David Rosenberg Slams Business Insider's Vincent Fernando
Who says Canadians lack a sense of humor... And are ever wrong about the ECRI.
From Rosie this morning:
ECRI WAS RIGHT ALL ALONG!
We rarely pay attention to blogs (John Mauldin, Barry Ritholtz and Tyler Durden aside) but yesterday yours truly was slammed by one Vincent Fernando (Here's Why It Was Ridiculous When David Rosenberg Used The ECRI To Predict A Double Dip — nice catchy title).
Well, if the truth be told, if things in the economy are so good and the ECRI was so wrong, why then did Bernanke hint about another major round of QE. No mention in this article, by the way, of how the Fed has now cut its forecast three times in the last four months. The fact that the 10-year Treasury note yield has plunged 150 basis points since April is actually telling you that there is an asset class out there that has responded forcefully to double-dip risks. And, let’s not forget that the Macroeconomic Adviser’s GDP figures show that the economy has contracted in three of the past four months.
It’s always encouraging to find yourself in the company of people you respect. To this end, have a look at the article on page C1 of the WSJ on Bridgewater’s Ray Dalio. To wit:
“One of the nation’s largest hedge funds is emerging as a big winner of 2010, earning its managers and clients billions in profits through a series of bearish bets on the U.S. economy.
Bridgewater Associates Inc. has scored a return of about 38% at its flagship fund, driven in part by a multifaceted wager that the U.S. economy would be in worse shape than many expected and the Federal Reserve would keep interest rates low....”
Then, we see this from Ken Goldstein, the Conference Board’s economist, on page 22 of the FT:
“More than a year after the recession officially ended, the economy is slow and has no forward momentum. The LEI suggests little change in economic conditions through the holidays or the early months of 2011.”
So you see, Vincent, it may not be a “double dip” per se, but stall-speed isn’t really altogether that far away from it either. And guess what? The ECRI actually did nail it!
And as for that other "Leading Index"...
LEADING INDICATORS: DEVIL IN THE DETAILS
On the surface, the Conference Board’s index of leading economic indicators (LEI) report seemed decent enough, registering a 0.3% monthly gain for September, exactly as expected. But the details of the report were to be desired and in fact, suggest sluggish economic growth ahead.
One of the 10 components of the composite index is the level of the Treasury yield curve. Given that short rates have been at virtually zero since the end of 2008, it is really no surprise that the yield curve has consistently made a positive contribution to the index since then. We think it’s much more meaningful in a zero-interest rate environment to look at the LEI excluding the yield curve, which was flat in September after three straight monthly declines.
If we strip out the S&P 500 as well to get a sense of how the “real economy” is doing. On this measure, the LEI fell 0.1%, the fourth consecutive monthly decline. This is actually a rare event when the economy is not in recession: going back to the early 1960s, four consecutive monthly declines in the LEI excluding the yield curve and S&P 500 has happened only 4% of the time (or is a 1-in-25 event).
As aside, when we ran some quick correlations with the LEI, LEI excluding the yield curve, LEI excluding the stock market, and the LEI excluding the yield curve and stock market, the latter had the highest correlation with GDP growth. In other words, the “real economy” components of the LEI historical have the strongest link to GDP growth.
The coincident-to-lagging ratio (a leading indicator of the LEI) fell 0.4% MoM in September and is the weakest since January 2009. Moreover, the ratio is now down three months in a row and we have not seen this happen since we were in recession in 2008-2009.
All in, the details of the report suggest sluggish growth ahead for the U.S. economy. And don’t take our word for it: Conference Board economist Ken Goldstein said in yesterday’s press release that “More than a year after the recession officially ended, the economy is slow and has no forward momentum. The LEI suggests little change in economic conditions through the holidays or the early months of 2011”.
We will have some more to say about the BLS-type data mining (or lack thereof) in the LEI soon enough.