The Quest for Clarity

We must embark on a quest for clarity.



By Dr. Jeff Miller

Once again, no one cares about the economic calendar. There have been big changes with more to come. While many claim to know what those changes will be, I see only speculation.

We must embark on a quest for clarity.

This implies the willingness to seek new information and go where it leads us.

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Last Week Recap

In my last installment of WTWA, I predicted an explosion of pundit predictions. In a world without meaningful data, all opinions are equal. This was an accurate guess. I will not spend much time on the noise. Suffice to say that uncertainty reinforced fear. All stocks and sectors moved in a highly correlated fashion. The week began with a negative reaction to the second emergency Fed move, reducing rates to near-zero. Instead of calming markets, this created additional panic among those who thought the Fed knew something they did not and was now “out of bullets.” Ironically, these were many of the same folks who have been demanding lower rates and who believe the Fed knows nothing. Go figure.

It was another week where a look at the news would provide little information about stock prices. The COVID-19 spread continued as informed observers expected, but stocks treated the continuing story as fresh news each day.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. This week I am featuring Jill Mislinski’s version, an excellent combination of key variables.

The market lost 15.0% on the week. Once stocks had gapped lower Monday morning, the range for the rest of the week was 11.6%. Every day of the week included moves of 1000 points or more in the DJIA. You can monitor volatility, implied volatility, and historical comparisons in my weekly Indicator Snapshot in the Quant Corner below.

Here is the updated news on the total drawdown so far.

See the full post for even more great charts and analysis.

Personal Note

I was supposed to take a break from writing for a couple of weeks, but I applied for special dispensation from Mrs. OldProf to post a few thoughts.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

New Deal Democrat’s high frequency indicators are a valuable part of my economic review. His approach divides indicators into three time frames. Currently, the long leading indicators remain positive, but the short-term forecast and nowcast have turned decisively negative. The coronavirus recession is here. The long leading indicators “are telling us that once the crisis passes, whenever that may be, conditions are favorable for the underlying economy.

Whenever that may be” is the key question for everyone to consider.

Until economic data begins to cover the relevant time period, I am going to stop the weekly updates. The Fed surveys showed weakness. We should expect to see more of that in other survey data. Initial jobless claims jumped from 211K to 281K. The report covers the survey period for the next official employment situation report. Leaked reports from state offices suggest that Thursday’s numbers will be much worse. Estimates range from 500K to 750K.

Instead of an economic focus, I will use our traditional format to organize significant weekly developments.

The Good

  • Policy actions
    • The Fed aggressively employed the obvious measures. Here is a description of the actions, cooperation with other central banks, and a comparison with 2008.
    • Expanded Fed Moves to come.
      Asset purchases have been increased, emergency lending has been included, and other items from the 2008 toolkit have been dusted off. It is just the start. And big banks are all borrowing (despite no need for funds) to remove the stigma.
    • State restrictions on social distancing – essential to flatten the curve.
    • Increase in drive-through testing.
    • Presidential emergency powers – on funds and in helping states
    • Congressional action. It seems like an agreement on a stimulus bill is taking forever, but for Congress this really is “warp speed.”
  • Scientific news
  • Private action
  • Underlying economy. 2008 comparisons not warranted. Barron’s on banks.

The Bad

  • The U.S. remains far behind on testing. (Statista).

  • “Deluge” of cases begins hitting hospitals.
  • Cases and deaths rising rapidlyOnly China shows some flattening of the curve. It proves it can be done, but it is not seen elsewhere.
  • U.S. cases are still underestimatedOnly more testing can provide the true story.

The Ugly

Bringing out the worst in some. Selling false cures on televangelist shows? Insider selling by political leaders? Testing provided to elites rather than those most in need?


As usual, I’ll describe more of my own conclusions in today’s Final Thought.

Quant Corner and Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update, featuring the Indicator Snapshot.

Both long-term and short-term technical indicators continued at the lowest reading. The C-Score improved slightly, but it will now be used for a different purpose. It put us on recession warning last May, but the confirming coincident indicators never pushed us beyond the tossup level. Conditions are sufficiently clear that I expect an “official” recession call from the NBER that will set the starting date some time this year. It will not be March, since the March data do not really meet the dating criteria. It takes a large and prolonged decine across the economy. It is certainly going to be a large decline, but prolonged will be a matter of judgement. We also might escape the tradition two negative quarter, say some economists. One data-driven firm still does not expect a recession this year.

For our purposes, none of this really matters. We will reset our thinking and let the C-Score work at helping us forecast the next cycle bottom.

As I have warned the last two weeks, the St. Louis Financial Stress Index is published on Thursday, using data from the prior Friday. We got the big increase I expected. Will we see another? It depends a lot on whether the Fed actions have calmed interest rate markets.

I am treating forward earnings and the resulting measures as not meaningful until we get more clarity.

I contine my rating of “Neutral” in the overall outlook since I would be neither a buyer nor a seller at this point. More on this in today’s Final Thought.”

The Featured Sources:

Bob Dieli: Business cycle analysis via the “C Score”.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Doug Short and Jill Mislinski: Regular updating of an array of indicators.

Georg Vrba: Business cycle indicator and market timing tools. The most recent update of Georg’s business cycle index does not signal recession – at least under normal circumstances. He expects his unemployment recession indicator to signal recession with data from the next employment situation report.


Insight for Investors

Temporarily, I am suspending discussion of specific stocks and sectors in this section. More information and careful study are required.


The Great Rotation – Now the Great Reset

The current recession scare has halted (postponed?) the value portion of the Great Rotation. It has also affected small cap stocks which are generally perceived as more vulnerable financially. It is wise to change course when you get fresh data. My current best thought is to emphasize a Great Reset – with the best sectors and stocks for the post-pandemic era.


Final Thought

An important type of policy problem is what I have called the perception dichotomy. On one side of an issue the effects are specific, visible, dramatic, and provide an easy narrative. On the other side, the outcomes are no less real, but they lack the same tangibility. In the current pandemic, for example, hardly anyone understands the major benefit of a treatment that shortens a hospital stay from twenty days to fifteen days. It is massive. It is real. But you can only understand it through a model. Government assistance both to individuals is also hard to grasp. Many, including some noted economists, ask “where will people spend the money?” This despite the daily stories of people who are losing jobs and have inadequate benefits. Which way is it? Once again, the impact is nearly impossible to gauge accurately. It requires a model, conclusions about concepts like “the marginal propensity to consume,” and the willingness to compare the result to the counterfactual of doing nothing. Try to make that into a narrative!

My approach to this problem involves actual, hands-on research.

  1. Close monitoring of the crisis and signs of curve-flattening.
  2. Tracking scientific progress any many fronts, even if the news seems modest.
  3. Careful examination of every public action which could
    1. Mitigate the spread of the virus;
    2. Aid those affected the most; or
    3. Provide important economic stimulus.
  4. There is a crucial opportunity before us, but not a need for haste.


There will be a great opportunity for anyone who is willing to study the new realities with an open mind.


[Readers interested in what I am doing to generate dependable income in a declining market should request our Enhanced Yield information. I also welcome readers wanting to join our Great Rotation email list – now the Great Reset list. You can opt-in to an email list which describes our progress with the design of the program, provides detail on the themes, and analyzes a specific stock we have already purchased. There is no charge and no obligation for participants, and we will not use your email for any other purpose. You can opt-out whenever you wish, but I hope you don’t! Comments and reactions are an important part of my investment process. I welcome your participation. Just write to “info at inclineia dot com”. There has been a lot of interest. If we have missed you, please try again].