Support For Gloom and Doom

When you take a position that spreads gloom and doom is that different than being a gloom and doomer? Perhaps, though the difference may be just how long you’ve been on that team. Another defining factor may be the zeal you have for your stated position.

Bright as they are, it would be fair to call Roubini and Rosenberg gloom and doomers. I’m beginning to feel I may be leaving the land of the “objective” and going over to the dark side with them. Admittedly I’ve been on ECRIs case for a while. I intend to stay there. But its not just me with ECRI.

In the last several weeks some pretty notable economists have come out with some surprising statements. Nobel laureate Paul Krugman did more than use the D word.

He stated we are in the early stages of a Depression, not the big one like in ’29, but the long less deep one like in 1873. A depression of course is in a different league than a double dip where economic activity could as drop as little as1% for instance. But if Krugman thinks the odds of a Depression are great enough to talk about it, then a double dip must be more like a slam dunk than just an ordinary lay up to him.

Today Robert Shiller of the Case Shiller Index joined the team. He said the odds of a double dip are greater than 50%. A very important forecast because of his well known early warnings on both the tech and real estate bubbles over the last decade.

And lastly the comment from Ben Bernanke, before a Senate Committee that current economic conditions are “unusually uncertain”. The significance here is the Fed had not spoken one word before then that hinted of a possible downturn in the economy. Not sure if “unusual uncertainty” will go down in history with “irrational exuberance” but they are words you don’t forget.

Back to ECRI. Lots of misinformation and misunderstanding about ECRI. Yes ECRI is the most qualified to interpret their own data. But that is not as obvious as it sounds and their advantage is actually quite subtle and limited. Their secret sauce is in the construction of the indexes, not in the interpretation. Their stated strong point is they are not doing economic analysis to make their calls. They are constructing indexes based on empirical relationships. Once those indexes are cast, it is the index which is doing the heavy lifting in making the call.

The point here is that any analyst can take their data series and match it to recession starting and ending dates. That process is independent of the construction of the series. The advantage to others doing it is to get an earlier call when it stacks the odds more in favor of the investor.

Many investors believe that ECRI holds back to reduce the odds of making miscalls, a laudable goal, but that also reduces the odds of an investor selling before the market drops as in this case. To be fair one of their four variables is not made available to the public, but that variable LLI Growth is derived from USLLI which is available.

Based on all the information available ECRIs indexes are very close to making a call, regardless what their management does. I am hoping to make my own call by the end of the week, based predominantly on ECRI data.

ECRIs data was recently the subject of an analysis by Nomura which concluded “ECRI’s weekly index is exaggerating the risk of recession because of the large weight it places on mortgage purchase applications.” Their thesis is mortgage apps account for too large a proportion of ECRIs movement, in this case downward movement, and if it were not biased in that way ECRI would not be so close to making a call.

Nomura’s analysis is flawed. As close to layman’s terms as possible – you cannot do multivariable regression and correlation analysis and then do a single variable analysis for one of the variables and conclude that it plays the largest role. In fact an economist friend did the analysis correctly and came up with less than a 20% contribution from mortgage apps, not close to 50% as Nomura did.

The moral here: When you think you may be zealous in your own position, look at others and if they are cutting corners to reach conclusions and you are not, then maybe they are the perma bulls rather than you the gloom and doomer.



4 Responses to Support For Gloom and Doom

  1. Egor says:

    HH: the above made me chuckle (is that to silently LOL in www vernacular?) when you mentioned big Ben saying “unusually uncertain”… versus Alan and his “irrational exuberance” remark of old. We wonders Precious, do Fed Chairmen toss out phrases such as this and know they will make a mark? Methinks they know, being anal about precise language.

    Of more interest than the Congressional circus (testimony) was release of the June FOMC minutes. This little gem sure caught my eye:

    The FOMC June Meeting Minutes – P12 – Summary of Economic Projections

    […] Overall, participants continued to expect the pace of the economic recovery to be held back by a number of factors, including household and business uncertainty, persistent weakness in real estate markets, only gradual improvement in labor market conditions, waning fiscal stimulus, and slow easing of credit conditions in the banking sector. Participants generally anticipated that, in light of the severity of the economic downturn, it would take some time for the economy to converge fully to its longer run path as characterized by sustainable rates of output growth, unemployment, and inflation consistent with participants’ interpretation of the Federal Reserve’s dual objectives; most expected the convergence process to take no more than five to six years. […]

    While I am sometimes thought a Gloomy Gus (perpetually in the doom and gloom camp) – “five to six years” is measured from when? From the “longer run path” peak, or the “longer run path” nadir?

    Or, is it the Fed projects return to (new) normal 5-6 years from now?

    I’m very interested in what call you might make irt ECRI.

    • hhill51 says:

      You’ll have to give your appreciation to BarryZee, my much more serious fellow-traveler and virtual thorn in the side of the Economic Cycle Research Institute.

    • hhill51 says:

      Egor —

      The more serious part of your question is one I’ve been wrestling with for a while. Specifically, how long until the economy comes back to something we will call “normal?”
      I groan in disgust when I see the partisans say that small businesses aren’t hiring because high-end personal tax rates might not stay cut, or that uncertainty about health insurance reform keeps them from hiring (the latter especially, because the tax credits provided to small and medium businesses actually lower the cost of providing health insurance).
      I’m quite sure the dislocation (virtual dissolution) of the securitization market was far and away the biggest reason
      we aren’t seeing any hiring — when you don’t have access to inventory financing, receivables financing, or operating capital financing (all provided by banks securitizing leases, loans, mortgages or receivables), then you can’t commit to expansion. In fact, you can’t commit to more than the orders in hand.
      Affordable multi-year credit for revolving assets (recievables) or for capital goods (equipment leases or commercial mortgages) was almost a miracle for ordinary businesses with fewer than 500 employees. The big guys can issue public debt, but not the smaller guys.
      The collapse of the securitization market has made it almost impossible for even healthy small banks to lend for longer than a year or two, because they have short liabilities (deposits). They simply can’t take a 5, 10 or 30 year risk onto their balance sheets, and these days can’t sell the duration to the life companies and pension funds.

  2. gp says:

    its not that we are gloom and doom but lets be realistic also saying the housing market is recovering for like the past two years…. really now … I can tell you right now its not over and values have yet to bottom out because rates are too damn low

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: