Last week I wrote that both ECRI’s initial recession call and also John Hussman’s recession warning criteria had been invalidated. Oversimplifying somewhat, Hussman’s 4 criteria were: (1) credit spreads wider than 6 months before; (2) the S&P 500 lower than 6 months before; (3) the ISM manufacturing index under 54 simultaneously with less than 1.3% YoY employment growth; and (4) a yield curve of less than 2.5%. As of last Friday, not only was the S&P not lower than it was 6 months before, it was actually at a 6 month high! Further, not only was the ISM manufacturing index above 54, but employment growth was also more than 1.3% higher YoY. I’ve also pointed out that the yield curve element of Hussman’s formula was in place for twenty years running during the 20th century, simultaneous with the strongest GDP growth in the last 100 years.

In closing, I said that Hussman should at least explain why he believed his recession call was still valid. Put another way, what is the “off” switch for the above criteria, if it is different from the “on” switch?

This week Hussman spent a large part of his weekly market comment defending that call. His defense rests, as I understand it, on two grounds: (1) one or more criteria was violated in 2008 and the recession warning, obviously, was still valid; and (2) there is no “off” switch for the criteria, but rather, once “on,” a cornucopia of bearish evidence may be invoked, and entirely different criteria, e.g., a positive ECRI growth WLI, signals the end of recession.

Before I go further, I should emphasize that Hussman defended his metrics on their merits, with no ad hominem attack on me. For my part, although I still disagree with him, he did make some valid points, and none of what follows should be taken as a personal attack on him. In fact, I think his shorthand indicator briefly summarized above is very helpful.

That being said, idea of an indicator that switches “on” but never “off” strikes me as not intellectually rigorous. Beyond that, if the ECRI indexes are the determinant of an indicator, I should just go directly by them and cut out Hussman as the middleman. That in the interim a cornucopia of evidence may be selected (cherry-picked?) in support of a conclusion strikes me as inherently subjective and unreliable.

Since I wasn’t satisfied with Hussman’s explanation, I decided to examine the 3 non-yield curve criteria on my own to determine what should cause them to switch from “on” to “off.” (With long term yields under 2.5%, that element is likely to remain in effect for a long time to come). The results indicate that if a recession were to happen now, it would still be unprecedented under Hussman’s own criteria.

As an initial note, Hussman’s claim that the S&P 500 criteria was violated in May 2008 is not correct. The closest it came was 1426.63 on May 19, 2008, only 7 points below its level of 1433.27 on November 19, 2007. That being said, my research indicates that it is not uncommon at all for that index to be higher than 6 months previously either shortly before or after the onset of a recession. Similarly, it is not uncommon for credit spreads to meander higher or lower than 6 months before during all but the most serious economic turns.

What is uncommon — in fact, almost non-existent — is for either the ISM manufacturing index criteria or the employment criteria to be violated. Generally speaking, once the ISM index falls below 54 in advance of a recession, it continues to fall under 50 and only rises back above 54 after the recession is over. Similarly, once job growth falls below 1.3% in advance of a recession, it typically only rises back above that level well after the recession has passed.

In fact, each has occurred only once, and not simultaneously. In particular, in all cases but one, the YoY employment percentage change was falling on a 6 month smoothed basis in advance of every recession since the second world war. The sole exception was in 1953. Similarly, the only time the ISM index fell below 54 within 1 year of the onset of recession but rebounded back above it was in 1959 for two months. These are shown in the graph below (in which the ISM index is normed so that a reading of 54 on the index = 0, and payroll YoY% growth is also normed so that 1.3% YoY growth = 0):

To show you the full record, here is the same graph for the 1970s and early 1980s recessions:

And here is the same graph from 1989 to the present:

Note that in every other case, not only did the ISM index continue to fall, but the YoY% change in employment was also declining going into a recession. There is simply no precedent for a recession occurring while both the YoY% change of employment is improving, and simultaneously the ISM index rebounding above 54. Put another way, whether a recession happens or not, under the set of criteria Hussman himself has established, a precedent will be set. Only in retrospect will we know the answer.

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See Also:

• IT’S OFFICIAL: The Hussman And ECRI Recession Warnings Are Invalidated
• Apple Might Lose A $1.6 Billion Lawsuit For Using The Word ‘iPad’
• A Huge New Call On Housing That You Must Pay Attention To

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Economists look to a broad variety of indexes and metrics when judging how the economy is functioning: the Baltic Dry Index, Underemployment (U-6), Industrial Production, regional Federal Reserve Activity. The list goes on.

