It’s Something Unpredictable - Even For Me

Another turning point, a fork stuck in the road

Time grabs you by the wrist, directs you where to go
So make the best of this test, and don't ask why
It's not a question, but a lesson learned in time – (Green Day)

My blog, Model T Stock Trends, debuted September 23, 2009 and this is 118^th post.  I started the blog three months after I was downsized and cast into the worst job market of our generation.  The purpose for the blog was to keep my writing and analysis skills sharp while I sought employment and to put these skills on display to potential employers.

I found a job, but the blog was not a factor.  I thought the blog would end at that point, but my readers encouraged me to continue writing, so I did.  I was recruited away for another job within a year. The blog was not a factor again, but I kept writing. And you kept reading. The blog has received over 62,000 total hits, with a monthly high of 3,059 in October 2012.

I have spent the past four years analyzing the economy, forecasting outcomes and writing about it.  And now someone has hired me to do economic analysis, forecasting and to write about it.  I am the new Vice President, Commercial Vehicles at FTR (Freight Transportation Research).  FTR is the leading freight analysis and forecasting firm in the transportation industry.  FTR was named winner of the 2012 Best Overall Forecast by the Chicago Federal Reserve.  It is an honor to be working with an organization of such

prominence.

Due to my new position, I have made the decision to suspend postings of Model T Stock Trends for now.  I will be blogging for FTR and there are some business issues to work out.  I may be able to resume posting at some point down the road.

I will continue to publish my humor blog, “Ake’s Pains”.  If you are on my mailing list and read the Model T Stock Trends but do not read Ake’s Pains, check the e-mail for instructions.

I cannot thank my loyal readers enough.  You kept reading, I kept writing, and as a result something great happened.  You have contributed so much to my success and I appreciate it immensely. Thank you. Thank you. Thank you.

It's something unpredictable, but in the end is right,
I hope you had the time of your life.

We Need This Economy To “Stroke Some 3's”

When we looked at the freight markets last December, I described it as “ugly”.  This ugliness preceded an ugly 1.1% GDP growth in Q1, 2013.  With the economy bobbing between a 1% and 2.5% GDP, it’s time again to check on freight.

Truck Freight

FTR (Freight Transportation Research) Truck Loading Index

August Report: +0.4%, July report +0.3%. August +6.3% year-over-year

Trend: Steady increase

Forecast: Good growth in Q4, slower in Q1, 2014

ATA Trucking Index

August Report: +1.4%, July report -0.6%. Up 6.9% year-over-year

Trend: Increasing. This is the largest year-over-year gain since December 2011

Rail Freight

September Report: Intermodal +4.4% year-over-year (monthly average) Carloads (excluding coal and grain) +4.9%

Trend:  Intermodal is red hot with the monthly average currently the second highest in history. Carloads are showing steady growth.

Forecast: Current trends to continue

Port Freight Activity (West Coast)

FTR Index

August Report: +4.3%, July +2.3%. +3.9% year-over-year

Trend: Inbound freight is increasing.  Outbound freight has struggled most of the year, but has bottomed out and is growing again.

Air Freight

Trend: Flat, but better than in Q1.  Air freight is down 3% year-over-year.

Business Inventories

July Report: +0.4%, +0.1% June.

Trend: July showed the largest increase in inventories in six months. Businesses restocked for anticipated increased business the rest of the year.  Wholesale inventories are flat however.

Forecast:  The Inventories to Sales Ratio is low.  Businesses need more inventory.  Any increase in sales will require more production, more goods and more freight.

What It Means

Do not get too excited about these positive freight reports. Both FTR and ATA say freight is outperforming the economy at this time.  This is because the sectors (automotive, for example) that produce freight are strong right now.

However, freight markets are in much better shape than there were last December.  Inventories are tight and this is creating steady freight demand.  The economy keeps cycling up and down within a tight range.  Every time it appears that a decent recovery is starting, it stalls.  The freight markets indicate that we are in another upswing.

Forecast

My Wall Street Journal Economic Panel (my seven favorite from the monthly survey) forecast a Q1 GDP of 2.7% (with a high of 2.9% and a low of 2.4%).  Based on the positive freight numbers, I believe we can get to 3% growth.  Of course this is assuming the government doesn’t create a crash and the start of the Affordable Care Act does not cause an economic disaster.

In the words of that great economist Dickie V, “We need somebody to stroke the three, baby”.  We need to pass the economic basketball to the greatest 3-point shooter of all-time, Reggie Miller, and let him fire away. 

We need to see "3" from the economy!

If we can get to around 3.2% GDP in Q1, then Q2 becomes critically important.  Every time the economy has bounced up, it has fallen back down.  If we could get consecutive quarters above 3%, then maybe, just maybe, we can call it a recovery.

When Will The Big Dog Take The Lead?

The housing market had been over-stimulated since 1995 and was on fire until the bubble burst in 2007-2008.  Housing was one of the last sectors to crash in the Great Recession, but when it crashed, it crashed hard.   Housing usually leads the recovery out of recessions, but many economists are becoming concerned because growth in the sector appears to be slowing.  So let’s check the numbers:

Housing Starts

August Report: 891,000 (annual rate). +0.9% vs. July, +19.0% vs. August 2012

Trend: The growth rate this year is slower than 2012.  Housing starts flattened out mid-year but now appear to be gaining some momentum.   Single family units are getting stronger, but multi-family units are decreasing.  My economic panel (Wall Street Journal data) forecasted 2013 housing starts at 980,000, so growth has been weaker than expected.

Building Permits

August Report: 918,000 (annual rate) -3.8% vs. July, +11.0% vs. August 2012

Trend: This indicates the new home market is still steady, but not strong.  The build rate may not increase much until 2014.

Home Builder Confidence

September Report: 58 (50 = Neutral) No change vs. 58 in August

Trend:  The index held steady after four consecutive monthly increases.  Builders are cautiously optimistic, but this optimism may be waning.

New Home Sales

August Report: 421,000 (annual rate) +7.9 vs. July, +12.6% vs. August 2012

Trend: Slow, steady, growth, but more measured than 2012.  New homes are not selling fast enough to stimulate the build rate.

New Home Inventory

August Report:  Steady, moderate, growth since mid-2012.  Inventory is still at very low levels.  Inventories will need significant growth to support “normal” sales rates whenever that occurs.

Existing Home Sales

September Report: 5.48 million (annual rate) +1.7% vs. August, +13.2% vs. September 2012

This is the highest volume since early in 2007 indicating strong growth in this sector. Prices are increasing, motivating both buyers and sellers.  Inventory of existing homes is shrinking and this could hamper future sales growth.

Housing Prices

July Case-Shiller Report: +1.8% vs. June.  Up 12.4% over past 12 months.

Trend: Prices have been steadily increasing since January 2012. They are still down 23% from peak.  The forecast is for another 12.4% increase in the next 12 months.

Commercial Construction

Trend: Commercial construction has been weaker in 2013 after displaying solid growth in 2012.  Construction of new retail, office, and hotel buildings should be much higher in the fifth year of an economic recovery.  If you looked at this number alone, you would conclude the economy is still in recession.

What It Is

Housing market growth slowed in the middle of the year after displaying strong growth in 2012.  It appears the sector is performing very similar to many of the industries that took big hits in the Great Recession. There was a strong rebound off the bottom of the curve, but at some point growth levels out and there is slow progress for an extended time.  Because housing was the last sector to crash, it is mirroring the general economy but still lagging it. 

What It Means

Housing is not going to lead us out of this lethargic recovery anytime soon.  However I don’t expect housing growth to stay this weak for much longer. New home sales are strong, selling prices are increasing and new home inventories are low.  There is still slack in the system (foreclosures, etc.). At some point the slack will be gone and demand will increase and stronger growth will return.  2014 should be a much better year for housing.

What Now?  

That the housing market is still lagging, instead of leading, the general economy is evidence that things are still messed up.  Our economy is a jumbled, malfunctioning, mess. Hopefully at some point the economy resets itself and a real recovery can begin.  Unfortunately my panel of economic

We need the Big Dog running!

experts from the Wall Street Journal is predicting less that average growth for the next four quarters: Q3 = 1.9%, Q4 = 2.5%, Q1 (2014) = 2.7%, Q2 = 2.6%.  We desperately need the “Big Dog” of housing to get up and lead the way, because that is when our economy runs the best.

No Plan Equals No Jobs

“Unemployment Rate Falls to 7.3% in August”. This was the headline in my local paper as well as how the August unemployment report was announced in various on-line and broadcast media.

While the statement is true, it appears to the uninformed and people not paying attention, to be a very positive report.  I mean, unemployment is now lower.  More jobs, more people working!

But consider what knowledge you need to have to understand this headline:

-         July unemployment was 7.4%, so the rate dropped a whole 0.1%. 

-         An unemployment rate of 7.3% in the fifth year of an economic recovery is very bad.

