The Economic Cycle Research Institute - referred to as the "ECRI" by anyone in the know on Wall Street - has correctly called every U.S. recession during the last 45 years.
To work its magic, the ECRI charts the weekly changes in an index of Leading Economic Indicators (WLI). Market professionals like myself very quietly use the same group of indicators to call market tops and bottoms. The indicators are so accurate in terms of what they have to say about the future that I refer to ECRI and the WLI as "The Prophet."
Given the Prophet's 100% hit rate over the last half century, investors should definitely take heed of the warning signals that this economic seer of seers is making right now.
Insight on ECRI
It's pretty likely that most retail-level investors have either never heard of the ECRI, or are aware of the organization but just don't really know what it does. And that's understandable: Up to now there's probably no real reason for ECRI to have been on your radar screen.
But it's time for that to change.
The ECRI was founded bythe late Prof.Geoffrey H. Moore, who in 1950 developed a list of leading indicators for recessions and recoveries. He followed that up with a composite index in 1958 and what we now call the LEI (Leading Economic Indicators) in 1967.
The ECRI is an independent institution dedicated to forecasting the turning points in an economy. It maintains about 100 proprietary economic indices. One of them - the WLI - is extremely good at calling tops and bottoms in the economy. The ECRI has a 100% hit rate and is right now warning anyone who will listen that another downdraft is in store for the U.S. economy.
In short, it's telling us that it's time to start worrying about a "double-dip" recession.
The WLI updates include a rate of change, which is what I want you to focus on going forward. When the real economy is growing, this indicator has a "positive" reading - meaning it provides a reading greater that "0."
When an economy is starting to slow down internally - and starting its slide toward recession - ECRI's WLI index will show a year-over-year negative change in the readings. This rate of change will go "negative" suggesting a slowdown in the economy. When the rate of change reaches a negative 10%, historically, a recession has broken out.
Let's take a closer look.
As we noted, a negative reading in the ECRI is telling. But going all the way back to 1965, every time ECRI reported a rate of change of "negative 10" or more, a recession has started within a couple of months. Each time, without fail, ECRI has been able to warn the investors who were listening that the economy was slowing down - and that a recession was in the offing.
What's 'The Prophet' Saying Now?
ECRI has yet to declare a double-dip recession. However, ECRI's WLI index - which has a 100% record of calling a recession when it hits negative 10% - is currently sitting at negative 10.7%. And the index has been sitting in this traditional, recessionary territory for two weeks.
Believe me when I say this: The institutional players are paying attention. Even if the ECRI has not said it yet.
"I have to pay attention to those people and indicators that have pointed in the right direction - whenthey've gone against the crowd (and my opinion at the time)," said Barron's columnistRandall W. Forsyth. "One such outfit is the Economic Cycle Research Institute, whose various leading indicators actually have done just that - lead where things were headed."
Just below is a chart that compares the weekly closing price of the Standard & Poor's SPDR S&P 500 exchange traded fund (NYSE:SPY) with ECRI's Weekly Leading Indicator (WLI) Index. In red, just below that, is the year-over-year rate of change in the WLI weekly reading.
This rate-of-change statistic is closely followed by Wall Street, since it gives investors the best feel for how the economic outlook has changed over a period of time. Right now, it seems to be telling investors that the economy continues to have internal weakness - enough, in fact, for the statistic to have reached what historically has been recessionary territory.
We intentionally decided to look at the period since July 2006 so investors could get a feel for how these indices related to each other - both before and after financial-crisis-related events of 2008.
For instance, it's especially worth noting that the ECRI index bottomed in December of 2008 - a full three months before the stock markets both here and abroad hit the bottom. Much like the Baltic Dry Index (BDI) thatwe explored in a popular Money Morning essay several weeks ago, the WLI also "called" the economic bottom during the 2008 meltdown.
Even more interesting: The WLI bottomed just as the BDI index also bottomed in December 2008. Combined, they provide investors with a "real" insight into what's happening in the markets.
This time around, the ECRI WLI update has dropped every week since April 30. The index peaked at a positive "24" back in September 2009, in part reflecting the historic rebound that U.S. stocks had posted in their run-up from the March 2009 market lows.
ECRI's strategy - in which its analysts document the regular up-and-down cycles of an economy, while also tracking the forward-looking indicators - has given this organization an unparalleled edge over its potential peers.
The "tops" and "bottoms" of aneconomic cycle are reached time and again, typically in the same manner. While the players change - as one presidential administration leads to another, and the leading investment bank of one era is subsumed by the leader to come - the signs of an economic slowdown really don't shift from one period to the next.
This is why I want you to follow those "signs" - which include ECRI's WLI, and the BDI. These are some of the tools that professional investors - like myself - employ as part of their never-ending quest to remain ahead of the market, and "the crowd."
You can put "The Prophet's" work to good use. And you don't even have to pay for the "service" that institutional players sign up and shell out for. That's because ECRI makes all its information available on site. You can download it for free each Friday: Just savethis link and click on it each Friday at around 11 a.m.
Action to Take: Review your domestic equity positions with an eye toward booking any long-term capital gains "profits" you have. You will want to have cash available to fund your return to market, once the BDI & LEI (WLI) say it's safe to be "long" in the U.S. stock market again. The old market adage that "you never go broke taking profits that already exist" may be truer today than at any time over the last 100 years.
Additionally, I would suggest that you might wish to set up for an account at Google.com (Nasdaq: GOOG), and sign up for free Google news alerts. Plug in "ECRI" as the topic and pick the once-a-day update option. This will get you a daily e-mail containing links to any articles quoting the ECRI or the different index information that this organization provides to professional investors. It is a great way to follow "The Prophet" in real time - and for free. How many other things can you make that kind of claim about these days?
[Editor's Note: Jack Barnes started his career at Franklin Templeton in 1997, working in its fund-information department - just as the Asian contagion infected the Asian tiger countries. He launched his own RIA shop in 2003 just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008. Last summer, Barnes retired to the beach - which is where he writes from now.]
News and Related Story Links:
- ECRI:
Official Website. - Wikipedia:
Leading Economic Indicators. - ECRI LEI data updated weekly:
http://www.businesscycle.com/files/ecri_data/uswliw.xls. - The New York Times:
Obituary of Geoffrey H. Moore. - Money Morning:
The Baltic Dry Index is Shouting "Danger, Will Robinson!" But Are Investors Listening? - Library of Economics and Liberty:
Recession. - Barron's Randall W. Forsyth:
Compendium of Columns. - InvestorWords:
Economic Cycle.
As per reuters, (USECRW=ECI), the ECRI weekly leading index level shows a value 121.1 for 7/31/2010. One year prior, i.e. 7/24/2009, it shows a value of 120.3. Hence its actually showing a +ve 0.67% return.
Please tell if i am seeing a wrong indicator value? If yes, then what should I look out for?
the indicator is RATE OF CHANGE… not the number, but the rate of change of the number
You need to spend more time on how ECRI's indicator worked prior to 1967. It gave at least a couple of false positives in the 1950s and 1960s when the indicator hit -10.
Double dipping is not allowed so this report is bogus! Seriously, if we are headed
that way I need to know which stocks to short and by put options on also which
ETF's to use!
My works superannuation, over which I had no control, lost many tens of thousands of dollars in 2008.
In an effort to protect my 30+ years of savings, I then bailed into the cash portfolio and in doing so cemented in my losses as we are only able to change annually.
I have since discovered Money morning and the Money Map Report and with the insight gained plus the information given I am hoping to do it right this time with my own shares portfolio.
It's looking good so far.
Thank you.
I think if your strategy is correct as it seems to be –we are going towards recesion ? Please explain-clarify–so when and till how long.
Also please let me know situation in Indian-stock market.
Thanks
Nimesh Modi
Hey my opinion is not professional but I am trying to stay on top of things. Here is my opinion.
The decline has already started in the market. The high from a couple of days ago is the end of this rally; expect a widespread sell-off ASAP intermediate target 875'ish on SPY within weeks or within two months.
Remember DYODD. Opinions are cheap because they are often worthless.
I am in agreement with you we are going into a double dip recession (we can call it that). No jobs, no spending, no credit will certainly peel back earnings and that will lead to recession.
