Hussman Calls Recession
November 11th, 2007 by 
reality
John Hussman: “I expect that a U.S. economic recession is immediately ahead.”
Even ECRI, for once, failed to deny that, with their Weekly Leading Index at a 59-week low, there was a risk of recession. “With WLI growth slightly negative, and remaining in a narrow band for the past two months, U.S. economic growth is set to slow through the New Year.” Given their perma-bullishness, that seals the deal as far as I am concerned. More from John Hussman:
But if a recession or a bear market would produce unacceptable losses or would force you to abandon your investment plan, it is best to begin altering your investment position immediately (even if not entirely at once) toward a position that you can maintain regardless of market outcomes. If your position is inappropriate, do not wait for an “ideal” opportunity to change it. Begin changing it immediately, and continue to change it in steps – larger steps when you can get favorable prices, smaller steps when you have to do it at adverse prices. The important thing is to start immediately and decide in advance to move step-by-step over a reasonably limited period of time, until your position is appropriate.
In English: Even if you believe intellectually in buy-and-hold, if you think you might even be tempted to sell your long positions during a 30% or more drawdown, get out now. Really Right Now.
Posted in John Hussman, Strategy & Scenarios, The Economy | 
November 11th, 2007 at 8:09 pm
I believe you do yourself and ECRI a disservice by labeling them as Perma-Bulls. The reality is that we have not had a recession yet (by official gov’t stats) and ECRI’s forecast has been correct to date. When people were calling for a double dip in 2004 they said no and were right. They forecasted the “jobless recovery” and were right. They forecasted a global industrial slowdown in 2006 and were right. They forecasted that GDP numbers would be much stronger in Q2 and Q3 of this year than most imagined possible and they were right.
Now anyone or institution/model can be wrong and have poor judgement, but to label them as Perma-bulls just because they have been positive on economic growth (and right) while you have been negative (and wrong) is simply an ad hominem attack. They still are not forecasting a recession but indicate that the risks are rising - that isn’t all that different than what Hussman said. They have also nailed the housing downturn and now report that it is likely to get worse from here.
I agree that they have appeared to be more sanguine in interviews (particularly Achuthan), but I think that is a product of having to combat the conventional wisdom when it is significantly out of line with their indicators.
I take issue with ECRI’s appearing reliance on government inflation numbers and believe that it is possible that they could be understating the absolute level of inflation while still getting the direction of inflection points and cycles correct. This would obviously also have an impact on real GDP growth. However, one must question what is more important from an investment standpoint - forecasting gov’t reported numbers or some semblance of “the truth” whatever that really is. Seems to me that until gov’t numbers become completely rejected by the investing public as a fraud (a la Argentina) it is important to know ahead of time what the numbers are likely to be and how investors may react to them - even if we personally believe them to be BS.
So in summary, I think it is possible that the economy is already near a recession based on my version of the “truth”. However, ECRI is likely to be accurate once again in forecasting when gov’t numbers will indicate recession. That is why I think their models are still critically important.
November 11th, 2007 at 9:24 pm
In fact my wife and I were talking at lunch today about what the government numbers actually mean given the amount of substitution adjustments, hedonic adjustments, birth-death adjustments and so forth. In my opinion, the government numbers - and ECRI’s forecasts - present an inappropriately rosy view of reality.
I quote Achuthan as recently as Oct. 26th. “a recession is not likely.” As you are doubtless aware he and his staff have repeated that mantra on numerous occasions. That is why I characterized ECRI as perma-bullish. That is not an ad-hominem attack, not only because it is not against a person, but because it is an observation of their opinions, not an attack on their character. Your own comments show that they have been consistently bullish on the economy.
I just think that they are likely to miss the turn, in the sense of being late enough not to be useful. The recession has already begun in housing, manufacturing and financial services. The rest of the economy will follow.
November 12th, 2007 at 7:27 am
The government stats on inflation are laughable, and those that believe them deserve their impoverishment. I don’t understand people that ignore their own eyes at the checkout counter. We need more rugged individualism, not reliance on government.
November 12th, 2007 at 8:43 am
Your quote of Achuthan is out of context - they have been stating that it is not likely in the near term. They have backed off anything longer than the next few months considerably in the past few weeks.
Achuthan is largely the public face of ECRI and to call any small group of individuals “perma bullish” when their track record blatantly refutes that is personal. We are not talking about the nameless faces of a large corporation here. They were clobbered in 2000 for calling for recession when practically NO MAJOR forecasters were doing the same.
Finally, you did not address what is really the critical issue IMO. Ironically, I think it is far more fair to label you a perma bear given your views over the past couple of years. I am sympathetic to your long term concerns but from an investment perspective you have been flat out wrong for quite some time. It appears the tide may finally be turning in your favor, but ECRI’s forecasts have done an incredible job helping people who are concerned about what investor consensus will be. Again, I think ECRI’s absolute levels may be off given the issues with reported inflation, but their’s is a job that is more important in determining trends and slope.
The reality is that most investors are not yet in our little club - they still “believe”. I am more interested in making money than being “right”. ECRI provides an excellent guide to what most investors will believe in a few months. I think we are likely on the front end of investors becoming much more aware of the gov’t nonsense so that could change, but that will be an process and not a point in time.
By the way for reference, I am no bull - I have personally been leveraged between 20-40 to 1 in the Yen for the past few weeks and have clients fully hedged. However, the financial markets and the economy are often two different things for significant periods of time. Relying on ECRI as a stock market forecasting service is dumb IMO.
November 12th, 2007 at 4:35 pm
James, as I know you have read because you have commented before, I have acknowledged ECRI’s excellent track record in calling recessions.
I have also discussed my view that ECRI’s forecast is too dependent on the stock market. This is illustrated here:
http://www.cxoadvisory.com/blog/internal/blog1-28-07/
Note from the chart that ECRI failed to lead the turn from the 2001 recession (which ended in November 2001 per the NBER), in my view because of the powerful down-move in the stock market. Yes, it called the entry into the recession, but so did the stock market.
I think it is failing to lead this present turn because of the strong up-move in the the stock market that just now has ended, moving the WLI down accordingly. ECRI has been perma-bullish because of a bubble in the stock market as far as I can tell. It is only interesting because I understand that the Fed listens to ECRI and that makes them more important. The chart at the link makes it clear that ECRI provides no predictive value as far as the stock market is concerned.
And yes, I’ve been prematurely bearish. Flat-out wrong? I don’t think so.
November 12th, 2007 at 8:29 pm
Here is a Dow Jones article (from ECRI site) discussing Weekly Leading Index and stock prices http://www.businesscycle.com/news/press/1318/