Therefore the headline is bad news, not good news.  And if you bother to actually the read the article, the news gets even worse. The small (for being in a “recovery”) number of jobs created just covered the number of young workers entering the workforce and the unemployment rate decreased because still more discouraged workers stopped looking because there are no jobs for them.  In reality: THE UNEMPLOYMENT RATE JUST WENT DOWN NOT BECAUSE THERE ARE MORE JOBS, BUT BECAUSE PEOPLE ARE GIVING UP LOOKING FOR JOBS THAT DO NOT EXIST.

I explained back in January that you can’t trust the unemployment statistics (The Unemployment Situation Is A Gooey Mess).  I wrote about how horrible the job market was then and unfortunately eight months later there has been very little progress.  Of course you will read reports that we are making “modest” improvement.  Whenever you see the word “modest” used to describe job or economic growth, just replace it with the word “pathetic”.  The job situation remains pathetic. 

John Crudele (New York Post) believes the job market is getting worse not better.   Calculated Risk is forecasting that it will take another 10 months to get to the same number of jobs that we had before the recession.  However we have had five years of population growth since the recession, so we will still be years away from having a normal unemployment rate.

If we can’t trust the macro statistics, let’s take a look at the micro level by looking what is happening with job seekers in Akron, Ohio.  The city has an unemployment rate lower than average (6.8% in July).  The city is benefiting from a diverse job base and promoting foreign investment.

Recently a Career Fair (notice it is not a Job Fair) was held and the advertising proclaimed over 30 organizations would attend.  First of all, it should not be necessary to have a job fair five years into an economic recovery.  One local fair advertised their fifth annual (now) fair back in February.  If you have to have a fifth one, the first four did not work!

At this Career Fair, once you eliminate:

-         The school and training firms (you need to see us because you have no chance to find a job right now!)

-         The telemarketing firms (our jobs are so bad we have very high turnover)

-         The employment agencies

-         The nursing homes

-         And the company that wants to hire you to sell cemetery plots to your friends

There are only four companies at the fair that offer decent jobs and one of these is a trucking company.  Over four years into this pathetic recovery and you still have this very lame “Career Fair”.  And people showed up over an hour before the doors open because of desperation.  It is very sad that people have to go through this.

How are the job seeker groups in the Akron area doing?  Once again the news is not good. One group just moved to a new location because they keep growing and ran out of space at the previous location.  This group peaked (the first time) in early 2010 and then decreased as the job market picked up mid-year.   However the numbers started growing again in late 2011 and have continued to climb. 

Another job group also had many people find jobs in 2010 and at one point looked like it might disband. However attendance picked up in 2011 and has held steady since then.  Some members are finding jobs but the leader of this group does not expect hiring in the area to increase soon.  There should not be job groups meeting in the fifth year of a recovery.  There should be enough jobs being created to make the groups unnecessary.

And from an individual level, my friend Alice is a very bright, competent, human resources/administrative person.  Under normal circumstances it should take her less than two months to find a good job.  But she has been looking for an extended time and like many others is grabbing on to temporary jobs to pay the bills.  You can see the pain in her eyes when she talks about her job search.  She feels that nobody cares about her situation.

And few people do care.  In the last election we had the choice between the “5-Step Plan” and the “Zero-Step Plan” and we choose the later.  The plan is “there is no plan”.  And now no plan is equal to no jobs.  The lack of focus, the lack of strategy and the lack of business acumen, has created a disaster of economic proportions.

Gazing Into A Hazy Crystal Ball

I'm not a fortune teller
Don't have crystal ball
I can't predict the future
Can't see nothing at all – (Maroon 5 – “Fortune Teller”)

When I started my “sabbatical” in early June the S&P 500 Index was two points higher than today’s close (1640) and nobody had a clue where the market was headed next.  So here we are almost three months later and …. uh.  Okay, so you have to give me credit for knowing when to take a break!

That’s not to say nothing happened this summer.  The market hit 1709 in early August (7% over the upper limit of the Model T forecast) and this peak (if it is in fact a peak) did happen in August (not May-June) which means the Model T failed to predict both the timing and the value of the market top this time.

Therefore it is time to speculate why the Model T forecast failed on this cycle.  Here are the reasons, not excuses, for the results:

1.   After writing for two years about how previously reliable economic models and indicators were being rendered inaccurate by the unusual economic circumstances, could I expect that the Model T to be immune to these same factors?  Score one (a negative one) for vanity.

