Thursday, January 21, 2010

Leading indicators: another V-sign

As I said before when I posted this chart back in September, I don't pay much attention to the "leading economic indicators." They don't really lead, and they can sometimes be "mis-leading." But they can be very good coincident indicators, and they appear to have done a good job of calling the end of the recession back in mid-2009. They've turned up quite sharply over the second half of 2009, and are exhibiting the classic signs of the beginning of a new business cycle. I don't see any signs that would suggest this recovery is at risk anytime soon.


UFormula said...

Wow.. I see a V shaped recovery signal in the 2001 Recession too. Funny how the market bottomed in 2003 eh?

Consider that the biggest factors in this report stem from the interest rate spread. Rising stock prices are also a factor. I believe this report is quite skewed by gov't support.

While the indicator has shown more breadth this time around, (i'll give you that), what is important is that we have had unprecedented stimulus pumped into the system and worse, Main Street clearly has not benefited.

How can you be saying that we are having a V shaped recovery if you just look at the main street news (not the financial news). Just talk to regular people. They do not sense that there is a pick up.

Political will to continue profligate policies are waning. Danger of turning off the monetary spigot is looming. Unfortunately the market has become addicted to these policies (and this was on full display this week).

Is it a coincidence that we just experience the worst week since March at the same time that the president's political strategy is being forced to change? This whole rally has been fed by easy money. Eventually the positive effects that ZIRP brings will also fade out (look at Japan) and we will be officially out of bullets to combat the crisis (my sense is that we already are).

The recovery is a complete mirage and this will become evident when MBS purchases end (housing led us in and will lead us out). While the summer season will certainly show a pick up in housing sales, it won't be nearly the pickup that many are expecting...the banks will come tumbling down again restricting credit once again and we'll have another crisis. Remember the problem is the debt and this has yet to be addressed.

In the end this might benefit the nation. "A double dip benefit the nation you say? What an idiot!". My reasoning: the US has 40%+ of their debt coming up to be rolled over... the only way I see this actually being rolled over successfully (that is without spiking interest rates) is if we have a flight to safety and it becomes evident that lowly treasuries at least provide guaranteed income (3.7% sure sounds good to millions of retirees right about now... look at the bond fund inflows!).

If we get the recovery that all the bulls are hoping for, please give me an argument that rates will continue to stay low. I believe they won't...rising rates will short circuit the recovery anyways. Either way, the case for a V shaped recovery and higher markets continues to have my wall of worry...and maybe that in itself is bullish!!!

Either way, the verdict will be known this get ready for a wild ride!

Scott Grannis said...

If you check back over most of the past year you'll see that I have never thought the "stimulus" of government spending and easy money was going to help the economy recover. Indeed, it is my belief that things are improving despite the stimulus. We would be doing much better without it. Government deficit spending is unproductive, and it raises future expected tax rates; that is bad. Monetary stimulus raises uncertainty about the future of inflation and weakens the dollar; that is bad.

Higher interest rates will come as the economy strengthens. Higher rates will be the result of a stronger economy, they won't weaken the economy. Rates would have to move much much higher, and be driven higher by the Fed, before they would pose a threat to the economy.

The weakness this past week comes from fears that Obama is going to hobble the banks; that populist policies are going to be turned loose, and that will be bad for the economy. There is also the uncertainty that now looms over Bernanke's renomination. And, will the Dems dig in and fight harder, or will they adapt and move closer to the center?

UFormula said...

Just a quick note: I have your weblog as part of my must read because I always like reading both sides of the argument.

With that said though, regarding your 1st paragraph, does this mean that had the gov't never instituted the extraordinary measures to prop up the economy (the housing credit, the cash for clunkers, the TARP, ZIRP and the myriad of other programs) that we would currently have better readings in all the economic indicators? When I read: "Indeed, it is my belief that things are improving despite the stimulus. We would be doing much better without it.", it certainly seems like you do. I completely disagree with that... it is precisely those measures that saved our economy from immediately entering the 2nd great depression.

Regarding your second paragraph, it is known that one of the biggest impediments to the economic recovery is a lack of credit. Additionally from reading the credit surveys released by the gov't it seems that there is very low credit demand, even at these historically low rates. What makes you think that higher rates would bring about higher demand for capital? That doesn't make logical sense. Please explain to me how higher rates at this point won't hurt the economy. In regards to your statement that rates would have to move much higher to hurt the economy, please remember that the economy is already in dire straits (at least that's what I see from a Main Street point of view... 17%+ unemployment) that's with historically low rates as it is!!

Regarding your 3rd statement, I understand that populist policies against the banks are bad for business, and thus hamper the recovery....I am in complete agreement with you here... but can you explain why the banks haven't been lending in the first place? To me it is because there is a S*&^ ton of debt on their books that is phony....they can't lend! Common Sense tells you that No lending in a credit based economy is just not healthy...

Additionally it seems that you are also placing the blame of a declining market on the future of Bernanke getting rehired... this would tell me that if he WERE NOT to get rehired, the market would continue to sell off.... does a genuine recovery in the stock market and the economy hinge on the hiring of one man? NO. The rise in the stock market has been based on low interest rates and extraordinary measures to re-inflate our way out of this mess. Why do you think that the worst 3 day stretch since the beginning of the rally coincided with a possible change in policy.

Unfortunately, whatever comes out of Washington is what influences the market these days, not the economy. What is coming out of Washington now is a possible change of policy (easy money and robbing the middle class to give rise to the stock market isn't working). The spigot might be turned off and we have just gotten a taste of what is to come if it were in fact to be turned off.

Scott Grannis said...

Rodrigo: The stimulus that I think proved counter-productive was primarily the $787 billion stimulus package passed in Feb. I've said many times before that the Fed's injections of liquidiy were most likely necessary and did indeed help save the financial system from collapse. Things like the housing credit, cash for clunkers were a complete waste of money.

Credit growth has been weak, but for every person who wants and is unable to get credit I'm sure there are several who are actively trying to deleverage (i.e., pay down their loans). In any event, bond markets stats show that there has been a very healthy expansion of corporate debt in the past year; by that measure credit is still expanding. Don't be so quick to generalize.

Low rates can reflect a surplus of credit being offered (which is equivalent to saying that most people are trying to deleverage). If the economy were stronger and the demand for credit stronger, we would see rates move higher. I see no problem with that happening.

In any event, the extension of credit does not create new demand. Weak credit growth doesn't ensure a weak economy.

Reasons for weak credit growth: banks are afraid of the risk of lending; more consumers want to pay down debt than want to increase debt; the federal government is absorbing the lion's share of the credit being extended by the economy. This is one of the downsides to a big deficit.

The market's 5% decline is just a blip (so far). Lots of reasons can be advanced for this, Bernanke being just one. I wasn't trying to say that the selloff will continue, just that uncertainties have suddenly increased. They may disappear soon.

I have a post about why the stock market rally is not a function of low interest rates:

Washington is indeed a very important determinant of the economy and the markets. So far Washington (with the exception of the Fed) has been doing more harm than good, in my opinion. If the stimulus plans were shut down tomorrow, the market might sell off briefly, but eventually the market would come to realize that this would be a very positive development. The fiscal spending multiplier I think is negative or only slightly positive and less than 1.