In what is supposedly a news article, Bloomberg.com “reports” that World Dodges Slump With China-U.S. Buoy in Europe Crisis. If we ignore the fractured syntax of this title, we are supposed to gather from it that all is well with the global economy, whatever exactly that is. I want to first criticize the lede:
The global economy is showing signs of withstanding a European recession triggered by the debt debacle in Greece.
I look at Bloomberg daily. I don’t recall a headline saying: Europe in Recession. This article is part of the ongoing PR campaign. “Europe” is in recession? Isn’t that worth its own article?
As part of the hopium campaign, of course Goldman Sachs is quoted early on in the article as supporting the headline’s message. Shortly after the Goldmanite’s quote, a CNBC regular, who is so much the insider that he hosts a retreat for economists from which CNBC televises, supports the bullish cause:
The U.S. stock market also will benefit (from dollar strength: Ed.), David R. Kotok, chairman and chief investment officer of Cumberland Advisors in Vineland, New Jersey, said in a Nov. 1 note to clients. He forecast the Standard & Poor’s 500 Index will finish the year at 1,350, compared with 1,253.23 at 4 p.m. on Nov. 4. percent in German trading.
“The bear is going into hibernation for the winter, and the surprise will be to the upside,” Kotok said.
He is “fully invested” in the U.S. markets and “very underweight” in Europe, he told Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance” Nov. 1.
Dr. Kotok is a very bright man. He will be aware that predicting a rise from about 1250 to 1350 in only two months is equivalent to predicting an annualized double in the index. At that rate, we would see Dow 36,000 by spring 2013. Talk about springtime in America! (Or, hyperinflation . . .)
I have no idea what stock prices will do, and I have actually spoken enough to Dr. Kotok about investing with his organization to suspect that over a beer, he will admit that he really is just guessing. My concern is that the Establishment doth protest too much. My latest example of that protestation goes beyond the above-discussed Bloomberg puff piece to the treatment of ECRI’s Lakshman Achuthan on Squawk Box this A. M. on CNBC.
Dr. Achuthan came on TV to reiterate that ECRI’s recession call, which it made in the third week of September, remains intact. The hosts beat him up pretty badly because the stock market had a good October. So, ever the scientist, I went back to see how the stock market has fared since ECRI came to the recession decision rather than its prior call of a U. S. and global industrial slowdown (which it made many months ago and which was obviously correct). ECRI told its clients on or about Sept. 22 of its recession call. Obviously it came to that decision at least one day before it told its clients. So if we take the middle of that week, or Sept. 20, as its recession signal date, how has the S&P 500 fared since then?
The index was at 1202 on Sept. 20. It is now at 1243- a bit over 3% higher. It was as low as just under 1100 in early October, perhaps influenced by ECRI’s recession call. The index was about 7% higher than it is now when ECRI went public in the beginning of May with its call for the global and U. S. industrial sectors to begin decelerating in the summer. So without expressing any opinion about its current recession call and whether a U. S. recession is already “priced in” re stock and/or bond prices, my major reaction to that interview (which you can see by going to ECRI’s website at www.businesscycle.com) was that the palpable anger at Dr. Achuthan and mini-triumphalism of the interviewers reminded me of one of the reasons I stopped watching CNBC, to wit:
In one of the most extraordinary hours of live TV one could wish for if one is into things that really matter, such as finance and economics, David Einhorn came on CNBC to explain why he was aggressively short Lehman Brothers stock. At that time, LEH was around $32/share. CNBC treated him as a pariah with audible and visible near-contempt. Einhorn held his ground. One needs to understand that short sellers rarely talk about individual shorts. This was brave on Einhorn’s part. Naturally, LEH went up a couple of points promptly after the interview. We all know what happened after that.
My sense is similar to what it was when I went “risk off” publicly on this site in very early May. Oil and stock prices were higher then than now, and I was bearish on them. Bond prices were lower (yields were higher), and I was bullish on Treasurys. Now that oil and stock prices have bounced off their lows, I once again think that there is a good deal more downside than upside risk. Unlike David Kotok, I don’t have the faintest idea what the stock averages will do in any special time frame. By owning Treasury bonds, while I have locked in rates that I expect to fail to keep up with the pace of price increases in the U. S. over time, I have preserved my “optionality” to sell them at a capital gain should at some point they dip to or below recent lows (the 10-year bond) or to or below their 2008-9 lows (the 30-year bond). But I don’t have to get the timing very right at all. I can be off by weeks, months or even some years and be “OK”.