2.   The Model T relies on forward looking data and forecasts.  Now it can be determined that this input information was not as accurate as it had been in the past.  Another victim of the economic environment.

3.   The stock market may be experiencing a “mini-bubble” (some would argue “major”).  Money flows where the return is greatest and with a weak economy and slow housing market, the stock market is the place to be.

4.   And that capital is cheap.  Ben (Master “B”) Bernanke has been pumping billions (around $80 billion a month) into the economy to keep it growing at around a whopping 2%.  Some of that cheap money is finding its way into the stock market.  Of course the last time people borrowed cheap money and inflated the stock market, was uh, 1929.  Oh boy!

The Market Is Jamming To “Master B”

Yes, the market loves “Master B” Bernanke and cheers him on as he pumps up the monetary jam.  He loves to raise the roof on the money supply.  The market hates it when he hints at cutting back the jam.  All the partiers in Club Wall Street shout:

Master "B" likes to pump it!

“No taper, no taper!

Just keep printing the paper!” 

But Master B’s arms are getting tired, so he is retiring.  He has done a good job of propping up, duct taping, and jerry-rigging the economy to this point.  He either should be commended as a genius or taken out behind the woodshed and shot.  We just don’t know which is appropriate yet.  If I were Master B, I would retire off-shore just in case, the Cayman Islands perhaps.

President Obama is having a difficult time selecting Bernanke’s replacement.  Let’s hope he doesn’t get this choice confused with other difficult decisions and appoints Larry Summers ambassador to Syria.

Still Have the Market/Economy Disconnect

The stock market is still smoking hot while the economy is tepid.  This situation can’t last much longer.  Either the economy starts to jump or the market tanks.  Despite the hopeful headlines, Wells Fargo is forecasting a 2013 GDP of 1.5%, improving to 2.1% in 2014.  The Model T Junior (based on consumer transportation) indicates the economy has been basically flat for the past 12 months (through June).  It says economic growth slowed starting in October 2012 and has not recovered much as of June.  This is now literally the “Hope & Change” economy.  Everyone is hoping, so hoping, that things will someday change.

What Does The Model T Say Now?

The quality of the data going into the Model T has not improved.  The Model T should show a very cyclical pattern and it is now producing a flat line.  I think this indicates that the economy is “sick”.  It is growing, but not generating many jobs. Nor is it able to gain much traction or momentum. This is not the new normal; it is an abnormal state that is not quickly resetting.

What About The Stock Market?

Respected analyst and investor John Hussman (Hussman Funds) is predicting a 40-55% drop in the market.  However there are other analysts forecasting continued gains the rest of the year.  The Model T says the market should be around 1350.  So if you jumped out (like me), I would stay out for now.  If you had the guts to stay in, set a floor (1550 perhaps) and be prepared to bail if needed. My crystal ball may not be broken, but I can’t even see it through the dense fog.

Obamacare Subsidies Are Not Magical

Many articles are being written about how the Affordable Care Act (i.e. Obombacare) is going to cost too much or provide too little benefits for different segments of the population.  Healthy younger people, smokers, part-time workers, etc. are all going to suffer consequences due to the law.

However near the end of every article, either a government spokesperson or the writer points out people really won’t suffer that much due to the generous “government subsidies” that will be available.  They make it sound like this money is “free” and will just magically appear.  For the recipients of these subsidies, it will be “magically delicious”, just like getting some Lucky Charms.

The key guy in making the ACA work!

The money for these subsidies must come from somewhere however.  I explained in an October 2011 post (see post here) that the ACA with the original estimates was not paid for.  Now the costs have skyrocketed and the expected revenue may have dropped. To fully implement the thing would cause financial disaster. So the “Affordable Care Act” is really very unaffordable! George Orwell take a bow!

The Obama administration also claims that most people will see no impact from the implementation of Obombacare.  This of course is a lie.   Almost everything said about the law, is a lie.  I pointed out two years ago “If you like your current health plan, you can keep it” was a lie when I had to leave my plan solely because of Obombacare.  Even ABC news admitted this statement was “not accurate” (a polite way to say lie) last week.

Almost everyone is going to be impacted by the law because as the government is focused on the public sector factors they are changing, the private sector is reacting by using something called “basic economics” to minimize costs and maximize profits.  You may end up experiencing higher health insurance costs (both at work and private policies), longer waiting times to see your doctor and maybe even $50 office co-pays.  This law is the biggest loser in the game of “unintended consequences” ever.

I read an article last month that talked about how some doctors had dumped all their low-profit Medicaid patients and made their other patients sign “four-figure”, yearly, contracts to get guaranteed healthcare access.  I thought the article was exaggerating this option and didn’t really believe people would pay for this.  That was until a guy I work with told me that he just signed a $1,500 access contract with his doctor.  Bottom line: His healthcare costs just went up $1,500 (minimum) next year.  So much for not being impacted.

So if Obombacare impacts almost everyone, you will find yourself in one of two positions.  You may be fortunate enough to receive a visit from the “Subsidy Fairy” who will magically appear and shower you with most generous gifts that will make your healthcare truly affordable.

However you may receive a visit from Dr. Ben Dover, who will require you to drop your drawers and grab your ankles.  He will then conduct an examination to determine the impact of Obombacare on you.  On some people he will use his small, smooth, probe which will cause nothing more than an irritation.  Unfortunately, on others he will use his large, auger, probe which will extract much pain.

Open wide America – here comes some great healthcare!

Which Animal Spirit Are You?

Okay, maybe just one more post before taking the summer off …

The stock market climbed above 1685 (S&P 500) in May but finished today under 1575. What’s an investor to do?  To help figure it out, let’s look at two active market participants: Billy Bear and Bobby Bull.

Billy Bear

Billy was very nervous about the stock market because of the weak economy and the unstable world financial markets.  Billy sold his stocks weeks ago when the market was just less than 1600.  However, Billy suffered physiological distress and “sellers” remorse as the market climbed higher and higher.  This made Billy a sad, sad, bear.  “I should’ve held on to my stocks and sold when the market was much higher”, Billy lamented.

Billy’s nemesis, Bobby Bull, found great delight in Billy’s plight and ridiculed him unmercifully.  “You shouldn’t have sold, you stupid bear!” he said.  “Look at all my new found profits and I’m even going to have more wealth when the market goes even higher!  You won’t get any of these great profits because you are an idiot!” he boasted.

But the market now has dropped below where Billy sold off.  While this alleviates Billy’s psychological stress and has caused Bobby to shut his pie hole, it doesn’t help Billy figure out what to do.  Although Billy has seen that the market can go higher, he will not buy because he is afraid the market may still crash.  So:

Cause little Billy, Billy Bear won’t - go buy

But you can’t force Billy to

Billy won’t go

Try saying it’s a bargain, but oh no

Cause little Billy, Billy Bear won’t - go buy

Bobby Bull

Bobby laughed at all the “wimps” who got out of this smoking hot market in May.  He was riding this rocket to the moon.  He is very disappointed in this very minor, very temporary setback.  Hell no, he ain’t selling.  “Are you crazy?” he asks.

He is not going to sell now because it would be very psychologically distressful knowing that he could have sold when the market was above 1685 but didn’t.  He tells himself if the market gets back above that level he can always sell.  But the sad truth is if the market goes back up, Bobby still won’t sell.  This is because the momentum that would drive the market up to that point would cause Bobby Bull to think the market was going much higher.  So:

Cause little Bobby, Bobby, won’t - go sell

No can’t push Bobby out

Bobby won’t go

Try warning him of danger, but oh no

Cause little Bobby, Bobby, won’t - go sell

And all the other animals in this menagerie stand watching the action, confused, wondering what to do ……..

This Market Is So Awesome – I Need a T.O. Baby!

Time now to check in with stock market analyst “Dickie V” for his take on the current market: “Oh this market is on fire.  It’s so hot, it’s smoking.  It’s beating all expectations. It’s beating those naysayers. People like that knucklehead Don Ake who said the S&P wouldn’t top 1600! He should just stick to marketing.

Let me tell you this: this is the best market of all time.  It’s a peak performer.  It a PTP’er (prime time player). It’s slamming, it’s jamming. When the market is this strong, this powerful, this determined, it is unstoppable, simply unstoppable! It’s awesome baby!

This market's awesome baby!

And the market continues to be awesome.  The S&P has been as high as 1687 this cycle and economists (according to a survey last week) see no bubble, no problems.  Everything is just fine and investors are happy, happy, happy.  Of course economist never see stock market problems before that happen, they just explain the problems after they happen (sort of like your mother-in-law).

This market is zooming despite:

-         Very slow job growth

-         Very slow economic growth

-         High level of uncertainty (implementation of the Healthcare Act)

This market resists all obstacles – so far it is unstoppable:

-         Last Monday - the purchasing managers’ index for May was horrible. Result: Dow up 180 points!

-         Last Friday - another sorry jobs report. Result: Dow up 207 points!

Model T Update

The Model T prediction for peak S&P this year was 1550 so it missed by at least 7%, which is a failure.  At the beginning of the year I listed a several S&P predictions for this year by major firms and they all were wrong.  However I do remember that someone (I didn’t save my notes) had predicted a peak in the mid-1600’s, so someone knew what they were talking about.  At the beginning of the year you called that forecast a “crazy outlier”, today you would simply call it “boss”.

The Model T also said the S&P would peak in the May/June time period. If I had no narrow it down to a one month time period it would have been May 15 to June 15, which means that time is about up.  Because the current peak is 1687 and today’s finish is 1642, the model still has a chance to be correct. But this market is tremendously unpredictable. Some analysts still predict a crash and some say this is the beginning of a big bull.  If this were a poker game, I would “check”.  I’m not ready to fold, but I’m not betting any more chips. 

The good news is that if the market dips (notice I did not say when); the Model T says the market bottom will be around 1440; previously the predicted bottom was 1350.   Also, before the correction was forecast to last around a year, now the correction may last only a few months.

Something To Consider #1:

The economy and the stock market are still dancing way out of sync. Therefore, one of them has to change course soon.  I know I said my flamenco dancers often don’t perform the same dance, but there are limits and we are testing them.

Something To Consider #2:

The stock market is a very painful psychological game to play, even when you play it correctly.

I took money out of the market at the very end of April.  I was nervous because the Model T’s upper limit (1550 plus 2% error) had been breached and two friends who follow the model had already pulled money back.  Of course watching the market keep going up has been psychology distressful.  I am not hoping for a market crash but the market closed today 2.8% higher than when I made my sale. It still may have been a good move, but the game of course is not over.

Yes, this is an evil game.  You feel bad when you play it well, you feel worse when you play it badly. And it is time for me to sit back and just watch the game. 

The Model T is taking the summer off to see how this all plays out.  If you are on my mailing list, I will still be sending out some “Model T Classics”, the best posts of the last 4 years. (Click here to get on the list) And I will continue my Ake’s Pains humor blog through the summer.

Good luck in this game, because we are all going to need it!

Lies, Damn Lies and GDP Statistics

Holy Moses I have been deceived
Now the wind has changed direction and I'll have to leave
Won't you please excuse my frankness but it's not my cup of tea
Holy Moses I have been deceived (Elton John)

In February (Some Experts Got Some Splainin’ To Do) I pointed out that some economists thought GDP was being overestimated by as much as 2% because an incorrect “GDP deflator” was being used when adjusting the data.  At that time I did consider the possibility that the government could be intentionally manipulating the data to overstate GDP for their benefit. I did not raise the issue then because it would have sounded like “kooky talk” and appeared politically biased.  And I didn’t think it could be true because I did not believe the government would blatantly lie and abuse power this brazenly for political gain.

Based on the events of the past few weeks, it’s time to take a closer look at this.  The GDP numbers are calculated by the Bureau of Economic Analysis which is part of the Department of Commerce.  This is not the IRS, Justice Department or State Department, but this article (click here) details how government power was also misused at the FBI, OSHA and ATF.  With corruption this widespread, no government agency is immune from suspicion.

Last July I thought the U.S. economy was entering into a recession (Feelings, Really Bad, Feelings) and The Economic Cycle Research Institute (ECRI) said a recession had already begun. ECRI is very accurate in predicting recessions and recoveries.  However it has been predicting an upcoming recession since October 2011 and has received much criticism since then for its “faulty” forecast. The subsequent GDP numbers for the time period were 1.3% for Q2, 2012 and 3.1% for Q3, 2012.  However, when looking back at some important data for this period, it is difficult to find collaborating evidence that the economy was growing at all:

-         Data for the shipping ports track import and export activity which is a good indicator of overall economic activity.  A growing economy should show steady increases in both.  In mid-2012, this data was very flat. (See graph from Calculated Risk).  No signs of growth here.

-         Key measures of consumer discretionary spending (clothing and hobbies) were negative or very weak from June – October 2012. This type of consumer spending is vitally important for economic growth. Again, no signs of life here.

-         Miles Driven data remained flat and depressed (from 2008 levels, see graph).  If people are driving to work, driving to buy things, driving on business, driving on vacation, then miles should increase as they did until 2008.  Economists have been trying to explain away this data by saying more people are using public transportation and demographic shifts, but this should reduce the growth, not stop it.  There are no signs of economic growth in this data. 