But an index from Stamford University’s economic department, completed by PhD candidate Scott Baker and professor Nicholas Bloom, as well as the University of Chicago’s Steven Davis, is offering yet another look at how the U.S. is performing.

And the index is finally beginning to show some return from the heights hit during the debt ceiling crisis of 2011 that nearly derailed the U.S. economy.

The Uncertainty Index combines a number of indicators including newspaper coverage of economic policy uncertainty, the expiration of federal tax codes, and disagreement between economic forecasters. 

What the researchers found was surprisingly substantive.

“We see that a 112 point rise in policy uncertainty (the rise in our policy uncertainty index from 2006 to 2011) is followed by a persistent fall in real industrial production with a peak negative impact of about -4.0% at 14 months,” Baker, Bloom, and Davis write. “Similarly, there is a persistent fall in aggregate employment following a policy uncertainty shocks, with a peak response of 2.3 million jobs after 20 months.”

The index has fallen to 156.9 in January from 199.5 the preceding month, but the rate remains above pre-crisis levels. That’s relatively good news — in fact it’s right in line with the reading in January of 2011. 

See the rest of the story at Business Insider

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See Also:

• CORELOGIC: Home Prices Fell For 5th Straight Month In December
• Why Friday’s Jobs Report Was Even Better Than Most People Realize
• ISM SERVICES REPORT CRUSHES EXPECTATIONS AT 56.8

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Economists look to a broad variety of indexes and metrics when judging how the economy is functioning: the Baltic Dry Index, Underemployment (U-6), Industrial Production, regional Federal Reserve Activity. The list goes on.

But an index from Stamford University’s economic department, completed by PhD candidate Scott Baker and professor Nicholas Bloom, as well as the University of Chicago’s Steven Davis, is offering yet another look at how the U.S. is performing.

And the index is finally beginning to show some return from the heights hit during the debt ceiling crisis of 2011 that nearly derailed the U.S. economy.

The Uncertainty Index combines a number of indicators including newspaper coverage of economic policy uncertainty, the expiration of federal tax codes, and disagreement between economic forecasters. 

What the researchers found was surprisingly substantive.

“We see that a 112 point rise in policy uncertainty (the rise in our policy uncertainty index from 2006 to 2011) is followed by a persistent fall in real industrial production with a peak negative impact of about -4.0% at 14 months,” Baker, Bloom, and Davis write. “Similarly, there is a persistent fall in aggregate employment following a policy uncertainty shocks, with a peak response of 2.3 million jobs after 20 months.”

The index has fallen to 156.9 in January from 199.5 the preceding month, but the rate remains above pre-crisis levels. That’s relatively good news — in fact it’s right in line with the reading in January of 2011. 

See the rest of the story at Business Insider

Please follow Money Game on Twitter and Facebook.

See Also:

• CORELOGIC: Home Prices Fell For 5th Straight Month In December
• Why Friday’s Jobs Report Was Even Better Than Most People Realize
• ISM SERVICES REPORT CRUSHES EXPECTATIONS AT 56.8

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Economists look to a broad variety of indexes and metrics when judging how the economy is functioning: the Baltic Dry Index, Underemployment (U-6), Industrial Production, regional Federal Reserve Activity. The list goes on.

But an index from Stamford University’s economic department, completed by PhD candidate Scott Baker and professor Nicholas Bloom, as well as the University of Chicago’s Steven Davis, is offering yet another look at how the U.S. is performing.

And the index is finally beginning to show some return from the heights hit during the debt ceiling crisis of 2011 that nearly derailed the U.S. economy.

The Uncertainty Index combines a number of indicators including newspaper coverage of economic policy uncertainty, the expiration of federal tax codes, and disagreement between economic forecasters. 

What the researchers found was surprisingly substantive.

“We see that a 112 point rise in policy uncertainty (the rise in our policy uncertainty index from 2006 to 2011) is followed by a persistent fall in real industrial production with a peak negative impact of about -4.0% at 14 months,” Baker, Bloom, and Davis write. “Similarly, there is a persistent fall in aggregate employment following a policy uncertainty shocks, with a peak response of 2.3 million jobs after 20 months.”

The index has fallen to 156.9 in January from 199.5 the preceding month, but the rate remains above pre-crisis levels. That’s relatively good news — in fact it’s right in line with the reading in January of 2011. 

See the rest of the story at Business Insider

Please follow Money Game on Twitter and Facebook.

See Also:

• Why Friday’s Jobs Report Was Even Better Than Most People Realize
• ISM SERVICES REPORT CRUSHES EXPECTATIONS AT 56.8
• December Factory Orders MISS Expectations, Growing 1.1%

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Dirty Harry says if you didn’t support the taxpayer bailout of General Motors and Chrysler back in 2008 and 2009, you quit on America … punk!