Thanks as always for sharing. Lot's of BS cheerleading as always with the talking heads. Talk is cheap but numbers don't usually come as cheap.
[…] And don't forget the two often-overlooked-but-telling economic sources that are pointing south: the Economic Cycle Research Institute (ECRI) and the Baltic Dry Index (BDI). The ECRI charts weekly changes in leading economic indicators, and […]
you can talk all you want about the (BDI), the stimulus, corporate earnings, etc etc. But as long as there is questionable tax hikes on the way, incredible national debt, no incentive for small to large businesses to hire, how is it going to cure the most important stat of all….unemployment?? if unemployed homeowners can't pay their mortgages after running out of their savings how are we to avoid a double dip? How are the 37% of American workers many of which are loosing their jobs to undocumented workers who send their money back to their home country, not benefiting us….I will clean toilets at $12 an hour with their pensions etc…and I will pay my taxes! We are headed for a society with two classes…I'm not sure if this is by design or greed or stupidity, but the American voters better wake up.
It leaves our middle class self employed out of luck…and all those employees down the line too. Ron Paul looks less like a loony and more like a genius everyday.
I am one of the lucky ones, since my father worked to the bone until he was 88 years old to leave some nest eggs for his family …without that ….I would hate to think.
I don't see how we'll avoid returning to negative growth.
Tally up the components of growth. Consumer spending is being reduced by stagnant income levels, underemployment and high amounts of personal debt. Exports are under threat by the stronger dollar and the slowdown in China. Government spending is being reduced by smaller tax revenues. That leaves capital investment by corporations. Why would they corporations money to increase capacity when so much of current capacity is unused? It's better to buy back their own stock – which is one reason the stock market is up for the year.
There won't be any double dip. The rally will continue into November. Housing prices stabilizing will save the day. SPY will be in high 130's by 2011.
But why would corporations be buying back their stock at the higher prices?
So many differing opinions here- do you ever get info overload, and then stuck at a stand-still?
I'm ready to trade, but it's so hard to decide which way to go- the hedge- gold/silver, or the commodoties that might bite the dust if this thing is for real! this rookie needs heeelp!!
Escape the economic uncertainty….buy a share in a land-sharing community out in the countryside. Build your own dwelling, put in your own garden, get a bicycle, join together with other similar-minded folk. If the USA/world economy goes down the drain you'll be sitting in about the safest place to be……..you don't want to be caught in the big city when the sh** hits the fan!!!!!
Also, a note to the editor, i tried to set up my google account to get news from ECRI, and was not able to. You have to search for a 'gadget' in the news section, and i searched for ecri within 'news' and brought up no results.
i give up. i'll stay tuned for when you guys make the call with going long again! i'm now a subscriber (paying), so maybe you should consider including this on your own webpage, which i would look at more often than igoogle, anyway.
One point, one question & one request:
1. The article is supper, clear and logic! My independent research got the same conclusion, we are going to "double-dip" recession – and my analysis suggest that sometimes in March-April 2011 all will be (very) deep down!
2. A question to the editor/J. BARNES: do you think that switching to gold could help?! To my opinion NOT, since my analysis suggest that after a minimal gain of Gold in the 4thQ, it will drop massively down, and will not reach the USD 1,500 per ounce in 2011 (as recently predicted by some…). So I wonder what is your outlook toward end of 2010 and during 2011 for Gold and its rule in the next "double-dip" recession?
3. I will appreciate if you can kindly link me to WLI/ECRI's forecast pages, so that I can compare theirs outlook charts with my own analysis and charts. Thanks in advance.
Thanks to Money Morning to bring such issues and brilliant authors like JACK BARNES!
Independent analyser,
H. Y. S.
Hello,
Looking for clarification and illumination.
Perhaps I'm missing something, i'm using the chart above so approximate figures. Following the logic of the WLI predicting the market bottom 3 months ahead in 2008, the WLI hit a similar low in early 2009, but the market went up from there. So what else, besides hindsight tells us that when the WLI is going down, that the market will go down as well and not up, as it did in the first half of 2009?
Susan