-         And of course if the economy were really growing, then the job market would be growing.  I previously wrote that we have been in a “jobs depression”.  The rate of job growth is not even fast enough to handle the number of new workers entering the work force; so many people are leaving the work force. No real signs of growth.

So what difference does it make?  The GDP is just a description of reality, it does not determine it.  The only time this would really matter is before an important election, which of course happened just after preliminary Q3 was released. 

The story we were sold, and which we bought, was that the economy was getting better and faster growth (and good times) were just around the corner.  The story changes dramatically if we were really around 0% growth or in a very mild recession.  (And this corner has taken another year and counting).

I have no evidence that the GDP numbers have been intentionally overstated.  I only have my sense of economic smell and something doesn’t smell right.  I hope some economists will investigate this in much greater detail and share their findings.  There is no way to “audit” the government so it may take years to figure this one out.

So who do you trust now? I think we are operating in an “economic fog”.  Some major economic indicators are still “broken” and GDP numbers are now suspect.   On the other hand, ECRI has never backed off its recession forecast.  People have accused them of being arrogant and stubborn for not acknowledging they were wrong. But maybe, just maybe, they were right and we just don’t know it yet. 

We Are Losing This Decade

Many economists have said that although the U.S. economy has taken a big hit, it will not experience a “lost decade” as Japan did from 1991 to 2000. But from where we sit right now, I’m not so sure.

The problems in Japan started when an “asset price bubble” burst.  This resulted in the Japanese economy basically stalling out (with weak or negative growth) for around 10 years.  The problems here started when the housing market bubble burst, leading to severe damage to our financial system (Japan’s financial system was similarly damaged back then).  Additional damage occurred because the housing bubble also diverted capital to that should have been invested in other developing industries rather than housing.  When the bubble burst, these industries were behind the foreign competition and were not providing the jobs they could have.

If we say the economic problems started in January 2008, we are over five years into an economic malaise and we don’t really know when a strong recovery will begin.  The stock market is smoking, but it just recently exceeded its previous peak.  Any shock or cyclical correction would put us behind again.

The part of the economy where we are really losing is the job market.  We frequently talk about unemployment numbers. But numbers do not get unemployed, people do.  And the people losing the most in this mess are those who lost jobs since 2008. Once you lose your job in this economy, you can stagger around in the “employment wilderness” for years. Not being employed productively in your field of expertise causes you to lose income, professional value and personal fulfillment. Here are some examples from my personal network (names changed):

This economy can make you feel like
a "castaway"

-       Rich is a marketing executive who was let go in 2007.  Under normal circumstances he would have found another position in his industry in 2008.  However due the recession, he bounced around several jobs outside of his industry before finding something that fully utilized his experience in 2012.  Rich lost five years of productive work.

-       Bill is a 53 year-old industrial engineer. He has been unemployed for two years because his skills are most valuable when companies are expanding. Companies are not expanding in this uncertain environment.  Bill’s loss is two years and counting.

-       Cindy is a 50-year old marketing communications professional who was laid off from a large company in 2010.  She found a new job within a year with a small Internet-based communications firm.  However, she did not fit in with the culture of the new company and lasted less than two years. She is back looking for work the second time in three years. Even though the job situation has improved since 2010, there are still four unemployed people for every job opening and competition for good jobs is fierce.  She is on her way to losing two years.

-       Joe, a web-based marketing guy, was downsized from his company and it took him 15 months to find a new position. But after two years, his company was sold and he is on the market again.  He will also lose two years.

-       Craig is a 54 year-old marketing communications professional and has been looking for work for three years.  Becky, a product manager, has worked one year out of the last four.

-       Many college graduates have not found jobs in their field.  Some are still looking three years after graduation while working part-time.  They just lost the first three years of their careers and it will take them three years longer (or more) to pay off sizable college loans.

All these people have valuable skills that they could be using to grow the economy, but they can’t because companies are not expanding, jobs are not being created and the economy is plodding along.  This is a huge waste of human capital.  The economy suffers and the people suffer.

And the suffering has consequences. Largely due to the Great Recession, the U.S. Centers for Disease Control and Prevention reports that the suicide rate for men in their 50’s has increased over 50%.  Rates for other demographic groups are up also.

If we have already “lost” five years, when will this end? The Wall Street

Is this guy running our economy?

