ECRI, the Economy, and the Stock Market

ECRI’s WLI was released Friday and ticked up to 128.8 for the week to Oct. 30, from a revised 128.3 the previous week. However, “the index’s yearly growth rate fell to a five-week low of 26.3 percent from 26.9 percent last week. ECRI noted, ” The weekly index was up due to higher commodity prices”.

But there is a problem here. In ECRI’s own words their Global Commodities Index is the only reason WLI is up. If it weren’t for their proprietary Global Commodities Index, both indicators would now be down three straight weeks. This would be a clear bear signal for the stock market, if not for the economy. This is a problem because the Global Commodities Index is no longer a leading indicator for the US.

From my first post:

<<< The importance of the global commodities index in last weeks performance of the WLI raised a red flag. It’s the word “global”. Not only is this index global in nature, but in 2009 China has major influence over all commodity prices. No longer is it the US. China uses 3x as much commodities as we do and accounts for all the growth in the world in many commodities. While an international commodities index would have worked well in the US until 2000 it doesn’t now. No more than the price of tea in China.

If you wanted to make the case that price increases in China affect increases in US economic activity, you would have to at the very least demonstrate that demand in China results in imports from the US. This is the only way you could even begin to justify the use of such an index as a leading index. This would not work though because US exports to China are so low. They are low because there is no mechanism to translate demand in China into imports from the US . The reason is the mechanism has been deliberately broken by the Chinese government. They have refused to allow a free market in their exchange rate with the US. So what happens in China stays in China .

China has been growing 8 – 9% and we have been experiencing negative growth. There is just no cause and effect relation between them and us. So a price index where they have the main influence has no predictive value here. Bottom line, imo ECRI should have shown two down weeks back to back and the stock market should be down a lot further right now. >>>

Why is this just coming up now? The commodities index would not have been a problem before, because the last recession took place in 2001 before China was the commodities powerhouse it is today.

The Employment Situation report also released Friday was a major downside surprise, but not enough of one to overcome all the upside surprises of the first four days of the week. At least it rescued my wrong prediction for a week of downside surprises from making me a reliable inverse indicator. At 10.2%, unemployment has become so pervasive that almost everyone knows someone who is unemployed and that affects sentiment and spending. To echo Rosenberg and others, it is hard to imagine a recovery with such sharp increases in unemployment. Although the week on balance was bullish for the economy, it was mixed enough in light of the two prior weeks of bearish economic news to say the positive and negative economic signals are still roughly in balance. The most plausible forecast is not a W at this time, but something more like teeth on a horizontal saw.

Next week is an extremely light week for economic releases with only jobless claims and consumer sentiment at the end of the week, so the market will have to reflect this week for a while and drift with its dominant inclination.
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There has been much talk about why the “real” unemployment figures are actually so much worse “than what we are being told,” I want to weigh in on this issue. Also because some of it really does rise to the level of conspiracy theory. Today the unemployment rate, U3 series, increased 4%, from 9.8 to 10.2%. The series U6, which includes those who stopped looking, those who are working part time and all who the gov’t calls marginally attached to the workforce, actually went up only 3%, from 17% to 17.5%.

If you look at the historical indexes of U3 and U6 they each go up and down roughly the same percent each month and over time. The ratio of U6 to U3 is relatively constant. Nothing has been hidden. One isn’t deteriorating faster than another, and both are reported to the public. I’m not really sure one series does anything different than the other, but there are issues of comparability with other countries and through time.

Take for instance older data series from before the current post war era. In 1929, shortly before the Depression the unemployment rate was as low as 0.65% and again it went below 1% during WWII. So if you suppose for a moment the “correct” unemployment series is U6 and it is compared with the unemployment rate in 1929 then you have to ask how much lower than .65% would the U3 equivalent be on that date? And if you want to compare it to the rate of 25.6% at the low point of the Depression, does today’s 17.5% really feel like we are three quarters the way towards the depths of the Depression or does the 10% feel more like its apples to apples with 25%?

Another common misconception is “the government changed the series on us.” Well if that happened you would have to see a a sharp drop in the rate on the one day they changed the series. It can’t be found because it doesn’t exist. No feathering in from one series to another either. Investors have a better use of their time as do market commentators who try and make something out of this.

Barry

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