ECRI guys wrong?

[shalab]

If this bloomberg article is right, looks like the ECRI guys got it wrong.

 

http://www.bloomberg.com/news/2011-11-18/u-s-leading-indicators-rise-more-than-forecast-in-sign-of-growth-into-12.html

 

 

[bmichaud]

Perhaps, but their call relied more upon their "long term leading indicators" in conjunction with ST leading indicators. Last summer, in the face of a sharply negative ECRI weekly leading index, they came out and said no double dip due to the configuration of their long term leading indicators.

 

[Ben Graham]

The key thing to keep in mind is that stocks and the economy really have very little to do with each other. I know that sounds crazy, and counterintuitive, but it's true. Bear markets for stocks and recessions for the economy tend to overlap, which make them linked in the minds of the public and media, but they are asynchronous, which means they start and end on different timetables. Economists have competed with each other for decades to devise a formula that shows the secret yoke between the two, but to no avail.

[ERICOPOLY]

 

it's quite a mystery what they relied on. but whatever it is, their promotional forecasting gone wrong in the days of CNBC and the Internet, could mean an epic fall for this group, ala Elaine Garzarellli who proved once again that's it's just big guessing game. Some might call it a con game.

 

You stopped short of calling them glass lookers. Maybe they have a stone in a hat that they peer into?

[Parsad]

They will prove to be right, just not now!  ;D  I think there will be serious issues cropping up through the end of 2012 and into 2013.  I'm not getting very warm and fuzzy feelings about what I'm reading with Chinese bank loan losses and loan provisions.  I think the U.S. will do fine, and we are definitely in recovery mode which is slowly starting to heat up, but the headwinds will come from offshore...continued problems in Europe and over time China will cause problems.  Cheers! 

[oldye]

The U.S did pretty well in the 90s after the Soviet Union collapsed, perhaps we're in store for a similar period where lack of demand from Europe results in lower commodity prices and a higher standard of living. 

[ubuy2wron]

If Europe has a serious recession which seems to me a reasonable expectation then robust growth in the US is not very likely that said a housing turn around and I mean nothing more than an consistent uptick in housing construction and a continued uptick in auto sales should be enough to keep the American economy above zero for the forseeable future. If the 99% are not buying homes or cars there is no economy in the US.

  The most interesting change in the markets in the last 3 weeks is the fact that the risk on off trade is no longer corelated to the US Euro cross. We should be back to normal volumes starting next week can the mkts continue to climb their wall of worry?

[bmichaud]

on Bloomberg this morning still claiming they are right. Buffett weighs in Monday morning.

 

For someone that doesn't care about economic projection, you're johnny-on-it this morning.

 

 

 

 

FWIW - YTD, rail carloads are up .3%, intermodal is up 2.2%, and ton-miles are up 1.3%. See attached.

2012-02-23-railtraffic.pdf

[bmichaud]

http://www.businesscycle.com/news_events/news_details/5047

 

I'm not seeing the spin here. he lays out a pretty coherent case for why the economy is weakening and why recent strength in the data does not negate their call. We'll see what Dr. Buffett has to say on Monday.....

[bmichaud]

Yes he wasn't pounding the table. He simply presented the facts.

 

Here's a video from early 2008 - tell me it does not sound eerily similar to what he was saying now:

 

http://www.bing.com/videos/watch/video/making-your-money-work/3x7ta1ym

 

Of course the economy isn't as bad now as it was back then. But you don't think there will be negative consequences for market participants when economic data begins turning negative? Look at what happen to the equity and risky credit markets back in August when we had a "0 job growth" print.

 

But as value investors none of this information is pertinent since we're buying with a margin of safety.

[ERICOPOLY]

I wish the interviewers had asked him why the recent jobs numbers have been so good if they are following 5 months of declining personal income growth.  He himself argues that the jobs numbers should be trending down over the next few months because of the declining personal income growth. 

 

Personally, I wonder if declining cost of servicing household debt (refinancing boom) can step in to help offset the declining personal income growth.  He talks about history of recessions since WWII but has there been a period since WWII where there has been such a large reduction of consumer debt servicing costs going on at the same time?

 

First he said this:

jobs follow, they do not lead, consumer spending growth.  I'd say in the next few months they'd start to lag.

Then a moment later this:

look at personal disposable income.  that has been negative, now, growth for five months.

[bmichaud]

First he said this:

jobs follow, they do not lead, consumer spending growth.  I'd say in the next few months they'd start to lag.

 

Then a moment later this:

look at personal disposable income.  that has been negative, now, growth for five months.

 

So due to 5 months of declining disposable income consumer spending is now set to decline, which a slowdown in job growth will follow. Makes sense to me, perhaps I'm reading it wrong?

 

Personally, I wonder if declining cost of servicing household debt (refinancing boom) can step in to help offset the declining personal income growth.  He talks about history of recessions since WWII but has there been a period since WWII where there has been such a large reduction of consumer debt servicing costs going on at the same time?

 

IMO, since the overall debt load is too high for the private sector as a whole, we're reducing our spending in order to pay down principle, thus negating the effect of how cheap it is to simply service our debts.

[ERICOPOLY]

So due to 5 months of declining disposable income consumer spending is now set to decline, which a slowdown in job growth will follow. Makes sense to me, perhaps I'm reading it wrong?

 

Yes it makes sense.  Hence my question.  Why a large sudden pop in hiring in month #5 when the data suggests that it should be weakening?  What will employers know in month #6,#7,and#8 that they don't already know now?

 

IMO, since the overall debt load is too high for the private sector as a whole, we're reducing our spending in order to pay down principle, thus negating the effect of how cheap it is to simply service our debts.

 

Where is the data that quantifies the amount of extra (above the minimum) principle payments households are making?  I don't see this passed around commonly, but I'm sure somebody must have it. 

 

I also believe that most of the household debt is in mortgages, in which case nobody needs to make extra principle payments (the amortization schedule will get a historically rather large mortgage paid off in 30 years at a low interest rate without making extra payments).  You either have a smaller (normal size) mortgage at historically normal (relatively large) interest rate, or a significantly larger mortgage at a low interest rate (today's rates).  The payment might be exactly the same and in 30 years either way the debt is entirely repaid.  So why stress about paying it off faster than you normally would? 

 

Paying it down faster doesn't serve your best interests at all because:

1)  it's a 30 yr fixed rate amortizing mortgage -- the payment size is fixed and doesn't drop month-to-month no matter how much principle has been pre-payed

2)  paying it down early reduces the risk to the bank and increases the risk to yourself.  So it's self destructive to do so.

 

[bmichaud]

Where is the data that quantifies the amount of extra (above the minimum) principle payments households are making?  I don't see this passed around commonly, but I'm sure somebody must have it.

 

 

Purely my opinion, though I'm sure there is data out there that specifies how much of the overall consumer deleveraging is due to actual paydowns versus charge-offs.

 

Yes it makes sense.  Hence my question.  Why a large sudden pop in hiring in month #5 when the data suggests that it should be weakening?  What will employers know in month #6,#7,and#8 that they don't already know now?

 

Yes the pop in jobs is weird (Though I think it is explained by an unseasonably warm winter, or perhaps....the data is wrong - see the first paragraph of page 6 of the attached document), but isn't job growth suppose to lag spending growth? If so, then wouldn't it take a little while for job growth to decline if spending is just now starting to decline? Employers have experienced increased consumer spending over the last quarter of 2011 thus they don't feel the need to shed employees. Just now consumer spending is starting to decline, so won't employers only just begin laying off workers right now, then accelerate it as spending declines even further?

Who_Took_My_Easy_Button.pdf

[ERICOPOLY]

Where is the data that quantifies the amount of extra (above the minimum) principle payments households are making?  I don't see this passed around commonly, but I'm sure somebody must have it.

 

 

Purely my opinion, though I'm sure there is data out there that specifies how much of the overall consumer deleveraging is due to actual paydowns versus charge-offs.

 

Yes it makes sense.  Hence my question.  Why a large sudden pop in hiring in month #5 when the data suggests that it should be weakening?  What will employers know in month #6,#7,and#8 that they don't already know now?

 

Yes the pop in jobs is weird (Though I think it is explained by an unseasonably warm winter, or perhaps....the data is wrong - see the first paragraph of page 6 of the attached document), but isn't job growth suppose to lag spending growth? If so, then wouldn't it take a little while for job growth to decline if spending is just now starting to decline? Employers have experienced increased consumer spending over the last quarter of 2011 thus they don't feel the need to shed employees. Just now consumer spending is starting to decline, so won't employers only just begin laying off workers right now, then accelerate it as spending declines even further?

 

I added a bit to my prior post fleshing out why it's crazy to pre-pay any amount of principle on an amortizing 30 yr fixed mortgage.  I expect people to be rational but that's probably a mistake to expect people to work for their best self-interests. 

 

Regarding jobs:

Refinancing and spending a few hundred bucks a month LESS on the mortgage payment is actually better for the economy than getting an extra few hundred bucks a month MORE from your employer.  The reason is that the employer doesn't feel the pinch.  This may explain how you can have hiring in the face of declining personal income growth.  The household gets the same boost without the employer getting an offsetting pinch.  This situation probably hasn't existed in the rest of the historical data that he is looking at, thus potential for an error if he isn't thinking about it.

 

Well, we'll see.

 

[Santayana]

It appears the employment numbers are in fact weakening now.

 

http://www.gallup.com/poll/152753/Unemployment-Increases-Mid-February.aspx

 

 

[bmichaud]

Regarding jobs:

Refinancing and spending a few hundred bucks a month LESS on the mortgage payment is actually better for the economy than getting an extra few hundred bucks a month MORE from your employer.  The reason is that the employer doesn't feel the pinch.  This may explain how you can have hiring in the face of declining personal income growth.  The household gets the same boost without the employer getting an offsetting pinch. 

