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John Hussman Is Predicting a Double Dip Recession

John Hussman is officially warning about a double dip recession. Hussman issued a similar call in November of 2007:

Based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.

A few weeks ago, I noted that our recession warning composite was on the brink of a signal that has always and only occurred during or immediately prior to U.S. recessions, the last signal being the warning I reported in the November 12, 2007 weekly comment Expecting A Recession. While the set of criteria I noted then would still require a decline in the ISM Purchasing Managers Index to 54 or less to complete a recession warning, what prompts my immediate concern is that the growth rate of the ECRI Weekly [url=#]Leading Index[/url] has now declined to -6.9%. The WLI growth rate has historically demonstrated a strong correlation with the ISM Purchasing Managers Index, with the correlation being highest at a lead time of 13 weeks.



Taking the growth rate of the WLI as a single indicator, the only instance when a level of -6.9% was not associated with an actual recession was a single observation in 1988. But as I’ve long noted, recession evidence is best taken as a syndrome of multiple conditions, including the behavior of the yield curve, credit spreads, stock prices, and employment growth. Given that the WLI growth rate leads the PMI by about 13 weeks, I substituted the WLI growth rate for the PMI criterion in condition 4 of our recession warning composite. As you can see, the results are nearly identical, and not surprisingly, are slightly more timely than using the PMI. The blue line indicates recession warning signals from the composite of indicators, while the red blocks indicate official U.S. recessions as identified by the National Bureau of Economic Research.

Read the full article here.

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


Rating: 3.3/5 (25 votes)

Comments

yswolinsky
Yswolinsky - 3 years ago
I trust good investors more than economists when it comes to economic predictions (with the exception of Shiller). This news frightens me, does anyone have any insights or thoughts?

www.valuewalk.com
Cowboy77
Cowboy77 - 3 years ago
Great article and I concur with his sentiments. I believe that far too many people have a false sense of security about the economy. As John Hussman states, and Ray Dalio of Bridgewater Associates has also stated, just because it hasn't happened in your lifetime or even way before, that doesn't mean it can't happen. Dalio has also stated that you need a Depression model built. That doesn't mean it will happen but it certainly is a possibility that you need to be prepared for.

Didn't Seth Klarman also state that he only has 10% of the 28 billion that he's managing invested in stocks at this time?
Rommel Acosta
Rommel Acosta - 3 years ago
That's actually the scariest part, that Klarman is so light on equities at the moment. If I remember correctly, even someone like Berkowitz, who in public seems to be a bull, is about 30% cash. That sort of tells you something.
batalha
Batalha - 3 years ago
Klarman runs a family office and not a Hedge Fund, that means he is way more risky averse than others. Also, he has recently stated he prefers bond over equities as they are senior securities and have a catalyst built into them. Ideally, we should compare the current equity exposure relative to past years as an indication of his bearishness though I believe he is bearish at the moment.
Rommel Acosta
Rommel Acosta - 3 years ago
From recent pieces about him, Klarman is said to be managing ~28 billion. That's one heck of a family office.
batalha
Batalha - 3 years ago
Actually it is 21 billion according to the last piece at Alpha Return. Baupost started with 3 families and most of the AUMs were result of compounding of almost 30 years at an incredible rate of return. (as a simple speculative math, a 100 million 30 years back compounded at 20% is ~23 billion). He took in new capital in 08 due to new opportunites in the market according to the same piece.
batalha
Batalha - 3 years ago
Rommel, I re-read the article it started with 4 families and 27 million in AUMs.

Cheers
Cowboy77
Cowboy77 - 3 years ago
Any way you look at it, Klarman turned it into 21 or 28 billion. If he's light the market, then we should be too!
batalha
Batalha - 3 years ago
My point is ...for someone with 30% average cash during this 30 year period it is important to know his historical equity allocation to relatively compare with the current 10%. Having said that his latest comments were that his was bearish with equities overall.
Sivaram
Sivaram - 3 years ago
COWBOY77: "Any way you look at it, Klarman turned it into 21 or 28 billion. If he's light the market, then we should be too!"

Not necessarily.

