Politics, the Economy and the Market Across Time
Guest post by Doug Short.
With the presidential election just a few days away, I thought this might be a good time to recall the larger historical context of the US economy and markets with an eye on the party in power.
First up, here is a look at GDP by party in control of the White House and Congress. Since the inception of quarterly GDP in 1947, Real Quarterly GDP has averaged 4.0 percent during Democratic administrations and 2.6 percent during Republican administrations.
Recessions are highlighted in gray.
Distinction Without a Difference
Market comments by Hussman of Hussman Funds.
In recent weeks, market conditions have fallen into a cluster of historical instances that have been associated with average market losses approaching -50% at an annualized rate. Of course, such conditions don’t generally persist for more than several weeks – the general outcome is a hard initial decline and then a transition to a less severe average rate of market weakness (the word “average” is important as the individual outcomes certainly aren’t uniformly negative on a week-to-week basis). Last week, our estimates of prospective market return/risk improved slightly, to a level that has historically been associated with market losses at an annualized rate of about -30%. Though that improvement falls into the category of a distinction without a difference, at least we can say that conditions are not the most negative on record.
Over the course of the coming cycle, I expect that we will easily observe conditions among the many favorable clusters in the historical record, where we will not face the syndromes of hostile conditions we’ve seen recently (e.g. overvalued, overbought, overbullish, yields rising). Valuations, though rich, are nowhere near where they were in 2000, and even the tepid valuations of early 2003 provided ample opportunity to accept market risk without the need for significant hedging. Unlike 2009, the next cycle will not unexpectedly present us with the need to capture Depression-era data in our approach (which we’ve addressed). Even without significant undervaluation, there are many combinations of market conditions that have historically been associated with strong subsequent market returns, on average.
So there’s little doubt that market conditions will provide investors with a strong basis to accept risk at various points over the coming market cycle. The difficulty today is not only that valuations are rich, but that on our metrics, present market conditions cluster among those that have produced strikingly negative market outcomes on a blended horizon from 2-weeks to 18-months. Wall Street’s beloved forward-earnings multiples only seem reasonable here because profit margins are the highest in history (largely as a result of steep government deficits and depressed savings rates). Once we normalize for profit margins – which is necessary because stocks are very long-lived assets – valuations are elevated, and are coupled with a variety of historically hostile, overvalued, overbought indicator syndromes. Moreover, while our economic concerns do not significantly feed into our concerns about the equity market, we continue to view the U.S. economy as being in an unrecognized recession that started about mid-year.
Core CAPEX as a Recession Indicator
Guest post by Doug Short.
Earlier this month Business Insider posted a commentary with the attention-grabbing headline:DAVID ROSENBERG: Here’s Your Big Red Flag That We Could Be Heading For Recession. I generally find Rosenberg’s chronically bearish commentaries of interest and in this case by the fact that he’s reported to view CAPEX as a recession indicator.
This morning the Census Bureau released the October Durable Goods report for data through September. The CAPEX referenced by Rosenberg is the Manufacturers’ New Orders: Nondefense Capital Goods Excluding Aircraft data series, which is conveniently available in the FRED database. The data goes back to February 1992, so we only have two recessions during this timeframe to evaluate CAPEX as a recession indicator. Here is a look at the monthly data.
U.K. Economy Surges 1% as Britain Exits Recession
Maybe we should throw the next Olympics in Spain? From Bloomberg.
Britain exited a double-dip recession in the third quarter with the strongest growth in five years as Olympic ticket sales and a surge in services helped boost the rebound. Inflation cooled to the slowest in almost three years in September, while retail sales increased more than forecast. Britain’s economy resumed growth in the third quarter by more than economists forecast, boosted by Olympic ticket sales and a surge in services.
Gross domestic product rose 1 percent from the three months through June, the fastest growth since 2007, the Office for National Statistics said in London today. That exceeded the highest estimate in a Bloomberg News survey for growth of 0.8 percent. The median forecast of 33 economists was 0.6 percent. The pound rose after the data were published.
The growth surge reflects a boost from the Olympics and a rebound from the second quarter, when GDP was affected by an extra public holiday. While the data may give some short-term relief to Prime Minister David Cameron’s struggling government, Bank of England Governor Mervyn King said this week that the recovery is “slow and uncertain.” That suggests the figures mask underlying weakness that could warrant further stimulus from the central bank. (Full article here)
Nobel Peace Price – fat finger?
When we heard of the Nobel Peace Prize earlier today, we had to check the calendar to make sure this wasn’t April 1st. Spiegel’s take below, without additional comments.
European leaders greeted the decision to award the Nobel Peace Prize to the European Union on Friday, saying it would provide urgently needed motivation in the debt crisis. But euroskeptics could hardly believe their ears and are already ridiculing the jury in Oslo.
The decision to award the Nobel Peace Prize to the European Union has divided the Continent. While European leaders in Brussels and national capitals are basking in the glow provided by the unexpected honor, euroskeptics in the EU have unleashed their contempt for the Norwegian Nobel Committee.
In Britain, Friday’s award has been the subject of particularly heated commentary. Iain Martin, a columnist with the conservative Daily Telegraph dismissed the prize as “beyond parody.” He writes that the prize has been awarded prematurely because “we have no idea how the experiment to create an anti-democratic federation will end.” Besides, he writes, “daftest of all is the notion that the EU itself has kept the peace.” Instead, he writes, it was the Brits and the Americans who brought peace to the Continent.
Trade Deficit – Recession Risks Increase
Guest post by Lance Roberts of Street talk Live.
I recently penned an article entitled “3 Major Risks To The 4th Quarter” wherein we discussed the impact of the Eurozone recession, and slowdown in China, on the domestic economy. In it we stated“The continued recessionary drag across the Eurozone is dampening revenues and slowing demand for exports from the U.S. Recent corporate reports from key transportation related companies have all warned of weaker outlooks due to slowdowns in the Eurozone.”
The chart below was presented recently by the Frederick Smith, the President and CEO of FedEx Corp., which shows the clearly negative trends in the year-over-year exports including the U.S.
Why are we bailing out the banks? Part two. Theory, Ideology and Failure.
Another must read piece by Golem XVI.
In part One I argued that if we want to understand why our rulers have insisted we MUST bail out the banks we simply have to look at who owns the banks and the vast bulk of the wealth they house. And surprise, surprise the owners of most of the financial ‘wealth’ are…our rulers and their friends.
I ended by suggesting that true though I felt this was, there were also theoretical reasons why some people felt the banks must be protected at all costs -as long as the burden of paying that cost was placed firmly upon the backs of the little people, you understand.
So….
You Can Lead a Horse to Water, But Can’t Make it Drink
Guest post by Peter Tchir.
Will Spain go through with the bank bailout? We Spain get OMT for the secondary market? Will ESM support Spanish new issuance?
In all likelihood each of these programs will be initiated, but I see them as likely being ineffective. They will be ineffective because they won’t be implemented with vigor. They will be lackadaisical attempts to calm the markets with minimal amounts of money.
Draghi gave a speech today, where from the sound bites I caught, he appeared to be backtracking a little. He spent more time emphasizing what Spain needed to do, and what the ECB couldn’t do, than offering a “whatever it takes” enthusiasm.
While I think plans will be implemented, the conditions will be tough and Spain will be constantly on the verge of not meeting the conditionality, giving the ECB and the rest of the EU the opportunity to back out. It will be Greece all over again. There will never be enough money to fix things and Spain will be constantly back at the table begging for more.
That is assuming Spain doesn’t decide to “go it alone”. The OMT was set up with Spain (and Italy) in mind, yet Spain seems reluctant to take the money. Spain is attempting to spin its own budget as all the conditionality that is needed. Even if you Ignore the fact that the Spanish budget is unlikely to work out and that the anti-austerity movement remains strong, it is hard to believe that Germany and the others won’t attempt to impose their own will on the conditionality.
Number Five – correction around the corner?
Market comments by Hussman Funds.
Examine the points in history that the Shiller P/E has been above 18, the S&P 500 has been within 2% of a 4-year high, 60% above a 4-year low, and more than 8% above its 52-week average, advisory bulls have exceeded 45%, with bears less than 27%, and the 10-year Treasury yield has been above its level of 20-weeks prior. While there are numerous similar ways to define an “overvalued, overbought, overbullish, rising-yields” syndrome, there are five small clusters of this one in the post-war record: November-December 1972, July-August 1987, a cluster between late-1999 and early 2000, early 2007, and today. The first four instances preceded the four most violent market declines in the post-war record, though each permitted a few percent of additional upside progress before those declines began in earnest. We do not know what will happen in the present instance, particularly over the short-run. But on the basis of this and a broad ensemble of additional evidence, we estimate that the likelihood of deep losses overwhelms the likelihood of durable gains. To ignore those four prior outcomes as “too small a sample” is like standing directly underneath a falling anvil, on the logic that falling anvils are an extremely rare occurrence.
What have the economists ever done for us?
BOE’s Haldande on economists and the blame game with regards to the financial crisis. From Voxeu.
There is a long list of culprits when it comes to assigning blame for the financial crisis. At least in this instance, failure has just as many parents as success. But among the guilty parties, economists played a special role in contributing to the problem. We are duty bound to be part of the solution (see Coyle 2012). Our role in the crisis was, in a nutshell, the result of succumbing to an intellectual virus which took hold of the body financial from the 1990s onwards.
One strain of this virus is an old one. Cycles in money and bank credit are familiar from centuries past. And yet, for perhaps a generation, the symptoms of this old virus were left untreated. That neglect allowed the infection to spread from the financial system to the real economy, with near-fatal consequences for both.
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