Nasdaq: Is The Economy Heading Into A Recession?

December 06, 2018

Article by Avi Gilburt on Nasdaq

Recently, one of my members of Elliott wave trader was in attendance at the 32nd Economic Outlook Symposium hosted by the Federal Reserve Bank of Chicago. On the first day, he sat in a room with 150 economists. When asked how many see a recession in 2019, all of two hands went up.

So, let me ask you a question: When was the last time the majority of economists correctly called for a recession? (I think we all know the answer to this one).

In fact, economists are the last people to see recessions coming. And by the time they identify that we are in recession, especially mild ones, they are often just about over by the time they recognize it.

I have often quoted Professor Douglas (a former Luksic Scholar at Harvard University, former Deputy Research Administrator at the World Bank, and former Senior Economist at the IMF) many times in the past, but it certainly is worth the repetition:

“Financial markets never collapse when things look bad. In fact, quite the contrary is true. Before contractions begin, macroeconomic flows always look fine. That is why the vast majority of economists always proclaim the economy to be in excellent health just before it swoons.”

Why does this happen?

Markets are driven by mass sentiment. When mass sentiment changes direction, the most immediate effect is investor buying and selling of stocks.

However, the fundamentals will significantly lag this effect. You see, it takes a lot of time between a changing sentiment and the point at which the delayed data begins to filter into the economist’s reports. In fact, it can be so delayed that by the time they have recognized that we are in a recession, we may be near its completion.

This explains why economists are often the last to be able to prognosticate a turn down in the economy well before it happens. This is even more true for their ability to predict a turn down in the stock market.

So, when one of my members reports that 2 out of 150 leading economists see any potential for a recession, that is something of which you should take note.

Allow me to give you a few more examples of economists who are/were quite certain of their economic perspectives.

Recently, Larry Kudlow, the Director of the National Economic Council, boldly exclaimed on television that "recession is so far in the distance, I can't see it.” Mind you, Mr. Kudlow made this statement just as the stock market began turning down.

Before Janet Yellen stepped down as the Chairman of the Federal Reserve, she said that the banking system is "very much stronger" due to Fed supervision and higher capital levels. She then predicted that because of the measures the Fed has taken, another financial crisis is unlikely "in our lifetime."

I see these economist’s perspective as being akin to the following:

"We will not have any more crashes in our time."

This was said John Maynard Keynes in 1927, two years before the stock market crash which lead to the Great Depression.

"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as they have predicted. I expect to see the stock market a good deal higher within a few months."

This was said on October 17, 1929, a few weeks before the Great Crash, by Dr. Irving Fisher, Professor of Economics at Yale University. Dr. Fisher was one of the leading US economists of his time.

"There will be no interruption of our permanent prosperity."

- Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

And, these are just a few of the popular quotes of their day. As George Santayana wisely said, “those who do not remember the past are condemned to repeat it.” And, as Professor Douglas highlighted, economists have never learned from history.

So, at the end of the day, if you are using economic indicators to determine your allocation to the stock market, you will most certainly be well behind the curve, and significantly under-performing the stock market based upon history. Will you learn from history, or will you be condemned to repeat it?

To read this article on Nasdaq in its entirety, click here.

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