Lagging Indicators...
November 26, 2007
– Comments (7)
I am reading a piece by John Hussman, Financial Markets Anticipate Recessions Before They are Obvious. It is worth reading.
I have quoted the introduction,
“'This month, market action produced a recession warning. Our investment position does not rely on a recession, so we hope that this signal is incorrect. It is quite true that consensus economic forecasts remain relatively upbeat here. Unfortunately, most economists have never fully internalized the “rational expectations” view that market prices convey information. Of course, accepting this view does not require one to believe that prices convey information perfectly (which is what the “efficient markets hypothesis assumes). But where finance economists take this information concept too far, economic forecasters don't take it far enough. As a result, economic forecasts are generally based on coincident indicators such as GDP growth and industrial production, or pathetically lagging indicators. This tendency to gauge economic prospects by looking backward is why economists failed to foresee the Great Depression and every recession since.
- Hussman Investment Research & Insight, October 3, 2000.
A year later, the NBER business cycle dating committee (the body that officially dates – not forecasts – recessions) confirmed that the U.S. was in recession. By then, the S&P 500 had already lost over 35% of its value. Indeed, by March 2001, which the NBER identified as the official recession start-date, the S&P 500 was already down more than 25% from the high it had set just a few months earlier. A large portion of bear market losses occur while investors are still denying the probability of a recession. By the time that a recession is well-recognized, significant damage has already been inflicted."
Some where in this piece he talks about how prepared the average investor is to absorb 20-30% losses and chasing a rally. More importantly, he questions why we invest in the first place, which of course is to make gains. Why take risks when there are strong indicators that the risks are serious?
Having been on the unprepared side of seeing 1/3rd of my capital wiped out in about 3 months after my first entry into the market I have no tolerance what-so-ever for screaming risk. I bought into the garbage that financial advisors know better and that they are competent. I admit I blindly followed advise, but I did look after the fact and I question how they ever earned a high school diplomia let alone something that gives them creditials that suggest they are an "expert."
Historically the credit markets had a leverage on capital of 1 to 12.50. Today by selling the mortgage backed securities the leverage is 1 to 30, and the equity is falling. There is nothing in anyone's personal experience to assess this risk based on past experience.
Today will likely be a strong day on the market and I re-iterate my position that smart money is selling into strength.