That’s basically the message of the Clint Eastwood-narrated Super Bowl ad which told U.S. football fans that Detroit ”almost lost everything. But we all pulled together, now Motor City is fighting again. … Detroit’s showing us it can be done. And, what’s true about them is true about all of us.”

What’s it like to live in a country where state capitalism—rather than free-market, entrepreneurial capitalism—is ascendant? Well, it’s one where car commercials morph into reelection ads for the incumbent president. It’s clear Team Obama wants to make the bailout of the U.S. auto industry a big selling point to voters. (In Obamaland, American workers at U.S.-based factories of foreign automakers—like the 400,000 folks who work at plants, design centers, and dealership for Toyota, Honda, and Nissan—don’t really count as being part of the U.S. auto industry.)

Here’s what the president said recently at the Washington Auto Show: “When you look at all these cars, it is testimony to the outstanding work that’s been done by workers—American workers, American designers. The U.S. auto industry is back … And it’s good to remember the fact that there were some folks who were willing to let this industry die. Because of folks coming together, we are now back in a place where we can compete with any car company in the world.”

Obama: “Because of folks coming together …”

Eastwood: “But we all pulled together …”

You get the picture.

But not the entire picture, of course. The most effective propaganda doesn’t present outright falsehoods but merely half truths that form a distorted image. View, if you will, a stock chart comparing General Motors (red), Ford (green), and the S&P 500 index.

Looks like GM still has some work to do to earn investor confidence.

Then there’s the issue of the cost to taxpayers. We received some new info on this late last month:

The U.S. Treasury Department boosted its estimate of government losses in the $85 billion auto bailout by $170 million. In the government’s latest report to Congress this month, the Treasury upped its estimate to $23.77 billion, up from $23.6 billion. Last fall, the government dramatically boosted its forecast of losses on the rescues of General Motors Co., Chrysler Group LLC and their finance units from $14 billion to $23.6 billion. … The Treasury, which initially held a 61 percent majority stake in GM, now holds a 26.5 percent share, or 500 million shares in GM. To break even, the government would need to average $53 per share for its remaining stake. At current prices, the government would lose more than $14 billion on its GM bailout. … The government booked a $1.3 billion loss on its $12.5 billion bailout of Chrysler. As part of its $17.2 billion bailout, the Treasury still holds a 74 percent majority stake in Ally Financial Inc., the Detroit-based auto lender and bank holding company. Ally, formerly known as GMAC, put its IPO on hold indefinitely last year because of market weakness.

Oh, and on top of that $24 million you can add another $13 billion, according to bankruptcy expert David Skeel. He says Treasury estimates “omit the cost of the previously accumulated tax losses GM can apply against future profits, thanks to a special post-bailout government gift. The ordinary rule is that these losses can only be preserved after bankruptcy if the company is restructured—not if it’s sold. By waiving this rule, the government saved GM at least $12 to $13 billion in future taxes, a large chunk of which (not all, because taxpayers also own GM stock) came straight out of taxpayers’ pockets.”

And what if Washington hadn’t forced taxpayers to ride to the rescue? Well, the Center for Automotive Research, an automaker and union-funded think tank, said back in 2008 that “a drawn-out, disorderly bankruptcy proceeding leading to liquidation of the automakers” would cause a loss of nearly two million jobs over the next two years.

But Skeel disagrees:

If the government wanted to “sell” the companies in bankruptcy, it should have held real auctions and invited anyone to bid. But the government decided that there was no need to let pesky rule-of-law considerations interfere with its plan to help out the unions and other favored creditors. … Nor would both companies simply have collapsed if the government hadn’t orchestrated the two transactions. General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process. … Although Chrysler wasn’t nearly so healthy, its best divisions—Jeep in particular—would have survived in a normal bankruptcy, either through restructuring or through a sale to a more viable company. This is very similar to what the government bailout did, given that Chrysler is essentially being turned over to Fiat.

Things like moral hazard and unintended consequences are of slight concern when you want to be the Motor City Messiah. But who knows, maybe GM will continue to prosper even though its Japanese competitors are now recovering from Japan’s mega-quake, tsunami, and nuclear disaster. And maybe GM and Chrysler will eventually boost quality enough to get into the first division of automakers.

But given the history of bailed-out companies — such as Chrysler, for instance — there may be opportunity for Eastwood to star in a sequel.

This post originally appeared at The American Enterprise Institute. 

Please follow Politics on Twitter and Facebook.

