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Dr. Ken Mayland: A year of decent growth is a resonable presumption (Porte, Griffin, checklist get in here)...

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June 16, 2010 – Comments (22) | RELATED TICKERS: EC , NOM , ICS.DL2

Even when you take the Greece crisis and BP oil spill into account...

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Yesterday, I had a pleasure of attending Surface Finishing Industry’s annual conference and trade show, where one of the keynote speakers was Dr. Ken Mayland, one of the nation’s most recognized economic forecasters.

Before I go into what Dr. Ken had to say, let me first “tell” you a little bit about Dr. Ken (I promise it will be worth your time). 

Here is what I gathered from his company’s website (ClearView Economics):

 Dr. Ken Mayland is President of ClearView Economics, LLC, a firm specializing in economic research and forecasting.  Ken was previously the Chief Economist of two major financial institutions (First Pennsylvania Bank and KeyCorp).  Graduating with degrees in economics from MIT (undergraduate) and the University of Pennsylvania (M.A. and Ph.D.), he has spent more than thirty years studying the business cycle and providing economic analyses to a variety of constituencies.

Ken is a member of the Blue Chip Economic Forecasters and Financial Forecasts survey panels, and several wire service and newspaper survey panels.  He has been a past member of the Economic Advisory Committee for the State of Ohio under various Governors, and he has held several leadership positions with the National Association for Business Economics.  Ken is frequently quoted in the local and national media, is listed in Who’s Who in America, and has won several awards in recent years from the Federal Reserve Bank of Chicago for “best forecasts.” As a member of the BusinessWeek Annual Economic Forecasting Survey panel, Ken hit the 2002 GDP, unemployment rate, and CPI inflation projections within a tenth of a percent.  Ken was the second best forecaster in USA Today’s forecasting panel for all of 2003.  Bloomberg Magazine (November 2004) identified Dr. Ken as the nation’s top forecaster (!) in its mid-2003 to mid-2004 tally of forecasts.  For the most recent forecast year (mid-2004 to mid-2005), Bloomberg Magazine (December 2005) had Dr. Ken as the best forecaster (tied) of the unemployment rate and the fifth best forecaster of the inflation rate.  In a feature article, Fortune Magazine (11/27/00) identified Ken (along with three others), “as one of the sexiest economists alive.”  (He will NOT, however, do presentations sans shirt.)


In the first half of 2006 USA Today has once again identified Dr. Ken as one of the nation's top ten forecasters for 2005! (#7) AND...
in December 2006, BusinessWeek determined that Dr. Ken was THE #1 most accurate forecaster for 2006!!! (12/25/06 issue.)
 

And now the "triple crown!"  Dr. Ken in 2007 won the Lawrence R. Klein award for Blue Chip Economic Indicators forecast accuracy.  This award is presented by Arizona State University for the person who best forecasted real GDP , CPI inflation, the unemployment rate, and the 3-month Treasury bill rate over the 4-year period 2003-2006.  By design, the winner of this award must be a consistently good forecaster.  The award carries a substantial monetary prize.  The picture below shows Prof. (and Nobel Laureate) Lawrence Klein (UPenn) and Randy Moore (Blue Chip) along with Dr. Ken. 

 

OK, let’s now get into what dr. Ken had to say yesterday.

As I don’t yet have the access to the slides from his presentation (will have it next week), I’m just going to try to share with you a few points Dr. Ken tried to make yesterday (sentence highlighted in bold are taken off Dr. Ken’s slides. Other stuff is basically my recollections):

-      Recovery is not synonymous with Recovered

We are in a recovery mode. However, that doesn’t mean we’ve recovered. It will take years to get back to “good old times”.

But the recovery has started.

We have 3 quarters of “growth” under our belt

2009 Q3 = 2.2%

2009 Q4 = 5.6%

2010 Q1 = 3.0%

 -      Manufacturing sector tends to do well when 12 months of sales growth is GREATER than 12 months of inventory growth.

That transition occurred in September of 2009.

(Understanding correlation between sales and inventory is most important part of understanding economic/business cycles).

At the end of 2007, demand for goods dropped sharply to a very low level (because of the credit crisis), but the manufacturing sector cut its production to an even lower level. This means we have been using up inventories for 2 years.

Looking back in history, every sharp drop in production (and inventories), just like the one we had in 2007-2009, was followed by a big jump in demand for production: It is not unusual to see 12% year-over-year growth after such sharp drops.

Steel industry is ramping up big right now.

3 Key sectors started improving last year: Housing (foreclosures are still a drag), Auto industry (very busy), Capital Spending (after cutting to the bone, some big companies made surprisingly good profits last few quarters. There is more money available for capital equipment. Capital spending is up 12%).

Projecting that auto industry production is going to pick up was the easiest forecast in the world. Two reasons:

1.    Our annual scrappage rate (13 mil/yr) was higher than our production rate (normally 16 mil/yr) for 2 years.

2.    Demographics (population is constantly growing)

Even though people are driving cars longer than before, and trying to fix them instead of buying new ones, let’s face it: when a car dies we don’t stop driving. You and I might by a used car, but somebody (the person who sold us the used car) will buy a new one. 

LESSONS FROM 2007 – 2009

-      The economy is cyclical

-      The Economy has a penchant for over-doing it (tends to form bubbles)

-      The “innocents” get hurt (people and companies alike)

-      Policymakers will respond (lower taxes, lower interest rates, increased government spending)

-      Politicians will exploit the pains and fears of the public (they will focus on the negatives, and will make them look worse than they actually are, just to promote their agendas, get elected, etc.)

-      The economy inevitably recovers (IT’S A HISTORICAL FACT) 

 

LESSONS APPLIED TO 2010

-      We are at the bottom of several cycles 

-      “Innocents” get relief

-      What are the new bubbles? (size of Federal Government? Deficit?)

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So that would be it for right now (Dr. Ken did also say the Greece issue is most likely a good thing for U.S.).

Once I get the slides (with a bunch of very useful charts), if there is any interest, I might post some of those. In the comments below, Ill try to post a few more things I remember from yesterday.

And one more thing: I invited Porte, Griffin416, and checklist34 to this post not just because they are my fellow bulls, but also because Porte has been saying for months that Germany’s economy and manufacturing is doing very well (almost reaching the “boom” quadrant in his “weird-looking” chart), Griffin has been reminding everyone for months that economy and stock market are cyclical (and we are on the way up if you haven't noticed), and checklist34 had this post where we covered some of the same stuff Dr. Ken talked about.

p.s.

 

I apologize to Dr. Ken (here is the link to his website) for the simplification of his presentation. I hope there are no inaccuracies in this post, but if there are, I apologize.

22 Comments – Post Your Own

#1) On June 16, 2010 at 3:48 PM, dragonLZ (99.35) wrote:

This is what Dr. Ken said in March of 2009 (from his website):

The economy is NOT a bottomless pit!  (From Late-March 2009)

One reason for the considerable gloom brings up what I believe to be a common forecasting mistake—to believe the economy is spiraling down a bottomless pit.  I think that is the wrong way to think about the economy.  The reasons: sectors have floors and behaviors have limits.  Once they are hit, the downward spiral ceases.  The better way of thinking about the economy: demands are transitioning from one equilibrium to a lower one.  The reductions in retail sales, industrial production, employment, factory orders, and so on, represent the dynamics of getting from one place to another.  But once you get there, then the economy’s nosedive flattens out. 

Let me create an example to demonstrate the point.  Consumer spending has fallen because persons, for various reasons, have lifted their personal saving rate (= lowered the personal spending rate out of disposable income).  But there is a limit to this behavior, and once the new equilibrium is reached, the drag on the economy stops.  In the simplified table below, as consumers raise their personal saving rate from 0% to 6%, spending declines.  But once that saving rate stabilizes, as it inevitably will, then consumer spending stops falling (Year 2:Q1).  And once consumer confidence returns and they decide to lower their personal saving rate somewhat, then the dynamics works in the other (positive) direction.  [In this simple example, without loss of generality, the feedback loop between consumer spending and income is omitted.]

                  Year 1:                           Year 2:
                   Q1    Q2    Q3    Q4    Q1   Q2
Income        100   100   100  100    100   100
Saving rate   0%    2%   4%   6%    6%     5%
Spending     100    98    96    94      94     95
--Growth rate      -2%  -2%  -2%    0%   +1%

 I expect over the next weeks and months you will hear more talk of the “second derivative” of the economy.  This is the rate of change of the rate of change.  In physics, if “X” marks a position, the first derivative of X gives you the rate of change of position, or velocity, and the second derivative of X gives you the rate of change of velocity, or acceleration.  If the economy is receding, then its first derivative is negative.  But if its rate of decline is lessening (e.g., from -6% growth to -4% growth to 0% growth…) then its second derivative is positiveThe second derivative turning positive is a necessary precursor to the economy flattening out and forming a bottom, a bottom from which an economic rebound can be staged.

