Double Dip Countdown

A double-dip recession is unusual. We may have had only one - in 1980 and 82. We had a double dip depression in the '30s, but the dips were five years apart, and the whole period is more of one slow slog of government life-support and a moribund private sector than a happy recovery and a fall back. It shows up in this unemployment chart - we never got employment back to pre-Depression levels until after the war. The question right now is will we have a double-dip in the Great Recession? 

 

The buzz to start this week was of the second coming of the double-dip, set off by David Rosenberg. What spooked him was the ECRI index falling below zero (see next chart, courtesy Pragmatic Capitalist). When ECRI drops below -10 (from its current -3.5), it has signaled a recession 100% of the time. Rosenberg ranks the odds at 80% of the double-dip. ECRI's indomitable leader continued his optimistic take, saying that while the drop "assures a significant slowing in US economic growth in the coming month, the recent weakness has not lasted long enough to signal a new recession threat." Others have backed his stance, saying it is premature to call the double dip or this is not a recession signal but a reaction to the sharp rise off the bottom. Fair enough, but the countdown has begun.

For the stats minded, here is a look at its record of prediction. The recent decline is the largest before any prior recession. Also, ECRI tends to be late in predicting a recession. Other leading indicators are also rolling over, such as the Conference Board LEI, which at least shows a slowdown:

 

Morgan Stanley holds out for just a slowdown, arguing primarily that global growth is rebounding. Indeed, there is some glass-half-full optimism even over in Europe, where the UK just raised GDP estimates for next quarter - ironically due to the Euro crisis and a cheaper Pound - but lowered their 2011 estimates. The same goes for Germany and a cheaper Euro, where the expectation is it helps more than austerity in Club Med hurts. Still, the OECD indicators for the global recovery are all rolling over to slower growth. Peaks are evident in the US, Japan and Germany, and are now showing up on the UK, France and Italy. Worse, China too is rolling over:

 

The poor retail report Friday also casts doubt on the recovery. It was the biggest decline since last September, and if we remove Cash4Clunkers, the biggest since March 2009, over a year ago. It may be that it reflects distortions from the first-time homebuyers credit, which caused a surge in April and thus may have led to the largest sector drop, a drop of 9.3% in May of building materials; but other sectors were down as well, including general merchandise and clothing. Auto sales are also looking weak, as fleet sales are up much more (32%) than individual sales (13%) in the first part of 2010, leading George Pipas, an analyst of Ford, to opine that consumers are back to deferring big purchases due to economic uncertainty. Savings had dipped a bit, but savings has gone back up, suggesting that a flood of tax refunds and other government checks may have temporarily boosted retail around April 15. That is now over. 

 

If we look at other GDP factors, two elements which had boosted GDP are now lagging: the inventory surge is now over, and State spending from stimulus is also on the downswing. State sales taxes are also likely to shrink, as we see in Texas, putting further pressure on State spending. The impact on GDP may be a 1/4 point, and comes on top of a drag of 1/2 point from the lower Stimulus and a further drag from the loss of the 1.3% inventory adjustment on Q1, making Q2 in the range of 2% lower than Q1. 

John Hussman gives us five leading indicators of a coming recession:

1. Widening credit spreads (check!)
2. Flat yield curve (almost there!)
3. Falling stocks (check!)
4. Moderating ISM growth (check!)
5. Moderating employment growth (check!)

The countdown to the double-dip is on. 

Comments

[yelnick]

Tony, thanks for the kind words on the AUD. Unwinding of the carry trade will hammer Oz. Right now we seem in a calm before a new storm later this summer.

The stats come from another denizen of Oz, Zoran Gayer. He has more. Perhaps I should post some details from his work. I have a sidebar continuing post called Zoran Bifurcation which I add to from time to time. I find it interesting how he pays more attention to the repetition numbers, particularly 70.7% and its twin 29.3% than EWI or Neely. He found that bifurcation points track fib and repetition times much more precisely than orthodox EW

[yelnick]

Chab thanks, and sorry about the tie. England has a real shot of going to the quarter finals whereas I cannot see the US going beyond the first round.

I am feeling the need to lay out the bull case in a major post. There are several scenarios that lead to higher highs before the second wave down comes

[DG]

For someone that prides themselves in being so incredibly "quantitative", I'm at a loss as to why you would feel so righteous in comparing "apples" to "oranges". No one in their right statistical mind would compare a "daytraders" results with that of someone that is issuing trading recommendations on a weekly basis.

I am at a total loss as to why you are unable to fathom that.

From reading your posts, I'm sure many things in life leave you "at a total loss".

Last I checked, traders trade for money. Thus, one can compare the amount of money made via different trading methods. I don't care if Carl Futia trades every 5 seconds and Neely trades once a decade, if I make more money on the once a decade trade, that's what I'm going to do. Clearly, Carl just churns out 1 and 2 point gainers, while Neely grabs larger-sized gains on his trades. Yes, it's two different styles, but, at the end of the day, what matters is the account's equity curve under whichever method.

Still "at a loss"?

