contrarian way. Was I correct, or are these unnamed CEOs?
What does 2012 have in store for the U.S. economy? Is our long national economic nightmare giving way to a wonderful springtime in America?
Here’s one reason I remain cautious:
While past performance may not predict future performance, a forecasting organization that has had a superb, verifiable record for at least the past 4+ years appears to be reiterating the U.S. recession forecast it made last September.
The Economic Cycle Research Institute (ECRI) issued a warning to its paying customers (minimum annual cost $60,000 last I checked) one year ago that the global industrial economy would peak in summer 2011. (Nice call, guys.) It then made a U.S. recession call around Sept. 20. A year earlier, it had made a similar call for a growth slowdown in H2 of 2010, which came to pass, but by late 2010, it was calling for renewed growth and criticized the Fed for QE2, saying it was unnecessary and dangerous. It also made timely calls about both recession and recovery in 2007-9.
In Talebian fashion, is anyone who acts on ECRI’s current forecasts simply being fooled by randomness, and would be following a series of good calls which will tend to revert to the mean state – in which no one can predict the course of the economy any better than the weather, if even that well? And, since ECRI is well-known, has whatever value of forecasts may have already been discounted in securities prices?
Time will of course tell.
In any case, here is ECRI, “stuck” with a recession forecast from September followed, month after month, by data showing that the U.S. has appeared to “decouple” from recessionary economic reports in several other countries. Does it recognize the error of its ways? Apparently not. Here are bits and pieces of fully-fleshed out proprietary opinions that it told its paying customers in real-time, snippets of which it then put up on its website for all to see a bit later. First, from Dec. 30, Recession Recognition:
With the consensus typically recognizing recession only long after it has begun and usually because of a negative GDP print–the fact that these releases are revised many months, years and even decades after their first release may be one reason why it is so difficult for many to pin-down recession timing.
In ECRI’s latest study, we summarize the nature of these revisions and examine how long it usually takes the consensus to recognize a recessionary economy. We also use ECRI’s leading indexes to estimate the recession’s most likely starting point.
Next, from Jan. 3, G7 Expansions at Risk:
With the Great Recession still a fresh memory, the global economy is facing another downturn, with some countries already in recession. The perceived shortness of the recoveries took most by surprise, demolishing expectations that a severe recession would be followed by a strong and prolonged recovery.
It should not have. Our recent analysis extends our original work on the U.S. economy from 2009 that was also previewed in The New York Times in 2008, to show that the key determinants of the length of an expansion were already stacked against a long expansion across most G7 economies. So, while most observers will blame the current recessions on shocks emanating from the Eurozone, the weakness in these economies is much more fundamental.
These statements appear to put ECRI at odds with JPM, which recently raised its growth forecast for Q1 to 2.5% (annualized), though the above quotes do not specify the U.S. in its renewed global downturn call.
I correlate the above with the bullish chart of Treasury bond prices (continuing trend toward lower yields) and speculate that there still remains an opportunity for appreciation in long Treasury bond prices (yet lower yields). There are actually not a lot of T-bonds outstanding longer than 10 years duration, at least relative to all outstanding Treasury debt. Under the above scenario, where the U.S. economy is viewed as the best house in a generally bad global government bond neighborhood, a further diminution of private (personal and business) credit demands will tend to further enhance the demand for yield with security of principal in nominal currency units. The 10-year T-note is well under its 2.08% panic low of December 2008, but the 30-year yield is still 40+ basis points above its low of the same month (2.48% was the low). Thus I think that the 30-year yield can go lower, even if the 10-year does not. This is in fact the very pattern that Japanese interest rates have had ever since their ZIRP era began around 1995. The holder of the 30-year bond always picked up incremental yield year after year while continuing to own a generally appreciating asset. Meanwhile the holder of the 10-year govvie had a matured bond, and had to reinvest the proceeds in hostile conditions.
Who can be sure that the U.S. will not continue to “go Japanese”, year after year? For sure, the Japanese didn’t know they were “going Japanese”, the future being unknowable and ZIRP being bizarre to them just as it is to us.
So, I keep an open mind re the future. 78 Treasurys have the advantage over most other bonds in that they are non-callable, one can figure the price precisely from the yield. A zero-coupon 30-year Treasury currently costs around $42 dollars to secure $100 dollars back in thirty years: about 3.1% annually. (This is a yield advantage over interest-bearing Treasurys.) If rates drop forty basis points, the price will increase by 10% or more.
How could Treasurys be a good investment given the rising deficit load? Once again, think Japan, but add in that unlike Japan, the U.S. won all the major wars of the 20th century and now bestrides this narrow world like a colossus. Also think back to the late Clinton years: rates trended upward even as the Federal deficit turned to a couple of years of surplus. Private credit demand was strong, so there was lots of competition for savers’ dollars. The reverse has been happening, on trend, for the past several years. A new recession in the U.S. will, in the short-term, tend to have that trend continue. More theoretically, I think that there are essentially only two core forms of money in the world today: U.S. Treasurys and gold. If ECRI’s apparent current view of a global recession, presumably including the U.S. (and thus I cannot see China, Japan or Brazil thriving in that environment) is correct, “lesser” bonds will be viewed as risky, lenders will be reluctant to enter into new debt agreements, riskier current loans will default, what I view as an overvalued U.S. stock market will decline, investors will factor in ZIRP as likely “4 EVA”, immediate price inflation will decline or go negative (if it is not negative already), and the price of Treasury debt in this scenario will move yet higher. If so, would the result be “logical”? Would it be a sound investment even at today’s prices for the long term? Dunno. Was NASDAQ 2500 in 1999 on its was to 5100 in 2000 a sound investment? No, but it worked for months on end. Whereas in Japan, only briefly did long-term interest rates ever get “too low” in the past 15+ years of ZIRP. So let’s see what the next weeks and months bring before thinking too long-term.
Finally, it is my somewhat contrarian view that the MSM headlines and commentary that the euro debt crisis is causing economies to weaken has matters backwards. More and more I think that cyclically weakening economies are causing shortfalls in government budgets and private finances alike, and that is causing the crisis. As we see from the linked two articles, Europe as well as the U.S. has been full of massive malinvestments; Ireland at the end of the road and Madeira’s Missing Yachts a Lesson on Europe Debt Crisis.
Let us hope that out of crisis comes more prudence.
Please note that I am unaffiliated with ECRI, have presented my recollection of its prior forecasts, and have no recognized professional expertise in cycle or economic forecasting, or actually in anything except in certain medical and scientific fields. Also, I am not aware that ECRI has any particular economic philosophy. If you are, for example, an “Austrian” or “Keynesian”, you may prefer different forecasting tools, such as those deriving from monetary or econometric models, which ECRI says it does not employ.
Related: ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT), iShares Barclays 7-10 Year Treasury Bond Fund (NYSEARCA:IEF), ProShares Short 20+ Year Treasury ETF (NYSEARCA:TBF), iShares Barclays 20+ Year Treas Bond ETF (NYSEARCA:TLT), Barclays 1-3 Year Treasury Bond ETF (NYSEARCA:SHY), Direxion Daily 30-Yr Treasury Bond ETF (NYSEARCA:TMV).
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