Hussman: The Recession is Here

John Hussman has long been on the recession bandwagon and he says his call is finally coming to fruition.  In his latest note he highlights the evidence showing that we have reached the point that clearly delineates expansion from new recession (via Hussman Funds):

With regard to the economy, I noted two weeks ago that the leading evidence pointed to a further weakening in employment, with an abrupt dropoff in industrial production and new orders. Mike Shedlock reviews the litany of awful figures we’ve seen since then, focusing on the new orders component of global purchasing managers indices: U.S. manufacturing new orders and export orders plunging from expansion to contraction, Eurozone new export orders plunging (only orders from Greece fell at a faster rate than those of Germany), and an accelerating decline in new orders in both China and Japan.

Recall that the NBER often looks for “a well-defined peak or trough in real sales or industrial production” to help determine the specific peak or trough date of an expansion or recession. From that standpoint, the sharp and abrupt decline we’re seeing in new orders is a short-leading precursor of output. As the chart below of global output suggests, I continue to believe that we have reached the point that delineates an expansion from a new recession.

On the employment front, Friday’s disappointing report of 80,000 jobs created in June may be looked on longingly within a few months, as we continue to expect the employment figures to turn negative shortly. That said, it remains important to focus on the joint action of numerous data points, rather than choosing a single figure as an acid test. I noted last week in Enter, the Blindside Recession, GDP and employment figures are subject to substantial revision. Lakshman Achuthan at ECRI has observed the first real-time negative GDP print is often seen two quarters after a recession starts. Earlier data is often subsequently revised negative. As for the June employment figures, the internals provided by the household survey were more dismal than the headline number. The net source of job growth was the 16-19 year-old cohort (even after seasonal adjustment that corrects for normal summer hiring). Employment among workers over 20 years of age actually fell, with a 136,000 plunge in the 25-54 year-old cohort offset by gains in the number of workers over the age of 55. Among those counted as employed, 277,000 workers shifted to the classification “Part-time for economic reasons: slack work or business conditions.”

The whole note is worth a read as it also details some good thoughts on QE, but I thought I’d bring this to your attention since I’ve obviously been on the other side of this recession call for the last year.


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • SS

    Hussman jumped on the ECRI recession bandwagon last year saying recession was imminent. They’ve turned a losing trade into an investment and it looks like it might just pay off.

  • brian


    One thing Hussman gets right is that the Fed is not God. It cannot prevent downturns (though it can create them) nor forestall people making their own decisions, whether individually or collectively. To take a specific micro example: No matter how much pump priming the Fed engaged in since 2008, it has not prevented customers from defecting from RIM and Nokia to Apple and Google/Samsung. Likewise, the Fed has not stopped investors from pouring money into bonds rather than equities, even as it has lowered rates and depreciated the dollar.

  • Bond Vigilante

    Remember what the ECRI said late last year ? Recession, anyone ?

  • H

    Some people apparently love to make it sound like the ECRI and Hussman said we were going into recession one year ago. They did not, and you know it. They pointed out that a broad set of leading indicators suggested one was one the way. I for one, am open to the possibility that it is.

    Maybe a little less arrogance is warranted when it comes to calling off an imminent recession. One runs the risk of looking awfully stupid if it is, in fact, imminent.

  • Cullen Roche

    They actually said we were in recession in q4 last year though they revised statements later to make the call more vague.

    Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off.

    Last year, amid the double-dip hysteria, we definitively ruled out an imminent recession based on leading indexes that began to turn up before QE2 was announced. Today, the key is that cyclical weakness is spreading widely from economic indicator to indicator in a telltale recessionary fashion.

  • Alberto

    I think the key point for the US is export. In the last years, if we take out oil and china contributions, export soared in an impressive way, and the relative commercial balance moved from negative to strongly positive. No more. Europe is a mess, Asia is sinking in a deep hole and the dollar is too strong. I don’t see how the US can avoid a mild recession (in any case) or a very deep and prolonged recession if the fiscal cliff takes place as originally planned.

  • innertrader

    There are a lot of things I’d like to say here, but bottom line, I’m a trader and all I want is the money! What GREAT markets we have!!!

  • Sam A

    GDP has never been a good indicator of what the stock market is going to do. Real GDP has contracted in 7 of the last 53 years, and out of those 7 years, the S&P has gone down in correlation exactly twice (1974 and 2008). Not something to hang your hat on if you’re a trader.

  • Anonymous

    If only economic forecasting was an exact science. Bullish tools like Saut who talks up real estate as his firm is trying to unload housing REITS onto the public…….. or bearish shock and awe salesmen like Achuthan trying to sell consulting services…… I guess everyone needs to make a living.

