US already in recession? Hussman makes the case.

For those unfamiliar with John Hussman, I cannot offer high enough praise of this mutual fund manager for his prudent, long-term style of equity investing, and his actionable financial market and economic research. The man uses statistics better than anyone else I’m aware of in finance.

Lately, he has been making a strong case that the US entered recession in 2012, as shown by those indicators that, when viewed as a group, have a strong record of appearing at the start of recessions, and only at such times.

From his weekly market commentary:

While we continue to observe some noise and dispersion in various month-to-month economic reports, the growth courses of production, consumption, sales, income and new order activity remain relatively indistinguishable from what we observed at the start of the past two recessions. The chart below presents the Chicago Fed National Activity Index (3 month average), the CFNAI Diffusion Index (the percentage of respondents reporting improvement in conditions, less those reporting deterioration, plus half of those reporting unchanged conditions), and the year-over-year growth rates of new orders for capital goods excluding aircraft, real personal consumption, real retail and food service sales, and real personal income. All values are scaled in order to compare them on a single axis.


12.12. Fred recession data Hussman

Readers are strongly encouraged to read this week’s commentary in full and to browse Hussman’s archive here.

Hussman: recession imminent

This is from his always worthwhile weekly Market Comment (this week he makes an airtight case against taking market risk at this time, with a recession all but guaranteed and no cushion of safety or reasonable expectation of a decent return in stocks or bonds).

I liked his comment about how although his fund has been very conservative and fully-hedged for most of the last several years, this is more a reflection of unfavorable market conditions than some sort of permabear tendency:

The overvaluation, misguided policy, and misallocation of capital that has produced more than a decade of dismal returns for the S&P 500 has also forced us to take a regularly hedged investment stance in response (though we know that the ensemble methods presently in use would have done things differently in several periods, particularly 2009 and early 2010). While our investment approach is by construction risk-managed, it is not by construction hard-defensive or fully-hedged. These are positions that have been thrust on us by conditions that have, predictably, led to a decade of stock market returns far below the historical norm. Though the present menu of prospective investment returns remains unappealing, those conditions can change quickly, particularly in a crisis-prone environment. This is important to mention here, because I strongly expect that we will begin seeing opportunities – probably not immediately but also not in the distant future – to significantly and perhaps sustainably reduce the extent of our hedging.

We emphatically don’t need to wait for the world to solve its problems before being willing to accept risk. What we do need is for those risks to be more appropriately priced in view of those problems. We’re not there by any means, but a significant change in the market’s return/risk profile could come quickly. To quote MIT economist Rudiger Dornbusch (who was a professor to the new head of the ECB, Mario Draghi), “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”

See this part on how his never-failing set of recession indicators is again flashing red:

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Here in the U.S., our broadest models (both ensembles and probit models) continue to imply a probability of oncoming recession near 100%. It’s important to recognize, though, that there is such a uniformity of recession warnings here (in ECRI head Lakshman Achuthan’s words, a “contagion”) that even an unsophisticated, unweighted average of evidence indicates a very high likelihood of recession. The following chart presents an unweighted average of 20 binary (1/0) recession flags we follow (e.g. credit spreads widening versus 6 months earlier, S&P 500 lower than 6 months earlier, PMI below 54, ECRI weekly leading index below -5, consumer confidence more than 20 points below its 12-month average, etc, etc). The black brackets represent official recessions. The simple fact is that we’ve never seen a plurality (>50%) of these measures unfavorable except during or immediately prior to U.S. recessions. Maybe this time is different? We hope so, but we certainly wouldn’t invest on that hope.