John Hussman — Recession Warning Composite flashing red

We use a variety of methods to gauge recession risk. The most straightforward is to form fairly low-order indicator sets like our Recession Warning Composite (see November 12, 2007, Expecting A Recession ), that have a long historical record of accurately distinguishing recessions. These indicator sets are comprised of what might be called "weak learners" - conditions that do not in themselves have infallible records of identifying recessions, but that provide very strong signals when observed in combination with other recession flags. They include fairly straightforward conditions such as whether or not the S&P 500 is below its level of 6 months earlier, whether credit spreads are wider than they were 6 months earlier, whether the Purchasing Manager's Index is in the low 50's or below, and so forth.

As of last week, a simple average of 20 of these binary recession indicators continued to show a preponderance of signals still in place - a condition that has never been observed except alongside a U.S. recession....

In short, recent U.S. economic reports have improved modestly from the clearly negative momentum that we saw in late-summer. Unfortunately, the underlying recessionary pressures we observe are largely unchanged. When we take the present set of economic evidence in its entirety, we see very little evidence of a meaningful reduction in recession risks. Indeed, the evidence from the rest of the world, both developed and developing, reinforces the expectation that the global economy is approaching a fresh contraction.

 Read the whole post at Hussman Funds Weekly Market Comment

Have We Avoided A Recession? 

by John P. Hussman, Ph.D.

Favorite quote from Hussman: "Frankly, I am concerned that Wall Street is becoming little more than a glorified crack house."

I also like this; it is something he has been reiterating and needs to be burned in, with a qualification:

What we have increasingly observed over the past decade is nothing but the gradual destruction of the ability of the financial markets to allocate capital for the benefit of future growth. By preventing the natural discipline of the markets to impose losses on poor stewards of capital, and to impose interest rates high enough to force debtors to allocate the capital usefully, the world's policy makers are increasingly wrecking the prospects for long-term economic growth. The world's standard of living (what we can consume for the work we do) is intimately tied to its productivity (what we can produce for the work we do). That productivity requires our scarce savings to be allocated to productive physical capital, and to productive human capital (primarily education). [emphasis added]

Here is the qualification. It is not the case that "productivity requires our scarce savings to be allocated to productive physical capital, and to productive human capital." According to Keynes, in a monetary economy investment results in savings rather than savings in investment. See Ann Pettifor, Saving not necessary prior to investment.

And investment is demand-driven. The underlying cause of slow recovery and the threat of renewed contraction is lagging demand.