  • Conventional Wisdumb

    These were the opening paragraphs to Hussman’s Commentary on Nov 9th, 2007:
    Expecting a recession

    “In recent months, I’ve repeatedly noted that while recession risks were gradually increasing, there was not sufficient evidence to expect an imminent economic downturn. Most economists still believe this. On Saturday, the consensus of economists surveyed by Blue Chip Economic Indicators indicated expectations that growth will be sluggish into next year, but that there will be no recession. Unfortunately, the economic consensus has never accurately anticipated a recession. For my part, the outlook has changed. I expect that a U.S. economic recession is immediately ahead.

    This conclusion is based on the combined weight of several classes of indicators, including asset prices, reliable survey measures, and measures of labor market activity.”

    The point about the data being revised months and years after the fact in the excerpt above always being ignored never ceases to surprise. It is a form of circular reasoning to say the current data doesn’t support a recession and therefore there is no recession if indeed that data is wrong and subject to revision (which it is).

  • El Viejo
  • Windchaser

    The Fed has definitely encouraged people to pour money into bonds and equities. As the Fed buys, it (obviously) supports bond prices. And by reducing interest rates on bonds, the Fed supports stocks, since stocks look more attractive for their yield as bond yields drop.

    It’s one reason I’m not a buyer of stocks right now (even aside from the current global slowdown). Should the US consumer recover and inflation pick up, interest rates will rise and stocks will decrease. Particularly, we should see some P/E compression.

  • anon

    You hit on the whole point to remember when reading Hussman – he IS an investor – as he keeps saying his investment horizon is the full bull/bear market cycle. If he happens to be 6 months early calling something, that’s just fine with him.

    (Of course he may not be right yet in his recession call, but it doesn’t matter – he’s a disciplined INVESTOR acting on solid research)

  • In Accounting

    I disagree with Mish’s conclusion:
    “Japan has debt-to-GDP ratio of 220% and rising. As of July 9, the Yield on 10-year Japanese Bonds is .80%.

    A mere rise of 2 percentage points would consume all Japanese revenues just to pay interest on the national debt.”

    What would cause this increase in rates? Clearly the Japanese government understands this simple math and would continue to issue bonds at low yields.

    So the USDJPY would go up substantially then right? Most Japanese firms would welcome a substantial devaluation of the Yen. The Yen is currently at 79.2, 64% stronger than peak in 2007 and substantially stronger than it has been at any time over the past 8-years.

    Firms like Mazda and Nintendo have explained recent losses in part due to margins being eroded by unfavourable exchange rates. If the Yen did weaken, these companies and others would see a substantial boost to profitability, which would go a long way towards addressing the crisis Mish is writing about.

  • Alberto

    I think you’re right. But a devaluation (a strong one) of the yen is in the cards. Andy Xie wrote extensively about this topic in the past. The problem is that the market is not ready for a real devaluation of the yen (that is 30% to 40% as suggested by Xie). This event will tank exports of Germany, Korea, China and the US. Japan is a severely ill country but still has a formidable industrial machine used to live with tight margins. I think that a devaluation of the yen will be an important step of the on going currency and trading war and could pose a threat to the current monetary system. But for Japan is just unavoidable, nobody knows when, but it will happen.

    So i’m really disappointed that intelligent people continue to write about the default of a country like US or Japan. But this doesn’t mean that something else could not happen. And if it’s true that a soverign will never default on debt denominated in its own currency, it’s also true that, in case of no growth, will devalue so much to reduce its public debt in THE other way. History tells that this happened tens of times, from the roman empire to the US and UK after WW2 (as explained by Carmen Reinhardt in her latest essay).

  • In Accounting

    Thanks for the response. Interestingly, a 40% devaluation of the yen would basically put it at par with levels seen in 2007.

  • Skippy Muldoon

    Busted H…

  • Alberto

    Yes, it’s absolutely not a remote possibility. The fact is that for many reasons, the yen (and the AUD for different reasons) are the most overvalued currencies in the world. But it seems no one is ready to see them much lower. But historically when a currency drops, it will do it very fast. And if the devaluation is not forced by the market day by day (like the euro in these 3 months) but by the local central bank it will happen on sunday when the markets are closed. What a surprise the next monday, a real carnage is in the making.

  • Ashkat

    Hussman has a horrible record as an investment manager. I wouldn’t put too much weight into his opinion. Why people listen to him at all is beyond belief.

  • Lance Paddock

    No he doesn’t. In fact, in relative terms he has only had one horrible year, and that was 2009. He has several fantastic years in relative terms and longer term has soundly beaten market indexes. That last statement is actually quite impressive considering that evaluation is being taken at a relative highpoint in the markets when one would expect his long term record to be least impressive.

    Feel free to criticize him for his recent record (basically the 2009 issue) or that his future record will be worse than his past (we will just have to see, to debate that would require an actual argument) but saying his overall record is horrible is just not true.