Sunday, 30 March 2008

The False Claims and Exaggerations of Permabulls.

There has been a gradual progression in the premabulls line of argument over the last 6 months. Firstly any suggestion that the stockmarket may tank and the economy slide into recession was simply laughed at. Then when negative economic data started coming in the permabulls would counter by pointing at the positive data. Now that there is no positive data they have started to make things up.

Take Don Luskin of Trend Macro and frequent Kudlow & Company contributor. This guy is not stupid, in fact he is articulate and quite often witty. He usually conducts himself in a calm controlled manner, however on occassion he loses it. You can tell when he's on the verge of losing it because he becomes almost hysterical, making wild gesticulations and speaking in a condescending, sarcastic tone.

A great example of that was on Friday 28th March on Kudlow & Company. Luskin, obviously battered from the reality of an ailing economy and stockmarket launched into a tirade about why he is bullish. This is what he managed to spew forth;

"Here's something for your ahhh Kudlow 101 recession watch that I think really tells the story. If we're in recession it probably started in December, if." "We're running you know what, the last payroll jobs report we lost 40 thousand jobs that month and jobless claims are running about 350, 360 thousand." "Normally when you're 3 months into a recession jobless claims are 550 thousand, normally payroll job losses are 250 thousand."

If the above were true I would agree that he has a fair argument in favour of a 'no recession' call. However not only is it not true, it's not even close. Let's take a look at the claim that normally 3 months into a recession intial jobless claims are 550,000 and job losses are -250k.

Luskin's argument rests on the assumption that a recession started in Dec-07 which is not at all clear but let's go along with that assumption for the sake of argument. Below is a table of the last 6 US recessions. Unfortunately I don't have the data on Jobless claims prior to 1980.

The jobless claims number is the 4 week moving average. So for example, the 395,000 number related to the March 2001 recession refers to the 4 week MA of inital jobless claims in June 2001. As you can see the only time it came close to Luskin's claims was in the shallow recession that started in July 1981 with the jobless claims 4 week MA reaching almost 530k 3 months later. The deep recession that started in July 1982 fell just short of the 500k mark whilst the last two recessions in 1991 and 2001 came nowhere near the 550k level Luskin suggests.

Currently the 4 week MA of jobless claims is around 360k so Luskin could have pointed out that jobless claims are running lower than where they normally are at this point in a recession (if it did in fact start in December) but instead he resorted to gross exaggeration.

How about the -250k job loss claim? As you can see from the table above that is not just an exaggeration, it is an outright lie. I've included both the change in non-farm payrolls and the 3 month MA change as the month on month change can be very volatile.

As you can see, in 2 out of 6 recessions shown, payrolls were actually showing gains while in 3 out of 6 the 3 month MA was positive. Payroll losses have never been -200k let alone -250k 3 months into any of the last 6 recessions. Currently payrolls are already in negative territory (Jan -22 Feb -63) and whilst we don't yet have the March non-farm payroll number, the 3 month MA is already negative at -15k.

So whilst jobless claims do look on the low side, changes in non-farm payrolls are bang in the middle of the range of the last 6 recessions. Either Luskin doesn't know the data very well or he is telling outright lies. I suspect it is the latter. He actually remains relatively restrained up to that point but then he really let's go with a very Luskinesque performance. I think I captured it well in the image below.

Funnily enough, after making blatantly false claims, later in the program Luskin accuses John Brown of "throwing numbers around like crazy," more particularly with respect to potential real estate losses. Brown then puts him in his place by pointing out that he got his numbers from the foremost expert on housing, Robert Shiller.

It really is a desperate, sad performance from Luskin. But don't take my word for it. Click on the image below for the entire segment.