There was a bit of negative news.
- Chinese economic indicators weaken. See Dr. Ed. for discussion and a great chart.
- Employment growth prospects are mixed at best (via the BLS JOLTS report). See Steven Hansen’s analysis and charts.
- Initial jobless claims popped to 382,000. Seasonal factors are cited, once again, but this should be recognized as bad news.
- Sea container counts are lower (via Steven Hansen). This is a good concurrent indicator.
- Industrial production declined by 1.2%, the worst since the start of the recession. Since this is part of the NBER’s group of recession indicators, we watch it closely. The best source is Doug Short’s “Big Four” update. Here is the most recent chart:
The ugliest news this week related to the death of US Ambassador to Libya, J. Christopher Stevens. The story has many dimensions and dominated today’s news programs. A real analysis is beyond what we can do in the weekly column, but it certainly represents a topic we should all be watching.
The underlying issues involve freedom of speech, security at embassies, foreign aid, and the US image abroad. The consequences affect oil prices, trade issues, and even nuclear flashpoints.
The Silver Bullet
I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. Think of The Lone Ranger.
This week’s award goes to Bob McTeer, although his entry is modestly stated. The problem is that he is a frequent guest on Larry Kudlow’s show. Kudlow has skewed to an almost unwatchable level of political commentary (so sad for me, one of his most loyal viewers). McTeer is a rock-ribbed Republican, and a genteel and gracious person.
Kudlow said something that is very foolish, but sounds good to the average viewer. McTeer calls him on it, but without naming the source. I already had the Kudlow statement on my own blog agenda, so this saves me the work of a post. Meanwhile, does McTeer deserve full honors when he will not name the source?
Here is the point. Kudlow notes that the Fed claims to have created two million jobs while increasing the balance sheet by $2 trillion. This is a frequent blunder by critics of government policy, who ignore what the expenditure has purchased. Here is McTeer’s response:
“The arithmetic may be right, but the logic is wrong. The “spending” may have been motivated by the need to unfreeze credit markets and stimulate the economy and create jobs, but the spending was on Treasury securities, mortgage-backed securities, commercial paper and the like—assets that are still on the Fed’s balance sheet if they haven’t matured and been replaced. Those assets did not disappear. They can be sold or held to maturity. Meanwhile, they produce earnings which increase the amounts turned over to the Treasury by the Fed. Taxpayer funds have not been used; they have been augmented.
To repeat for emphasis, however many jobs the $2 trillion may have helped “buy,” it also bought $2 trillion of securities.”
The Indicator Snapshot
It is important to keep the current news in perspective. My weekly snapshot includes the most important summary indicators:
- The St. Louis Financial Stress Index.
- The key measures from our “Felix” ETF model.
- An updated analysis of recession probability.
The SLFSI reports with a one-week lag. This means that the reported values do not include last week’s market action. The SLFSI has moved a lot lower, and is now out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a “warning range” that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.
The SLFSI is not a market-timing tool, since it does not attempt to predict how people will interpret events. It uses data, mostly from credit markets, to reach an objective risk assessment. The biggest profits come from going all-in when risk is high on this indicator, but so do the biggest losses.
The C-Score is a weekly interpretation of the best recession indicator I found, Bob Dieli’s “aggregate spread.“
Bob and I recently did some videos explaining the recession history. I am working on a post that will show how to use this method. As I have written for many months, there is no imminent recession concern. I recently showed the significance of by explaining the relationship to the business cycle.
The evidence against the ECRI recession forecast continues to mount. It is disappointing that those with the best forecasting records get so much less media attention. The idea that a recession has already started is losing credibility with most observers. I urge readers to check out the list of excellent updates from prior posts.
Readers might also want to review my new Recession Resource Page, which explains many of the concepts people get wrong.
The single best resource for the ECRI call and the ongoing debate is Doug Short. This week’s article describes the complete history, the critics, and how it has played out. The post highlights the most important economic indicators used in identifying recessions, showing that none have rolled over. Doug updates the recession debate every week and includes a great chart of the “big four” indicators used by the NBER in recession dating.
Meanwhile, the ECRI story continues to change. The latest variation is that the data will eventually be revised lower to show that we are already in recession. The Bloomberg interviews, which have generally been very friendly, now state,
Watch the video, but the title tells the story!