On November 7th, CNBC conducted an interview with Lakshman Achuthan, ECRI Co Founder & COO. This interview was very interesting
to me, as someone who has been monitoring their weekly data for some time.
Update: To learn more on the ECRI WLI, see our previous post here. To see the current update, scroll to the bottom of this post.
Last time Lakshman was on the show was at the end of September, and he predicted the economy would go into a recession.
A few days later (on 10/3) we issued a buy signal. Since then, the market shot almost straight up. Who’s right?
First of all, I’ve never considered economic reports as a good indicator of where the stock market will go and timing. They’re two different animals. But it brings up a point that I’ve been developing regarding the timing of indicators.
One reason I don’t like economic indicators, is that they’re for the most part, backwards looking numbers. Now combine that with a stock market that’s supposed to be looking months ahead, and the two just don’t go together.
I want to showcase some of the comments made by Lakshman.
“Nothing has transpired since then (his September visit) to change their view that we’re going into an economic downturn.”
My only concern with that statement is that he’s looking at very recent data. Here’s the ECRI WLI that he’s referencing.
One thing to note is that I don’t modify the past data. Once they issue a number, it may be revised in the future. I don’t think that’s the appropriate use of data, so I refuse to update their past data in my analysis. It’s not a huge difference, and I’m sure they think it’s ok, since it’s in line with what occurs to other economic data, but in my mind, it’s cheating.
I would never consider going back and changing my past readings based on future revisions. That’s hindsight and that’s never good!
Historically speaking, sure the growth rate is very low, but it’s also right where it was back in July of 2010, right before the market took off higher. There is some correlation here, but big picture, if this indicator continues to the upside, we could be at just the same place we were back in July 2010 and see a move higher into the end of the year – consistent with my forecast.
Now I’ll admit, as developer of the Stock Barometer, which is another black box indicator that I use to trade, he has access to the components of the WLI and we do not and his statement that it’s a “Contagion among the forward looking indicators” that’s bringing us into recession.
He further supports the recession test with “In the past century, the vast majority of all recessions begun in a quarter that showed positive gdp growth” countering comments about our currently low, but still positive GDP.
Another comment he made in reference to large financial institutions that were recently upping their GDP forecast, “The others look at models, that are fitting the data, including gdp and retail sales to past patterns. They’re good at now casting. “ Of course they are, because you have to trade based on things that will move the market now!
If you took the position that the ECRI WLI was pricing in a recession, you would have missed this most recent move in the stock market.
Then he referenced “The Cockroach Theory”, which is a market theory that when you see one there’s likely to be more that you haven’t seen yet. I’d argue that we can already see many cockroaches…
Other comments he made that I have somewhat of an issue with:
“In august of 2008, over 8 months into a recession, and wasn’t recognized until Lehmann hit us over the head.” I’d argue that the market topped out well in advance of the crash. In my mind, the stock market is the best forward looking economic indicator.
“Now you’re dealing with the psychology component of economics – where it is very difficult to know as a group how quickly we’re going to recognize stuff”; ok, psychology and economics – I’m all about the psychology of the markets. And believe the stock market is a better indicator than any economic report.
Here’s a chart of the ECRI Growth Rate. While he was referencing the WLI – this view of growth is more of what he was considering.
Investment Research Group, Inc.
Here’s our most recent update: