Five Recessions the Fed Failed to Predict

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The Federal Reserve is confident that a double-dip recession won't be taking place. One of the major forecasting tools they use to determine this is yield curve analysis. This approach has never really worked and can't possibly work in a ZIRP (zero interest rate policy) environment.

According to their yield curve model, the Fed is predicting there is only a 10% chance of a recession in the near future. Before breathing a sigh of relief, investors should ask themselves how well this model has worked in the past. Here are the relevant questions and answers:

Did the model accurately predict the 2007-09 recession, the worst since the Great Depression?  Well, no it didn't.

Did the model accurately predict the 2001 recession? Err, well no it didn't do that either.

Did the model accurately predict the 1990-91 recession? Well, it missed that one as well.

Did the model predict the huge downturn in 1973-75?  Well no, it failed then too.

Did the model predict the 1969-70 downturn?  No, that was another one it missed. 

The only time the model predicted a greater than 50% chance (and it was only a little above 50%, so the prediction was basically no better than tossing a coin) of a recession was for the 1980 and the 1981-82 recessions. This had nothing to do with the double dip nature of those recessions, but was a factor of the high interest rate environment that made it possible for short-term interest rates to be higher than long-term rates. It is quite obvious that the higher interest rates are, the better this model works. The model in fact can't work at all when short-term rates are close to zero as they are now. In such circumstances, the yield curve can't invert because nominal long-term interest rates would have to be negative - an impossibility. So with our current low interest rates, the Fed model will never predict a recession.

As usual when the economy is falling apart, the Fed is making its usual positive comments of how things are really in good shape and the public should ignore all the reality-based signs of trouble. Dallas Fed President Richard Fisher was on CNBC on Wednesday and stated with confidence, "while the recovery has slowed, it is unlikely the U.S. will fall back into recession". The Fed was also very confident of avoiding the Great Recession as well and continued to say so long after the recession had begun.

Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

10 Reasons Why We Are Heading Into Recession

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


We have entered another period similar to late 2007 and 2008, when the economic establishment had a rosy view of the economy, but a number of indicators were flashing warning signs that a major downturn was coming. Neither the Federal Reserve, the IMF, nor Wall Street correctly predicted a recession would begin in December 2007. None of these august bodies even realized the greatest economic downturn since the Depression was taking place even months after it had begun. Bullishness once again reigns supreme among the economic elites as one indicator after another is signaling trouble ahead.

Here are 10 reasons to think that a there will be a recession soon:

1. The ECRI weekly leading indicators have dropped to minus 7.7%. There has been no case since its existence when a recession didn't take place if this indicator fell to minus 10%. This doesn't mean that it has to fall that low, a recession is still very likely if it even gets close. Falling below zero and staying in that range for any period of time also signals a recession. In the 2007, the recession began three months after this indicator turned negative.

2. Global shipping has experienced a collapse in the last six weeks. The Baltic Dry Shipping Index has fallen from 4209 on May 26th to 2018 in early July, a drop of over 50%. The BDI is now as low as it was in May 2009. Its high in 2008 was 11,793.

3. Interest rates on U.S. treasuries have been falling rapidly and this indicates a weakening economy. The yield on the two-year note even hit an all-time low recently, dropping below its rate during the Credit Crisis in late 2008 when the global economy was in freefall.

4. The stock market is turning down and the Dow Industrials and S&P 500 have both given bear market trading signals. The small cap Russell 2000 has already experienced a bear market loss. The stock market peaked only two months before the 2007 recession began.

5. U.S. Consumer confidence took a nosedive in June falling 10 points to 52.9. A reading of 90 or above indicates a healthy confidence level.  Confidence hasn't gotten anywhere near that level during the recovery. Prior to the Credit Crisis, consumer spending was responsible for 72% of GDP. The consumer is the 800 pound gorilla that determines the fate of the economy.

6. The jobs picture hasn't improved and isn't likely to get better for a long time. Weekly unemployment claims were 454,00 this week. Anything around or above 400,000 indicates a recessionary environment. Claims have not even gotten that low at any point during the recovery. Surveys indicate that job offers for 2010 graduating students are few and far between. Long-term unemployment is far higher than it has been in any post-War recession.

7. Housing, the epicenter of the Credit Crisis, is getting worse. New Homes sales fell to an all-time low recently.

8. Government stimulus is declining and turning into retrenchment globally. The 2009 U.S. stimulus package's impact on the economy peaked this spring and spending will run out by the end of this year. It is highly unlikely a new stimulus package will appear in 2011. Government spending didn't just stimulate the recovery, government spending WAS the recovery. Without it, there will be a sharp drop in economic activity.

9. Taxes are increasing globally and higher taxes are a drag on economic growth. In the U.S., the Bush tax cuts expire at the end of the year. In the UK, capital gains are going up from 18% to 28% and the VAT is being raised from 17.5% to 20.0%. In Japan, there is a proposal to double the national sales tax from 5% to 10%. In the EU, countries are trying to outdo each other in imposing new and higher taxes.

10. The eurozone debt crisis is not yet resolved, but has been temporarily postponed. Greece could still default and problems are likely to continue in Portugal, Spain, Ireland and Italy. These can continue to negatively impact the global economy for a long time to come.

Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Dow Industrials to Give Bear Market Signal Today

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The big cap Dow Industrials will be giving a bear market trading signal today.

The Dow's 50-day simple moving average will be falling below its 200-day. The happened for the S&P 500 last Friday, July 2nd. While this has not occurred for the Russell 2000 yet, the index simply confirmed small caps were already in a bear market with a close-to-close loss of 20.5% as of yesterday, July 6th. This puts it in a bear market by the strictest definition.

Trading on the U.S. markets started out with a strong bullish bias in the morning, but as the day progressed the rally lost its momentum. This is a trading pattern typical of bear markets - strong in the morning, weaker toward the close. While the Dow was up as much as 170 points early on, by around 3PM it was in negative territory like all the other major stock indices. A last minute rally pushed the Dow, S&P 500 and Nasdaq into positive territory. The Russell 2000 closed down 1.5% however. The Dow managed to close up 57 points, the S&P 500 5 points and the Nasdaq 2 points - not exactly a sterling performance after two weeks of severe losses.

The 50-day moving averages for all the indices are dropping rapidly. The 200-day's are still moving up, but just barely. They should begin to move down soon to complete the bear market picture. The 50-day almost crossed the 200-day on the Dow yesterday, but missed by coming in at 10,361.77 versus the 200-day's 10,360.60. There is no doubt that the cross will take place today.

It makes sense that small caps should enter a bear market first since they are more volatile and risky. The big cap Dow usually enters bear market territory last because it consists of what are perceived to be the safest stocks. The Nasdaq should be next to follow the Russell 2000 into the jaws of the bear, but it's trading signal is not likely to happen until the end of this next week at the earliest. Only one bad trading day though could provide it with a bear market loss. It has already declined 18.7% peak to trough. So the Nasdaq could actually be in a bear market before it gives its trading signal, just like the Russell 2000.

The market has provided investors with a number of clues, indications, and signals that the bull market it over and we have entered a rough patch. About the only thing that is missing so far is someone putting up a giant neon sign in Times Square that flashes 'Stocks are in a Bear Market'. If you need that much notice, perhaps you should try paying more attention.

Disclosure:

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

What's Driving Today's Market Rally

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Major European stock indices were up two to three percent today after Asian indices rose around one percent last night. The U.S. markets then had a strong opening after the three-day holiday weekend. Mainstream media is citing bargain hunting as the source of the rally, whereas money-pumping operations to support the euro is likely the major contributor to the market's bullish behavior.

Stocks were devastated in the last two weeks and some rally at this point is reasonable in order to resolve an oversold condition. Strong buying in the U.S. though would be inconsistent with the bear market signal being giving by the S&P 500 on Friday and the small cap Russell 2000 having experienced a bear market loss of over 20% the same day. This is not the type of market environment that traders can't wait to plunge into on the long side. Liquidity pumping by the major central banks would be most effective (and likely) at a key market juncture like this however.

Central bank efforts to support a faltering global financial system began in earnest on Sunday May 9th after the Flash Crash three days earlier. The EU announced its $915 billion euro rescue plan and at the same time the U.S. Fed opened unlimited liquidity swap facilities with the European Central Bank, the Bank of England and the Swiss National Bank. A swap facility up to $30 billion was opened with the Bank of Canada. The Fed stated, "These facilities are designed to help improve liquidity conditions" and that the Bank of Japan was considering similar measures. The swap arrangements were authorized until January 2011.

Stock markets around the world then skyrocketed on Monday, May 10th since increased liquidity shows up immediately in stock prices. Investors should expect intermittent market impact both from euro rescue money and swap generated liquidity for the next few months. For the full text of the Fed's announcement, see: http://www.federalreserve.gov/newsevents/press/monetary/20100509a.htm.

It is fortunate for the markets that liquidity is on tap when needed. Not only is the technical picture of the market deteriorating, but the economic news isn't supporting stocks either. Little noticed last Friday was the announcement of a decline of 1.4% in U.S. industrial production. The ISM Manufacturing index for June, which came in at 56.2, indicated a slowing expansion (over 50 indicates growth). Almost every component, except for those related to inventories, was down. New orders, an indication of future activity, dropped 7.2 from the previous month. The ISM Service index fell to 53.8, which was below forecast. The employment component was 49.7 dropping below 50 and indicating job losses. The service sector is four times bigger than the manufacturing sector in the U.S.

Investors should enjoy the rally while is lasts. The rally after the flash crash in May lasted four days. Within ten days, stocks were lower than they had been during the crash. Liquidity induced rallies can be powerful, but they don't last very long.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Russell 2000 and S&P 500 Confirm Bear Market

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The S&P 500 gave a bear market signal on July 2nd; while the small cap Russell 2000's decline reached bear market territory.

All the major U.S. stock indices had significant losses last week and Friday capped it off with more evidence that stocks are no longer in a bull market. From intraday peak to trough, the Russell 2000 has lost 20.2% so far. The definition of a bear market is a 20% loss.

The S&P 500 signaled it would be joining the Russell soon with its simple 50-day moving average falling below its 200-day. This is the classical technical definition of a bear market. Mathematical inevitabilities indicate that the S&P's 50-day will be falling sharply in the next two weeks putting more distance between it and the 200. The 200-day itself is still slowly rising and will have to turn down to complete the bear trading pattern. The S&P 500 should be close to a 20% loss when that happens. It has already lost 16.7% peak to trough in the latest sell off.

The Dow Jones will join the S&P 500 in giving a bear market signal by July 7th at the latest. The Nasdaq will follow the Dow shortly thereafter. Ironically, the last major index that will have a 50-day, 200-day cross will be the Russell 2000. It will obviously be anticlimactic when it happens.

Both the Russell's bear market loss and the S&P 500's bear trading signal were foreshadowed by the first four trading-days of the month indicator. Stocks sold off in the beginning of May and June and two months in a row indicates a bear market. Stocks have sold down the first two trading days of July so far, even though the day before the July 4th holiday has a high probability of being bullish. At least a small rally is quite likely in the next two days however. The Dow Industrials have sold off seven days in a row as of Friday. The last time the Dow sold off for eight consecutive days was in October 2008 at the height of the Credit Crisis. Conditions now would have to be worse than they were then for a nine day sell off.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

June Employment Report: Where are the Graduating Students?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Every May and June millions of students graduate from high school and college and enter the U.S. labor force swelling the numbers. Yet in the just released employment report for June, the BLS claimed the labor force decreased by 652,000 last month. This followed a decrease of 286,000 in May. This of course is not possible unless the U.S. economy is in the midst of a depression.

So where did the all the recent graduates go? One place most of them didn't go was to a place of employment. A survey by the National Association of Colleges and Employers found only 40% of new college graduates had a job offer before leaving school in 2010. This compares to two-thirds in pre-recession 2007.  High school graduates not going to college probably didn't do much better. The BLS lists the unemployment rate for those between 16 and 19 as 25.7%.

