Low Volumy, With An 80% Probability Of A Double Dip

Tyler Durden's picture

Last week, we pointed out that the ECRI Leading Index dipped to negative for the first time in over a year, which on a historical basis tends to predict a recession with surprising regularity. Today, David Rosenberg takes this data and expands on his views of the probability of a double dip. An interesting observation: when the ECRI drops to -10 (from the current -3.5, and plunging at the fastest rate in history), the economy has gone into a recession 100% of the time, based on 42 years of data. At the current rate of collapse, this means in two months we should know with certainty if the double dip has now arrived.

From this morning's Breakfast with Dave:

The smoothed ECRI leading economic index fell in the opening week in June for the fifth week in a row and now down in nine of the past ten. The index, went from +0.3% to -3.5%, the weakest it has been in a year. After predicting the V-shaped recovery we got briefly in the inventory-led GDP data when the index soared off the bottom in late 2008, at -3.5%, we can safely say that this barometer is now signalling an 80% chance of a double-dip recession. It is one thing to slip to or fractionally below the zero line, but a -3.5% reading has only sent off two head-fakes in the past, while accurately foreshadowing seven recessions — with a three month lag. Keep your eye on the -10 threshold, for at that level, the economy has gone into recession … only 100% of the time (42 years of data).

Suffice it to say, when the ECRI was drifting lower in 2007, it got to -3.5%, where are we are now, in November and unbeknownst to the consensus at the time that a recession was only one month away. Remember that the economics community did not call for recession until after Lehman collapsed — nine months after it started; and go back to 2001, and the consensus did not call for recession until after 9/11 and again the economy had been in recession for a good six months). We should probably point out here that real M3 has contracted at the fastest rate since the early 1930s, as John Williams has published, and declines in the broad money measured has foreshadowed every recession in the past seven decades.

To be sure, the Fed has not raised rates and the yield curve is steep but there has been a visible tightening in financial market conditions that poses a significant risk for what has been a very fragile recovery in dire need of recurring rounds of policy stimulus. The widening in credit spreads and decline in the stock market represent a sizeable increase in the debt and equity cost of capital. The Fed has stopped expanding its balance sheet (and now we have Fed presidents Hoenig clamoring for rate hikes and Plosser for reducing the size of the Fed’s balance sheet) and end of the housing tax credits implies a major withdrawal of federal government support at a time when restraint is accelerating at the State and local levels (the States have a $127.4 billion aggregate deficit to close for the fiscal year beginning July 1st so right there we have a one-percentage point drag on baseline GDP growth).

The data suggest that we are now seeing the consumer sputter with what looks like a very weak handoff into the third quarter. The housing sector is collapsing again. The export-import data are pointing to a sudden deceleration in two-way trade flows. Commercial real estate is dead in the water. Bank credit is in freefall right now (down 0.3% or $32 billion in the first week of June — the third decline in a row and has now contracted in six of the past seven weeks and at an 11% annual rate. In the last three weeks, bank credit has contracted a total of $119bln, which is the steepest decline since the week of November 19, 2008 when the economy was deep in recession.

There is still something left in the tank as far as capex and inventory investment is concerned, but by the fourth quarter, we could well be looking at a flat or even negative GDP print. This is exactly what happened in the second half of 2002, when by the end of the year real GDP converged in real final sales near the 0% mark after a sharp but truncated mini-inventory cycle. That may not have been classified as a double-dip recession, but it was a growth collapse nonetheless — an aborted recovery for a consensus that went into the second half of that year, much like this one, with a consensus forecast of 3% real economic growth. The lesson, is that expectations had surpassed reality to such an extent that it didn’t even take another recession to take the equity market down to new lows, which happened in October 2002 (not October 2001!), fully 11 months after the downturn officially ended.