 

Well, we'll see.

 

Makes sense. Would be an interesting study to see how much refis have boosted consumer spending since FYE 2008.

 

[ERICOPOLY]

It appears the employment numbers are in fact weakening now.

 

http://www.gallup.com/poll/152753/Unemployment-Increases-Mid-February.aspx

 

That only measure the people who are looking for work but can't find it.

 

If you advertise a new job and two previously discouraged people come out of the shadows to apply for it, the unemployment rate goes up.

 

The perma-bears have told us time and again that unemployment is really much higher than it looks due to the number of discouraged workers who have given up looking.  Now is their time to jump out and make the denial that I am making (I doubt they will, because they are called perma-bears for a reason).

 

[Viking]

Buffett has consistently said that when housing gets better the general economy will improve. Earlier in 2011 he said housing may get better by the end of 2011. I am looking forward to reading Buffett's letter on Saturday to get his take on things (and I think he is doing a few interviews next week). My guess is he will be positive on a turn in housing happening sooner than people expect.

 

I do not expect housing to become a huge jobs engine moving forward. However, I think we may have hit bottom in 2011 and we may start to see a slowly improving housing market contribute in a positive way to GDP moving forward. The consensus view is housing is a train wreck and will continue to be a mess for years... this trade is so one sided right now that I wonder if the opposite view is not a profitable way to go.

[Santayana]

It appears the employment numbers are in fact weakening now.

 

http://www.gallup.com/poll/152753/Unemployment-Increases-Mid-February.aspx

 

That only measure the people who are looking for work but can't find it.

 

If you advertise a new job and two previously discouraged people come out of the shadows to apply for it, the unemployment rate goes up.

 

The perma-bears have told us time and again that unemployment is really much higher than it looks due to the number of discouraged workers who have given up looking.  Now is their time to jump out and make the denial that I am making (I doubt they will, because they are called perma-bears for a reason).

 

We just don't know which situation is causing the number to rise yet (fewer jobs or more applicants), but it should become more clear in the next couple of months.  Or this may just be a temporary blip and we start seeing a decline in the UE% again. 

 

Disclosure, I'm not a permabear, just for as long as you've known me :D    If only I had listened to my brother back in April 2006 when he told me about his friend Eric that had just made a huge option bet on some company I had never heard of called Fairfax.  Then I'd have a lot less to worry about ;D

[Vish_ram]

These ECRI guys are selling a product and people suck it up.

 

Even if ECRI guys are predicting economy accurately 75% of the time, and if assuming that you're correct 75% in predicting market using economic indicators (a generous number), you arrive at 55% chance of making $ using ECRI. That is as good as a coin toss.

 

[ERICOPOLY]

We just don't know which situation is causing the number to rise yet (fewer jobs or more applicants), but it should become more clear in the next couple of months.  Or this may just be a temporary blip and we start seeing a decline in the UE% again. 

 

I think looking at trends in job postings would be helpful, but I don't know where to find that data.

 

You'd think that if you can easily count rail cars as a proxy of activity then job postings could be done too.

[bmichaud]

I already demolished this notion by pointing out that UNP is way higher, despite two recession calls from ECRI over the last few years. It would have been foolish to sell it based on their forecast.

 

Except you happen to pick a stock, such as McDonalds, that is in a secular growth phase. Absolutely ridiculous. Why don't you use Apple or Priceline for that matter? The general investing public, which has a portfolio largely tied to the performance of the S&P 500, would have been better off selling back in early 2008 when the ECRI came out with their call and the S&P was at 1,300, then getting back in when ECRI said growth is set to resume in early 2009. Had the general public invested against the ECRI's call in early 2008 as you would recommend, they would have barely broken even through right now. Seems to be a pretty darn good way of avoiding a market decline, IMO.

[Santayana]

These ECRI guys are selling a product and people suck it up.

 

Even if ECRI guys are predicting economy accurately 75% of the time, and if assuming that you're correct 75% in predicting market using economic indicators (a generous number), you arrive at 55% chance of making $ using ECRI. That is as good as a coin toss.

 

except you just pulled 75% out of your hat. it's random. you have no idea how accurate they will be in the future and you have no idea that you can predict with accuracy of 75% what the market will do based on their forecast. I already demolished this notion by pointing out that UNP is way higher, despite two recession calls from ECRI over the last few years. It would have been foolish to sell it based on their forecast.

 

But your idea is a good, if flawed, defense of their service.

 

I don't think he was defending their service.

[ubuy2wron]

The consensus view is housing is a train wreck and will continue to be a mess for years... this trade is so one sided right now that I wonder if the opposite view is not a profitable way to go.

 

Viking, Me thinks you have not paid much attention to the homebuilders, the index has pretty much doubled since OCT. 4 the only group that has done better have been the European banks which only the TRUELY BRAVE (or foolishly brave) bought in the fall. I think Warrens little company may be one of the most interesting ways to safely participate if this residential real estate turn around has any legs.