Sunday, November 25, 2007

Financial Markets Anticipate Recessions Before They are Obvious / Hussman

I agree with Hussman that the US is very close to a recession. I´m not so sure if the stock market is a good indicator. To my experience the market only reacts when the obvious is no longer to hide and every spin attempt has failed.....

I stimme mit Hussman überein das die USA sich schon nahe einer Rezession befinden. Allerdings glaube ich nach meinen Erfahrungen nicht das der Aktienmarkt irgendeine verläßliche Aussagekraft in diesem Zusammenhang geben kann. Der reagiert erst dann wenn sich die Tatsachen überhaupt nicht mehr kaschieren lassen und jeder erdenliche Spinversuch gescheitert ist. Dann allerdings umso heftiger......

Financial Markets Anticipate Recessions Before They are Obvious
Two weeks ago, for the first time since the 2001-2002 downturn, our measures again signaled an oncoming U.S. recession. This signal is based on four general conditions. They are all well-known to be related to economic weakness (not the result of spurious data-mining), but they do not have great usefulness individually. They become powerful when they are unanimous – these conditions have always occurred together during or just prior to recessions, and they have only occurred together during or just prior to recessions. Apart from the survey measures in the fourth condition (the ISM Purchasing Managers Index and U.S. employment), the most reliable evidence for an oncoming recession is based on financial market indicators. It is the forward-looking aspect of market action that produces a timely risk signal. These measures are:

1: Widening credit spreads: An increase over the past 6 months in either the spread between commercial paper and 3-month Treasury yields, or between the Dow Corporate Bond Index yield and 10-year Treasury yields.

2: Moderate or flat yield curve: 10-year Treasury yield no more than 2.5% above 3-month Treasury yields (this doesn't create a strong risk of recession in and of itself).

3: Falling stock prices: S&P 500 below its level of 6 months earlier. Again, this is not terribly unusual by itself, which is why people say that market declines have called 11 of the past 6 recessions, but falling stock prices are very important as part of the broader syndrome.

4: Moderating ISM and employment growth: PMI in the low 50's or worse (below 54), coupled with either total nonfarm employment growth below 1.3% over the preceding year (this is a figure that Marty Zweig noted in a Barron's piece years ago), or an unemployment rate up 0.4% or more from its 12-month low.

For ease of reference, I've reproduced the chart I presented two weeks ago. The recession signals based on the foregoing criteria are depicted in blue in the chart below. Actual recessions are depicted in red.

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