What economic indicators are issuing a second derivative reading?  Weekly initial claims for unemployment insurance have stopped increasing (around 650k) for now.  Housing starts stopped falling and increased in February.  Retail sales fared better in January and February than they did in November and December.  And durable goods orders increased in February.  Indeed, as a result of these indicators, my projection for the economy’s Q1 decline is less than the 6.3% (AR) fall-off actually suffered in Q4, and my Q2 estimated decline is less than I am expecting for Q1.
 

 

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#2) On June 16, 2010 at 4:04 PM, chk999 (99.97) wrote:

Good post. Things are not currently rosy, but neither are we all going to die immediately.

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#3) On June 16, 2010 at 4:30 PM, JaysRage (88.84) wrote:

Great post. +1 rec.      I summarize the notes significantly differently than you do, but the content in this post is top notch.   Thanks for sharing your notes.   There is a lot of very very good information here.   I really appreciate you taking the time to put it all on here.    

 

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#4) On June 16, 2010 at 6:33 PM, checklist34 (99.73) wrote:

is there a link to the presentation?  I can't find it

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#5) On June 16, 2010 at 6:43 PM, rofgile (99.43) wrote:

I also think this has good information-

 The sales growth vs inventory growth as being positive for manufacturing is very interesting.  

 Notes on steel industry are interesting too, I may look more into that. 

 -Rof 

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#6) On June 16, 2010 at 7:21 PM, checklist34 (99.73) wrote:

Anyway, my basic thoughts on the economy at this point are these:

1.  business is good at places I am familiar with.  My old business's are having the best year they have ever had by a fair margin after being slightly better than flat in 2009 (and viciously down from oct08-sep09 from oct07-sep08

2.  inventory levels are low everywhere and some evidence of a boom related to restocking them has occured or is occuring, still low though

3.  a good friend who runs a $300 mil division (manufacturing) of a huge company is up 22% over last year and 7% over 2008

4.  A recession hasn't, I believe, ever begun with unemployment already really high (>7-8%) (someone check that).  presumably because alot of what causes a recession is the psychological and income shock of layoffs and people getting scared (and inventory de-stocking)

5.  layoffs and inventory reductions can only go so far, and once they can't be stripped anymore they cease being catalysts for downward economic activity

6.  despite what you read constgantly, this recovery was not fueled solely by stimulus and its debatable whether the stimulus even helped.  only half the money has been spent, so if its a stimulus fueled recovery, it should carry on as long as it has.  http://www.recovery.gov/Pages/home.aspx

7.  There is not at this time evidence that Europe is falling into a catastrophic recession.   I think the memory of 2008 causes panic to rise up very, very quickly now where in late 2007 or early 2008 the 25 years without a severe recession caused panic to rise up very slowly.  Like a person who grew up in Montana and has never been mugged -vs- someone from Brooklyn who gets mugged twice a year.  Which one is going to fear walking down the street at night more?  Same danger to each, but one is tense and panicky, the other happily drunk and carefree.  We just got mugged, hence the tension is potentially exxagerated.

8.  Wages are rising as are hours worked.  Ultimately that is moreimportant to the broad economy than the actual employment figures. 

9.  Companies are vastly better off than they were 20 months ago, vastly.  Cash on balance sheets, secondaries, refinancings, debt paid down.  This means they are less likely to panic and run around firing and cutting back because they won't feel actually endangered.

10.  The BP cleanup should be some kind of mini-stimulus in and of itself. Much as Katrina probably helped fueld the tail end of the housing bubble by running up building material costs due to demand to rebuild, there is a side benefit to every disaster

11.  The commodity inflation cycle that began in 2000 may be drawing towards its end.  That, folks, ultimately, is a GOOD thing.  

12.  ISM #'s remain good and better than expected

13.  Corporate earnings are good

 

And some downsides:

1.  Europe may wind up experiencing a significant recession, and austerity measures may wind up being exactly the wrong medicine at the wrong time

2.  China may actually have issues and bubbles and disasters lying in wait

3.  ECRI leading indicators has been dropping significantly and while this has happened far more times than we have actually experienced a recession, and ECRI is not at this time calling for a recession, that isn't good.   Not good at all.

4.  BP is an unpredictable issue for the economy, it may be bad

5.  The de-leveraging process etc.

Basically the well-touted and elaborated on comments that are made constantly by bears everywhere.  

The world is not awash in good news.  That is a material fact, but I don't think doom is certain.  

 

If I knew the recovery would go smoothly, I'd go all in on about 20 stocks with leverage.  As it is I feel cautious, although I remain net long

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#7) On June 16, 2010 at 8:07 PM, simplemts (< 20) wrote:

"4.  A recession hasn't, I believe, ever begun with unemployment already really high (>7-8%) (someone check that).  presumably because alot of what causes a recession is the psychological and income shock of layoffs and people getting scared (and inventory de-stocking)"

 Unemployment in 1980 was at 7.5%, the second dip in 1981 came while unemployment was high still.

