HUSSMAN: RECESSION IS STILL COMING
I have to admit that the news flow certainly hasn’t improved in recent weeks. While domestic economic data remains somewhat strong it’s impossible not to notice that the world around us appears to be increasingly unstable. My two chief foreign concerns in 2011 were China and Europe. The economic situations in both regions are tenuous at best. Nonetheless, I still think you have to view the 2008 recession as one long recession as opposed to falling for the idea that we recovered and are now at risk of relapse into new recession.
As I’ve long stated, the balance sheet recession never ended. All that happened was that the government came in and papered it over with massive deficit spending. To predict new recession is to misunderstand the macro dynamics at work here. The key remains government spending and understanding the exogenous risks. In a fragile economy like ours where the consumer continues to de-leverage, we have to be increasingly aware of what could tip us from mild growth into severe downturn. The obvious risk is austerity which has exposed the true depth of the balance sheet recession in many European countries (something we predicted would occur in both the UK and Europe).
But many prominent economists don’t agree with this general macro notion and I can’t say that I don’t take their opinions to heart. After all, I am largely alone in a camp that is essentially saying “it’s different this time” – certainly not something I feel comfortable with. Among those calling for renewed recession is John Hussman whose opinion is always worth taking into consideration. In this week’s missive he continues to build the case for his recession call:
“To extend the evidence beyond our own measures and ECRI’s analysis, the chart below presents data (through October) from the Organization for Economic Cooperation and Development, an international quasi-governmental agency that sets international standards on a wide range of economic policy issues. The OECD publishes its own set of leading economic indicators on developed and developing countries. Notably, we’ve never observed deterioration to the extent that we presently observe, except when the U.S. was in or entering a recession.”
Now, I clearly don’t agree with the idea of renewed recession, but the risks are certainly rising. The rhetoric out of Washington is particularly alarming with the payroll tax cut now looking at risk of not passing or being extended for only a brief period. That’s an estimated 0.75% off of Q1 GDP….Whatever happened to Republicans loving tax cuts? I guess they’re more concerned with our mythical insolvency that is right around the corner as Congressman Boehner reminds us today that the payroll tax cut needs to be “financed”. Oye.
Either way we can expect the tough slog to continue. In Hussman’s case the slog turns into a stall. I still don’t think that’s where we’re headed courtesy of 10% budget deficits, but you’d be a fool not to acknowledge the risk and invest accordingly….
Cullen, am I correct that you would say that if the Republicans insist on “funding” the extension of the payroll tax cut with reductions in 2011 federal spending, that this would be a net negative for GDP (b/c rather than just extend tax cuts they would reduce (or negate) the impact with simultaneous spending cuts)?
It depends on timing, but it’s essentially neutral. They extend taxes now, raise taxes later, helps in the near-term and hurts later when they raise taxes. It all depends on what they do….
I mean to say: negative for GDP vs. 2010 where the tax cuts were not “funded” with spending cuts.
Strangely enough their insistence on “funding” means that instead of being a fiscal stimulus measure it becomes a re-allocation of wealth from one group to another.
Yep….
New reader here.
“Now, I clearly don’t agree with the idea of renewed recession, but the risks are certainly rising.”
When you say “risks rising” do you mean the risk of a new recession which would contradict your earlier statement that the 2008 recession never ended, or do you mean the risks of the current recession getting worse are rising?
Haven’t had the time to review your position papers but would be interested in seeing you publish a summary along the lines of “Here’s is what I think needs to happen in order for the developed world issues to be “fixed” as it where.
Enjoy reading your stuff.
The risks of a technical recession (negative growth) are rising, but we shouldn’t let that detract from the fact that we’ve been in one long recession this whole time. I still don’t think we’ll go officially negative, but the risk of that occurring is rising. Summary of position in process….Really busy as year ends though….
Agreed. Thanks.
Looking forward to your summary.
If CPI is higher than nominal growth that’s negative. Factor in how that GDP ‘growth’ affects (or doesn’t) incomes, and how much of that is debt propelled by leveraging indebtedness capacity (redundant but self-explanatory) and you get how the real thing is.
A big part of the OCDE didn’t experience any growth since 2007 (4 years ago), and arguably the same could be said since 2000, all things considered, it was just asset bubbles (propelled by credit bubbles), which does not equal sustainable wealth creation. Everything else is just economists rabbling.
What are your thoughts that an economy cannot muddle, it either grows or contracts?
The US economy muddled the majority of the early part of this decade….http://pragcap.com/achuthan-the-recession-is-still-coming/comment-page-1#comment-90769
Thanks for the link, I missed that one
At least we have reduced the flow of dollars every month to Iraq. We are many billions ahead, even if we don’t downsize the military or military procurement. That should help us to muddle through. If only we can bring our troops home from Afghanistan, Europe, Japan, Australia, …
dgc, I thought most of the spending by the military industrial complex ended up in the USA. During the Bush years this was “off budget”, thus Cullen’s “muddle through” data was likely because of this massive “off budget” deficit spending. What we gave Iraq is dead people and blown up stuff, all the moola went to pay for our brave men and weomen. When I look at the data it seems that after each war we brought everyone home and thus lowered the deficit spending and our economy tanked. We should look for this again after Afghanistan.
The reason it so difficult to predict when a recession may happen is quite simply this: if we all thought a recession were about to happen it probably wouldn’t happen. Recessions happen when people least expect them to happen, when people become too overly confident and lax of their finances and so become too overly extended and leveraged. After all if you thought a recession were about to happen would you be saying “gee honey lets go take out a loan and buy that vacation home or boat that we always wanted”?
