Friday, July 17, 2009


While Nouriel Roubini repeats his dour outlook for all sorts of economic and financial problems, and others such as David Rosenberg who have been correctly bearish on the economy for this cycle continue to trash the green shoots hypothesis, the Economic Cycle Research Institute continues to pound the table. Their web site reveals advice it provided their paying customers:

Professional Report Excerpt:


(Full report received by Pro clients on 18-Jun-09)The modest pullback in stock prices that followed the springtime rally, along with a worse-than-expected June jobs report, allowed the skeptics to re-emerge, asserting that without actual improvement in hard economic data, the “green shoots” had wilted away. What they do not realize, as we reasserted in ECRI’s June U.S. Cyclical Outlook report to Professional Members, “is that the cyclical improvement in the economy is proceeding in a textbook sequence, from long leading indicators to short leading indicators to coincident indicators.” In fact, “there are now pronounced, pervasive and persistent upturns in a succession of leading indexes of economic revival.” . . .

In fact, “what is impressive here is the degree of unanimity within and across ECRI’s leading indexes, along with the classic sequence of advances in those indexes. Such a combination of upturns – a resounding confirmation of our April forecast that the recession will end this summer – does not happen unless an end to the recession is imminent.

In sum, the economy has a raft of problems that will take a long time to resolve. But none of them can head off the imminent economic recovery that ECRI’s objective leading indexes are promising today.”

So what the ECRI is saying is that those such as Dr. Roubini who foretold this downturn in excruciating detail are incorrect in saying that this time it's different. The ECRI is saying that no matter how severe this storm was, the ECRI knows that it's effectively in the rearview mirror just as a hurricane does its damage and moves on.

This is a fascinating heavyweight match between top-tier researchers.

From an investment standpoint, this blog has suggested somewhat of a rerun of the 2000-2003 downturn. The recession officially ended in 2001, but stocks bottomed a year later and really hit their durable bottom in winter 2003, around the same time as long-term interest rates also bottomed. Investors make a big mistake when they buy and sell stocks and bonds based on whether the economy is or is not expanding at the moment.

The chart to the right shows the US Long Leading Indicators, the Weekly Leading Indicators (Intermediate), the US Short Leading Indicators (USSLI), and the US Coincident Indicators (USCI).

It would appear to my eyeballs that the index with the best correlation with the stock market is the coincident indicators. They remain negative, though improving. Stay tuned.

Copyright (C) Long Lake LLC 2009

1 comment:

  1. Is ECRI predicting that GDP growth will turn positive or that P/E ratios soon return to the mid-20's or higher so that retail investors can be wiped out again in 5 to 10 years by the next asset bubble/debt implosion?

    The S&P valuation looks pretty fair assuming a return to long-term trend line earnings. I vote for 7-8% yoy equity appreciation based on dividend yield and sustainable growth rather than aggressive multiple expansion. Multiple expansion always ends in heartbreak on mean reversion.