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Transcript of 105655519 105644251 Lighthouse Special Report Who Moved My Recession
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7/29/2019 105655519 105644251 Lighthouse Special Report Who Moved My Recession
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Lighth
Special Report: Leading Indicator
Posted on September 11, 2012
Lakshman Achutan, ECRI (Econo
on September 30, 2011 (and co
Gary Shilling, according to his A
However, equity markets dont
new all-time high. Only one side
environment. Long bond yields
interest until 2014, and possibly
Usually, central bankers hit the
strong demand and brisk econo
inflation recedes.
But what if the economy went i
already (as seen, for example, in
easily explained by central bank
use Investment Management
s - September 2012
ho moved my recession?
y Alexander Gloy, CIO of Lighthouse Investme
mic Cycle Research Institute) made a recession
firmed it multiple times since then).
gust letter, says We are already in a global re
hink so, with the S&P 500 trading less than 10
can be right. Could this be a repeat of October
S&P 500 hit new all-time hi
weeks before the Great Re
Are so-called leading indica
the Conference Board, still
The adjacent table shows te
indicators (h/t Mish Shedlo
market (#7) is a terrible indi
economic performance. Wh
the yield curve (#9) was a v
indicator in the past, it wou
the yield curve to invert in t
ould have to go negative as the Fed promised
longer.
brakes (raise interest rates) for fear of inflatio
ic growth. The yield curve inverts, a recession
to recession with short-term interest rates bei
Southern Europe)? Over the past 50 years, all
action and oil price shocks:
Page 1
t Management
call for the US
ession.
away from a
2007, when the
hs mere six
cession began?
ors, as used by
eliable?
n leading
k). The stock
cator of future
ile the slope of
ry good leading
ld be difficult for
he current
near-zero
induced by
follows, and
g near zero
ecessions were
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Lighth
Special Report: Leading Indicator
The following chart shows how
recessions. Black line: absolute l
prior post-recession low. Right-h
changes (negative absolute num
use Investment Management
s - September 2012
he Fed increased interest rates ahead of each
evel of Fed Funds rate; blue line: increase in %-
and scale for absolute data, left-hand scale for
bers merely for better formatting):
Page 2
f the last 9
points from the
percentage
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Lighth
Special Report: Leading Indicator
The same logic applies to the cr
use Investment Management
s - September 2012
de oil price (log scale):
Page 3
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Lighth
Special Report: Leading Indicator
I have looked at many indicator
short-term noise in order to p
Some data do not give good sign
need to be trend adjusted (num
cars and population).
The following indicators have be
was none), missed recessions, t
what it said in H2 2011, the curr
to it for a weighted overall rece
Not all recessions are equal, and
trigger line. Set it too low, and
get a lot of false positives (indi
I have drawn boxes shaded in re
catch all recessions; the bottom
The taller the box, the less confi
between those bands, recession
use Investment Management
s - September 2012
from every angle. Some have to be smoothed
event false signals (used mostly 3-months mo
als unless you look at decline from recent pea
er of miles driven, for example, benefits from
en tested for false positives (calling for a reces
e confidence I have in to work in the future, p
ent likelihood of a recession and the importanc
sion probability:
no single indicator is perfect. It is therefore ha
ou will miss some recessions. Position it too hi
ator signals a recession when there is none).
d. The upper end of the box is the highest level
end is the lowest setting necessary to avoid all
ence the indicator deserves. If the read-out is
probabilities are assigned.
Page 4
to cancel out
ing average).
s. Other data
rising number of
ion when there
ssible lead time,
e (1-3) I assigned
rd to draw the
gh, and you will
necessary to
false positives.
somewhere in
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Lighth
Special Report: Leading Indicator
At the risk of boring you with de
Want to build a house? Need a
and you can bet on a recession.
level still below the lows of 199
today.
use Investment Management
s - September 2012
tails, here are the remaining charts:
ermit! Any decline in permits of 25% or more
Missed the one in 2001 though. 2011 was a clo
/91 recession. Population was 250m then com
Page 5
rom prior peak
se call. Absolute
pared to 315m
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Lighth
Special Report: Leading Indicator
UoM Consumer Sentiment: One
back recessions, so lets not be twas a close call, but currently ou
use Investment Management
s - September 2012
false positive (2005), one miss (1981). 1980-82
oo harsh about that. Declines of 25%+ indicatet of the woods.
Page 6
were back-to-
recession. 2011
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Lighth
Special Report: Leading Indicator
If you run a business you need e
peaks in summer due to air condrops by 1% or more, its a rece
Currently a close call.
use Investment Management
s - September 2012
lectricity. Sure, weather has an impact (electric
itioning), but this thing seems to work. If electsion. Limited historic data, but no misses and n
Page 7
ity use in the US
icity usageo false positives.