Not only are the economists calling for 3% real growth, which would imply something close to 4-5% nominal GDP growth, but the consensus among equity analysts is that we will end up seeing over 30% operating EPS growth to a new high of $95.59 for 2011. But there are a couple of points worth making here. The bottom-up crowd is never that good at predicting where profits are going to be heading at the best of times, but at turning points in the economy it is awful — overestimating earnings by an average of nearly 20%. So we could easily be closer to $75 for next year’s EPS than $95. And, even $75 may be a stretch when you consider that there is not a snowball’s chance in hell that we are going to see earnings outstrip nominal GDP by a factor of six in the coming year. This type of earnings is always possible at the trough in profit margins, but we are coming off the third highest level on record — coming off the trough, historically, corporate earnings jump 17% the next year. At the peak, profits actually tend to decline 6% in the ensuing 12 months — imagine what that number becomes when you come off peak margins and head into a recession at the same time. It’s not a pretty picture.

A double-dip, admittedly, is not yet a sure thing but I am definitely warming to the view. As an aside, I spent a memorable weekend with Gary Shilling, Nouriel Roubini and Marc Faber, and not even these “bears” believe the economy will double dip. I should add that we were joined by Louise Yamada and Fred Hickey — all legends.

Suffice it to say that there is probably a greater chance that profits go down than meet the consensus estimate, especially considering the deflationary shock out of Europe as well as the tremendous headwind for foreign-derived corporate earnings from the recent surge in the U.S. dollar. So from our lens, slapping on a 12x forward multiple on a range of corporate earnings of $60-75 leaves quite a bit of downside potential in a market that is still priced for too much growth, and 20% overvalued on a Shiller normalized real P/E basis. Judging by Felix Zuluaf’s comments in the Barron’s Roundtable, we would have to assume that his math would not be far off — he sees book value justifying a move towards 500!

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Mako's picture

You never really had growth, you had a slowdown of the decline which gave you good month over month or year over year stats.  Life is a series of cycles or waves, and waves within waves.  From April 09 to March 10, you had an upwave of a much bigger downwave.  

There is no double dip, it's will be a continuing of the larger cycle.

The only way you are going to have growth is if the system starts expanding.... ie credit growth which was $4.7T rate in 2007 and is now at a -$0.8T rate now.  Death spiral comes to mind.  The people that promote "The Secret" BS are going to have a rude ass awakening.

dryam's picture

I always appreciate your posts.  I don't know why so many people can't see that fractional reserve banking system is predicated on always needing to move forward, otherwise it crashes backwards very quickly.  It's hard to invision the ultimate collapse being held off too much longer even if there was a new megastimulus now.   

VK's picture

Hey Mako, we've been been in a double dip since the beginning of the year.


• The 2010 event has now gone on for nearly 150 days without forming a bottom. The 2006 event had already completely ended by the 110th day, while the much more severe 2008 event had at least formed a bottom by the 120th day. In contrast the downward slope of the 2010 event increased after passing the 140th day.  
• The 2010 event has now passed the 2006 event in terms of maximum level of contraction. In 2006 our 'Daily Growth Index' bottomed at a year-over-year contraction rate of -2.28% on August 25th. On June 10th, 2010 our 'Daily Growth Index' dropped below that level for the first time during the current slowdown.  
• The severity of contraction events is the product of the average negative 'growth' rate observed and the duration of the negative 'growth' period. This means that the two-dimensional 'area under the curve' is the best true indication of how much economic pain is associated with each event. In 2006 our 'Daily Growth Index' had a total of about 136 negative-percent-days of contraction over the 110 day event, and the BEA's measurement of the GDP dropped to a barely positive .1% growth for the third quarter of 2006. During the current 2010 contraction event we have already accumulated over 210 negative-percent-days of contraction during the first 148 days, a figure that is more that 50% greater than in 2006 and still growing. (To keep these figures in perspective, however, the 2008 event reached 794 negative-percent-days of contraction over 223 days. This means that the current slowdown, although already 2/3 the length of the 2008 event, has to this date inflicted only about a quarter of the damage to the economy as experienced in 2008.)  
• What is troubling to our eyes is that the shape of the current curve is clearly different from both the 2006 and 2008 events, which were similar except for scale. Put bluntly, our recent past experience with contraction events can offer no predictions as to where we are headed now. Something is structurally different this time.  
That said, what is different this time? As we have mentioned in previous posts, consumers are clearly more cautious/concerned about debt. And they have recently shown more interests in conventional banking products than at any time over the past year.