First of all, it's possible that his portfolio is way too big and hence can't find enough opportunities of size. This may or may not mean others should share the same view.

Secondly, value investors generally aren't very good macro forecasters. A recent classic example is Warren Buffett, whom I consider the best investor of all time AFAIK, writing put options on major indexes very close to possible multi-decade peaks. I have been wrong on may issues and I'm no Klarman but, for whatever it's worth, I believe Klarman is going to be completely wrong with his bullishness on inflation.
DaveinHackensack
DaveinHackensack - 3 years ago
I trust good investors more than economists when it comes to economic predictions (with the exception of Shiller). This news frightens me, does anyone have any insights or thoughts?

Hussman is actually a former economist, in addition to being a money manager.

yswolinsky
Yswolinsky - 3 years ago
Former is a key word here. Besides its all in how they present themselves. The PIMCO crew are investors, but seem more like publicists and economists to me.
Rommel Acosta
Rommel Acosta - 3 years ago
First of all, it's possible that his portfolio is way too big and hence can't find enough opportunities of size. This may or may not mean others should share the same view.

I doubt that its just because he can't find good opportunities of size. Companies like JNJ, MSFT, and GS are trading at low multiples. No matter how big your portfolio you can get into these. To my mind, if he's so light the market, then it either means that: 1) he sees more opportunity in other investment assets, or 2) he really is bearish. But that's just my opinion.

Sivaram
Sivaram - 3 years ago
I doubt that its just because he can't find good opportunities of size. Companies like JNJ, MSFT, and GS are trading at low multiples. No matter how big your portfolio you can get into these.


It's debatable whether those companies are actually cheap.
Rommel Acosta
Rommel Acosta - 3 years ago
It's always debatable if anything is cheap. If we could all agree on which securities are undervalued and why they will remain undervalued, they would never become so in the first place.

But look JNJ up and tell me exactly why you think its not undervalued. Its currently yielding something like 3.7%. The 10yr treasury is yielding 2.98%. This is one of of the best businesses in the world. It can throw off ~13 billion of free cash per year. It's selling at 11x earnings. Ten years ago it was selling for somewhere around 25x earnings. It is being priced like a pure pharma play (which has issues with patent expiry), but it is now primarily a medical devices company. Further, it is the only pharma stock that Buffett has ever bought, and even Munger is on record for saying that they expect the stock to beat the S&P slightly over the long-term. Seeing as this is debatable to you, back it up with your own arguments please.

arodeen
Arodeen - 3 years ago
One comment I'd like to make is, there are more than one reason to hold cash. One you can call being bearish, but another is to ensure you have the means to capitalize on bargains when they arise - like Buffet retaining dividends from high multiple companies to re-invest elsewhere - "The Berky."

"Being bearish," implies what you think the market will do in the future. Ben Graham calls this speculating, and if memory serves, dedicates an entire chapter in The Intelligent Investor against speculative market timing. I am not "bearish," because I admit that I don't know which way the market will go. However, I have learned the hard way to utilize trailing stops wisely to help me adhere to Buffet's "Rule #1," which is "Don't lose money." That said, there are several companies much in the same realm as Rommel portrays JNJ to be. (As an aside, thanks for the tip - I'll add it to my research list.)

Not to be stingy, some companies I've recently researched that I think are great buys as-is, but are dropping like a rock include:

AAN (very predictable long and short term, legacy management with very high % ownership, no slowdown in earnings or growth, high margin of safety)

WMT (same as above, plus historical low P/B, P/S, and 52wk price low)

WAG, L3, APOL, ESI, BBY, GME, TSS, GD, NOV, and a few others that I'm still researching all show good, honest management, diligent forward planning, and good prices. Although I'm not bearish on these companies, I am checking every day on the MACD, Stochastics, and MA signals. You could say that is attempting to time the market, but I also agree with one thing Jim Cramer has said, "You have to decide whether you want to be right or to make money." I think I'm right, but I'm going to wait until the big guys stop hammering these stocks down; for now I'm

Rommel Acosta
Rommel Acosta - 3 years ago
Arodeen, thanks for these names. I certainly agree that there are plenty of companies that are selling at interesting prices, even if one doesn't like the general market.

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