Join the conversation about this story »

See Also:

• Mitt Romney Was Right: We Shouldn’t ‘Focus’ On The Poor
• Republican Senator Says Obama Thinks He Is Jesus
• Apple Might Lose A $1.6 Billion Lawsuit For Using The Word ‘iPad’

---

Dirty Harry says if you didn’t support the taxpayer bailout of General Motors and Chrysler back in 2008 and 2009, you quit on America … punk!

That’s basically the message of the Clint Eastwood-narrated Super Bowl ad which told U.S. football fans that Detroit ”almost lost everything. But we all pulled together, now Motor City is fighting again. … Detroit’s showing us it can be done. And, what’s true about them is true about all of us.”

What’s it like to live in a country where state capitalism—rather than free-market, entrepreneurial capitalism—is ascendant? Well, it’s one where car commercials morph into reelection ads for the incumbent president. It’s clear Team Obama wants to make the bailout of the U.S. auto industry a big selling point to voters. (In Obamaland, American workers at U.S.-based factories of foreign automakers—like the 400,000 folks who work at plants, design centers, and dealership for Toyota, Honda, and Nissan—don’t really count as being part of the U.S. auto industry.)

Here’s what the president said recently at the Washington Auto Show: “When you look at all these cars, it is testimony to the outstanding work that’s been done by workers—American workers, American designers. The U.S. auto industry is back … And it’s good to remember the fact that there were some folks who were willing to let this industry die. Because of folks coming together, we are now back in a place where we can compete with any car company in the world.”

Obama: “Because of folks coming together …”

Eastwood: “But we all pulled together …”

You get the picture.

But not the entire picture, of course. The most effective propaganda doesn’t present outright falsehoods but merely half truths that form a distorted image. View, if you will, a stock chart comparing General Motors (red), Ford (green), and the S&P 500 index.

Looks like GM still has some work to do to earn investor confidence.

Then there’s the issue of the cost to taxpayers. We received some new info on this late last month:

The U.S. Treasury Department boosted its estimate of government losses in the $85 billion auto bailout by $170 million. In the government’s latest report to Congress this month, the Treasury upped its estimate to $23.77 billion, up from $23.6 billion. Last fall, the government dramatically boosted its forecast of losses on the rescues of General Motors Co., Chrysler Group LLC and their finance units from $14 billion to $23.6 billion. … The Treasury, which initially held a 61 percent majority stake in GM, now holds a 26.5 percent share, or 500 million shares in GM. To break even, the government would need to average $53 per share for its remaining stake. At current prices, the government would lose more than $14 billion on its GM bailout. … The government booked a $1.3 billion loss on its $12.5 billion bailout of Chrysler. As part of its $17.2 billion bailout, the Treasury still holds a 74 percent majority stake in Ally Financial Inc., the Detroit-based auto lender and bank holding company. Ally, formerly known as GMAC, put its IPO on hold indefinitely last year because of market weakness.

Oh, and on top of that $24 million you can add another $13 billion, according to bankruptcy expert David Skeel. He says Treasury estimates “omit the cost of the previously accumulated tax losses GM can apply against future profits, thanks to a special post-bailout government gift. The ordinary rule is that these losses can only be preserved after bankruptcy if the company is restructured—not if it’s sold. By waiving this rule, the government saved GM at least $12 to $13 billion in future taxes, a large chunk of which (not all, because taxpayers also own GM stock) came straight out of taxpayers’ pockets.”

And what if Washington hadn’t forced taxpayers to ride to the rescue? Well, the Center for Automotive Research, an automaker and union-funded think tank, said back in 2008 that “a drawn-out, disorderly bankruptcy proceeding leading to liquidation of the automakers” would cause a loss of nearly two million jobs over the next two years.

But Skeel disagrees:

If the government wanted to “sell” the companies in bankruptcy, it should have held real auctions and invited anyone to bid. But the government decided that there was no need to let pesky rule-of-law considerations interfere with its plan to help out the unions and other favored creditors. … Nor would both companies simply have collapsed if the government hadn’t orchestrated the two transactions. General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process. … Although Chrysler wasn’t nearly so healthy, its best divisions—Jeep in particular—would have survived in a normal bankruptcy, either through restructuring or through a sale to a more viable company. This is very similar to what the government bailout did, given that Chrysler is essentially being turned over to Fiat.

Things like moral hazard and unintended consequences are of slight concern when you want to be the Motor City Messiah. But who knows, maybe GM will continue to prosper even though its Japanese competitors are now recovering from Japan’s mega-quake, tsunami, and nuclear disaster. And maybe GM and Chrysler will eventually boost quality enough to get into the first division of automakers.

