Optimism, Albeit Restrained, Comes to Zero Hedge: A Sell Signal?

This bearish chart appeared on a guest post from Lance Roberts on Zero Hedge along with a surprisingly  upbeat denial of its implications (LINK).

STA-EOCI-Index-120312

The author says:

Historically, a reading of this level on the composite index has indicated that the economy was in, or was about to be in, a recession…

Are we in a recession now?  The answer is “no”

In case the reader missed his point, he goes on to say:

So, while we are not currently in a recession…

What was the point of even presenting this composite index if its implications were going to simply be ignored?  

There is now intense recession denial- even of the possibility that one is underway.  When ECRI’s head, Lakshman Achuthan, came on Bloomberg TV last week to update and defend his call that a recession began around July this year, he was met with more than skepticism.  The host introduced him by stating that this call was “wrong”.

I have no expertise in recession calling, so I don’t know.  What I do think I know is that when something is broadly considered almost impossible, almost a black swan, then if it occurs, the markets likely have completely not priced it in, and a sharp price reaction may follow.

Perhaps some have been blinded a bit from considering recession a possibility now because of the glare of the lead-in to the last recession/depression.  Then, there was one identifiable gorilla in the malinvestment room:  housing.  It was similar with the 2001 recession:  overinvestment in the tech-telecom bubble.  

Today, people look around and can’t see those sorts of bubbles.  They are correct in that regard.  Even the aggregate level of Federal debt is high but not so extreme as to be a bubble.  Bubbles are extraordinarily rare.  Almost all recessions that occur in the U.S. and globally are not related to bursting bubbles, merely booms that have run out of steam.  The absence of one obvious investment bubble, though, does not preclude a recession, which may be mild (1990-91) or severe (1981-2).  

Many investors have made up their minds that because cash and bonds lack investment merit in their view, they are just going to ride the stock car because over time they are confident it will get them where they want to go faster than the slow boat of bonds or just sitting and going nowhere (cash).

But…    

They are ignoring the Japanese stock market example (LINK).  

The Japanese stock market message in an era of ZIRP may be translated as:  Beware when they start to descend (LINK).

With a growing number of hard economic data points and aggregated indices such as those created by Mr. Roberts looking recessionary, sometimes cash makes sense even if the Fed is going to dilute that cash by creating new cash ex nihilo.  After all, everyone knows that’s to be expected, so it has to have been priced into anything you want to buy to avoid cash.  This would include the price of gold, Treasury bonds– or stocks, which have characteristics both of the inflation-hedge characteristics of gold and the weak-economy hedge of “safe” bonds.

One reason to be leery of stocks right now is the following.

For the past few years, the volatility indices such as the VIX keep descending to low levels and then hit resistance there.  Then they had brief spikes as stocks sell off, but eventually the SPY and other indices soared again and the VIX descended– all as economic data has trended weaker for many months.  This divergence is troubling.  In 2008 and early 2009, investors were taught to fear the rebound.  For the last nearly four years, the lesson has been to buy the dip.

If economic data continue to trend weaker, will that more recent lesson turn toxic?

How certain are individuals investing their own savings that the Fed has been propping up stock prices, and even if it has that it will continue to do so?

We are deep into financial Extremistan.  Dry powder may be useful here.

 

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2 comments to Optimism, Albeit Restrained, Comes to Zero Hedge: A Sell Signal?

  • JB McMunn

    It wasn’t one of the Tylers who wrote that so I’m not sure it is a true contrarian indicator.

    To answer your rhetorical question, the presentation and dismissal of the data remind me of scientific paper discussion sections where you see this sort of thing: “I have such a good rebuttal for this objection that I now shall raise it”.

    I do know what I see in front of my eyes, which is that big chunks of sky keep falling and the markets ignore it. The longer this goes on the worse it will be when the lid blows off. I’m astonished that countries like Japan and Greece, which are so dysfunctional, have successfully festered so long. These are like large unstable snow packs that keep building and building until one day someone sneezes.

    I think a reasonable argument could be made to just hold cash and gold right now.

  • “I think a reasonable argument could be made to just hold cash and gold right now.”

    That’s a tres reasonable statement IMHO.

    When one considers carefully what “cash” actually is, one could also include long-term Treasury bonds on the theories that A) cash is in essence a Treasury bond of zero maturity and B) the trend is your friend until it ends.