According to the Statistical Abstract of the United States, 3.3 million students graduated high school and another 3.3 million received college degrees in 2010. While not all of these people would have entered the labor force, it can be assumed that at least a few million did in the last two months. Nevertheless, the BLS claims that there were almost a million less people in the U.S. labor force in June than there were in April. This huge drop in participants caused the reported unemployment rate to drop to 9.5% in June since people who leave the labor force aren't counted as unemployed. The Bureau explained these disappearing participants as people who gave up looking for jobs because none were available for them - not exactly an indication of a recovering job market.

BLS figures further show that there were 301,000 less employed Americans in June than there were in May (see http://www.bls.gov/news.release/empsit.a.htm). The headline number reported a loss of only 125,000 jobs however. The BLS explained this away as a loss of 225,000 census jobs and claimed that the private sector added 83,000 jobs. If you use the 301,000 figure though, it looks like there was a loss of approximately 83,000 private sector jobs.

The insane contradictions in the BLS figures can partially be explained by 'seasonal adjustments'. This is one of the statistical tricks the bureau utilizes to try to make a sow's ear look like a silk purse. Seasonal adjustments make it possible for millions of graduating students to enter the labor force and the BLS to report that the labor force shrank while this was happening.

The employment numbers should be seen for what they are - absurd results created by gross manipulation. Many people however don't wish to believe this takes place despite all the evidence. Those are the people who really need to worry about the current state of the U.S. economy. If the labor force can decline by a million when millions or graduating students are entering it, this means it really lost maybe four or five million workers in a two-month period. That indicates that things are worse in the U.S. now than they were during the Great Depression in the 1930s.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Stocks End Q2 Giving Another Sell Signal

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


After Tuesday's sharp drop, it would be reasonable to have assumed that U.S stocks could have at least had a dead cat bounce. Not only didn't the cat bounce, but prices fell even further confirming a head and shoulders top on the S&P 500. Even worse, a more important sell signal will be given by Friday when the S&P's simple 50-day moving average falls below its 200-day. This is a classic bear market confirmation. The first of the month indicator already confirmed a bear market in early June.

While it looks like there's much worse to come for stocks, the second quarter was bad enough as is. The U.S. stock market was in a correction no matter how you measure it. For the quarter, the Dow was down 10% and the S&P 500 and Nasdaq were both down 12%.  From their highs on April 26th to their lows on June 30th, the Dow, the S&P 500, the Nasdaq and the small cap Russell 2000 were down 13.9%, 15.7%, 17.0% and 18.4% respectively. A market is in correction when it has dropped between 10% and 20% from its high.

A market has entered bear territory once it is down 20%. There is more than enough reason to think that this will be happening soon. Both the S&P 500 and Nasdaq hit their 2010 lows on June 30th. The Dow was only slightly above its low on June 8th. The S&P 500's head and shoulders topping formation indicates a possible additional drop of 20% (based on the work of market technician Thomas Bulkowski). This pattern was confirmed when the S&P 500 fell below 1040.78. Its low on the last day of the quarter was 1028.33. In an article on May 28th, I pointed out that this chart pattern was in formation. Well, now it has been confirmed and is providing one more piece of evidence of a market prone to selling.

U.S. stocks already started a bear trading pattern when the major indices sold off during the first four trading days of the month in both May and June. An article I wrote on June 6th detailed the specifics. The next confirmation will be the simple 50-day moving average crossing below the simple 200-day moving average. This will take place for the S&P 500 this Friday, if not today. The ultimate and final confirmation will be given when the 200-day moving averages for the major indices start heading down.  They have been flattening out and trending sideways lately, so this too will be happening soon.

The technical picture for the major U.S. stock indices is not only negative, but is getting worse. The market is dropping just ahead of the sharp and sudden deterioration of the economy that is beginning to show up in a number of places. The upcoming bear market though is likely to move faster than the previous one that lasted 18 months from peak to trough. Traders will love the volatility. Investors should wait for the signs of a bottom, which will offer them many opportunities for major profits.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.