Saturday, June 20, 2009

The ECRI Doth Pound the Table Too Much

The Economic Cycle Research Institute may be going a bit overboard. It is by now hardly a surprise that, with new home construction near zero, auto sales not much more than half their high, with unprecedented monetary stimulus in the U. S. and elsewhere, the longest economic banana since the Great Depression will give wa y to some degree of growth one of these days. Growth of 1% - which merely equals population growth- counts as growth, though it will not feel very good.

Why then does the ECRI come out today with the following news release (through Reuters, as always): WLI Virtually Pounding Table on Recovery, which states:

"With WLI growth rocketing up almost 30 percentage points in six months, it's virtually pounding the table about the recession ending this summer," said Lakshman Achuthan, managing director at ECRI.

(The WLI = Weekly Leading Indicators.)

Within the past week, I saw a clip of an interview with Dr. Achuthan, who at the end of the interview not only predicted that growth would resume by Labor Day, but he recommended that stocks were a good investment.

I feel that this last statement is an absolute no-no. While the stock market has been a leading indicator for the economy, it's circular to then say that the leading indicators are good predictors of the stock market. I would be more bullish if he had warned people that stocks, up 40% or so from their low point less than 4 months ago, and at above-average P/E ratios and historically low dividend yields, may be poor investments. He certainly could have done well to have pointed out that had one bought the stock market as the end of the 2001 recession loomed, much lower lows lay ahead a year and a half later.

David Rosenberg points out that the Conference Board's Leading Economic Indicators, which are strongly positive, would have been slightly lower on the last report if they were limited to the real world indicators; all the money-finance indicators such as money supply, stock market and yield curve are what are predicting growth. In other words, it's all about "stimulus".

He is not impressed.

The bull market that peaked in 2000 far exceeded the valuations reached in 1929. The crash, adjusted for inflation, since 2000 has been tremendous, but has only brought valuations at best back to average. The Federal Government now controls or directly influences massive segments of the economy; this will probably lower the P/E ratio. Purveyors of used stocks need volatility to make their money. When the ECRI goes from cheerleading its predictive ability (it is a business, after all) to cheerleading the stock market, it's no longer AAA-rated; and neither is the market it is flogging.

Copyright (C) Long Lake LLC 2009


  1. Agree with you that it's not a good idea to say the market will go up, but I get the sense that you're after ECRI because you think the economy will be bad, or the market will go down, also a "no-no" as you put it.

    I've followed ECRI closely and I understand what they're saying as "the risk of a cyclical downturn in stocks is low," which has a similar sound to what you report, but is actually different. Anyhow, I think they;re right about recession ending this summer, and this belief is simply based on their track record of being right about such things.

  2. A lot of people talk about ECRIs track record of being right. It has become perceived wisdom, largely promulgated by ECRI themselves. But where's the evidence? I certainly haven't been able to find any.

  3. Anon - The proof on their website comes from various reports that were right while the consensus was wrong. The problem with this is that since their other reports are behind a pay wall all they need to generate these "great forecasts" are outlooks with varying bullish and bearish reports. They can then highlight their bullish or bearish reports where needed. Niederhoffer's "Education of a Speculator" documents how a newsletter writer can do this type of thing rather easily. I'm suspicious of ECRI because their book was a giant advertisement instead of one that really explained a subset of their methods.