probably implies serious debt service problems in business, asset liquidation leading to falling asset prices, and major bank write-offs requiring government recapitalisation. There is a major danger that current austerity policies will lead straight to depression.

Portugal Projections

Portugal will probably be out of the EMU quickly if Greece goes, and this will bring the focus onto the two large Med-Europe countries, Italy and Spain, of which Italy will probably be "next up". The debt crises of Ireland, Portugal and Spain (in order of overall debt/GDP ratio, all of them with a higher ratio than Greece or Italy) lie in the private sector, and are therefore "slowburn".

In Portugal, where the chief export market is potentially recessionary Spain, where cost competitiveness is worse than Spain, and the business debt burden much higher at 16 times net cash flow, as is government debt relative to GDP, the private sector is actually still in deficit – the current-account deficit is larger than the budget deficit.

It is almost impossible to see how Portugal can avoid a crash. It is a poorer country than Greece, so the Franco-German decision to insist on no further government debt write-offs after Greece means the country is likely to be returned to penury – having in any case had very little growth since it joined the euro at its inception.

In this projection of Portuguese financial needs, the assumption is that coping with the extremity of business debt ratios creates a crisis that requires the write-off of existing debt over three years, as in Greece above. The projected government debt of zero in 2015 is therefore fictitious in the sense that the existing debt will have been replaced by a large volume of government debt to finance a banking recapitalisation. This could be substantially larger than Ireland's 2010 31% of GDP, as Portugal's business debt is larger than Ireland's was. Portugal's future debt capacity will be extremely low, as it has negligible potential growth and, assuming it stays in the euro, no inflation either – yet market interest rates are likely to be quite high.

Austerity + Subsidy – Not a Cure

In summary terms, curing a country's excessive debt problem requires one (or more) of the three 'de's: devaluation, default or deflation. The Eurozone has ruled out the first two – and adopting the third seems likely to achieve a fourth 'de': depression.

With unchanged Eurozone membership, the only method of adjusting costs and prices in Med-Europe to be competitive without extreme and constantly reinforced austerity, leading to depression, would be stimulation of rapid inflation in The Netherlands and Germany for a decade or two; and acceptance over that adjustment period of large fiscal subsidy payments to the deficit countries – not loans to be repaid later, but unrequited transfers. Such transfers are already happening through banking systems being subsidised by access to the ECB's repo "window" to finance themselves at interest rates well below those paid by their own governments

The danger for The Netherlands is that the potential for subsidy needed by Med-Europe is open-ended. All official scenarios are based on a rapid reversion to recovery, both in Eurozone economies and financial markets. Official scenarios never anticipate recession or financial crisis. This is part of the problem. The imbalances that are poisoning the Eurozone economies cannot be acknowledged because their cure, once they are acknowledged, clearly requires major exits from the euro, or its disbandment. Unacknowledged, they remain unaddressed, so continued financial deterioration is likely, unless the core Eurozone countries step in and provide the continuing subsidies outlined above.

Aggregate Potential Costs of Current EMU Membership

Dutch Freedom Party Wants Euro Exit Referendum

Bloomberg reports Dutch Freedom Party Wants Euro Exit Referendum

The Dutch Freedom party wants voters in the Netherlands to decide in a referendum whether the country should return to the guilder, De Telegraaf reported today, citing an interview with party leader Geert Wilders.

The Freedom Party hired Lombard Street Research to investigate the cost of maintaining the Euro zone and alternative scenarios if countries elect to leave, according to a statement by London-based FTI Consulting. The report will be presented in The Hague on March 5.

How Significant is the Dutch Freedom Party?

Inquiring minds may be wondering how big and influential the Dutch Partij voor de Vrijheid ('PVV', the Party for Freedom) might be. It's a good question, too. The short answer is the PVV is a critical part of the coalition holding the Netherlands government together.

Reuters explains in commentary from November, Analysis: Populists exploit euro zone crisis to gain influence

In the Netherlands, eurosceptic politician Geert Wilders is staging a campaign which could push the minority government to the brink of collapse after barely a year in power.

Last week, Wilders proposed that the Netherlands should hold a referendum on whether to ditch the euro and embrace the Dutch guilder again, pending a study of the long-term economic costs.

The government relies on the support of Wilders's Freedom Party (PVV), even though it is not in the ruling coalition.

PVV won the third-largest number of seats in parliament in elections last year, mainly because of its tough stance on immigration and Islam. It has a pact with the coalition of Liberals (VVD) and Christian Democrats (CDA), giving the pro-euro government the majority it needs to pass legislation.

Wilders denies he wants to bring down the government over the euro but he is playing up a split on a major issue between the coalition and the party on which it relies for survival.

"The euro and Europe is the key element of our foreign policy. How can we have a split between VVD-CDA who strongly support Europe, and PVV? This is the most dangerous issue for our cabinet," Eijffinger told Reuters.

