Hussman: Cliffhanger

The following is an excerpt from John Hussman’s latest Weekly Market Commentary.

I noted last week that we are closing in on a syndrome of indications that has always and only appeared during or immediately prior to recessions. At present, however, we still do not have that evidence in hand. A recession forecast would be jumping the gun.

The latest data from the Economic Cycle Research Institute (ECRI) draws the same conclusion. The ECRI weekly leading index deteriorated last week to a -5.7% annual growth rate. ECRI head Lakshman Achuthan noted "We’re definitely rolling over, let’s not sugar coat it," but properly reluctant to take that evidence to a recession forecast, he noted, "Unfortunately, it’s not that simple. We’re not brushing this off, but it’s premature. It has not persisted long enough." From my perspective, that’s exactly the right interpretation of the data – of notable concern, but not yet conclusive. Interestingly, the main indication required to trigger our own recession warning composite would be a deterioration in the Purchasing Managers Index to 54 or less, and fluctuations in the PMI have been well correlated with the ECRI’s Weekly Leading Index. Still, we’ll wait for the evidence to emerge in its own right.

Achuthan also added the following comment, which is consistent with our views – "We expect this decade to provide more recessions than anyone is used to."

While it would undoubtedly be more satisfying for the data to provide a specific point forecast of where the market is headed and when, the fact is that we deal with probability distributions, not specific forecasts. The prevailing evidence suggests that the outcome from similar conditions has historically been unfavorable on average, and also suggests that there is a "fat left tail" to the bell curve (that is, a small but larger-than-normal probability of a significantly negative outcome). Still, we can also find instances where similar conditions of valuation and market action were followed by positive returns, so it is impossible to rule out a more benign resolution to our situation.

Given that the primary source of economic growth over the past year can be traced to massive fiscal deficits, and given that credit strains are emerging at the same time this fiscal stimulus is trailing off, it’s tempting to decide in advance which way this situation will play out. We’ll leave that to speculators. We don’t take bearish net positions – but we are fully hedged. For us, that stance adequately reflects the elevated risks we observe here.

Source: Cliffhanger, John Hussman

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