Tuesday, August 18, 2009

Expert Opinions on Upcoming Boom Diverging Sharply

David Rosenberg, chief economist and strategist for Canada's Gluskin Sheff takes on the Economic Cycle Research Institute and other mainstream economists full frontal today in Breakfast with Dave:

In the next economic recovery, whenever it comes — and it will not be determined by a one-quarter adjustment in auto assemblies, by the way — we are most likely going to be dealing with the idea that household credit ratios will undergo a secular, intentional and steep downtrend and that is where conventional interpretation on the business cycle is most likely to go awry. Just because the conventional economists are drinking the Kool-Aid doesn’t mean you have to.

We can understand that "leading" financial indicators seem to be pointing towards a recovery, but remember, they also priced in a "depression scenario" late last year and early in 2009 and that never came to fruition, so investors should be aware that we could be seeing a similar head-fake. Relying on the ECRI index, for example, could be folly since the index has done little more than a bungee jump from levels we had never seen before. So keep in mind that even with the bounce, the equity market is still just back to levels prevailing when the U.S. economy was "only" a year into recession. Corporate bonds spreads may have narrowed sharply, but are still at levels that represented peaks during several prior economic downturns. The fact that practically everyone is declaring the recession to be over, from a purely contrary standpoint, should be cause for pause as well because the herd mentality rarely proves to be the correct course.

Rosenberg and Roubini were both far more accurate in early August 2008 than was ECRI, which was still saying that the U. S. was in a mild recession and rang no warning bells about depression. Roubini and Rosenberg remain unswayed in their consistent prognosis for economic weakness.

For stock investors, you can go to http://www.indexarb.com/dividendYieldSortedsp.html to view dividend yields on all S&P 500 stocks. The average yield of all 500 stocks is about 2%. The average yield of all stocks not paying dividends is about 2.7%. Weighting by capitalization may or may not change matters for dividend yielders, given that XOM yields 2.5%, GE yields 2.9%, and JPM yields 0.5%.

What made me more fundamentally "down" on ECRI was an interview that Dr. Achuthan gave a couple of months ago in which he was so excited about the latest upturn in his indicators that he ended the interview by saying: "Buy stocks". Wrong comment. Let him buy stocks privately. Last fall, ECRI was pointing out that their indicators were the worst since ECRI was formed about 60 years ago, but not as bad as they would have been had they been applied to the Great Depression. If 8 months from now, his indicators have rolled out of bed, will he issue another stock call?

ECRI's stance and strength had been their independence. The moment they became just another media shill for the stock market, they lost something that, like virginity, they cannot regain. And thus they became even fairer game for pros such as Dr. Rosenberg. This continues to be an important and entertaining debate.

Copyright (C) Long Lake LLC 2009


  1. You sir, have lost your independence. I watch ECRI closely too, and I recall Acuthan talking about stocks, only as a result of being pressed by the interviewer (Forbes?). He was not shilling as you suggest. He was talking about a 'cyclical' turn back down in stocks not being likely near-term. I agree that it would have been better if he had avoided the stock valuation question altogether.

    I would also not equate ECRI with mainstream economists. Their approach is completely different, and as a result, they regularly disagree with the consensus view.

  2. Seems to me ECRI's unique approach is a black box algorithm for which you pay for the privilege of seeing the output. You do get to peek behind the curtain for free, but the view is limited. And so we get to see Dr. Achuthan flogging his pay for hire service wherever and whenever he can.

    More power to him. We all need to eat. His recent "table pounding" does seems to indicate that he has true faith in the ECRI model. But models have limits. Not all relevant inputs are measurable or predictable, which makes stock market predictions of any kind a dangerous game.

    Ben Graham nailed it 80 years ago. In the short-term the stock market is a voting machine. Guessing its short-term direction is a fool's game because so many fools - and I include myself in that group - are participating.