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« Do Internet and Media Resources Help the Individual Investor? | Main | Election Effect on Stocks »

August 30, 2007



This is a very interesting post. Your thoughts make a whole set of sense. I don't see how some people expect Q3 and Q4 to go negative. If that happens I will be absoutely shocked, and if it does, it will have to be caused by some collapse of a scale that has not been seen in years.


Around March, ECRI came out with bullish notes on housing based on their housing price index and featured their construction sector index with their upturn on their webpage. This was right at the top of their own housing price index before it started a fresh downturn, as I recall. I believe that their index construction is still sound, but their interpretation of it may not necessarily portend a secular change.
Also, with regards to their business cycle calls, as their own founder Geoffrey Moore said -- if you can call a recession just as it's starting, you are doing pretty well. They do not call recessions unless the components of their index show pronounced, pervasive and persistent declines. So, a recession forecast is academic from an investment point of view, in my opinion. CXO has a study showing that stock market movements are coincident with the ECRI leading index.



Here's an article where they talk about it:

Josh Stern

I found the ECRI by going to their website, (and then fixing their slightly broken Bloomberg link).

The stuff in Bloomberg cache appears to be indexed by some sort of digital hash codes and doesn't show up in Google or Yahoo video search, so I can't help you with the Ritholtz request.

You can find Bloomberg video highlights from each day here:

Bloomberg t.v. runs continuously on the web - click the link from their homepage.

Bill aka NO DooDahs!

Josh, how did you find that on Bloomers' site?

and could you find the video to Barry Ritholtz's appearance on Bloomers on 8/16/2007? I'm curious to see what he was saying then ...

Josh Stern

Bill, I don't have an ECRI subscription, so I mainly follow them from blog items. Here is a video link with their forecast from the start of the year:

It's very true that international infrastructure construction (e.g. Fluor) has been booming this year, but that's a different issue altogether.

Bill aka NO DooDahs!

Interestingly, Charleston SC is not only one of many MSAs enjoying above-average property value growth, it is also one of the few places on the east coast of the U.S. subject to earthquake risk.

claus vistesen

There are some important lessons to be drawn from this post although the implicit point about how only non-economists tend to forecast a recession is not one of them :).

However, I do think you have struck a crucial note by pointing out that what investors, analysts, and essentially economists need today, in order to cope with the amount of information, is a way/method to sort out what is credible information and what is not.

Bill aka NO DooDahs!

DrToast, Josh,

Either of y'all have a link to the ECRI call at the beginning of the year? Was it specific to housing construction, or was it overall construction?

The reason I'm asking, there was a big boom in infrastructure construction this year, PKB up like 17% YTD.



I don't think anyone is saying ECRI is infallible. And they definitely did get their housing call wrong at the beginning of the year. Personally, I think maybe they were out of their element a bit there; however, their business cycle forecasting is still as good as it gets, IMO.

Josh Stern

A few different comments:

1) Agree that ECRI is the best forecaster out there, and agree that it's because they use a calibrated model looking at lots of data. But they are not infallible. Weren't they calling for a home construction turnaround last January? Or was that just any kind of construction?

2) "The recession question" itself is something of a media hype category. The difference between -0.5% GDP and 0.5% GDP shouldn't mean more to the profits of a random corporation than the difference between 1.5% and 0.5%. But predicting the actual measured GDP, which gets decided in retrospect, and the stock market's take on GDP, which is forward looking, are two very different things.

3) Every day the stock market goes up or down, the media tries to report why it happened, and a lot of the explanations are transparently silly. Recognizing that silliness is a lot easier than saying which top down information is soon to be, but is not yet, priced into the markets (which is what traders care about). Suppose I believe the ECRI is right that growth will slow going forward (they try to predict 9 months out if I remember correctly) but GDP will not go negative in that time window. How should a trader or investor use that idea? Sell far out of the money puts on the index? Be 50% in cash? Figuring that out is a lot harder than just predicting growth is going to slow (which is what one would take away if they were influenced by that CNBC interview your linked, as all three participants were saying that).

4) Marty Whitman has useful names for the contrast between "price conscious" and "outlook conscious" investors. Most of the money traded in the market on a daily basis is more outlook conscious (are things getter better or worse relative to expectations), so predicting that is more valuable. But it is harder to do, so investing primarily in a price conscious way with a nod to the outlook part one can informatively predict - which means modeling the difference between the best predicted outlook and what other market participants will soon think about the outlook - is a sensible strategy.

Lee Wilson

You make good points, especially in your conclusion. Learning to be a wise consumer, particularly in market trading, and knowing how to evaluate correctly are key to true "experts" and correct knowledge.

This knowing about everything and seeing what no one else sees is a 2 pronged warning. I agree, anyone claiming or alluding to knowing everything is just plain silly, a goal to aspire to but a red warning flag on self promotion. From experience and awareness, because the person is so specialized they can of course see what very few others see in the market they are trading and if their information isn't full of omitted information and other holes they are probably onto something you should listen to.

I like your posts and thought I'd add my 2cents.

If there is interest in really learning Futures Trading we have a seminar class coming up at the CBOE in October which anyone is welcome to check out. Also (smile) a warning this is not your typical futures trading class.

Here's our info page.


I forgot to add that a moving average crossover would have been just as effective as ECRI's September 2000 warning for something actionable. The decisive call though came in March 2001 which was too late.


Great post. Here's an article published prior to the previous recession at a time when the Fed was optimistic that it could stave off a recession

At the same time ECRI nailed it

John Forman

Kudos for pointing out the need to understand from where a so-called expert is coming. Everyone has things which tend to bias their views, oftentimes unconsciously. It's like the old saying about how to a hammer everything looks like a nail.


Hi Jeff, thanks for the links but more importantly, thanks for this absolutely fantastic article. It is essential reading for all investors and deserves to be read widely.

ps - I'm printing it off in case the internet ever breaks.


Very interesting ideas about finding the right experts--the proverbial needle in the haystack, especially on cable news. One question for those of us who are beginners at this stuff (or have been away for too long):

Mr. Achuthan cited the, "spread between AAA corporates and BAA corporates..." as one leading indicator for the economy. Can you (or anyone else) explain what exactly he is referencing here and why it is of particular significance?

Great blog, and I will surely be back.

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