Hussman: Show Me The Money

Fund manager John Hussman remains skeptical about the imminent v-shaped recovery that is now the market consensus. He's not betting against it (smart). He just doesn't think the fundamentals support it.

If the market is right, Hussman says, "green shoots" should become full-blown growth by the end of the year.

John Hussman: The markets have built a full head of steam around a consensus that the U.S. economy has bottomed and will begin to recover during the second half of this year. My own reservations about this conclusion should be clear from previous weekly comments – the greatest of these reservations is the large extent to which prior economic recoveries have relied on the expansion of debt-financed economic activity such as housing starts, capital spending, and other forms of gross domestic investment, as well as sustained automotive demand (beyond a brief Cash for Clunkers jolt).

Debt-financed economic activity typically leads broader economic activity by nearly a year. It strikes me as hopeful to expect this at present, in the face of continued deleveraging pressures, fresh highs in mortgage delinquencies and foreclosures, and a huge second-wave of adjustable rate mortgage resets on Alt-A and Option-ARM mortgages that were initiated at the peak of the housing bubble (which will become pressing beginning in November and December, and will continue through 2010 and 2011)...

In my view, the next 12-16 weeks will be extremely important in shedding light on any incipient economic recovery. Investors have become so used to the idea that stocks often foreshadow economic strength that actual, convincing evidence has been dispensable – beyond the excitement over “less bad” economic news. The next 12-16 weeks will change that.

As it happens, aside from the unemployment rate (which is a lagging indicator), past economic recoveries have been very forceful in generating clear evidence of real economic improvement in the months immediately following the economic low. Not every indicator moves at once, or in every cycle, but the composite movement of economic indicators of production, new orders, temporary workers, and housing starts has been clearly and almost immediately positive as soon as a recovery begins. Notably, except for a few months in the aftermath of 9/11, even net job growth (not just temporaries) has turned positive within three months of a recession low. (For a look at how temporary employment leads overall payroll figures, see Bill Hester's new article Is The Job Market Ready for a Recovery?).

Essentially, we have now entered the window in which growth – not simply slowing of deterioration – is required to support the idea of an economic recovery. The next 12-16 weeks will be the first hurdle on that front. I don't rule that possibility out (hence our index call position), but I do remain skeptical.

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