Lakshman Achuthan at the ECRI has been making some pretty confident statements in recent months. He says leading indicators tell him that the recession ended this summer, a V recovery is now underway and no meaningful downturn in the stock market is likely ahead. I would love to admire such confidence about an unforeseen future. If I knew less, I might. Unfortunately experience has taught us that over-confidence in this area is naive and financially dangerous.

A close study of the past few cycles shows that ECRI's leading indicators have not offered accurate advance warning of downturns but rather have tended to coincide with or slightly trail stock market movements. Not only did the ECRI not predict the start or depth of the present downturn but back in 2002 the ECRI was also predicting an "imminent recovery" based on a recovery in the stock market:

"At the point of ECRI's recovery forecast, the SPX was making its first post-9/11 rally highs at a January 2002 close of ~1,130 (print high of 1,177). The SPX fell thereafter from April 2002 by ~30% to the September closing low and ~35% peak to trough in October.

The SPX made a secondary higher low in March 2003 some 14 months after ECRI's "imminent recovery" call."

For a lengthy and detailed review of their track record read: A look at ECRI's recession predicting track record   more »

Bill Moyer’s Journal had a disturbing discussion this week with former International Monetary Fund chief economist Simon Johnson and US Rep. Marcy Kaptur (D-OH) on the blatant nepotism of Wall Street and Washington. It is a nauseating review of how the ideals of democracy has been hijacked and degraded in a flagrant display with little civil outcry to date. This should make people mad as hell if they are paying attention.

Obama did inherit a flawed structure, but the financial crisis gave him a rare opportunity at the outset of his term to clean house and start fresh. Instead he appointed the usual suspects to his inner circle, promoting and rewarding those who created and profited most from the disaster. So far Obama has failed completely to deliver the meaningful change he has promised in this critical area. He cannot plead ignorance and innocence on this any longer. The longer he misses his opportunity here, the more the monkey of blame will climb on to his back. The Nobel Peace Prize beckons him to seize his opportunity or be judged accordingly.

Watch the 30-minute interview here:    more »

1. What's happening in California (the world's eighth largest economy) is incredible. Really, these are not 'ordinary' times. Maybe its time to reread The Grapes of Wrath:

See the UK Observer's story: Will California become America's first failed state?

2. Quick builds on cheap imports during the housing bubble are the plague that keeps on giving: see Thousands of US homeowners site drywall for ills

3. It's hard to find anyone optimistic on the US dollar these days, which should be a red flag in itself. " Talk of the perils of dollar weakness has been exaggerated for three decades-and in that way is somewhat comical--while predictions of its demise as the reserve currency are premature. The dollar saga is also the stuff of a short memory."
See a contrarian argument: Dollar's Demise-Bah Humbug

4. Following up on Meredith Whitney’s observations about contracting credit for small business loans, maybe its not so much banks not wanting to lend, but people unwilling to borrow that is reducing the total credit outstanding. Again, short term this reduces leverage and growth expansion, but longer-term it’s main street taking back its power from the loan sharks. See: You can’t see Main Street from Wall Street.   more »

Lately markets have seemed manically euphoric. For those of us taking sober measurements prices seem pretty crazy here. Most of the independent veterans who are risk managers rather than traders are voicing scepticism and concern about a gapping disconnect between economic reality and soaring prices over the past few months. But so far the falling US dollar is continuing to incite a panic-like speculation in most other assets, pretty much across the board. Where and when this wild ride end will end is everyone's guess at the moment.

A couple of weeks ago Pimco manager, Mohamed El-Eran caught media attention with his assessment that world markets were now trading on a liquidity injected sugar high that would eventually fall hard.

In a similar theme, we read with some amazement this morning a Bloomberg story on rampant cocaine abuse in London's financial district.

"...medical experts say [it] is rampant in the City, London’s financial district. It’s a habit that often goes hand in hand with heavy drinking. Junor says he and his mates wanted to maintain the thrill they felt at work as they poured into the Square Mile’s pubs and clubs after a day of getting high on finance.

“It’s the same rush from doing a deal and doing cocaine,” Junor, 45, says. “The adulation from doing a deal spills into going for a beer and then a party -- it’s an amorphous blob of energy.” Everyone knows about the City’s drug problem, recovering addicts say. Bosses turn a blind eye to drugs, as long as you’re making money for your firm -- and until recently, making big money was easy to do."

See Cocaine Survivors Losing London Bonus See End to Bubble’s Binge: for a lengthy account of the problems.

Gee I wonder if London is an anomaly in this abuse, surely drug use is not rampant among traders and finance types in other major cities in the world? So much for omnipotent markets setting rational prices... No wonder some of us are not seeing the math here, we've been trying to make these assessments straight...   more »

Aron Task at Tech Ticker yesterday interviewed Christopher Whalen of Institutional Risk Analytics on the accelerating credit contraction that is now undermining the economic recovery. As I have said before, longer-term, reducing debt levels is part of the solution to restoring strength and equity in consumer balance sheets and the economy. Near-term though, the adjustment of reducing credit is painful and flies in the face of a quick economic rebound.