[DG]

Sounds like your exclusive committment to Wave Theory keeps you from taking advantage of tremendous money making trading opportunities in individual stocks, especially the high beta, high volume names.

Why would anyone do something like that? Are you not that active of a trader? How many times do you trade per week?

Yeah, it also keeps me from losing money in individual stocks. I swear I've never seen anyone who focuses so much on beta as you. Who gives a toss? With higher beta comes higher risk and volatility so clearly you reduce position size to adjust because you can't possibly keep your stops as close as you would with lower-beta instruments. You sound like some dumbass rookie talking about beta this and beta that. Once you adjust for risk, beta cancels out anyway. Duh. I'm trading directionality, not beta.

I trade as many times per week as the market dictates. I have a very specific set-up for this market environment and I only trade that, long and short. I get no special pleasure out of the act of trading, so I don't seek out opportunities to trade just for the sake of trading. In the last month, I've made 29 trades. If I need to make 60 trades in the next month, so be it. If I need to make 15, that's fine, too.

[DG]

Yelnick,

Thanks for posting the stats. Of course, they beg the question of whether or not those Impulse waves were properly identified to begin with. My hunch is that Zoran and Neely would disagree on whether or not many of the Impulse waves identified in those stats were "real".

[Roger D.]

I count a triple z almost complete,in wave c of big 2. Dow 10440 maybe.

Roger D.

[Roger D.]

"I count a triple z almost complete,in wave c of big 2. Dow 10440 maybe."

Roger D.

Say hello to P3!!!!!!!!!!!

[Wave Rust]

yelnick,
i'm asking about B's cause i see the possibility of the march '09 to April'10 as a bull wave 1 (alternation of 2's and 4's is not absolutely required).

assume it is a wacky p1, and this higher degree wave 2 down from april high has only completed the A and is now in B up.

imo, the longer it takes for the 2 to complete, the deeper it will go, especially if spx 1200 is never seen in this B wave.

fwiw, from june 9 low, the B is doing its a-b-c for the a of B,and that c should be done by Wednesday next, at about spx 1142-46. the b down of B should be fast (2 days), then c of B to possibly spx 1200 into late July/early august.

then the ugly C ,,,, voting for complex and violent C

but I do agree with you, B's are inconsistent, except that a daily often hits the 38% or 62% in the broad indices. intraday's B's are wacky.

wave rust

[yelnick]

Wave, if you could somehow crunch mar09-apr10 into a leading diagonal, it might fit an impulse. If so, the drop in wave 2 should be large - this is one of the cases where a wave 2 goes beyond 62%. It fits the psychology of a scrunched impulse for there to be a big retrace. I have not seen a credible assessment of the Hope Rally as an LD. Other than that, I do not know of waves 1 that lack the rule of alternation.

I would rather wavers ponder whether it is a wave B triangle - that is the form of a five wave pattern which breaks this way. It would be one of EWI's new found Skewed Triangles.

[yelnick]

DG, Zoran was closer to Neely than EWI. He also read the original Elliott and kept to some of the forms (such as an irregular top) which EWI has argued are unsound. Zoran found triangles everywhere like Neely, and used Terminals not ED's as ending patterns. He also pegged the tops and bottoms at bifurcations not the nominal top or bottom. At some point I will go back over his materials and see if he followed Neely rules on impulses. In sum, he took Neely and rather than further complexifying the MEW rules with extensions and new forms, he was simplifying based on chaos theory concepts.

[DG]

i'm asking about B's cause i see the possibility of the march '09 to April'10 as a bull wave 1 (alternation of 2's and 4's is not absolutely required).

There is no way that is the correct wave structure. Once you get beyond the initial thrust out of the March 09, July 09 and February 09 lows, there is WAY too much overlap for any kind of Impulse, even if your 1 and 4 don't overlap per se, not to mention the fact that on a Daily or even Weekly chart (a NeoWave chart, not some crappy bar or candlestick chart), none of the sub-waves exhibit anything like the proper Fib relationships for an Impulse. It's a :3.

Why do people have a hard time accepting that all of these structures are :3s? The market moves as far as it moves (which, for bulls over the past year, has been pretty damn far) regardless of the fact that the structures are :3s, so why insist they're :5s?

I'm asking honestly because I just don't understand the obsession with labeling things :5s when they don't conform to the rules for :5s.

I swear, if wave counters would just assume everything is a :3 until absolutely proven otherwise, your wave counts wouldn't have to change so dang much. I can't believe I'm the only person who's noticed this, but it seems that way.

[Excuses, Excuses...]

"I have a very specific set-up for this market environment and I only trade that, long and short." - DG

Yeah, and we all know how well Elliott Wave Theory has served you and your beloved Glenn Neely over the past year. Funny that you would "trap" yourself into using a methodology that is so subjective that Neely himself admits that it is not always applicable given its predisposition to periods of time that he deems as "unpredictable".

What a bunch of crap.
No wonder why you've gotten banged-up recently!

[software testing training]

Carl is at least forthcoming in his track record, but I have no idea how much risk he is taking on to generate the 80%+ returns he's claiming.