Saturday, July 2, 2011

ECRI Gets More Bearish, Raises Recession Possibility for First Time Since Last Year

By DoctoRx

Not giving a fig for this week’s stock market rally and backward-looking data such as a 55 ISM survey print, the Economic Cycle Research Institute’s co-founder gave an interview to Reuters that is linked to on the ECRI website. In this interview, Dr. Achuthan increases his bearishness and for the first time since last year, raises the possibility of recession. He also predicts that price inflationary pressures are going to recede. In this vein it is worth noting that gold, platinum, silver and oil are all down in price today and are in downtrends.

Achuthan also warms the hearts of certain capitalists by criticizing the Fed. He says that the Fed errs by predicting economic activities using a model. In contrast, ECRI is as empirical as possible, I believe. As a physician, I am an empiricist. First, notice what works. If one has an idea about a new treatment, test it prospectively to assess risks and benefits. Nassim Taleb spends a lot of time in his books talking about medicine and empiricism, which is one of the reasons I like him.

In the markets, the VIX has collapsed to frankly complacent levels. How quickly rising stock prices cheer the punters!

This sort of complacency was “OK” in the boom of the 1990s, but times have changed.
Without being a doom and gloomer, I simply don’t “get” the optimism here. We can’t avoid facing facts (e.g., liquidate malinvestments and move on). When my patients had health problems, we had to deal with them. Giving an unwell patient the medical equivalent of a 15 VIX would have been to commit malpractice. On the other hand, I had some patients, all women, who were so healthy that I advised them to avoid checkups for 3-5 years unless they had symptoms. These gals had the equivalent of a 5-10 VIX. (Happily, they stayed healthy through their prescribed term of medical avoidance.)

It took Ben about 2 months after the end of QE 1 to begin QE 1.5. Now that QE2 has ended, let’s see if the markets “force” his Keynesian hand to push the “Buy” button again and begin some version of QE 3.

However, there is no QE 3 yet, and a bearish divergence is occurring within the precious metals space that relates to damming up of the stream of new money from the system. Gold is a bit below its 50 day moving average (I use simple moving averages = sma rather than exponential ones = ema) but remains 3% above its 150 day sma. All gold’s moving averages from 50-200 day sma are moving up, though the 50-day sma is flattening severely. Platinum, which is almost solely an industrial and consumer jewelry metal without accepted use as money, is below all the same moving averages (PPLT lets you track platinum prices). In fact, unlike gold and silver, platinum is down in price on the year. So, the industrial and consumer metal is much weaker than gold, which is priced as money, meaning the anti-dollar in most general terms. Meanwhile, silver is below its 50- and 150-day sma’s but above its 200 day sma. In other words, silver is acting a lot like the average of gold and platinum. I take this to be confirmation of what I have been saying, which is that silver is not money and is a more dangerous asset than gold in periods of unexpected economic decline or deceleration. When the electronics industry finds itself with double orders and slowing demand, it buys less silver. And then what happens is that the ETF known as “SLV” has to dump silver into the decline (for technical reasons), accelerating the price decline. (For silver bugs, SLV can be a gigantic source of supply of silver that can replenish Comex silver inventories. Just sayin’; TPTB have lots of ways to accomplish their goals.) Meanwhile the Sprott Physical Silver fund, symbol PSLV, remains at a massive premium to NAV. This shows that there are lots of true believers in silver. I called this a good thing when I blogged bullishly on silver last September in different posts (with silver around $20/ounce), but it can be a bad thing on the way down. I think that silver is a good long-term investment, but that the odds favor lower prices in the weeks and months ahead (though a short squeeze could occur with explosive results). On the charts, it is at critical horizontal support right here. The next support comes in roughly 10% below this level. In a new cyclical recession (ignoring that the 2007 one did not really end in my view), I can see silver dropping to its 2008 high in the low $20s. Such a low would still be well above its low of summer 2010 and thus could mark an all-time low for the metal.

While I respect ECRI, I try to make decisions based on what I see happening in the real world. Right now I am seeing things that coincide with these public predictions of ECRI. Of course they could be wildly wrong there. In the real world that I see and that people tell me about, times are not good and there is no uptrend in economic activity. Unfortunately we have monetary authorities rather than truly free markets, and these authorities appear wedded to the same sorts of financial models and command-and-control games that would be a bit funny were they not so serious and so damaging to our lives. We can hope that if and when America gets back to where it once belonged, namely a land of sound money and (we can dream big dreams) limited government, we will find to the surprise and perhaps dismay of the Krugmanites that Keynes mostly got it wrong. We could see a boom that would make a lot of people’s heads spin, not a pseud0-boom caused by currency depreciation and other tricks. But until political-economic policies change, I expect to tend to continue to take the “under” when it comes to real economic performance.

On this holiday weekend, I’m going to reflect on the Founders and perhaps reread parts of the recent Ron Chernow bio of George Washington. GW mostly got it right. With more economic liberty and more freedom for companies to fail if things don’t go their way, then it would be a great pleasure to forget about gold as an investment and refocus on fairly priced, well-financed wealth-creating vehicles called stocks. As it is, though, I have not thrown away my (imaginary) Dow 10,000 hat.

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