 Also, the great depression can be described as "two recessions" too.  Unemployment exceeded 10+% when the "2nd recession" came.

There is no reason unemployment alone will NOT create a double dip.  You are right however, that the likely result would be slow growth or stagflation over a double dip based simply on history.

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#8) On June 16, 2010 at 8:09 PM, simplemts (< 20) wrote:

"2.  China may actually have issues and bubbles and disasters lying in wait"

China was estimated to consist of approximately 40% of the world growth in 2010.  If Europe/US are slowing down, you know emerging markets will take huge hits, and China may have a property bubble causing huge credit contraction.  If US/Europe/China all slow... do we really not expect a double dip or horrible growth (Horrible growth = 0.0% to 1.0%)

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#9) On June 16, 2010 at 8:21 PM, dragonLZ (99.35) wrote:

chk999, Thank you.

JaysRage, Thank you. I really appreciate it. I'm glad you liked the info from the post.

rofgile, Thank you. Glad you found the post informative.

 checklist34, Thanks for the comment.

There is no link to the presentation, It will be available next week, but only for the members of NASF.

I wish you guys could see it. I loved it. Dr. Ken makes economics a lot of fun. His charts are great. So easy to see the trends (not quite like Porte's chart, but close :) 

For some reason I'm not able to post a link to his website.

Go to www.cvecon.com (when there, see Special Topics - good stuff).

Thank you all for the recs.

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#10) On June 16, 2010 at 10:39 PM, dragonLZ (99.35) wrote:

checklist34, regarding your comment# 6:

Remember when I commented on your blog and said that my company is very busy this year (70% of our sales come from auto industry).

The bonus I mentioned at that time, I didn't get just because of a few good months my company had, but also because we were awarded a few new big jobs and owners knew we'll be very busy this year. To be more precise, based on all the new jobs, we knew our sales will double this year.

Guess what? We got awarded two more jobs last week. Just these 2 new jobs will double our sales once again.

My company was in the same building for 40 years. This summer we will be expanding.

The line where we run all these new jobs (all stainless steel stuff - hint, hint, hint) doesn't have enough capacity at this time.

Yesterday, when I told the owners that I need more people (not for new jobs, but for stuff we run right now), for the first time in a long time they said: "No problem. Get as many as you think you need." Just a month or so ago, they said: "Let's wait. Maybe we can do it with the people we already have."

What I like a lot is the fact that a lot of stuff we are getting now was done in China for the past few years.

A big Chinese company, which produces the same stuff our biggest customer does, is in big trouble because of the supplier which does the same stuff my company does.

This Friday one of the OEM's is coming to visit us with this Chiese company to try to convince us to help them out by taking on a few jobs the old (Chinese) supplier used to do.

We are not gonna do it. We want to stay loyal to the U.S. customer who basically helped us stay in business.

Why would we help out a company that is the main competitor of our biggest customer, an U.S. customer (who seems to already be winning the battle)...??? No way, Ching Ming Ho.  

Exciting times, I'm telling you.

Great stuff. I'm loving it... :)

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#11) On June 16, 2010 at 11:48 PM, checklist34 (99.73) wrote:

dragon, that is incredibly awesome, you will reduce the unemployment #'s by a handful... 

I take in your corner of the world, the economy is looking pretty good...

 

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#12) On June 17, 2010 at 12:13 AM, dragonLZ (99.35) wrote:

I kind of feel bad I can't share with all of you guys the names of some of our biggest customers. I hope you understand.

p.s.

On a different note, this stock is up 104% since this post, and this stock is up 84% since this post.

Both of these stocks were mentioned in this post too (in my opinion,some of the greatest comments by checklist were made in this post).

I've gotta go now.

Good Night. 

 

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#13) On June 17, 2010 at 3:01 AM, minduza (< 20) wrote:

what kind of forecasts Dr. Ken Mayland had for 2008 and 2009?

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#14) On June 17, 2010 at 7:11 AM, dbjella (< 20) wrote:

 checklist34 

10.  The BP cleanup should be some kind of mini-stimulus in and of itself. Much as Katrina probably helped fueld the tail end of the housing bubble by running up building material costs due to demand to rebuild, there is a side benefit to every disaster.

Overall, great list.  I am trying to rap my head around this one though.  Do you advocate destroying things to stimulate spending? 

