Hussman Weekly Market Comment: Recession, Restructuring, and the Ring Fence
In recent months, our recession models have forcefully shifted to warning of oncoming recession. Our initial concern in August was based on a fairly compact set of indicators that we track as a Recession Warning Composite (see Recession Warning, and The Proper Policy Response ), followed by a deterioration a few weeks later in much broader statistical and ensemble models we've developed (see An Imminent Downturn ).
On Friday, Lakshman Achuthan of the Economic Cycle Research Institute reviewed the weight of ECRI's research, observing "Now it's a done deal. We are going into a recession." (Required viewing: Lakshman Achuthan on CNBC, as well as additional commentary at the ECRI website... I'll wait).
For us, the ECRI is an important source of analysis to confirm or question our own views, as it is undoubtedly the best private economic research group we know. They are conservative in their major economic calls, but are still invariably far ahead of the consensus. Though ECRI's Weekly Leading Index deteriorated sharply in 2010, ECRI did not go to a recession warning, and the Fed was successful in provoking enough hope, speculation, and pent-up demand to kick a downturn slightly down the road in any case. Soon after reaching what we've called "the cliff" at the end of June (when the major sources of fiscal support and Fed-driven speculation simultaneously ran out), numerous leading economic measures promptly collapsed.
The way you spot a thoughtful economist, in my view, is to listen for an understanding of both data analysis and equilibrium. In our experience, most economists and Wall Street analysts seem to analyze the economy as what I'd call a "flow of anecdotes" - weekly unemployment claims did this, retail sales did that, we got a positive surprise here, and so forth, without putting that information into any real structure and without knowing which data points actually matter or in what combination. In contrast, good economists think about the economy as a system - where multiple sectors interact. We tend to use words like "equilibrium" and "syndrome" when we talk about economic data - emphasizing that the best signals involve a whole conformation of evidence, not one or two indicators, where the data - in combination - captures a particular signature of recession or recovery. Look at how Achuthan described the situation on CNBC on Friday, and you'll see a good example of this sort of thinking:
"This is a done deal. We are going into a recession. We've been very objective about getting to this point, but last week we announced to our clients that we're slipping into a recession. This is the first time I'm saying it publicly. A broad range - this is not based on any one indicator - this is based on dozens of indicators for the United States - there is a contagion among those forward looking indicators that we only see at the onset of a business cycle recession.. These leading indicators, which are objective.. they have a certain pattern that they present in front of a recession, and that is in, that is in right now.
"A recession is a process, and I think a lot of people don't understand that; they're looking for two negative quarters of GDP. But it is a process where sales disappoint, so production falls, employment falls, income falls, and then sales fall. That vicious circle has started. You're looking at the forward drivers of that, which are different indicators - there's not one - everything's imperfect. The Weekly Leading Index .. that is saying unequivocally, this is recession. Long Leading Index, which has a longer lead, is saying recession. Service sector indicators, non-financial services where 5 out of 8 Americans work, plunging. Manufacturing, going into contraction. Exports, collapsing. This is a deadly combination, we are not going to escape this, and it is a new recession."
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