"If you disagree on such enormously important issues then it becomes harder and harder to avoid accidents. At a certain moment it will accelerate."
The Freedom Party has become the second-most popular party in Dutch opinion polls, mainly because it opposes the costly bailouts of the euro zone's heavily indebted members.

By proposing a referendum, Wilders has heightened tensions between his party and the government. The euro zone debt crisis has already toppled several governments and now threatens to engulf Dutch Prime Minister Mark Rutte.

Rutte has shot down the idea of quitting the euro, saying it would be disastrous for the export-oriented Dutch economy.

But his government has been criticized for supporting bailouts of countries such as Ireland and Portugal, and a stability fund intended for future rescues as the euro zone debt crisis spreads like wildfire to bigger economies like Italy.

Opinion polls suggest many Dutch still hanker for the guilder, and resent having to pay for Europe's more profligate members, particularly while the Dutch government is cutting spending on healthcare, education, and social security benefits.

A poll at the weekend found 32 percent favored quitting the euro, 60 percent were against leaving, and 43 percent wanted a referendum on whether to return to the guilder. Another poll found that a majority wished the country had stuck with the guilder.

With elections due in 2013, Austria's Freedom Party is neck and neck with the governing Social Democrats and ahead of the conservative People's Party, the junior party in the coalition.

"Now even Paris and Berlin are thinking about splitting up the euro zone. We in the Freedom Party suggested this at the start of the euro crisis because in truth it is the only correct solution. This is the only way to save Europe," Strache said.

In an interview with the newspaper Oesterreich in May, he warned: "We have to get out of the euro before it plunges us into the abyss. We need a new currency along with other strong-currency countries."

Critical Juncture for Eurozone

This new report could very well topple the government of Dutch Prime Minister Mark Rutte. Put that bit of news together with the fact that French Presidential candidate wants to redo portions of the just signed "Merkozy" treaty. Polls show French president Nicolas Sarkozy will not survive the next set of elections.

German chancellor Angela Merkel is rapidly losing support as well. Ironically, the breakup of Merkel's coalition might be to a coalition wanting to lend still more support the nanny-zone.

Regardless, the net effect of the demise of the governments of Germany, France, and the Netherlands would be for far more feuding, adding to the overall pressure for a eurozone breakup.

The eurozone is at a critical juncture now. If governments in the Netherlands, Germany, and France collapse, and I think they will, the eurozone could be nearing the inevitable breakup stage already.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Eurozone Services and Composite PMI Back in Contraction; Italy, Spain, France at New Lows

Posted: 05 Mar 2012 10:58 AM PST

Markit Eurozone Services and Composite PMIs show renewed contraction due to drop in services activity, making it extremely difficult to deny that Europe is in a recession. Let's take a look at some numbers.

Markit Eurozone Composite PMI®

The Markit Eurozone PMI® Composite Output Index fell from 50.4 in January to 49.3 in February, dropping below the earlier flash estimate of 49.7. The final reading confirmed that business activity contracted in February, having briefly returned to growth in January following four months of decline at the end of last year.

Key points:

Final data confirm slide back into contraction, as drop in services activity offsets marginal rise in manufacturing output

Strong downturns still evident in Italy and Spain

Employment and prices charged fall as firms seek to cut costs and win new sales

Markit Eurozone Services PMI®

Service sector weakness poses new recession risk

Key points:

Service sector activity contracts for fifth time in six months

Ongoing fall in new business leads to job losses

Growth in Germany contrasts with steeper declines in Italy and Spain

Business confidence hits seven-month high

Of the four largest euro countries, only Germany showed expansion in February, and the rate of growth slowed from January's seven-month high. The French service sector stagnated, ending a two-month period of mild expansion. Both Spain and Italy registered steep contractions, with the rates of decline gathering momentum in both cases.

Nations ranked by business activity (February)

Ireland 53.3 12-month high

Germany 52.8 2-month low

France 50.0 3-month low

Italy 44.1 4-month low

Spain 41.9 3-month low

Spanish service providers reported a further particularly steep drop in payroll numbers, and employment also fell sharply in Italy's service sector. French headcounts rose only slightly, while services employment growth in Germany slowed to the weakest since June 2010.

Companies frequently sought to boost sales by cutting prices, and average prices charged for services fell for the fifth time in the past six months as a result. Price trends varied markedly by country, however, ranging from ongoing upward pressure in Germany to steep falls in Spain and, to a lesser extent, Italy. France registered a slight fall in prices charged for services, reflecting the stagnation of new business flows in February.

In contrast to the trend for charges levied by service providers, input prices in the sector rose for the twenty-seventh straight month, pushed up in many instances by higher fuel and energy prices.

Profit Squeeze

Note that prices received fell for the fifth month in six, but prices paid rose for the twenty-seventh straight month.

