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« Positioning for 2012: Don't forget about stocks | Main | Weighing the Week Ahead: The State of the Union, Bernanke, Earnings »

January 18, 2012


Eric Kennedy

Jeff, when I first saw ECRI's stuff posted by Anirvan Banerji on in 2000, the recession calls were based off a persistent decline in the US Long Leading Index (US LLI). The WLI is a shorter leading index (that's why it's not called the Weekly Long Leading Index). As you can infer from this article
the LLI is a monthly series, while the WLI is a noisy weekly series.

ECRI doesn't publish USLLI data publicly, which tells you that they value that more than WLI. However, sometimes it is distributed in chart form, like this:

ECRI didn't call a recession in 2010 even when WLI growth went negative because USLLI had not had a pronounced, pervasive and persistent decline until early 2011.

Given today's very light nominal GDP data and the recessions in Europe and slowdowns in Asia, it looks like ECRI will be right. In 1990 and 2000, they were 5-6 months ahead of a recession, while they were a bit late saying that policy actions could have helped in January 2008.


VK - -No, you are incorrect. Out of the group of fakers, I can spot them with high assurance. This is a long-time experiment, as the link showed. It is not a matter of opinion, but one of fact.

If you want to tell me the odds of a streak of 7 in a row, we can continue the discussion from there. Until and unless you know this, you are just doing a seat-of-the pants opinion on something that is a matter of statistics.

Meanwhile, I am amazed that anyone is questioning this point. It just goes to show why we can make so much money in the markets. People are willing to believe contrived data and unable to recognize those who really understand a specific problem.

Anyway, why don't you provide the x% of fakes in the sample, and then we can revisit my assertion, and that of the Professor I cited in the link ---


V K Chandy

I would hesitate to make the assertion, "...I can usually spot the faker...". Don't you think prof, that it would be more correct to say, "In a sample of 100 sets of 200-coin toss sequences, I can say with a great deal of confidence that x% of this 100-set sample have faked results, based on deviations from the norm. however, it is impossible to say who has faked the result and who has not." (As an aside, an expert who knows statistics can insert just the right number of 6 or 7 heads/tails in a row sequences...i.e. he is a faker, but a truly innocent participant who did not fake the result may in fact have ended up with only 4 or 5 H/T sequences purely randomly..i.e. she did not fake the result...)


HenryE -- You might also like the one where I reviewed The Big Short --

This is really crucial for drawing the right lesson from the crisis.

Concerning 2009 -- the forward P/E ratio is now lower than it was in May of 2009. I'll be taking up that theme in a couple of weeks:)

Thanks again for joining in.



Thank you for pointing me to that previous posting. I've actually been reading a lot of your previous writings in the archives. I wish I had read your articles regarding FAS 157 before March 2009.


HenryE -- This is a good question, and you are right about my general viewpoint. I have been thinking about doing something on the topic. Usually I download all of the new year's transcripts, making them easier to search and to analyze.

My basic viewpoint is summarized in this piece about Bernanke.

Very good analysts -- hardly clueless -- looked at the subprime problem and calculated the total possible effect. This is why people thought they had a handle on the problem.

They did not know that the total amount of synthetic mortgage obligations was much larger than the actual market. There was no reporting or transparency. We could say that nearly everyone was clueless in the sense that there was no good contemporaneous information on the size of this derivative market.

Some of the banks knew or suspected, as did the heroes written up by Michael Lewis in The Big Short. No one believed them at the time.

The effect of this has wrecked the housing market in many areas where there was never a bubble to begin with.

Anyway, that is my brief and basic answer to your very good question. I know it requires more evidence and explanation, but you have a reasonable attitude toward the issue.



Dr. Miller,

I think you've done an excellent job highlighting the weak analyses of many economic/maket commentators. You also generally defend the competence and professionalism of members of the Fed and government officials.

A few days ago, I read extracts from transcripts of the Fed minutes from 2006 (since apparantly the Fed releases these with a 5 year lag). These showed a high degree of ignorence and complacency about the size of the bubble in the housing market, the lengths to which people were substituting debt for income, and the severe dislocations that would take place when that particular ponzi game stopped. Obviously the extracts were picked to show the Fed members in the worst light, but these were their words and they give a strong impression of not understanding that a massive proportions was about to go pop.

I'm sure you read the same transcripts. Would you not say that the Fed, despite all the brilliant and educated people at its disposal, was just as clueless in the mid-2000's as the people who have been calling for another crash ever since March 2009?


Bud -- I clearly did not state that the ECRI data is faked or a random series. If you follow the links to the research that I have described you will see what is known about their approach.

Let's try a different approach. Are you a football fan? Suppose someone came to you with a system that had correctly predicted every Super Bowl -- every one. He created the system last week. Meanwhile, you have a friend you have known for decades who called 70% of the games in real time. Which one would you expect to be right this year?

As to answers -- I have two or three more articles in this series. Maybe I'll get a little closer, but it is a topic where we'll never have all the answers. You should share my suspicion of anyone who thinks he does.



Seriously, if you can spot a fake in an heartbeat how come ECRI is still a mystery? When random data is reduced to a moving average isn't the randomness of the data altered? I don't see any conviction in your provides more questions then answers...???


There is this link which states:
The growth rate is based on a four-week moving average of the weekly leading index level, compared with the previous year’s moving average.

ECRI has explained how they annualize the numbers i.e. exponent of (52/26.5) for weekly series. I extrapolated this to the expression I gave which matches the growth index very well. In fact, I shared this with Doug Short who asked for my comments on this article:

which further illustrates how the exponent is calculated. I think he didn't buy my explanation because he has a simpler version on his ECRI posts.


WallStreet_Rant -- The statistical properties of such random distributions have been extensively studied and are well known.

What do you think the % chance is that a 200 flips will have no streak of 6? A streak of 7?

This is not a matter of opinion, but one of knowledge.



RB -- Thanks for sharing your analysis on this. Any links you could provide would be most welcome.



"Suppose you assign a group of students to flip a coin 200 times and write down the results. Some of them actually do it, while others fake it. I could spot the fakes in a heartbeat, and so could you with a little practice. Most people do not understand what random data looks like, so they do not know how to fake it. They do not understand that "streaks" happen."

But maybe you are too confident that you could spot the fakes based on what you "think" randomness really looks like. Seems you think a lack of streaks implies faking. But reality is, in true randomness there is no way to be certain you spotted a fake....


BTW, SMA4=most recent 4-week moving average
SMA52=previous 52-week moving average prior to most recent 4-weeks.
The accuracy is better than the article reports using a 37-week average and is in fact the method used by ECRI, for which I can find some supportive links, if I feel the motivation to.


Also, I calculated the ECRI growth index from the WLI as follows:
Growth index (ratio) = (SMA4/SMA52)^(52/28)

based on the moving averages, essentially annualizing the change based on its center 6.5months ago.

The growth index (%) is realized from above 100*(Growth_index_ratio -1).


The ECRI analysis is interesting - thanks for pointing it out. There might just be something useful there in combination with a simple 200 day moving average monthly prices based system such as Meb Faber's.


Err, what I meant to say was that many forecasters examine the current expansion with an older mental framework which worked well in understanding recent ones. To me, that isn't always justified. When they do so however, it seems that this can cause significant missteps when they make judgments. My mistake if there was any confusion.


"Here is the key concept: Most recession forecasters mistakenly look for weakness. That tells you that the current economy is performing below trend, but it is not a signal of a new recession."

I couldn't have put it better myself. On top of that, they also tend to elaborate upon new data in light of the previous expansion. I feel that to do so ignores the dynamic nature of the economy, markets, demographics, and culture.

Anyway, thank you for the post.


This article REALLY helps. I have learned a lot from these articles Professor!

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