To summarize, the cheerleaders described above ignore, in my view, what we at The Daily Capitalist believe to have the core problem with the “Great Recession”: massive malinvestment of capital that was allocated before 2008 but which was only revealed by the deepness of the economic downturn. Unfortunately, there has not been nearly enough time to develop adequate new capital at home to allow a “normal” and durable economic expansion. We are also seeing that Europe is in a phase similar to that of the U. S. in 2008, namely that it is discovering massive holes in its capital accounts. Not the U. S. is in such wonderful shape. And then there’s the great unknown of China . . . is China the emperor of modern malinvestments? Talk about a riddle/enigma/puzzle . . .
I’d like to close by focusing on the world’s most important internationally traded physical industrial commodity, oil. The latest price rebound could be dangerous for the industrial economies, given the absence of European or U. S. quantitative easing at the moment. I wouldn’t be surprised to see the price back in the $70s or below that for West Texas Intermediate sometime well before the end of 2012. If that happens, there will be major headwinds for the prices of gold and silver as well. For those who already have a significant allocation to those monetary metals and who therefore trade them (for fiat, I know), better buying opportunities may lie ahead. Gold and silver are “patient”. Investors in them should, I urge, be patient as well, and let matters play out as central banks, over time, work with the real world to re-inflate the collapsed and collapsing financial and economic souffles they helped inflate, while creating “new” and more attractive confections to dazzle both new and jaded eyes once again.
DoctoRx,
I think Lakshman’s emphasis on the ‘contagion effect’ did not register with the CNBC spokesmen, who are looking at market ticks for validating their opinions. For the CNBC guys, a stock market crash like 2008 indicates a recession, LOL. They completely miss the set of events that lead a stock market crash.
Market reacts to all kinds of news (Euro crisis, employment numbers whatever) and focusing fully on a reactive machine will not help in making a proactive decision.
What I think Lakshman meant was that you get multiple poor forward looking indicators coming together and are amplifying the effect of the individual indicators. A sum is greater than the parts in effect both on the upside and on the downside. Which is why he talks with conviction about the inevitable nature of the business cycle and nothing that policy makers can do will stop it.
I also like Lakshman’s derision against models, which are backwards looking and don’t really tell anything meaningful about future trends.
Austrian: agree with everything you said. Thanks for mentioning the “models” issue. ECRI believes that just as if one mixed the “right” mix of reagents the “right” way in a lab, one would expect the same chemical reaction, then recessions are highly predictable if the “right” (though always changing to some degree) mix of low confidence, decelerating profits etc etc occurs, and it’s their job to understand the parameters of what economic predictors have led to and “should” lead to a pronounced, persistent and pervasive downturn in economic activity. But since things are never identical from year to year, they look at each period anew and then try to predict what “might” happen. If business “must” turn up or down based on the new facts and circumstances, they make their recession/end-of-recession calls. Can they be “perfect”? We know the answer to that . . . but so far their track record is quite good, plus they are a dignified organization.
Doc: I like your chemistry experiment analogy. The CNBC spokesmen are asking for “one indicator” or “where will the S&P 500 level be?” etc. Really goes to show they have no clue about the ECRI analysis. They are also unwilling to listen to him and understand where he’s coming from.
I would say, based on his statement that a recession doesn’t really sink in until we’re six months in it => May be things will really deteriorate well in 2012.
The good thing about this recession is that US actually has a decent enough window to get the house in order. This is due to the temporary strength effect on the US dollar, due to the debt woes world-wide. Whether we do it really depends on decisive leadership, which is lacking big time.
Dr Achuthan should not be in cnbc if he wills with his Rah Rah on recession in september as indicator, without or unable to quantify his qualified opinoin . thats the crust of the matter .Happy crsytall balling with the rah rah.