Hungry For Knowledge's picture

I see the same enormous negative velocity in the downward move of ECRI as Rosie does.  Ominous......

Previous moves down were subtle compared to this one.

Short something, anything when we get another bit of a rise from the markets......

Sudden Debt's picture

I'm glad you aren't the weather man Tyler!

I like to hear that the sun will shine, even when it won't :)

jtmo3's picture

And how can you have a double dip when you never really had an uptrend?

Leo Kolivakis's picture

Prepare for the summer meltup...you've been warned.

CoopDeluxe's picture

Leo, please stick with pensions since you do good work on that topic.  Otherwise, I hope your balls get stomped on, along with your religious devotion to being a bull.  We can only hope you have to eat your balls too so you shut the fuck up.

Sqworl's picture

Listen douche, we at ZH are offended by your post!


Leo is a respected member of this community!!!  I suggest your delete your post or apologize?  

CoopDeluxe's picture

Wow, I didn't know ZH got all touchy feely Sqworl.  I respect Leo for his pension posts and the pics he posts of hot ladies.  Other than that, he is combative, repetitive, and boring; I feel his bullish prognostications are hopium-induced drivel.  I didn't say I wanted Leo to eat another guy's balls, just his own so he finally shuts up.  Leo inserting his foot into his mouth is acceptable too when this market meets reality.  I wish no ill-will towards people, but Leo is utterly dogmatic and combative, so I don't feel bad about sending some jabs his way.

Group hug with Leo and Sqworl!  

Jeff Lebowski's picture

Leo is both respected and intelligent, and he succeeded in getting exactly the reaction he intended.

Rick64's picture

Does that cardboard cutout represent the fake bull market?

homersimpson's picture

Given the picture, are you going to clean up your bulls--t when everything is said and done?

Hephasteus's picture

Oh no hungry people are barbequeing your cow!!!

Rider's picture

That's the "Spanish Bull" by Osborne, this is an authentic oxymoron, are you being sarcastic Leo or is just the true bull in you is getting wild because of today's BENRON rally?

fiddler_on_the_roof's picture

I agree. My 401K is also positioned such.

But sometime before Dec 2010, I will get out.

Also captital Gains Tax going up by 5% from next year 2011 onwards

undermind's picture

Check out this youtube video of a NC congressman assaulting an innocent student in the streets of DC.   http://www.youtube.com/watch?v=v60oNUoHBYM





HarryWanger's picture

Starting to look like the good old days of last summer through EOY - market goes up everyday - 1,2,3%. Now that everything is ok, buy, buy, buy. 

Actually, I just went short AAPL, looked easy here. We'll see.

Kina's picture
Financial Times


Wall St higher on global growth hopes


Market Watch

U.S. stocks open higher on growth hopes


Seems these guys got sent the same script from the Fed.


But where the fuck are these hopes coming from? The new improved austerity drive of Europe? The slow down of China? The slow down in consumer spending? Residential and Commercial Real Estate nightmares?


Their headlines are just rubbish to add to the predestined stock market target set by the Fed for the day.


They emabarass themselves with this obvious nonsense and simply confirm they have no idea, or are too dishonest to give the truth.


What they should write is =Today's market will be whatever the Fed's manipulation targets.


