ECRI Recession Call Overview

[bmichaud]

ECRI came out with its initial recession call on September 30th, 2011 and has updated its call three times since then. Thought I'd aggregate all the videos for those interested....

 

September 30: http://www.businesscycle.com/news_events/news_details/1472

 

December 8: http://www.businesscycle.com/news_events/news_details/3105

 

February 24: http://www.businesscycle.com/news_events/news_details/5051

 

May 9: http://www.businesscycle.com/news_events/news_details/5093

 

 

Common sense would say that given the severity of the last recession the next recession would be a bit more shallow. However, given the deleveraging environment we currently find ourselves in, I wonder if the potential oncoming fiscal contraction coupled with potentially tepid monetary policy (though I would put money on Big Ben holding up his end of the bargain...) doesn't drive us into a post-1937 type recession and subsequent market downturn. In Dalio's in-depth look at deleveragings, he shows the "reflationary" period from 1933 to 1937 led by fiscal deficits and a -10% devaluation of the USD against gold (see page 8 of the PDF), which led to a 324% rise in the S&P 500 from 4.40 on 6/1/1932 to 18.67 on 3/10/1937 for a 5y CAGR of approximately 34% per year.

 

After the 1932-1937 reflationary period, real GDP contracted -3.4% in 1938. The S&P 500 peaked on 3/10/1937 at 18.67 with a Schiller PE of 22.2X (history-to-date Schiller PE was 15.2X at the time) and dropped 54% in almost exactly a year to 8.50 on 3/31/1938 with a Schiller PE of 10.1X. The S&P didn't reach 18 again until 1/10/1946 when it traded at a 14.6X Schiller PE.

 

This is all very rudimentary and largely off the top of my head (except actual data points), but interesting, IMO nonetheless. Perhaps what Fairfax is looking at to a degree?

An_In-Depth_Look_At_Deleveragings.pdf

[Parsad]

I don't think you'll see that sort of contraction in the United States, but you will see flat to zero growth.  This is very much a repeat of 1937, but in Europe!  They are headed for a severe recession...depression in some regions already...and that level of contraction may happen over there.  That will mean continued low interest policy here and slower growth.  Let's just hope nothing significant happens in China or Japan.  Cheers!

[bmichaud]

I'd agree with not seeing -3%, but it was shocking to me to see that the market declined -54% with only a -3% real GDP decline! We're at even lower valuations now, so just from that any decline won't be as bad, but still could be pretty nasty even with just -1% growth.

[Viking]

Since Q4 of last year stocks have had a great run. Over the past month I have been happy to lock in some pretty decent gains and now sit at almost 90% cash. Europe continues to be a mess; Asia looks to be slowing; the US??? Lately I have tried to pay less attention to organizations like ECRI and Hussman and focus more on buying quality that is out of favour and dirt cheap (i.e. US banks in Q4). However, I also love to read their stuff and I am sure it is impacting my thought process over time.

 

I am once again happy to sit in the weeds and wait for stocks I like to fall to crazy cheap prices. Seems to happen every year, although certain sectors get beat up more than others. Many low quality stocks are currently cheap (in declining industries (i.e. ABH), some with a lot of debt). I am waiting for more high quality stuff to get cheap (as happened in Q4). Patience will be the key.

 

I am becoming a scardy cat investor (buy when fear hits and sell when greed returns). With market PE multiples coming back down to earth we have had many years with lots of volatility and the market averages basically moving sideways (and down in real terms). Buy and hold will be a great strategy at some point in the future; just not sure that the bear market is over yet (started in 2000 for S&P). Regardless, I do need to work on my selling strategy as I do have a habit of exiting positions early.

[Valuebo]

Viking, I remember you being a big BRK fan at 1,15xBV and below last summer. Have you sold now? How would you justify selling brk (or any cheap stock) at the current price? I've seen 50-90% cash positions a couple of times here. I understand 50%, but 90% is just pure timing. You talk about waiting for high quality to be dirt cheap before buying again. What would you call BRK at a decade low valuation? What are you hoping for? Below $100,000 with BV at $100,000? I don't see that happening unless the market drops 30-40% and then BV will be fairly lower as well. I could say the same about plenty of other stocks but obviously they wouldn't give the same downside protection. I'm only giving BRK as a very obvious example of why I believe being 90% in cash is somewhat odd imo.

 

Just trying to see the logic in being extremely cash rich right now, don't take this as critism because it isn't.  ;) I'd just rather be 125% long in BRK (with the option to switch to 100% long in other stocks when the market breaks) than 90% in cash! Timing has a poor track record.

[Viking]

tombgrt, yes, last summer/fall I bought BRK all the way down to $66. I then started selling a small amount in the high 70's and recently sold out at $82. I was holding BRK in place of holding a bond and my goal was to do better than 6-8% per year. I sold simply to lock in my gain. BRK was one of a number of sells for me; I was just very pleased with my year to date results and decided to get much more defensive.

 

I have not had a chance to review BRK's Q1 results. With equity markets strong, BV looks to have increased substantially, which is to be expected. With BRK now repurchasing shares at 1.1xBV I may have trouble reestablishing a position. I continue to love the company.

 

Nothing has really changed in the macro environment over the past 8 months. The issues are still out there. I think there is a good chance that fear will hit markets again at some point this year and stocks will go on sale. I hope I have a chance to buy well run companies like BRK again. Perhaps BRK never trades below $82 again. As the old saying goes, there is more than one fish in the sea.

 

Regarding my high cash position, every investor is in a very different personal situation. Returns from FFH were very good to me over the years (thanks to some good advice from posters on this board) and allowed me to quit my day job almost 7 years ago. I now invest and spend tons of time with my young family. I have enough capital to continue with this lifesyle for at least the next few years (and perhaps longer depending on returns); I do not have enough capital to say with certainly that I will never need another paying job again. If I can get an 8-10% annual return on my portfolio then I extend my current lifestlye indefinitely. Most importantly, if I take a 30 or 40% hit to my portfolio then I will most likely be looking for a day job in the next few years (not something that stresses me out but also not my first choice). As my kids get older I can see they need (and want) me around less. My wife and I have both talked about re-entering the work force in some capacity when out kids hit high school. So until then I will likely remain quite defensive and appear a little (a lot!) schizophrenic with some of my posts. Just trying to keep a good thing going! :-)   

[hundredwaters]

Parsad - thanks for weighing in.  How do you take Hugh Hendry's assertion about China derailling...?

[Parsad]

Parsad - thanks for weighing in.  How do you take Hugh Hendry's assertion about China derailling...?

 

Like the United States, they are rich enough to keep themselves on the rails for a pretty long-time.  If they can fix the problems while staying on the rails, then it is not a problem. 

 

Europe cannot do that...their nations and their banks are pretty leveraged, and they aren't rich enough or eager enough to work together.  Some will go and some will stay, and then things will be fine...but in between it will be volatile and alot of work.  Cheers!