But given the history of bailed-out companies — such as Chrysler, for instance — there may be opportunity for Eastwood to star in a sequel.

This post originally appeared at The American Enterprise Institute. 

Please follow Politics on Twitter and Facebook.

Join the conversation about this story »

See Also:

• Mitt Romney Was Right: We Shouldn’t ‘Focus’ On The Poor
• Republican Senator Says Obama Thinks He Is Jesus
• Apple Might Lose A $1.6 Billion Lawsuit For Using The Word ‘iPad’

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From Credit Suisse:

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See Also:

• Philly Fed’s Plosser Sees 8% Unemployment By The End Of The Year
• The Euro Rockets To A 2012 High Amid Reports That A Greek Deal On Austerity Is At Hand
• Apple Might Lose A $1.6 Billion Lawsuit For Using The Word ‘iPad’

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Europe’s LTRO has far surpassed most investor’s expectations and my brief rental of German equities in September is now looking like a mistake.   The LTRO program has proven far more beneficial than I expected it to be and European stocks have boomed since Q3 last year with German equities surging almost 40% from their lows.

But the real story for equities has been in 2012.  So far this year the S&P 500 has yet to experience a single -1% down day.  And while the S&P 500 is up almost 6% YTD, its performance is nothing compared to German equities which have been the primary beneficiary of healing in Europe.   The Xetra DAX is up 14.5% year to date!  For those playing the trend following game, that’s a 143% annualized return….My guess is some German equity traders are packing it in the for year after a very healthy gain….After all, 145% annualized isn’t exactly sustainable and 14.5% is a pretty good year given the way this market has yo-yo’d these last few years….

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See Also:

• The Stock Market Is Overvalued Between 33% And 44%
• JOHN BROWNE: Stocks Are Up 22% From October, But Is This A Bona-Fide Bull Market?
• EL-ERIAN: It’s Too Early To Declare This Market Rally A ‘Victory’

We’re back for another day of Greek drama.

Just as a reminder, here’s what’s being discussed right now:

- Bondholder losses of 70 percent ore more, with coupons that would increase from 3.6 percent as the Greek economy grows in the future.

- ECB involvement in the debt restructuring, something that the bank has appeared to consider only recently and might be in opposition to its mandate. It holds about €50 billion ($65.6 billion) in Greek bonds that it purchased at a discount. Private sector investors are reportedly demanding this official sector involvement (OSI) as a precondition for the haircut deal.

- Austerity measures include a steep reduction in minimum wage and a 25 percent drop in private sector labor costs. Labor unions have unsurprisingly rejected this move, although Greek leaders apparently agree “in principle” on the deal.

- Long-term sustainability of Greek public debt. The current debt restructuring appears unlikely to deliver on this.

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See Also:

• In Case You Forgot, This Greek Deal Is Probably Worthless
• LIVE: Negotiations And Crisis In Greece
• STIGLITZ: The ECB Needs To Revise Its ‘Peculiar’ Stance On Greek Default

This year’s market gains will need more than an improving economic picture and investor willingness to shrug off the European debt crisis, Pimco’s Mohamed El-Erian said.

“It’s too early to declare victory,” the co-CEO for the world’s largest bond fund told CNBC in an interview Tuesday.

He outlined three issues that must be addressed if the 2012 rally is to continue:

1) Geopolitical risk that remains both in Europe and the Middle East.

2) A “handoff to more sustainable policies” beyond the monetary easing from the world’s central banks.

3) Getting “long-term investors” off the sidelines and putting their money to work in riskier assets than bonds.

As those headwinds remain, El-Erian advises investors to dedicate a smaller portion of their portfolios to stocks and a larger allocation toward precious metals. On bonds, he advocates shorter duration, with a target of seven years or less, which is where the Federal Reserve has focused its debt-buying efforts.

“They’re both willing and able,” El-Erian said of the Fed and other central banks and aggressive monetary policies. “The issue is the effectiveness. Even the central bankers are beginning to announce that it is not just bout the effects, it’s about the costs and risks.”

“The central banks are absolutely committed, but we must not extrapolate that they will remain highly effective,” he continued. “They need help. They are a bridge and they have to be a bridge to somewhere. So far the other government agencies are on the sidelines.”

An unexpected surge in job creation for the US will help investors sentiment, he said.

Please follow Money Game on Twitter and Facebook.

Join the conversation about this story »

See Also:

• S&P Sounds Alarm On US, G20 Downgrades
• The Stock Market Is Overvalued Between 33% And 44%
• JOHN BROWNE: Stocks Are Up 22% From October, But Is This A Bona-Fide Bull Market?