Don’t worry, be happy. US recession chances ‘smoothed’ away.

Three weeks ago we posted an update on the probability of recession that had jumped up into the warning zone: Update on Recession Probability: Rough Seas Ahead? The chart from the St. Louis Fed’s FRED data looked like this:

US recession warning from St. Louis Fed

Only twice in the last forty five years has the level gotten this high without a recession following soon after. The chart is usually updated only once a month but I check it every week, especially since it had risen. When I checked this week I got quite a shock because the high levels I had seen earlier had disappeared:

Chances of US recession August 2013

WT…? It turns out that the ‘Smoothed’ in the chart title: “Smoothed U.S. Recession Probabilities (RECPROUSM156N)” means that the data is subject to change based on Continue reading Don’t worry, be happy. US recession chances ‘smoothed’ away.

Update on Recession Probability: Rough Seas Ahead?

Back in March I posted a FRED chart that Bill McBride over at Calculated Risk shared tracking a set of data that pretty reliably coincides with recessions. Even better is that in almost fifty years of data there have been only two false positives which brings us to a very interesting point. First, here’s the chart as it appeared when I posted back in March:

FRED Recession Probabilities March 2013
Looks like pretty smooth sailing since 2010

Next let’s look in more detail at those false positives:

FRED Recession Probabilities March Detail
FRED Recession Probabilities March 2013

This is what I like about this data series: Even if we set the bar as low as 5%, there have only been two instances Continue reading Update on Recession Probability: Rough Seas Ahead?

The Recession Probability Chart, A New Coincident Indicator?

Quick link to a very interesting chart Bill McBride put up over at Calculated Risk:

Chance of Recession?
Source: FRED. Note: We added the red and green lines (at 80 and 20 on chart) to highlight points made in the article.


The chart is from the St. Louis Fed’s Fred database which I’ve highlighted and you can find the original here.  According to U of O Professor Jeremy Piger: “Historically, three consecutive Continue reading The Recession Probability Chart, A New Coincident Indicator?

Apartment building investments good for the ‘Age of Deleveraging’ Says author Gary Shilling.

Apartment building investments are a top choice according to Gary Shilling, one of the world’s foremost economic forecasters, a long-time Forbes columnist, publisher of Insight Newsletter with his editor Fred Rossi, and author of “The Age of Deleveraging,” ( on Amazon) the perfect playbook for America’s new Age of Austerity.

apartment building investing for the age of deleveraging

Quoted in the Market Watch post:

Rental apartments. A huge inventory still overhangs the housing market as prices continue falling. The American dream of homeownership may be history. Renting is the affordable option. And with REIT prices running high, “direct ownership of rental apartments may still be attractive.”

See the whole post for more ideas for investing in these turbulent times.

A new (and simple to understand) economic model that actually works- Via Bridgewater Associates

Three related research pieces from the guy about whom former Fed Chairman Paul Volcker said had a degree of detail that is “mind-blowing” and admits to feeling sometimes that “he has a bigger staff, and produces more relevant statistics and analyses, than the Federal Reserve.”- The Economist

A Template for Understanding…

…How the Economic Machine Works and How it is Reflected Now

Ray Dalio  |  October 2008 (Updated March 2012): The economy is like a machine.  At the most fundamental level it is a relatively simple machine, yet it is not well understood.  I wrote this paper to describe how I believe it works.  My description is not the same as conventional economists’ descriptions so you should decide for yourself whether or not what I’m saying makes sense.  I will start with the simple things and build up, so please bear with me.  I believe that you will be able to understand and assess my description if we patiently go through it.


An In-Depth Look at Deleveragings

Ray Dalio  |  February, 2012: The purpose of this paper is to show the compositions of past deleveragings and, through this process, to convey in-depth, how the deleveraging process works.


Why Countries Succeed and Fail Economically

Ray Dalio  |  June, 2011: This study looks at how different countries’ shares of the world economy have changed and why these changes have occurred, with a particular emphasis on the period since 1820. As explained in this study, the rises and declines in countries’ shares of the world economy occur as a result of very long-term cycles that are not apparent to observers who look at economic conditions from a close-up perspective.

Economists Prove Einstein’s Theory About Repeating Behavior And Expecting Different Results.

Mainstream economic theory (MsET) has two fundamental tenets that most thoughtful people (even economists) realize are wrong and yet economic decisions and importantly even Fed policy is still based on this flawed model. We know what Einstein said this defines and it’s true.

Problem #1 is the Efficient Market Theory (EMT) or Theory of Rational Expectations says that economic information is widely distributed and that we as individuals and collectively as a market of decision makers and consumers consistently make our choices based on what will give us the most benefit. This has been scientifically proven to be not the case way more often than we like to think. For more on this see “Predictably Irrational” by Dan Ariely and “Thinking, Fast and Slow” by Kahneman in the ‘On Our eReaders Now’ box in the far right column of this page.

The second problem is that MsET is built on the idea that the economy tends to be stable and that dislocations are temporary and tend to correct themselves back to stability somewhat like a train running down the tracks that gets thrown off from time to time. History teaches us that is not the case either. Most often we are moving away from or back towards stability and occasionally pass through stability but typically overshoot. It doesn’t take much imagination to see how these two errors cause problems for economists (and us) and leads to a dismal reputation for them.

I’ve been reading a lot on economics lately searching for a new improved model and have just found a number of articles that tackle those issues. They are lengthy but well worth the reads. The first two were posted by John Mauldin in his ‘Outside The Box’ (OTB) series where others write about and discuss their sometimes opposing views from John’s. Mauldin will begin each piece with an intro about the author and where he might differ from that point of view. His guests are typically people who deal at the highest levels and their insights are Continue reading Economists Prove Einstein’s Theory About Repeating Behavior And Expecting Different Results.

Whodunit? Great books on the causes and solutions to the Financial Collapse

A year ago for Christmas I received a Kindle eReader (thank you Tammy!) and it has greatly accelerated my consumption of books. One of the subjects that I dove (continued to dive) into was the causes of the financial collapse. The conditions that contributed to our undoing, how we get out of our ongoing mess and the steps that should be taken to prevent a repeat are vitally important to our future as well as to our children and their children.

Learning from History

I have written about this myself since 2008 (see here and here for instance) and have read a number of books on the subject (see my Whodunit list down to the right on this page under Learning From History) that I thought covered fairly well the breadth of the subject and helped me refine my understanding. However I was humbled last night by a blog post on The Baseline Scenario that linked to Reading About the Financial Crisis: A 21-Book Review by Andrew Lo, a truly epic undertaking that is well worth reading on its own.

The causes are Continue reading Whodunit? Great books on the causes and solutions to the Financial Collapse

Mauldin: Mayan Calander predicts end of Europe… not world. Whew, good thing we’ll be ok- or not

Gallows humor for sure. The article is the best explanation of Europe’s predicament in layman’s terms I’ve read. See the article here: The End of Europe?

Is a Gold Standard the Answer to Our Monetary Crack-Up?

My brother Tom shared an article from the Cato Institute entitled: “Why Gold-Defined Money Is the Answer to Our Monetary Crack-Up”.

I agree with the writer in theory but as Yogi Berra said: In theory, there is no difference between theory and practice. In practice, there is. A couple points:

With a fixed currency like a gold standard innovation and value creation that grows the economy will be constrained and what growth does occur will cause prices to fall, hurting the producers of goods and limiting real returns to their investors. There has to be some mechanism to grow money supply at the approximate rate of real growth in the economy.

The real problems we’re facing around the world are from excess leverage and at the end of every debt binge the unwinding happens in three ways.  Debt creation can be reduced and austerity can be imposed to make room for Continue reading Is a Gold Standard the Answer to Our Monetary Crack-Up?

Leading Indicators and the Risk of a Blindside Recession. In-depth on economic indicators from John Hussman

Over the past few weeks, investors used to setting their economic expectations based on a “stream of anecdotes” approach have seen their economic views evolve roughly as follows:

“After a brief ‘scare’ during the third quarter, economic reports have come in better than expectations for weeks – a sign that the economy is on a gradual but predictable growth path; Purchasing managers reports out of China and Europe have firmed, and the U.S. Purchasing Managers Indices have advanced, albeit in the low 50’s, but confirming a favorable positive trend, and indicating that the U.S. is strong enough to pull the global economy back to a growth path, or at least sidestep any downturn…”

“Unfortunately, in all of these cases, the inference being drawn from these data points is not supported by the data set of economic evidence that is presently available, which is instead historically associated with a much more difficult outcome. Specifically, the data set continues to imply a nearly immediate global economic downturn… Frankly, I’ll be surprised if the U.S. gets through the first quarter without a downturn.” (Underlining mine)

Definitely worth a careful read: John Hussman is a value investor and a serious student of the economy, we may not always agree with him but we should not dismiss his research.