Before we get too optimistic about the new year, we have to take stock of where we are. All indications seem to point to little progress being made in our effort to crawl out of the last recession of 2008-2009. The following "ECRI" article from Business Insider concern's their call for another probable recession right around the corner. With a recession staring us in the face, Europe still trying to implode, the consumer paying down debt and the very low GDP forecasts for 2012, it is hard to believe the stock market can rally to new highs unless the FED intervenes and unleashes QE3. Even then it will only be a quick sugar high until the market figures out that things are really much worse than anyone thought they could be.
Read the article (excerpts) that follow and then look very closely at the last chart at the bottom of the page. You need to understand the potential environment you will be investing in going forward. It will help you to decide what kind of risk tolerance you're willing to maintain.
Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there's nothing that policy makers can do to head it off.
ECRI's recession call isn't based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index, which was the first to turn down — before the Arab Spring and Japanese earthquake — to be followed by downturns in the Weekly Leading Index and other shorter-leading indexes. In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not "soft landings." (Read the report here.)
For a close look at this movement of this index in recent months, here's a snapshot of the data since 2000.
Read more: http://www.businessinsider.com/advisorperspectives.com/dshort/updates/ECRI-Weekly-Leading-Index.php#ixzz1iEDX29oe
ECRI doesn't provide the general public with the analytical details behind its calls, but the latest Hoisington Investment Management quarterly report a similar forecast for negative growth with an interesting analysis that warrants close reading. Here is the opening paragraph and a snippet near from the conclusion:
Negative economic growth will probably be registered in the U.S. during the fourth quarter of 2011, and in subsequent quarters in 2012. Though partially caused by monetary and fiscal actions and excessive indebtedness, this contraction has been further aggravated by three current cyclical developments: a) declining productivity, b) elevated inventory investment, and c) contracting real wage income....
In summary, the case for an impending recession rests not only on cyclical precursors evident in productivity, real wages, and inventory investment, but also on the dysfunctionality of monetary and fiscal policy.
The full report in PDF format is available at the Hoisington website.
More recently Van Hoisington reiterated his view of a coming recession in a Barron's interview:
Our expectation is that we are going to enter another recession next year, when we haven't really fully recovered from the previous one. We think we are in what Niall Ferguson, a Harvard historian, recently termed a slight depression. This isn't a normal business cycle.
(2) Here is a chart of the (SP500) shown before and the details behind it can be found on dshort.com. It's a collaboration of work done by Doug Short and John Carlucci. It suggests the market is likely to retrace from its 2000 highs to the the blue arrow at the lower trend line. The rate of decent will follow a ~34% (grey) retracement angle. The key points to take away from the analysis is that we are not yet half way done with the move lower and it will take until ~2022 to complete the move to approximately ~500. Scary eh? That's about 4500 on the Dow.
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