Cursive's picture

Double dip?  But Yahoo Finance ran an AP story this morning about how pickup truck sales are doing great.  I mean, what's a better stat - M3 and credit expansion/contraction or pickup truck sales?  Nothing could go wrong as I know that Uncle Sugar and Benron got my back. (sarcasm off)

Leo Kolivakis's picture

More good news from my friends at the National Bank of Canada:

Despite all the uncertainty emanating from Europe, an important positive development is taking place in the U.S. banking sector. According to Federal Reserve data, commercial banks are starting to lend again for commercial & industrial (C&I) loans. C&I loans for the week of June 2 were up $3 billion from their early May level. As today’s Hot Chart shows, this is the first positive reading over a four-week period since the collapse of Lehman Brothers. Granted, one should not get too excited by one positive reading. Nonetheless, we have to start somewhere. If this trend continues, it means that small and medium businesses – which are very reliant on commercial banks for their financing needs – are about to start to make a significant contribution to US economic growth. 

homersimpson's picture

Since when did Helicopter Ben take over Leo's account? My Gawd - I haven't seen this much BS propaganda since Obama's Presidential campaign. What's next? The orange futures will skyrocket because three people on Wall Street were seen drinking OJ instead of Red Bull?

Leo Kolivakis's picture

Oh yeah, the numbers are all fake on the upside, only true on the downside. -)

Cursive's picture

Granted, one should not get too excited by one positive reading. Nonetheless, we have to start somewhere.

Leo, read your own posts.  And take it down a notch.  When you get an initial claims or NFP report correct, maybe you'll regain some credibility.  Until then, maybe sitting on your hands would be useful.

George the baby crusher's picture

Dito. That's a dito to Leo, thought it was a rather funny comment.  But that's just me, like a good laugh.

homersimpson's picture

So basically what you're implying is that your little morsel of upside data outweighs all the not-so-happy data out there. Selective blindness on your part, obviously.

mephisto's picture

Thanks Leo, good info. But:

-I'm not sure enough final customer demand is there for strong credit growth. This data may just be credit bottoming out

-There's still not the hiring levels that are indicative of real economic growth.

-Credit wont come cheap, not for a long time.

-Any US business with a significant international element is suffering lower growth ex-USA than they had foreseen.

-Every government is out of bullets if the economies roll over again.

I'd love to be able to buy this market, but I can't. The valuation levels dont look worth it to me yet, and from a risk/reward point of view it doesnt work for me. I still think we go much lower before this is over.

Assetman's picture

Wow Leo... thanks for that little tidbit.  I'm going all in now... on Chinese solars! ;)

ydderf1950's picture

how can you have a dbl dip if you have not come out of the first dip

Assetman's picture

Because you can dip lower than the first time around?

Neo-zero's picture


Absolutely!  Can't find it now someone wrote an article with the 30's chart side by side comparison to today, if you look at the 30's crash it mirror's current charts brief recovery as everyone sing's a chorus of "Happy Days Are Here Again" before reality rears its ugly head.  Remember they didn't call it the Great depression until many years in.




Mark Beck's picture

I guess I have a Problem in describing what is going on as a Double Dip. Because it implies, in a historical sense, that what we are experiencing, or will experience, has happended before. In economic terms it has never happend before. 

We are on the precipice of having to debase our currency in order to pay our bills. When this happends depends on the worlds capacity for sovereign debt.

The tax base can no longer support both state and federal costs.

We are not in recession, we are in restructure.

It is just a matter of how the restructuring will occur.

Mark Beck

Silversinner's picture

If you want to see the true picture of the stock markets,check out the dow/gold ratio and everything is very clear.

We have been in a bear market since 2000,hardly any bearmarket rally's there.Everytime the stockmarket plunges

they(central banks) just push the magic fiat add on button and stockmarkets start rising again.The stockmarket isn't

a great place to be for (long term) investers.Just look at the dividend yields(low) and P/E ratios(high).Hope to see

true free markets(again??)in my lifetime,nobody is more clever then the market.Let the markets decides the price of

money;interests rates ,instead of fools like Bernake or Trichet.The only thing they have done is the distruction of the

middle class.They think they are more clever then 7 billion people making trillions of transactions a year,how arrogant!!

note:my English(spelling)is not great,because I'am not from an English speeking country.I'am Dutch.

All in gold,silver,love and knowlege.

lawton's picture

I still say that 3Q GDP will go negative in the US. The final number anyway. They will probably report a positive .6% or so in the first release since the election will be only days away however...