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« What is the right analogy: 2008 or 2009? | Main | Investors: Prepare to be deceived on the Europe Story »

September 24, 2011

Comments

PowerStocks Research

Statistically speaking the ECRI index is the worst performing predictor of NBER recessions. Your best performing indicators (lowest false positives, highest r-squared to NBER etc) is Filly Fed ADS,e-forecasting eLEI and conference boards' Employment Trends Index (ETI).

Mike C

Achuthan

http://video.cnbc.com/gallery/?video=3000048636

Interestingly, if he is right and he is been more right than anyone who is generally either permanently optimistic or permanently pessimistic (there are stopped clocks on both sides of the aisle) than once again the market will have been prescient in declining BEFORE the recession is widely and universally acknowledged. Good argument IMO for taking portfolio action based on market price action (such as 200 DMA break) and not any one person's economic forecast.

bfuruta

Jeff, since the ECRI made a recession call today, 09/30/11, it is a good real time test. Is it worth replacing the ECRI with any other forecaster?

krs

Have you looked at the ADS Business Conditions Index? It's free and frequent, so perhaps that might supplant the ECRI's WLI. Alas, I haven't worked with either Index, so my apologies for not adding any substance to the debate....

http://www.philadelphiafed.org/research-and-data/real-time-center/business-conditions-index/

ODW

I'll see your joke (Williams) and raise you with:

The EFSF is really the ESFS (European Science Fiction Society).

RB

Dueker's index is positive too currently.

RB

There's also the Chauvet-Hamilton indicator described here , still in the no-recession camp. Piger's indicator shows pretty low readings as well. I'm not comforted by the fact that neither these nor Eddy's chart covers prior deflationary periods.

Angel Martin

Jeff, on europe, I don't think it is correct to say that nothing has happened. Spain and Italy no longer have access to credit markets at sustainable rates for medium and long term issues - that's big.

On the leverage issue, it worked for the Fed in the MBS/agency market. But as i understand it they were buying bonds which had fallen in value a lot, so once the panic ended they were able to resell at a profit.

The leverage proposals for the ESFS/ECB are totally different, they want to buy bonds to prevent the prices falling and yields going up. That strategy is much more likely to incur losses, which, as they are leveraged will be massive if they are wrong.

On quantification of risk, I agree that it's better to be able to quantify risk as it guarantees a more rigorous analysis.

However, just because it is difficult to quantify doesn't mean that risks can be ignored. For example, lack of leadership is a significant problem for europe in dealing with this crisis.

oldprof

Martin - Bob has been working on a weekly version, permitting closer monitoring of changes. The tests I have seen look good. The current readings are still in the no recession camp.

His method is completely objective and data-based. It has worked for decades in real time.

I am also looking at two other approaches from similar objective sources with strong credentials. I might use more than one. I am not looking at methods that were created to prove a point. I might include more than one.

You are a careful reader:) Good question, and I'll have a more complete discussion soon.

Jeff

Martin

You've been looking for a new indicator that may replace ECRI's WLI for a few months now. In your Weighing the Week Ahead articles over the past few weeks, you always mentioned that Bob Dieli's Mr. Model may be a candidate for such a replacement, but this week I noticed that you make no mention of Bob Dieli.

Could it be because you find his analysis methods too subjective? Or could it be because he doesn't provide a unique weekly leading index of some sort?

Last week, you mentioned that Bob Dieli didn't see a cycle top for at least the next six months, and I must admit that while I was pleasantly surprised by his prognostic, I was also wondering how he could be so confident with this call in the current economic context. (Not being a subscriber of Dieli, I didn't read his most recent report, but you did.)

So I'd be interested to get a clue as to what turned you off in Bod Dieli's methods, or maybe I'm simply implying too much by your omission of Dieli's name in your current article. Thanks.

David

I understand. Thank you for clarifying your perspective.

David

The 10-2 spread is one proxy for the shape of the yield curve, hence why I brought it up.

I just have my reservations about making a bullish case based on it. Perhaps looking at an aggregated global yield curve would be more informative.

oldprof

jd- This is an excellent article. Everyone should read it.

Thanks for your comments and for sharing the link.

Jeff

oldprof

Angel - Your argument is logical. Better growth provides better insulation. Please note that we have already been dealing with:
1) Japan earthquake and aftermath
2) Buying/investing pause after debt debate
3) Europe effects even before anything has happened because of the incessant demand of the market that this get fixed RIGHT NOW!!

So some heavy lifting is already going on. I try to read statements in a more neutral way, not thinking of leaders as "admitting" things. There are plenty of efforts to encourage and speed things along. I especially urge you to read the long quote and related article and consider the leverage argument -- which I spotted partly because you have helped us focus on the aggregate difference.

Once again, I generally agree that risks are higher, but I like to quantify.

Jeff

oldprof

Leo -- I haven't seen the specific argument from Francois, so it is difficult to respond well. I would wonder why you would adjust only one end of the curve, since policies clearly affect longer rates as well.

If you have a link, I'll look more closely.

Thanks,

Jeff

oldprof

David -- I am trying to reach a conclusion about indicators. When someone points to one that has worked for many years, many say "not this time." Meanwhile, you get people who concoct something and do back-fitting to show that it "predicted" past recessions (but not in real time). Or you can rely on a black box -- no way to criticize those components.

As to the yield curve, you could look at the 10/30 spread and get similar results.

Anyway, I am not taking this chart as definitive, nor is Eddy. It is just part of the mix.

Thanks for joining in.

Jeff

jd

Great Recap

On Europe here's a link to more information that you alluded to on Europe.

http://www.telegraph.co.uk/finance/financialcrisis/8786665/Multi-trillion-plan-to-save-the-eurozone-being-prepared.html

Finally, hints that suggest that a plan which deals with the major problems is emerging. But, as you suggested, slowly and dealing with the needs of all the parties.

But, they mention

Recaps of the banks
Write down of Greek debt
Enough money to establish a firewall to stop contagion.

It seems that they are deciding just where they must draw the line.

Rich

Hi Jeff, Your commentaries are wonderful and I enjoy reading them--thank you for your insights. It appears that the events in Europe are weighing heavily on US markets and reduced world demand will eventually impact corporate profits. I think it is a race between consumer demand growth and consumer fear that will determine whether we have a recession.

Angel Martin

Jeff, I think that the probability of recession has to be higher than for an average year just because growth is so weak. Even a moderate shock would be enough to push the economy into recession. Even in an average year (ie without the current problems in europe) there are plenty of potential moderate shocks that could push a weak economy into recession (major terrorist attack, oil price spike, large natural disaster... etc)

Then there is europe: their own central bank now admits that the euro is at risk if they can't solve the debt crisis. So, the possibility of a euro collapse and follow-on financial crisis in europe also adds to the risk of recession above and beyond the normal shocks.

Leo

Where was the yield curve mentioned in this commentary?
As to your point, I read the same argument from Trahan. He suggested replacing the short end with CPI (instead of the Fed rate). If you do this, then the current yield is currently inverted.
Jeff, I'd be interested in your take on this.
Thanks.

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