Let's take a look at the second biggest economy, France, to see what is coming up.

Markit France Services PMI®

French service sector output stagnates in February, despite rise in new business.

Key points:

Final Markit France Services Activity Index(1) at 50.0 (52.3 in January), 3-month low.

Final Markit France Composite Output Index(2) at 50.2 (51.2 in January), 2-month low.

Recent growth of French service sector output slowed to a halt in February, as activity levels stagnated. This was despite a marginal rise in new work intakes, with poor weather impeding output. Nonetheless, backlogs of work declined again, albeit only slightly. A mild increase in staffing levels was indicated. Future expectations strengthened markedly in February, albeit remaining below the long-run series trend. Meanwhile, strong competition led to a further reduction in output prices despite solid input cost inflation.

Spain is in an economic depression as are Greece and Portugal. Italy is not in a depression but it is a basket case as shown by the business activity above.

See that positive GDP in the France chart? Don't expect it to last because it won't.

Moreover, austerity measures across the board coupled with a slowdown in Asia strongly indicate the vaunted German export machine is about to break down as well.

The European recession will be both long and deep.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Disingenuous Recession Explanations from ECRI Regarding Coincident Indicators; An Email Response From ECRI; Does the ECRI Even Believe Its Own Indicators?

Posted: 05 Mar 2012 01:13 AM PST

Late last month in ECRI Sticks with Recession Call on CNBC; More than a Bit of an Exaggeration by Achuthan to Make His Call? I questioned the ECRI's use of coincident indicators to make a claim regarding recession

I count three instances between 1990 and 2000 where ECRI coincident indicators flagged a recession by the methodology Achuthan cited.

I have numerous other problems historically with ECRI claims, including their alleged "perfect" track record. Please see A Look at ECRI's Recession Predicting Track Record for details.

This time, I happen to think Achuthan has very valid points. However, once again, Achuthan has a hard time articulating them in a purely factual manner in spite of the fact he is clearly bright and articulate.

Email Response From ECRI

In response to that article, reader "Art" sent an email to the ECRI and received this email back from Melinda Hubman, ECRI Managing Director, Operations.

Hi Art,

Actually, it is incorrect to say that the U.S. Coincident Index (USCI) year-over-year growth rate dropped even more in ~91, 95 & 98 and no recession followed.

We have attached an Excel file showing the straightforward calculations, based on the USCI data available from ECRI's website (http://www.businesscycle.com/reports_indexes/allindexes).

The latest USCI growth rate is 1.94% (which can be rounded off to 1.9%). In January 1996, it had dropped only to 2.06% (which can be rounded off to 2.1%). This was certainly not below current readings. Of course, no recession followed.

In 1998, the USCI growth came nowhere near current readings, so the question doesn't arise. It wasn't until January 2001 that it fell below 2%, and the recession began two months later.

The attached worksheet marks all months when USCI growth, rounded off to one decimal place, fell to 2.1% (marked in blue) or to 2.0% or below (marked in red).

If you look at all the occasions in the last 50-plus years when USCI growth fell to 2.0% or below (marked in red), it is clear that recessions began around those dates (obviously, we don't include the occasions when USCI growth had risen through 2.0% following the recessions).

In sum, it is precisely accurate to claim that y-o-y USCI growth has never dropped to current readings in the past 50-plus years without a recession ensuing.

Kind regards,

Melinda Hubman
Managing Director, Operations
ECRI

Disingenuous Response

I am rather amazed at the disingenuous response from the ECRI.

The ECRI rounded down 1.94% to 1.9% then rounded up 2.06% to 2.1% to make their claim. Really! You cannot make this stuff up.

The ECRI sent an excel spreadsheet to reader Art, and I took that exact spreadsheet and created a chart from it. Here is my chart.

ECRI Year-Over-Year Percent Change in Coincident Indicators

click on chart for sharper image

Incredulous Defense

Somehow the ECRI wants us to believe that a year-over-year plunge in coincident indicators from 3.71% to 1.94% (a 1.77 percentage point drop in 15 months) is more important than the 1995-1996 plunge from 5.23% to 2.06% (a whopping 3.17 percentage point drop in 12 months).

I am not the only one in disbelief of this ridiculous position.

Georg Vrba, P.E. wrote a pair of articles on Advisor Perspectives on the subject.

Is There Something Magic About 2 Percent?

I want to continue the discussion with a point Vrba missed, specifically the "magic" 2 percent threshold.

Melinda Hubman, ECRI Managing Director, took great "rounding" pains to defend a dip below 2 percent as if a decline to 1.94 percent was significant but a far bigger percentage point decline to 2.06% was not.

Indeed.

Spotlight 2007

Please take a good look at that chart created using ECRI data, supplied by the ECRI. What I want you to focus on is the decline in March of 2006 from 3.76% to 1.80% in October of 2007, all the way to 1.05% in February of 2008.

