ECRI’s report this morning is just the worst news the market has to contend with. When other things put Greece and the impending doom in Europe on the back burner, you begin to wonder if some walls of worry are just too high to climb?
ECRIs WLI had another down week, now five in a row. More worrisome is the rate of decrease in both the WLI and WLI Growth indices.
Looking back at 35 years of data there is no other time the rate of decline in each has been so sharp. The question is when does ECRI make their public call for a change in stance? Investors are justified in raising this question since institutions pay $100,000 annually for something the rest of the investing community gets for free.
I have made my call. It is sell.
That doesn’t mean I think it is likely the economy will have a double dip, just that it is more likely than last week. Currently I think the probability of a double dip has increased to a 35% chance of occurring within one year.
My sell on the market is not just based on ECRI. Stubborn unemployment claims that can’t seem to get below 450,000 is an indication the economy will barely hold its own. Final Sales GDP numbers have been running well below reported GDP, a reflection of cost reductions at companies. Read layoffs.
The Fed has no more dry powder. QE, quantitative easing, is not going to overcome the problems of a liquidity trap.
Fiscal response was not handled well the first time around in a better political environment. Any legislation for stimulus spending at this point is dead on arrival. It is also questionable whether further fiscal action would even work.
Some may recall Keynes’ allegory of putting people to work digging a mine with nothing at the bottom as a means of stimulating the economy. There is a limit to how many mines without ore at the bottom can be dug before that sleight of hand loses its potency, or the cure becomes worse than the Depression.
My own projection for GDP this year has been 1.5%. Final sales GDP should be in that ballpark. With such a low longer term rate of growth than reported GDP, it means recessions are more likely, just because it is so easy for any decline to get below zero starting from such a low base. With unemployment remaining high and payrolls showing very little growth eventually aggregate demand will slowly wither.
This, under a best case scenario, is not good for corporate profits and the market. A worst case scenario would be we have a double dip recession in the next 12 months. Coming so soon on the heels of this still unrecovered economy it would be hard to forecast just how deep it could go.
Another issue is China. This mostly affects commodities, but China is large enough to have additional effects on other countries as well like Germany and Japan as well as its neighbors.
China’s recent numbers are worse than they look. Steel demand a key indicator in China has been down for over a month. Automobile sales while still up smartly yoy are now down two months in a row, mom. It remains to be seen what China does about additional stimulus.
The May economic numbers, out last night look positive on the surface, but the most important one, Industrial Output, showed growth was down significantly from the prior month. This is the third month in a row this has occurred.
In 2008 this data series forecast the overall drop in China’s growth rate. Without China’s large and highly successful stimulus package it would have forecast a full blown recession. By next month the data coming out of China should be more pronounced and more visible to the stock market.
Europe of course is another source of concern. While contagion beyond the Eurozone can’t be completely ruled out it doesn’t look like any other country is on the same downward spiraling path as Greece. Nevertheless the headlines and continual surprises there raise the level of uncertainty enough to be a factor for investors. Even if no crisis develops, growth there will certainly decline and a be a negative for the world at large.
I really don’t see any good news anywhere you turn.