Hi Cullen,
The line ‘…impossible to notice that the world…’ should be ‘not to’
Thanks for the good work, though, and please keep posting.
Thanks.
@Steve, Quite the opposite. That’s why confidence is so important to economic growth. When the American people believe a recession is coming, then it is more likely, because they all start cutting back on their spending, which reduces GDP and total sales, which causes layoffs, etc. A reduction in spending by enough people, especially the top 20% in income, will lead to a recession.
The problem with consumer sentiment is same as the problem with the economy: it is either boom or bust. During a boom everone thinks that it will be clear skies and sunny sailing as far as the eye can see. During the bust everyone seems to have their money in gold, hidden in a hole in the wall worried that the sky is going to fall in.
i think the odds of a technical recession here are extremely high if for no reason other than Europe is likely to have a depression and it seems that will increase problems in China. Throw in a GOP seemingly hell bent on harming the economy here and we have a combo that should do the trick.
Hussman is always worth reading. His last recession prediction didn’t come true, but we didn’t exactly have stellar growth either.
The interesting thing is that he actually “cheated” in the summer of 2010 on his own recession model. The conditions of his model were not all in place – manufacturing PMI was above his threshold, but he correlated the weekly WLI index with manufacturing PMI to “complete” the syndrome.
One data point is never proof, but it sure makes you think about what they say about models being smarter than experts, even when you give experts access to the model.
The tax-picture of the US is getting worse.
http://jugglingdynamite.com/2011/12/19/more-cause-for-pause/
Troops coming home and getting out of the military will sadly be an anti-stimulus and increase unemployment for sure.
So, Iran it is then?
Perhaps, but where have you seen that soldiers are getting out of the military?
dgc: Our deficit spending is going here!
https://www.fpds.gov/downloads/top_requests/Top_100_Contractors_Report_Fiscal_Year_2010.xls
Our deficit is more than $1,000,000,000 every 8 hours. Our budget (and our deficit) goes primarily to Social Security, Medicare & Medicaid.
dgc, You have been missinformed. I gave you the actual numbers. click on “departments” https://www.fpds.gov/fpdsng_cms/
That’s very interesting. A lot of military comapnies at the top of the list.
Living in the UK, I wonder why healthcare gets so heavily criticised in the US, but military spending doesn’t. Do people in the US think that the military spending is justified?
I find the different mindest in the US very interesting and it is hard to judge what the result of the current economic situation will be. Europe seems to be more likely to look at a collectivist solution to the current problems, but I have worries about the rhetoric coming out of Germany.
From what I read, I fear that the people of the US are more inclined to believe the Austrian explanation of the economy and see a smaller state as the answer, as a lot of people with loud voices are putting this view forward. The major problem with this ‘solution’ is that it is a scorched Earth policy that would absoultely devastate the economy in the short term in order to grow sustainably in the medium to long term. The human cost of this would be deeply unpleasant and it would take a strong willed government to push it through.
The seemingly counter intuitve solutions that are put forward from MMT may be the best way to solve the crisis, but are viewed as unconventional. “Worldly wisdom teaches that it is better for reputation to fail conventionally then to succeed unconventionally.” JM Keynes.
The original plan called for “funding” the tax cut by tacking on fees on Fannie and Freddie mortgages. I fail to see how this is a bad thing…
I think it is more finely balanced than perhaps headline reports would suggest. Firstly here are a couple of the negative news items that have popped up recently.
Calculated Risk report on LA Port Traffic for November shows inbound traffic down 0.3% and outbound down 0.2% from October (It could just reflect changes in seasonality factors from year to year)
Gallop unemployment poll shows underemployment at 18.4% in mid december which is up from 18.1% at the end of November (The size of the poll may limit its ability to predict)
Secondly here are some of the more positive news items on the economy.
Gains in November rail traffic numbers on last year, with first week in december numbers showing gains as well. (A percentage of this is raw materials coming from Canada, a good part of it Autos, but we should note that Mexican rail traffic is down)
November ISM Report at 52.7 which indicates growth. (It was slightly down on the previous month. Increases in Production were matched by increases in customer inventories, order back log was down along with employment).
To me it looks as if the US economy is barely growing at the moment. There are a number of risks on the horizon apart from the obvious problems in Europe.
Investment inflows into China have abaited and the latest PMI was not brilliant.Michael Pettis take was that growth was slowing in China.
European banks curtail their credit activities in the US due to requirements to de-leverage by the stress tests. Most likely this would affect municipal markets and the commercial mortgage markets.
The Euro drops a little further in value, dropping the price of European imports and curtailing exports. The most obvious market affected here would be the Auto industry.
With the oil pipeline open from Cushing to the coast, oil prices in the US will no longer diverge from the rest of the world prices. Oil prices remain above $90 a barrel regardless of US demand and have a tendency to be higher.
Existing Tax breaks and social security extensions may not be continued.
There may also be some postive surprises.
Mortgage rates continue to fall and the housing market stabilizes.
Wheat prices raise due to the el nino effects.
US bank profits rise as european banks exit US markets.
On balance I have no idea which way things will go, but think those who perceive only growth might want to make sure they have proper risk management in place. I agree with Cullen that the US never really got out of recession.
Cullen, largely due to this website, I’ve been quite right about 2011. However, as of late, I’ve starting getting lost as I haven’t been able to follow how my expectations differ from those of others. Any advice on how to do that? Trading/investing really boils down to profiting from a difference of opinion, so it’s helpful to know where others stand.
My trading algo does that for me. I’m afraid I don’t have the answer for you there. There are lots of different indicators you can use such as sentiment readings and surprise indices, etc. Other than that it comes down to being on top of the changing market news….