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« Weighing the Week Ahead: Are Earnings Expectations Too High? | Main

January 10, 2013


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wei said...

A much simpler indicator is to just use the yield curve. If it is inverted, then a recession is coming. If it's steep, then a recession is far away. It's MORE accurate and MORE simple. and you don't need to pick an arbitrary level of 200bps to indicate recessions, which in my opinion is just massaging the data to fit the conclusion you're looking for.

But then again, we're a victim of selection and survivership bias. we're just selecting the data series that proves out a given pattern. Using this methodology, you can find "forecasting" tools for almost any pattern. That is why forward looking analysis is important. For example, the Fed can keep us in expansion phase by just keeping the short rate at zero forever! but we all know that this doesn't work for a lot of reasons.

The fed has gotten very aggressive at keeping the yield curve steep, so i suspect that the "inverted yield curve" indicator alone is going to be a poor recession indicator. You can already see this in the last two recessions, where the contribution from the yield curve component of the Aggregate Index is less pronounced.

SI said...

Good segments, but would have preferred a consolidated 20 min discussion, notwithstanding the universal tendency to pander to short attention spans.

Proteus said...

Great post, Jeff. Very well written and clearly a lot of thought and effort was put into this.

And congratulations, you're hit the big time - this story is on the home page of Business Insider.

Joe said...

Jeff: thanks for your very helpful blog, a real eye-opener and refreshingly absent of ideology.
My comment for this recession-forecasting model post is that it seems to be helpful for the timing, but not for the severity of a recession. The recession(s) 1980-82 appears much much worse than the recent Great Recession, which appears to be just as light if a bit longer than the 1990 and 2001 recession. But in reality it was the worst of them all.

RB said...

Very nice job. What is striking is that this is not a mechanical model, but one that involves judgement. The other indicator that you discuss in your weekly reports, the Superindex, strikes me as having a more mechanical approach, combining various recession indicators. the superindex also had smoother transitions for the 2008/2009 recession. It also seems to involve some fitting for determining trigger thresholds based on past recessions. I wonder if you have any thoughts on comparing the two approaches.

Mr. AggregateSpread makes me feel better though about sitting out of the market from mid-2006 until 2009. It wasn't easy watching the market go up in 2007.

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