 

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#15) On June 17, 2010 at 7:49 AM, cthomas1017 (98.45) wrote:

+10 Recs.  I've been bearish since July '09 and remain so.  Excellent points made that cause me to pause and go "hmmmmmmm..."  Look forward to the slides, but absent those, your summary was excellent.  Perhaps Dr. Mayland needs an assistant? :)

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#16) On June 17, 2010 at 12:22 PM, FreeMarkets (95.75) wrote:

This is the same Dr. Ken Mayland who said:

A few feel the economy will weaken but not fall into recession. "A recession, by definition, is a broad-based decline in GDP that lasts more than a few months," says Ken Mayland of ClearView Economics. Even if there were a decline in the first quarter, it's not certain there will be a decline in the second, Mayland says.
April 29, 2008
USA Today

His own podcast
"There are a few analysts out there, openly saying, these problems [housing market] will bring the economy to its knees, i.e. bring on a recession. I remain hopeful that this will not be the case.  I think the rebound still could, and probably will occur.  It remains my best guess scenario."
December 11, 2007
From Episode 13

I could go on and on, but this guy not only COMPLETELY missed the boat on the magnitude of the recession, but that any recession would occur at all.  

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#17) On June 17, 2010 at 12:28 PM, dragonLZ (99.35) wrote:

what kind of forecasts Dr. Ken Mayland had for 2008 and 2009?

minduza, I really don't know. probably nothing to brag about as I couldn't find anything on his website. I'll see what I can find through google search.

cthomas1017, thank you very much. I really appreciate it.

Perhaps Dr. Mayland needs an assistant? :)

I already checked on that, but here is what is says on his website:

I am often asked if I can take on student interns--paid or unpaid--for a period of time.  While I have done this very successfully in the past, my time and my office space are not currently configured to do this.  Sorry!

 :)

 

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#18) On June 17, 2010 at 12:30 PM, dragonLZ (99.35) wrote:

I now see FreeMarkets already did the search (he posted it while I was writing my comment above).

Thank you, FreeMarkets.

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#19) On June 17, 2010 at 12:50 PM, portefeuille (99.66) wrote:

#16 Not sure whether saying that there might not come a recession a few months before the recession starts or saying the recession is still "ongoing" about a year after it ended is worse, hehe ...

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#20) On June 21, 2010 at 12:42 AM, MoneyWorksforMe (< 20) wrote:

"There are a few analysts out there, openly saying, these problems [housing market] will bring the economy to its knees, i.e. bring on a recession. I remain hopeful that this will not be the case.  I think the rebound still could, and probably will occur.  It remains my best guess scenario."

December 11, 2007 

LOL! Thanks FreeMarkets.

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#21) On June 21, 2010 at 11:43 AM, Griffin416 (99.98) wrote:

Dragon,

Thanks for the shout out, I am a little late here though. There is another cycle which people need reminding of. The presidential cycle. http://www.decisionpoint.com/TAC/ORD.html 2nd and 3rd quarter of the 1st term are historically terrible for the market.

From Checklist34 #6 post, the panic memory from 2008 seems to be driving this market quite a bit. I even got bearish for 1.5 weeks, 2 weeks ago (for technical reasons mostly). Secondly, thanks for those 5 bearish reasons things are not so rosy...it tells me we are not at the top yet.

By the way, my real estate management biz shows the economy is still down around 15% from the high, which IMHO still means the stock market has a ways to go up. The people who print news about the real estate market are friggin crazy. my company is trying to sell a horrible high rise in CT. The 3 principals and myself all valued it at around $6 million, we have received multiple offers above $10 million. WTF?

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#22) On November 23, 2010 at 2:06 PM, Ernest41 (< 20) wrote:

December 20, 2007. "Most of the decline is behind us," says Ken Mayland at ClearView Economics in Pepper Pike, Ohio. http://www.businessweek.com/magazine/content/07_53/b4065048242547_page_2.htm

March 21, 2008. Ken Mayland: "Well, I think I'm going to blame this on the media. Bad news seems to sell easier than good news." And, ever the optimist, Mayland remains hopeful the country will see better economic times later this year.
http://marketplace.publicradio.org/display/web/2008/03/21/sunny_side/

Sept 2008. In spite of foreclosures continuing to rise in California, Florida, Nevada and Michigan, Mayland said most of the home-building decline is behind us.
http://findarticles.com/p/articles/mi_qa5315/is_200809/ai_n29492652/

October 30, 2009. Pepper Pike economist Ken Mayland forecasts economic growth. The nation's economy is recovering and could be positioned for a "vigorous snapback," Ken Mayland said today.
http://www.cleveland.com/business/index.ssf/2009/10/pepper_pike_economist_ken_mayl.html

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