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Lighth
Special Report: Leading Indicator
The CBs Consumer Confidence i
2003), but it did catch all recessiother indicators). 2011 was a cl
trigger recession call in 2013.
use Investment Management
s - September 2012
s similar to the UoM Sentiment. Two false posi
ons including the ones in 1981/2 and 2001 (difose call. Currently no red flag. Would have to
Page 8
ives (1992,
icult for a lot ofdecline to 45 to
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Lighth
Special Report: Leading Indicator
Retail sales (ex food services) fel
sales for three consecutive monseries began (1947), according t
add a few weak months and the
use Investment Management
s - September 2012
l annualized 2.7% over the three months to Jul
hs indicated a recession 27 out of 29 times sinGary Shilling. Year-over-year, the chance is sti
economy would be in the tank.
Page 9
. Falling retail
e the datall positive, but
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Lighth
Special Report: Leading Indicator
Before you fire employees you r
hours in the manufacturing sect1996. According to this indicato
use Investment Management
s - September 2012
educe their working hours. A drop in average
r of 2% or more indicates a recession. Except, the US economy is currently sailing smoothly.
Page 10
eekly working
or
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Lighth
Special Report: Leading Indicator
The Institute for Supply Manage
sales, inventories etc. A level ofweaker business activity (econo
contraction. However, the decli
alarm. One false positive (1989).
use Investment Management
s - September 2012
ment (ISM) regularly asks company executives
50 indicates no net balance for participants seey stagnates). The current level (48) points to
e from prior peak is not yet large enough to ra
Page 11
bout orders,
ing stronger andslight
ise recession
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Lighth
Special Report: Leading Indicator
Unemployed people usually don
1% per annum, so traffic increas
If total miles driven grow less th
The 2001 recession was missed.
theoretically possible we migh
since 2007 due to online shoppi
shopping and mail order houses
to 9.0% in 2011. However, addit
partially negating fewer trips to
was approximately the same in
of the decline.
The steep drop in 2011 is puzzli
decline in gasoline consumption
use Investment Management
s - September 2012
t drive to work. But the US population increas
es constantly.
n 0.1% versus its own trend, you are likely to
This indicator says we had a recession in 2011
t not know it yet). Is the prolonged decline in
g? According to data from the Census Bureau,
amounted for 5.9% of retail sales (ex autos) in
ional trucks are needed to deliver the addition
the mall by individuals. The number of non-far
011 and in 2004, eliminating reduced employ
g. Mish Shedlock recently looked at possible r
.
Page 12
s approximately
e in a recession.
which is
iles traveled
electronic
2004, increasing
l volume,
employees
ent as a source
asons for the
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Lighth
Special Report: Leading Indicator
Defense and aircraft orders are l
confidence in this indicator duefalse positive in 1998 and are cu
use Investment Management
s - September 2012
umpy and distort trends, so we exclude them
to limited historic data. If you set the trigger atrrently in recession.
Page 13
ere. Medium
0%, we had a
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Lighth
Special Report: Leading Indicator
Electricity production should be
many false positives (1983, 199below -0.5% would eliminate fal
electricity production suggests
use Investment Management
s - September 2012
linked to economic growth. This indicator, unf
, 1997, 2006), so confidence is medium. Settse positives, but make you also miss 1990/91.
e are in a recession as I type.
Page 14
rtunately, had
ing the triggeregardless,
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Lighth
Special Report: Leading Indicator
Finally, the least confident indic
current reading of 48.7 suggests1998, 2005) muddy the water.
use Investment Management
s - September 2012
tors. First, the ISM manufacturing supplier deli
a mild contraction. Multiple false positives (19
Page 15
veries. The
85, 1989, 1995,
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Lighth
Special Report: Leading Indicator
Cars need gas, and gas needs to
because of high turnover. Lowdata. Can the recent decline be
use Investment Management
s - September 2012
be delivered to gas stations. Inventory effects
confidence because of false positive (1996) anxplained by online shopping?
Page 16
re unlikely
d limited historic
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Lighthouse Investment Management
Special Report: Leading Indicators - September 2012 Page 17
SUMMARY: Established leading indicators incorporate questionable input. While there is no
perfect indicator, a combination of the ones tested above, weighed by accuracy, confidence
and timeliness should produce a good reading.
The higher-confidence indicators say that 2011 was a close call, but we are currently not in a
recession. However, a lot of lower-confidence indicators are showing readings consistent with a
severe recession.
It is entirely possible we narrowly avoided a recession in 2011 and are heading towards another
one in 2013. Currently, however, combined indicators suggest only a 10% likelihood of being in
a recession at this point (September 2012).
The US economy is experiencing the slowest recovery of the past 50 years (both from an
employment perspective as well as from GDP growth). After looking at total credit market debt
outstanding I concluded this was due to a decline in the marginal utility of additional debt (see
this post). Some readers have mistaken me for an advocate of more quantitative easing. I
should have been more clear about this: I do not think printing money is an appropriate remedy
for economic woes. Enabling the government to finance fiscal largess at artificially low rates isunlikely to cure problems related to excessive debt levels.