Whalen makes some excellent observations about why we have seen speculative capital fleeing into stocks, bonds and commodities the past 2 quarters. It’s not a good sign. It’s the same reason that Chinese people are using government incentives to speculate (gamble) rather than investing in building small business right now: the real economy is presently dying, drowning in over-capacity and still anaemic consumption demand. If entrepreneurs and investors see attractive business opportunity they are encouraged to direct capital and energy into creating enterprise. When they don't see it, they are more inclined to park in cash, buy bonds, speculate, and stock-pile rather than invest in building equity with a long term view.



In the same vein, we note that a significant motivation behind Australia's surprise rate hike yesterday, was the government’s concerns about rapidly re-flating asset bubbles again...   more »

This morning the market is euphoric again over news that the Bank of Australia chose to raise interest rates and declare the economic downturn a thing of the past. Too bad Canada didn't sell more of our stuff to Asia. Thanks to massive government stimulus, and widespread speculation and stockpiling, Asia has been pretty much the only hot demand spot in recent months. Australia has therefore naturally seen a pick up in demand for its raw material exports. Over on our side of the world, the US is still floundering and Canada is still desperately seeking some customers with a pulse. Whether Asian demand can continue in light of weak demand everywhere else is doubtful. I suspect Australia may have sounded the all clear a little too soon, time will tell.

Roubini did a CNBC spot yesterday talking about the risk of shock to commodity exporting countries which is likely to come when the world economy does not bounce back as quickly as many are forecasting. He talks about the large disconnect we have seen over recent months between soaring risk assets and real prospects for economic recovery.



I think Roubini is right about the economic headwinds, but as my friend ...   more »

Bank analyst Meredith Whitney shared a dim but pragmatic view on the prospects for economic recovery in a Wall Street Journal article last week:

"Anyone counting on a meaningful economic recovery will be greatly disappointed. How do I know? I follow credit, and credit is contracting. Access to credit is being denied at an accelerating pace....small businesses...have never had a harder time getting a loan."

"Banks...want to lend only to those that don't want to borrow...I believe that we are only in the early stages of the second half of this credit cycle..."

Read the whole article here: WSJ: The credit crunch continues, for a sobering reminder of how important credit is to small business and how important small business is to jobs and stability in our economy.   more »

This weekend we went to the latest Michael Moore movie: Capitalism: A love story. I find Moore’s work to be generally entertaining and of value where it provokes critical thought and discussion about the status quo. Any medium that helps to shake awake epidemic complacency is worth something. I recall writing to Moore back in 2004 after seeing Fahrenheit 911 and urging him to examine the financial industry as his next area of expose. I am sure I am not the only one who raised the idea.

My criticism of Moore’s work is always basically the same: he excludes rather completely any acknowledgement of the responsibility we individuals bear for our own decisions.

In Sicko, he was all about the big Drug Cos and the right wing neglecting the needs of the poor. I agree; but I also see blame in those who eat, drink and smoke their health into oblivion.

In Capitalism Moore starts out with a study of families being foreclosed from their homes. It’s painful to watch, and sad. But never once does he also tip his hand to the fact that many of the now destitute, willingly levered and spent their own way to hell...   more »

Perm-bulls have had quite a party the past few months. You can always tell the bulls that lost a ton in the bear market to March as they are the people most bragging about "gains" they have now "made" year to date. The fact that most are still suffering heavy negative return numbers over the past 1, 3, 5 and in some cases even 10 years is not a point most care to acknowledge. And now we have October. Hopefully something will crack one way or another this month: either through a bullish pick up in buying volume (at last), or by a bearish pick up in sellers. Prices and valuations are high here; very tough to defend on rational arguments unless we are going to see a strong rebound in consumption and earnings over the next six months.

October doesn't have to be a negative month of course. Momentum driven markets, even on low volume and wide-eyed hope, can go on longer than logical. We know that so far 2009 has been the steepest rebound on the lowest volume ever since 1930. This is quite an achievement. But it doesn't exactly give capital-careful investors a warm content feeling about the price risk at present levels.

We can see from market history that October has been a particularly volatile month in secular bear periods and particularly so when the previous months have seen a strong summer rally as we did this year.

If I got to chose, I would have October be the last downside test to the 2007-2009 cyclical bear market. We had suspected from the outset that this bear market might last a couple of years; this month would be the 2nd anniversary.

The best plan for thinking investors is never confident predictions or one-sided plans but rather a plan A, B and C:

A. What if the market rolls over 10-20% here?
B. What if it moves lower than that?
C. What if it doesn't pull-back but continues to climb?

Failing to plan for different outcomes is no plan at all.
Define your rule set now, so that you will know what to do no matter what way this goes.   more »