Doug Short

The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) is at 133.2, up from the previous week's 132.0. The WLI annualized growth indicator (WLIg) is at -2.4, down from -2.9 the previous week. ECRI's latest public statements have focused on Japan. The website now features a November 17th response to the announcement of Japan's Fourth Recession Since 2008.

I had the pleasure of being interviewed by Gordon Long last week. Gordon is publisher and editor of Gordon T Long Macro Analytics. The topic was "Financial Repression". What is financial repression? I defined it as "a set of fiscal and monetary policies for the expressed benefit of the ruling class: politicians, banks, and the already wealthy, at the expense of everyone else." In the video, I give numerous examples of repression, noting that central bank sponsored inflation is the epitome of financial repression. We also discuss what to do about financial repression.

Here is a new update of a popular market valuation method using the most recent Standard & Poor's "as reported" earnings and earnings estimates and the index monthly averages of daily closes for the past month, which is 1993.23. The ratios in parentheses use the monthly close of 2003.37. For the earnings, see the table below created from Standard & Poor's latest earnings spreadsheet.

Over this time frame, we see that the personal consumption expenditures component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has been positive, and vice versa. As the Q2 GDP component analysis clearly illustrates, personal consumption expenditures, at 0.07 of the real GDP 1.29, is at the razor's edge of positive territory.

Let's take a closer look at Uncle Sam's balance sheet for last year and the official government projections for 2011 and the decade beyond. With the looming congressional showdown on the debt ceiling, it seems particularly appropriate to understand the broader context. For a quick review of 2010, here is a slide I created for a presentation at the Retirement Income Industry Association (RIIA) conference. 2010 entitlement costs exceeded the entire tax revenue for the year. However, according to the Congressional Budget Office, entitlements only accounted for about 55% of 2010 spending.

Here are the four market valuation indicators I regularly follow: The Crestmont Research P/E Ratio, The cyclical P/E ratio using the trailing 10-year earnings as the divisor, The Q Ratio, which is the total price of the market divided by its replacement cost and the relationship of the S&P Composite to a regression trendline. To facilitate comparisons, I've adjusted the two P/E ratios and Q Ratio to their arithmetic means and the inflation-adjusted S&P Composite to its exponential regression. Based on the S&P 500 monthly data, the market is overvalued somewhere in the range of 34% to 48%.

The Weekly Leading Index (WLI) Growth indicator of the Economic Cycle Research Institute (ECRI) declined to 2.0 from last week's 2.9. This is the tenth consecutive week of decline from the 11-month interim high of 7.8 for the week ending on April 15. The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.

The recent article P/E: Future On The Horizon by Advisor Perspectives contributor Ed Easterling provided an overview of Eds method for determining where the market is headed. His analysis is quite compelling. Accordingly I have added the Crestmont data to my monthly market valuation updates. The first chart is the Crestmont equivalent of the Cyclical P/E10 ratio chart Ive been sharing on a monthly basis for the past few years. The Crestmont P/E of 19.3 is 41% above its average of 13.7. This valuation level is almost identical what we saw in my latest S&P Composite regression to trend update.

In real (inflation/deflation-adjusted) terms, when did the US market permanently regain the high reached in 1929? The first chart illustrates two answers to the question. One uses the real price and the other uses the real total return. The remaining charts compare market performance since 2000 with the equivalent elapsed time following the peak in 1929. As the final chart shows, the current real total return over the past eleven plus years has been worse than the performance over the equivalent timeframe during the Great Depression ? at least until the second round of quantitative easing.

The Weekly Leading Index (WLI) Growth indicator of the Economic Cycle Research Institute (ECRI) declined to 2.9 from last week's 3.6 (a downward revision from 3.7). This is the ninth consecutive week of decline from the 11-month interim high of 7.8 for the week ending on April 15. The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.

There are several reasons why it may be useful to have a more robust estimate of future expected returns on stocks: People who are approaching retirement need to estimate probable returns in order to budget how much they need to save. A retiree's level of sustainable income is largely dictated by expected returns over the early years of retirement. And investors of all types must make an informed decision about how best to allocate their capital among various investment opportunities. Many studies have attempted to quantify the relationship between Shiller PE and future stock returns.

The Weekly Leading Index (WLI) Growth indicator of the Economic Cycle Research Institute (ECRI) declined to 3.7 from last week's 4.1. This is the eighth consecutive week of decline from the 11-month interim high of 7.8 for the week ending on April 15. The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.

Traditional Advisors assume that the best estimate of future market returns in all market environments is the simple long-term average return on stocks: about 6.5% per year after inflation. We hypothesized that it is possible to construct a statistical model using long-term market data which will allow us to make much more accurate predictions about long-term returns. It turns out that we were right. Those who are interested in the process we used, and the specifications of our model, are encouraged to read our full report.

Here is a table showing the annualized change over the past five months for Headline and Core CPI. I've also included each of the eight components of Headline CPI and a separate entry for Energy, which is a collection of sub-indexes in Housing and Transportation. We can make some inferences about how inflation is impacting our personal expenses depending on our relative exposure to the individual components.

The Weekly Leading Index (WLI) Growth indicator of the Economic Cycle Research Institute (ECRI) declined to 4.1 from last week's 4.9. This is the seventh consecutive week of decline from the 11-month interim high of 7.8 for the week ending on April 15.