Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

The Economy's Much-Needed Macro Look


The facts about our future.

Editor's Note: This article was written by Karl Denninger of The Market Ticker.

I'm going to present for you my "deconstruction" of the current economic view -- based on facts, not hype or "hope and dreams".

We'll begin with a couple of charts that should dispel one of the more common myths that the goggle-eyed pundits like to express: The stock market is an accurate leading indicator of economic conditions.

First, mid-2006 into the first part of 2007, when the housing market had already peaked and the die had been cast for the housing and economic crash:

Next, the market from 1995 to the middle of 2000, when we had blown a tremendous bubble -- and in point of fact, the NASDAQ had already collapsed at the right side this chart.

Or, if you prefer, this chart, showing that the economy was literally going to be in the toilet six months to a year later:

The point?

Those who claim that the stock market predicts the economy on a forward basis are cherry picking their claims, using only those times when the market was in front of the economy and ignoring those times when the market was dead wrong about forward economic prospects.

In fact, by the start of 2007 it was clear that we were headed for the economic cliff, yet the market kept rising for months and ultimately peaked in October. In August of 2000 it wasn't only clear that the tech sector was going to fall apart, it already had, with the NASDAQ 100 down roughly 30% while the broader market continued to rise, signaling that this was "just a blip."

And in 2002, while the recession had already ended (according to the NBER it ended in November of 2001), the market was prognosticating a continuing economic collapse and had been for more than half a year after the recession was over. The prediction was wrong.

If you take a dispassionate view of the equity markets as "leading economic indicators" you're forced to conclude that they are, in fact, no better at forecasting than a coin toss. That's because the stock market isn't a "profit forecaster" or a "prosperity forecaster" – it's the expression of opinion based not on current return but rather on the speculative belief that someone will (or won't) pay more for a given security tomorrow than today.

So what can you look for in terms of forward economic expectations?

I have and continue to argue that there are three items that give us a short-to-intermediate view of the economic outlook. They are:

1. Sales tax receipts. This is virtually the only economic "count" that isn't subject to being gamed when it comes to the current picture for consumer spending. Since personal consumption accounts for 70% of the US economy, this is the most accurate indicator we have. It's both timely reported (monthly) and reliable, as no business will report and remit taxes that weren't collected on actual sales.

At the same time, underreporting (that is, refusing to pay taxes that are actually due) is punitive enough and caught quickly enough that most businesses won't attempt to cheat. Non-discretionary items (food and medicine) in most jurisdictions aren't taxed, so this indicator has reasonable accuracy when it comes to what matters in the economy -- discretionary spending.

Finally, the tax is proportional, not regressive or progressive, so changes are proportional to actual discretionary spending.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos