Quote of the Day from a Favorite Banker

"There will be 3 Fed Heads speaking today... Fed Speak will be all over the place... Yesterday, we had Fed Head Lacker doing the Fed Speak...Lacker believes he sees a "risk of a mild recession." and that more rate cuts are possible, and may be necessary... I say HOGWASH! Quit giving in to the markets, and trying to save a couple of financial institutions that should be strung up and put on public display for their handling of the mortgage bubble...the Fed is out of control... They are laying the groundwork for the next bubble, and it's called inflation!" Chuck Butler, Everbank.com, The Daily Pfennig, Feb. 6, 2008

ISM Reports as Indicators of Recession

This chart shows the ISM Manufacturing and Non-manufacturing Diffusion Indices for Business activity from July 1997 to January 2008. A number below 50 indications contraction, and a number above 50 indicates expansion.

Also on this chart is a gray bar indicating official NBER recessions, and the annual rate of change in Real GDP compounded. Obviously a number below zero (0) is negative growth.

The conclusion is that a dip of both the Non-Mfg and Mfg numbers below 50 are very strong indications that the economy is in recession. In the current situation the Non-Mfg index is screaming recession as of the number given today, which is why the market sold off. However, the Manufacturing number is strangely resilient, especially considering the weak state of manufacturing in the US.

The future revisions of the Manufacturing Index will be watched closely, including any subsequent report such as the upcoming number in February. If the Manufacturing number swings back down below 50 look for most economists to start upping their calls that the economy is in recession.

We believe that we are in recession already with little doubt based on the Jobs and other indicators we have shown in earlier postings. NBER usually makes the official call by the time the recession is over. We think this one might last a little longer that the 2001 recession.

What Happened in the Last Recession and Bear Market?

Like most Americans here in the United States of Amnesia you may have already forgotten, but the last bear market and official recession we had was in the Y2K and stock bubble collapse of 2000-2003. Here is a chart showing a rough but fairly good comparison of the SP 500 action from the market tops, then and now. By popular request, we were asked to show the performance of gold and silver during the entire timeframe spanning the bear market and recession. We have mapped this out, on a percentage basis, in this second chart.
As you can see, gold was a stellar performer as the dollar was devalued to combat the downturn, even though we saw a brief whiff of deflation in M1 during this period, although most probably do not remember the big deflation scare. Silver did a 'sideways chop' throughout, reflecting its own market conditions and slack demand from industrial usages.

We have to note, and will put to you with emphasis, that just because this is how things happened the last time, that does not mean this is how they will happen this time around. Not at all. But its a very positive thing to bother to consider the data when people around you are spinning theories, and pointing to historic examples like Japan in the 1980's and 1990's, which we remember extremely well, being very preoccupied with in-country Japanese business ventures during the latter half of the Japan bust.

We have to admit we were extremely surprised by one thing. A good friend asked us to also take a look at the performance of the miners in this period as represented by the Gold Bugs Index (HUI). Our take on this was that the miners would have been clocked along with the SP500 during this period.

We stand corrected on that assumption, and remind ourselves again, to listen to what others may have to say, hear their arguments, but always, always look at the data.