Journal reports that at the current rate of job growth (adjusted for population growth) it will take nine more years for employment to return to pre-recession levels.  Of course the rate of job growth is expected to increase soon. However if it takes even five more years (instead of nine), then five plus five I believe equals a decade.  We haven’t lost the decade yet, but we are well on our way.

Some people may argue that the situation is not that dire and that displaced middle-aged workers will just have to work into their 70’s to make up the difference. 

But just because people are living longer in general does not mean people are healthy enough or able to work this long. If you have to work that long, there is no guarantee that you will even have a retirement.

For example, my friend Jerry, age 64, planned to finish his long, successful, career this fall and begin enjoying a great, extended, retirement. They buried him last week.

To subscribe free by e-mail just click here and type subscribe in the subject line.

  

The Party’s Over – It’s Time To Leave Now!

Turn out the lights, the party's over

They say that, 'All good things must end'

Let's call it a night, the party's over

And tomorrow starts the same old thing again

In January I wrote that the Model T was predicting a major market correction in May or June.  Since then, the blog has experienced a record number of readers and I have received questions about the model, the blog, and other issues. So as May approaches, it is time for a review:

2000 – While doing an analysis of several factors in the commercial transportation industry, I notice a connection between the industry, the economy, and the stock market.  My analysis indicates I should sell my stocks immediately. I do not sell and soon afterwards the market tanks.

2001- 2006 – I isolate the factors in the commercial transportation industry that are key leading indicators to the direction of the stock market and construct the Model T.

2007 – I start sharing the forecasts of the Model T with a group of around 20 investment professionals and industry colleagues.   The Model T correctly forecasts the market peak in October, months in advance.

2009 (June) – I am downsized from my job after 16 years and cast into the worst job market since WWII. June 2009 was actually the very bottom of the job market.  It was a very frightening environment and can only truly be understood by those unfortunate enough to have experienced it.

2009 (September) – I decide I need to write a business blog as part of my networking and personal branding strategy to help find employment.  I decide to base the blog on The Model T because it is unique and would showcase my analysis, forecasting and writing skills to potential employers.

Therefore I am sharing this information with the world not because it has no value and not because I am so altruistic that I just want to help people. No, I made this decision because I saw it as my escape from unemployment.  Ironically, my three plus years of writing the blog have only produced one interview opportunity (albeit with a Wall Street investment firm).

2010 (April) – I start working in a new job, in a new field and a different function.  I assumed I would cease writing the blog, until my readers convinced me they wanted it to continue.

2013 (January) – The Model T indicates that the stock market will peak in May or June and I publish the forecast.

 

2013 (February – April) – The stock market continues to rise surpassing the 1550 (S & P) model prediction in March and the plus 2% (1581) upper range in April.  This movement is very consistent with the Model T forecast.

Today - Currently, the Model T is flashing bright red.  It says to sell now.  The acid test of the Model T has arrived.  I do realize that I am either going to look like a genius or a fool.  When I went public with the Model T I didn’t envision this post.  Maybe I thought only my 20 initial comrades would still be reading the blog at this point, but around 3,200 people (and counting) around the world have read the prediction.

Two weeks ago the stock market had a few days of losses and several analysts announced the correction had begun. I didn’t sell then because I trusted the Model T to get to May.  This was a “test” correction.  It is what my friend professional investor Jeff Kaufman would call a “head fake”.  Because that wasn’t really the start of the correction, it may cause you to keep your money in the market longer once the real correction starts.

It takes “stones” to pull your money out of the market when it is this hot, but my friend Kurt (one the original 20 and a close follower of the Model T) pulled a big chunk of his funds out of the market last Friday.  I will sell off around 45% of my holdings (this is my practical limit based on tax and other factors) on April 30.  I don’t recommend pulling all your money out of the market because the model could be wrong. As I mentioned last time, some analysts predict the market will continue to zoom to record heights.  If your money is in mutual funds, it is easier to move more money out if you desire.

And this is not “sell in May and go away”.  In is a coincidence that The Model T is advising to sell in May, but I sense that this makes a May correction more likely.  Regardless, the Model T says the market won’t begin to recover soon (see below).

People ask me how I am going to reinvest.  In the short-term, a good option is short-term bond funds.  However some analysts fear a stock market correction could trigger another shock to the financial system, so you may want to just sit on the cash until the smoke clears.

The Model T is predicting a correction down (eventually) to around 1350 (about 15%).  It says the market should stay depressed about a year before starting a modest recovery.  But it looks like we will have plenty of time to prepare for that.

Let the games begin!

To subscribe free by e-mail just click here and type subscribe in the subject line.