Please consider this image clip from the November-December 2007 ECRI Outlook (now conveniently redirected by the ECRI to another spot).

Got that?

The ECRI in its November-December 2007 Outlook, in spite of that massive drop in coincident indicators, in spite of a recession that I believe should have been obvious, actually said "this weakness is not pronounced, pervasive and persistent enough to be recessionary"!

Coincident indicators did not appear to be a concern at all in 2007, now (out of the blue), they are paramount.

Saturday, January 05, 2008
ECRI Says Fed Has Room To Cut Rates Despite Fears of Inflation

"WLI growth is now at its worst reading since the 2001 recession. However, the WLI's recent decline is not based on pervasive weakness among its components, suggesting that a recession could still be averted," Achuthan said.

Somehow a recession that had already started could be avoided.

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.

If we have a recession this year, it would turn out to be the most widely anticipated recession in history. Clearly, the pessimism of consumers and business managers could cause them to cut spending, creating a self- fulfilling recession prophecy. But there is another side to the story.

At turning points, a few months' lag in policy action can be immensely costly. If it spells the difference between a recession and a soft landing, a couple of months' delay can end up costing a couple of million jobs and couple of hundred extra basis points in rate cuts – and still not have the same effect. What a stitch in time can accomplish early in a down cycle cannot be achieved, even with far more aggressive action, a few months down the road. At best, forceful but delayed action can mitigate the severity of a recession.

Amazingly, in a recession that was now two months old, with coincident indicators all the way down to 1.05%, the ECRI saw a "Window of Opportunity" to avoid a recession.

What's even more amazing is the ECRI's discussion of a "soft landing"!

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.

The bottom line is that the outcome was not pre-ordained. Policy-makers had a choice about the speed with which stimulus took effect. If they had understood this, their actions could indeed have averted this recessionary downturn.

ECRI Digs Deeper and Deeper Holes

At the end of March the ECRI was still in denial about the recession that was then four months old! Amazingly, the ECRI has the unmitigated gall to claim a perfect track record at predicting recessions.

By the way, according to the Excel spreadsheet sent to Art, the ECRI monthly coincident index was .62 on March 1, 2008 and .32 on April 1, 2008 (the ECRI having finally thrown in the towel just 4 days prior).

In attempting to defend the indefensible, and by attempting "mind over indicators" the ECRI has dug a hole that is impossible to get out of.

Does the ECRI Even Believe Its Own Indicators?

I have to ask a serious question. Does the ECRI even believe its own indicators?

If it does, then why did the ECRI refuse to see a recession in late 2007 that should have been blatantly obvious? If it does, then why all these contortions now?

The only explanation I can come up with is Achuthan and the ECRI form an opinion, then twist and turn past history to defend it.

In this case, the ECRI made extensive use of coincident indicators to make its point, having totally ignored coincident indicators in similar conditions as recently as 2007. When you do that, you miss things, serious things, as I pointed out above.

As a result, the ECRI looks ridiculous.

On Making Mistakes

Regardless of how it may look, I do not have anything against the ECRI per se. Everyone makes mistakes. I have made dozens and I will make dozens more. The only way to not make mistakes is to not predict anything. However, I do have problems with people twisting facts and making claims known to be inaccurate.

The problem the ECRI has is twofold.

Pretending they have a perfect track record when they don't
Twisting and contorting their own indicators to say what they want them to say

One can only get away with each of those for so long. Indeed, on point number two, I would have to say the ECRI's interpretation has been good enough, long, enough, to generally mask the problem.

However, repeated cover-ups eventually blowup in spectacular fashion, just as they have done now.

About That 2012 Recession Call

In spite of all the above, I happen to like the ECRI recession call. Yes, I am biased, but it is hard to find anyone who is not.

I was way early in 2006 when the yield curve inverted, and I was early again this time, but never emphatic as was economist David Rosenberg with his June 13, 2011 "99% chance of US recession by 2012"

To go out on a limb, I think GDP in 2012 is going to hugely surprise on the downside, and 1st Quarter GDP may be as low as zero to .5%. A negative number (or more likely a revised negative number) would not shock me in the least.

If so, there is still room for the ECRI to be correct. The ECRI needs (by its own admission) a recession by mid-year to be correct. It will be interesting to see how much they twist and turn a few months from now.

However, even if GDP tanks big time, the NBER (the official designator of recessions) may not acknowledge the recession for another six months to a year.

In general, delayed NBER calls explain why the ECRI can also get away with late calls. However, it fails to explain why the ECRI stuck its neck out so early this time. The most likely explanation is as described earlier: "mind over indicators".

I don't care that much, recognizing that perfection is simply impossible. However, it does pose a big problem to the ECRI because they pretend they are perfect even though facts prove otherwise.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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